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The New York Times 
February 13, 2005


Giving Away Lots of Money Is Easy, Right?

null Business Minute With Gretchen Morgenson

A troubling example of shareholder inertia at Computer Associates shows how corporate malfeasance can thrive in the U.S. in the first place.

IF $225 million was sitting in a restitution fund for wronged shareholders and you were entitled to some of it, wouldn't you agitate to get your fair share?

Silly question, right? Not, it seems, if you're an institutional shareholder.

Last September, Computer Associates International, the Long Island software company that has been plagued by scandal, agreed to put $225 million into just such a restitution fund. The idea was to compensate shareholders injured by the company's bad behavior, which came to light after an investigation by the Justice Department and the Securities and Exchange Commission.

So far, not one shareholder has come forward with ideas about how to dispense the money in the fairest and most appropriate way.

To some degree, this example of investor passivity is understandable, since the courts typically decide shareholder compensation in securities fraud cases. Indeed, some suits against the company were handled by the courts. Institutional investors aren't accustomed to negotiating for their fair share in such cases; unfortunately, they're used to seeing the lawyers get most of the money.

But because the Computer Associates case presents such a fine opportunity for shareholders to design a fair and proper restitution fund - and because many more of these funds are likely to be set up in the future - their inaction is troubling. It is precisely such shareholder inertia that has allowed corporate malfeasance to thrive in this country in the first place.

The $225 million fund was established as part of a deferred prosecution agreement struck last fall between Computer Associates and federal prosecutors. It followed a two-year investigation into accounting improprieties at the company; some $2.2 billion in revenues were improperly booked.

Five former Computer Associates executives have pleaded guilty to fraud or obstruction, and Sanjay Kumar, the former chief executive, was indicted last September. Mr. Kumar, who is awaiting trial, maintains his innocence.

The United States government charged the company with securities fraud, obstruction of justice and conspiracy, and Computer Associates admitted that it had engaged in securities fraud and obstruction.

On the heel of these admissions, Computer Associates offered to reform itself, and the Justice Department agreed to give it a second chance. Under the terms of the deferred prosecution deal, if the company flies right for 18 months - the clock has not yet started ticking - the government will drop the charges.

The lead prosecutor in the case is David B. Pitofsky, an assistant United States attorney. Mr. Pitofsky negotiated very hard with Computer Associates to set up the restitution fund. And last November, Kenneth R. Feinberg, the special master of the federal Victim Compensation Fund set up after the Sept. 11 attacks, was appointed administrator of the Computer Associates fund.

"We and the S.E.C. worked hard in this case to vindicate the rights of C.A.'s shareholders, and the restitution fund is a key component of that effort," Mr. Pitofsky said in an interview on Friday. "Meaningful input by the shareholders themselves will be invaluable in ensuring that the fund is administered fairly and in a way that benefits them most."

Which is why it is so odd that Computer Associates shareholders have not been storming the gates to help figure out who gets what. Coming up with the right formula is not a simple matter.

Mr. Feinberg was given six months to devise a plan for how to divide the $225 million. About two months remains. So time's a-wasting for shareholders to make their voices heard.

UNLIKE securities fraud cases in which shareholders compute their damages based on declines in a company's stock price that occurred after the fraud emerged, this restitution fund is also supposed to pay back stockholders who have been injured by the company's obstructionist actions. This behavior has harmed the company's owners in meaningful but not easily measured ways - for instance, how do you calculate the loss of customers who decided not to deal with Computer Associates after the fraud was disclosed?

Shareholders have provided no answers.

Mr. Feinberg said that while he hasn't yet heard from any shareholders, he is eager to. "I have a $225 million restitution fund to distribute," he said. "I have a substantive challenge: What should the formula be for the distribution? But I also have a mechanical challenge of how best, in a cost-effective way, to get the money out to eligible claimants and how best to cut checks."

The California Public Employees Retirement System was a Computer Associates shareholder during the time that the fraud was committed. Calpers, as it is known, has already received remuneration as part of a civil case, it said.

But when Calpers was asked what it had done to present its views on how the fund should be administered, a spokeswoman said the pension fund was waiting for the government to call. "We haven't been contacted by the federal government and don't know what process they are going to go through," said Lindy Plaza of Calpers.

This approach is, alas, far too common. Often shareholders wait to see what their share of restitution is and then complain about it.

Gary Lutin, an investment banker at Lutin & Company in New York who is conducting an investor forum on Computer Associates, has an idea for how to counter shareholder inertia: set up a nonprofit institute to address situations in which investors' interests need to be resolved. In the meantime, he plans to hold a meeting at which interested shareholders can exchange ideas with Mr. Feinberg.

"A very diligent U.S. attorney has put $225 million on a table and appointed a very experienced administrator who wants to know what shareholders think about how their money should be divided up," Mr. Lutin said. "Now it's up to all of the shareholders, not just the ones willing to assume the burdens of leadership, to do what's expected of them. It's easy. All they have to do is show up."

Copyright 2005 The New York Times Company


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