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