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For a copy of the referenced report, see:


Report of CA Board's Special Litigation Committee


Wall Street Journal, April 14, 2007 article

The Wall Street Journal  

April 14, 2007


Directors' Probe
Ties CA Founder
To Massive Fraud

Report Suggests Suing
Wang for $500 Million;
Evidence of Backdating
April 14, 2007; Page A1


A special committee of the board of directors has accused Charles Wang, founder and former chairman of Computer Associates International Inc., of directing and participating in fraudulent accounting during the 1980s and 1990s.

[Charles Wang]

The committee's report, filed late Friday afternoon in Chancery Court in Delaware, is the first investigation that publicly ties Mr. Wang to what the government has described as a $2.2 billion accounting fraud. The committee recommended that the Islandia, N.Y., software company, which has changed its name to CA Inc., file suit to recover at least $500 million from Mr. Wang in costs related to his conduct, including a $225 million payment CA made to a government-ordered restitution fund.

The committee's findings are the latest twist in one of the major scandals to erupt amid the crackdown on accounting fraud after the technology bubble burst. The surprise October 2003 ouster of CA's longtime finance chief led to a frantic year in which Chief Executive Sanjay Kumar defended his leadership of the company, fought to save his job, was demoted and then forced out -- before ultimately being indicted for fraud.

Eight former CA officials have pleaded guilty to Justice Department charges related to CA's accounting. Mr. Wang, a 62-year-old Shanghai native and hard-driving entrepreneur who built the company into a Wall Street darling, hasn't been indicted.

[Sanjay Kumar]

In a strongly worded statement, Mr. Wang said he is "appalled" by the "fallacious" committee report, saying it is based on the statements of "those who perpetrated the crimes at issue and then lied about them." Mr. Wang said he felt "personally wronged" by Mr. Kumar -- his successor and onetime protégé -- and called his own decision in 1994 to recommend him for the position that would eventually take him to the corner office a "major mistake."

Mr. Wang said he "fully cooperated" with the company's outside law firm -- though he didn't mention the committee's lawyers -- and the U.S. government. He added that he intends to "vigorously defend my good name and fight any and all efforts to place the crimes of Kumar and his management team at my feet."

Mr. Kumar, who was sentenced to 12 years in prison last year, on Friday agreed to pay to the restitution fund $52 million this year and next plus 20% of his income after he is released from prison. Mr. Kumar cooperated with the special committee, according to the report. A lawyer for Mr. Kumar didn't return a message seeking comment for this article.

It appears unlikely that information uncovered by the committee's investigators will lead to criminal action against Mr. Wang, who lives in Oyster Bay, N.Y., and is well-known as owner of the New York Islanders professional hockey team. Mr. Wang stepped down as chief executive of Computer Associates in 2000 and resigned as chairman in 2002. The statute of limitations for fraud expires after five years. Moreover, Mr. Wang rarely used email or written documents to communicate, leaving a sparse paper trail.

CA formed the directors' committee in 2005 to investigate claims made in various shareholder derivative suits -- a type of litigation designed to recover funds for a company -- that named as defendants many directors and several executives who served in the later years of Mr. Wang's tenure. The committee, aided by four investigators, said it interviewed 90 current and former employees and examined millions of pages of documents in compiling its roughly 400-page report; it said Mr. Wang refused to cooperate with its probe. The report also built on information revealed by Justice Department investigations, but was conducted separately.

The committee concluded that directors other than Messrs. Wang and Kumar weren't to blame for the fraud and that audit firms shouldn't be pursued either, and it said it will seek to have shareholder suits against those firms dismissed.

According to the committee's report on Mr. Wang, it "uncovered credible evidence he directed and participated in" backdating contracts several days after each quarter ended in what were known internally as "35-day months." In one of the few specific examples cited in alleging Mr. Wang's direct involvement, the committee says that in July 1999, after the end of CA's fiscal first quarter, Mr. Kumar "at the direction of Mr. Wang, flew to France to close" a $32 million deal that was then improperly included in the first-quarter results. The committee said that during that fiscal year, the company improperly recognized revenue from 165 contracts worth $1.75 billion, or 29% of full-year revenue.

The committee said Mr. Wang had actively negotiated "deals he knew to be backdated." It said Mr. Wang created a "climate of fear" at the company that discouraged employees from giving him bad news and drove them to meet Wall Street earnings estimates at all costs.

The committee said Mr. Kumar, who pleaded guilty to eight charges of accounting fraud and obstructing the government's investigation into the backdating, stopped the backdating practices by switching to a new accounting method in 2001 after he became chief executive.

Suspicious investors and former CA employees have long asserted that Mr. Wang was deeply involved in the fraudulent accounting that plagued CA. Mr. Wang emigrated with his family to the U.S. when he was eight years old and grew up poor. In 1976, he founded Computer Associates International. The company had one product, a piece of software for mainframe computers.

Pumped up with acquisitions, it grew rapidly, and in 1989 became the first software company to surpass $1 billion in annual sales. In the 1990s, CA became a stock-market favorite, thanks to steadily rising earnings and a seemingly magical ability to make its predicted earnings numbers quarter after quarter. Mr. Wang fostered an aggressive culture, antagonizing many software-industry insiders by drastically cutting costs and firing workers after buying their companies. A fiercely competitive basketball player and sports fan, Mr. Wang pushed long working hours at CA's headquarters, early on establishing a tradition of free breakfasts to get employees in the building and working quickly.

Under Mr. Wang, CA even tussled with its customers, leaning on strict interpretations of contract terms -- backed by occasional lawsuits -- to keep customers renewing their expensive contracts to run CA software.

Mr. Wang suffered wide criticism for a 1998 stock grant worth $1.1 billion that went to him, Mr. Kumar and co-founder Russell Artzt. The grant, which made the trio poster boys for excessive compensation, was derided by some investors. The executives gave back a sizeable portion of the award after losing a civil lawsuit filed by unhappy shareholders.

In its report, the committee said the company is entitled to return of the shares Mr. Wang received as part of the billion-dollar award in 1998 -- at the time one of the largest payouts ever to corporate officers. The grant was "neither deserved nor earned," the committee said, since it was achieved because CA's stock price was "materially and fraudulently inflated" by the accounting misdeeds. Without the fraud, the committee said, the shares "would not actually have vested."

Mr. Wang received 8.64 million shares, after subtracting those he returned to settle a shareholder suit in 2000.

Mr. Wang, who in 2001 made the Forbes magazine list of the 400 richest Americans with a fortune estimated at $925 million, has substantial assets. Besides owning the Islanders, he is a major real-estate developer and investor on Long Island, and once bid to buy the New Jersey Nets basketball team. But it isn't clear how much CA could hope to recover even if it is successful in suing him. One sticking point may be a release the company granted him in 2000 from claims against some shares he received.

The independent directors' committee was composed of William E. McCracken, a management consultant, and Renato Zambonini, chairman of software company Cognos Inc. It was charged with evaluating claims in the shareholder derivative suits and making recommendations. Those proposals will be subject to approval by the court.

The committee negotiated settlements with Messrs. Kumar and Artzt. Mr. Kumar agreed to pay $15 million to reimburse CA for legal fees it paid for his legal defense. In November, CA sued to recover those fees and attached as security Mr. Kumar's $9 million house in Upper Brookville, N.Y., two Ferrari 550 Maranello sports cars and a 57-foot Italian Azimut yacht, as well as a Land Rover and a Volvo. Mr. Artzt agreed to pay the company $9 million, although the committee report said he wasn't aware of the backdating practices.

The committee report also cited three former CA officers who haven't been prosecuted, but who it said were involved in or responsible for some of the accounting problems.

Mr. Kumar will start serving his sentence in August after arranging payment of the restitution. In a stipulation and order of settlement filed in the U.S. district court in Brooklyn, Mr. Kumar agreed that the full amount of the damages to victims of the stock fraud was $1.023 billion. The court entered an order that Mr. Kumar pay $798.6 million, representing the estimate of losses by investors minus the amount CA itself paid into the restitution fund.

CA has already paid $225 million into a fund administered by the Feinberg Group under a deferred-prosecution agreement. At a hearing Friday, Kenneth C. Feinberg, the special master for the fund, said 95,363 eligible persons have made claims to the fund, which now has about $235 million in assets. Mr. Feinberg said distributions will begin in July after the fund receives about $50 million from Mr. Kumar. However, victims will each receive only about 2.32% of their loss, Mr. Feinberg said in court.

Write to William M. Bulkeley at bill.bulkeley@wsj.com1 and Charles Forelle at charles.forelle@wsj.com2

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