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Forum Report: Significance of Deferred Prosecution Agreement

(September 30, 2004)

See also the referenced Exhibit B "Information" in United States of America v. Computer Associates International, Inc., Cr. No. 04-837 (ILG), September 22, 2004.

For a subsequent interview of the prosecutor responsible for negotiation of the Agreement, see

For a record of subsequent court filings, with links to documents relating to the required Examiner's report, see


Significance of Deferred Prosecution Agreement

            The provisions of CA’s September 22, 2004 Deferred Prosecution Agreement expand both the need and the ability of shareholders to monitor their interests in the company, with potential broader applications to all investments, and should be carefully considered by CA Forum participants in our definition of issues to be addressed during the next year.

            Beyond the Agreement’s reduction of risk associated with a possible corporate indictment, its real significance should be in supporting the interests of the company’s shareholders to make informed decisions about who will represent them on CA’s board.  The Agreement essentially establishes a foundation for the company’s recovery by reinforcing the rights and responsibilities of shareholders to perform the kind of oversight on which effective corporate governance depends.

            It is clear from the conditions imposed on CA by the DOJ and SEC officials, who were fully informed of facts after a two year investigation, that they do not believe the current board of directors can be relied upon to establish corporate integrity on its own.

  • The Agreement provides for an 18 month conditional deferral of prosecution (Agreement introduction and ¶23), based on what the board must do in the future rather than on what they’ve done in the past.
  • A court-appointed “examiner” will investigate and report to the government on the board’s compliance with the specified conditions (Agreement ¶¶19-22).
  • Satisfactory completion of the probation period is conditioned on the board’s implementation of specified corporate reforms (Agreement ¶¶12-18), all of which are conventional “good governance” practices that the current directors could have initiated years ago.
  • One of the required corporate reforms is the addition of two new independent directors to establish a two-thirds majority of independent directors (Agreement ¶12(a)), suggesting not only that government officials see a need for board changes but also, significantly, that they view fewer than six of the current nine board members to be independent.
  • In an extraordinary step, the DOJ and SEC have taken over the responsibility for pursuing the corporation’s rights to recover compensation paid to former executives, acting essentially as a shareholder might in a derivative lawsuit, relieving CA management of any role other than to provide information in support of the government effort (Agreement ¶6(g)).

            Investors must consider the DOJ-SEC imposition of these conditions in the context of the following facts from the company’s reports and other public records.

  • Three of the current nine directors – Messrs. Artzt, D’Amato (an Audit Committee member) and Ranieri (non-executive Chairman) – have been serving on CA’s board since 2001,[1] when management was continuing to falsify its reported revenues and after serious questions had been raised about the integrity of CA’s financial reporting.[2]
  • Two more of the current directors – Messrs. Lorsch and Schuetze (Chairman of the Audit Committee) – had been engaged by CA management as consultants during 2001 and were then elected by existing directors to join the board on April 1, 2002, classified by the company as “independent,”[3] approximately a month after the government investigations were reported.[4]
  • Another two of the current directors – Messrs. Cron (interim CEO) and La Blanc (member of the Audit Committee) – were elected by the existing board to begin serving in July 2002,[5] a week before the board approved paying the dissident Sam Wyly $10 million to abandon his proxy campaign for a slate of replacement directors.[6]
  • While these seven current directors served as members, the board failed to initiate an independent investigation of financial reporting issues until August 2003, after a year and a half of widely publicized government inquiries, and did not report any findings of misleading reports or management misconduct until October 2003.[7]
  • While all but one of the nine current directors served, the board failed to take any actions to recover unjustified compensation from executives, including those who had admitted criminal conduct, in spite of shareholder demands and widespread public attention.[8]
  • All but one of the current directors also served on the board that failed to relieve the CEO of his executive authority until more than six months after finding pervasive management fraud and obstruction, and even then continued his employment until government pressure forced the individual’s resignation two months later.[9]  The former CEO’s severance perks, in fact, were not terminated until after he was indicted last week.

            Just as the information available to CA’s board should have compelled their investigation and other appropriate actions, the information now available to CA’s shareholders compels responsible investor inquiry.  Every CA shareholder must determine what information is needed, what questions must be asked and answered, before you can make an independent, reasonable decision about relying on the current board members to represent investor interests.  Some of you may decide that you agree with the apparent DOJ-SEC view, and others may agree with the board’s apparent judgment of its own performance as reflected in their August 2003 tripling of director compensation.[10]  But all of you will need more information than what is available now to make that decision.

            The Agreement, as noted previously, should improve your ability to obtain this needed information, and to act on it.

  • CA’s probationary status can be expected to encourage management’s cooperative response to reasonable shareholder requests for the information needed to evaluate director performance, without the burdens of formal demands and court proceedings to enforce the company’s obligation to provide board minutes and other records.
  • The previously mentioned requirement to add two new directors presents shareholders with a practical opportunity to establish the kind of nominating procedure currently being sought in controversial proposals to revise SEC regulations.

            It should be emphasized that the Agreement’s support of investor rights is coupled with encouragement to responsibly exercise those rights.  The $225 million penalty payment (Agreement ¶8) is pointedly imposed on the company’s current shareholders, explicitly prohibiting insurance coverage (Agreement ¶9).  This is an assessment of approximately $.37 per share,[11] significantly more than the cost of effective investor monitoring to assure the corporate integrity of CA.

            Forum participants should consider the implications and opportunities of the Agreement, not only in relation to decisions about board members but also in relation to all the other requirements of CA’s value enhancement.  The marketplace continues to discount the value of CA stock by more than 25%.[12]  Reducing that discount will require a resolution of the financial reporting and corporate integrity issues that stimulated the initiation of both the 2001 CA Forum and the current program.  And that can be accomplished only with active investor guidance to define what is needed.

GL - September 30, 2004


[10] In August 2003, at the time of initiating an investigation but before taking any action to stop the ongoing management fraud and obstruction, the board recommended shareholder approval of a new plan for non-employee director compensation which allowed them to more than triple their pay, from approximately $49,000 to $150,000 annually (CA proxy statement filed July 21, 2003, pages 19-22). At the time, before being informed of the investigation, shareholders approved the board’s plan with a 96% supporting vote (CA Form 10-Q report filed October 22, 2003, page 39).

[11] Based on the 615 million shares used by the company in calculations of earnings per share, as reported in CA’s most recent Form 10-Q quarterly report filed July 30, 2004.

[12] Compared with the average of all companies in the Reuters Software & Programming Industry index as of the September 29, 2004 market close, CA’s $26.17 stock price was 26% below the average ratio to book value, 28% below the average ratio to revenue, and 47% below the average ratio to free cash flow.



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The material presented on this web site is published by Gary Lutin, as chairman of the Shareholder Forum.