Significance of Deferred Prosecution
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
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
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,
when management was continuing to falsify its reported revenues and after
serious questions had been raised about the integrity of CA’s financial
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,”
approximately a month after the government investigations were reported.
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,
a week before the board approved paying the dissident Sam Wyly $10 million
to abandon his proxy campaign for a slate of replacement directors.
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.
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.
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.
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
But all of you will need more information than what is available now to make
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,
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%.
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