Thursday, September 23, 2004
Ex-CA chairman Kumar indicted
for fraud
Company settles with government to avoid criminal prosecution
By Mark Harrington and James Toedtman
Federal prosecutors Wednesday charged former
Computer Associates International Inc. chairman and chief executive
Sanjay Kumar and a former sales executive with 10 counts each of
securities fraud and obstruction of justice, as the company reached a
multimillion-dollar agreement aimed at dismissal of corporate criminal
charges.
In a dizzying day of developments in the two-year-old case, a grand jury handed up indictments of Kumar and his one-time top lieutenant, former executive vice president of sales Stephen Richards, saying they masterminded a scheme to prematurely book sales at the Islandia software company to the tune of $2.2 billion. Both men are scheduled to be arraigned in U.S. District Court in Brooklyn this morning. Through their attorneys, both men Wednesday denied wrongdoing. Meanwhile, CA's onetime top lawyer, former general counsel Steven Woghin, entered an emotional guilty plea to securities fraud conspiracy and obstruction of justice charges. He faces 25 years in prison. And the company agreed to a laundry list of new controls and measures as part of a deferred prosecution agreement that also includes a $225 million fine and the hiring of an independent monitor for at least 18 months. In a conference call yesterday, CA chairman Lewis Ranieri expressed contrition. "CA accepts responsibility for the improper accounting practices and misstatement of revenue from January 1, 1998, through September 30, 2000, and for impeding and failing to cooperate with the Department of Justice and the SEC investigations," he said. "This conduct was wrong. I want to be very clear on this point: We fully support the government's efforts to bring wrongdoers to justice." Kumar, who left CA in June after 17 years at the company, is expected to plead not guilty today. In a statement, he denied wrongdoing and his attorney, Jack Cooney, said he "expects to be exonerated of all charges." Rather than obstruct the federal probes, Kumar recommended the hiring of outside law firms to uncover the wrongdoing, the statement said, and he pushed for the release of documents and employee cooperation. Richards' attorney, David Zornow, accused the government of having "overreached in this case." He said Richards' duties were "selling the company's software," not finance or sales accounting functions. "Mr. Richards vigorously denies any wrongdoing and is confident he will be vindicated at trial." But Deputy Attorney General James Comey, in a conference in Washington, painted a far different picture. "The investigators in this case went up against highly sophisticated and allegedly corrupt corporate executives who used every means at their disposal to delay, deceive and derail the government's investigation," Comey charged. On one occasion, on July 8, 1999, according to the indictment, Kumar took CA's corporate jet to Paris, where he secured quick agreement on a $32 million license. Officials backdated the contract June 30, 1999, and directed $19 million as revenue for the quarter that had closed eight days earlier. According to Comey, "After he got home, Kumar boasted about how his Paris caper had saved the quarter for Computer Associates." Three months later, Kumar was miffed at having to take the emergency trans-Atlantic flight and ordered his sales officers to company headquarters in Islandia for the formal "cleaning up" exercise, Comey charged. For that quarter, 58 contracts worth $560 million were backdated -- 35 percent of all revenue posted in that quarter. The alleged fraud is only half of the story, Comey charged. "The Computer Associates story also includes a failed cover-up, replete with lies to government investigators, lies under oath, and the use of attorneys to obstruct and impede the government's investigation of this fraud." Kumar and Richards were both charged with misleading corporate lawyers and board audit committee lawyers, with the knowledge that their statements would be relayed to investigators, further delaying the investigation. After charges were filed Wednesday in Brooklyn, Comey, U.S. Attorney for the Eastern District Roslyn Mauskopf and SEC Enforcement Division Director Steven Cutler described the case, the penalties and the stakes. Comey called the scheme "all too familiar," but said the "the house of cards collapsed in July 2000, when Computer Associates was forced to abandon its '35-day month' and the truth about its financial condition came out. The company's stock dropped 43 percent in a single day," hitting investors hard. Accordingly, all of the $225 million in fines will be paid directly to shareholders, current and past, in three installments by CA of $75 million over 18 months, with a outside monitor overseeing the payments. Authorities acknowledged the rare use of the deferred prosecution and outside-monitor mechanism, saying CA received special treatment because of its cooperation with investigators. "Today's agreement with Computer Associates shows that the government expects companies to take affirmative, proactive steps to make sure their employees act ethically, work in a healthy culture and comply with the law. And if they don't take those steps, the consequences will be severe," Comey said. "We have no interest in swinging at the wrong door and knocking down thousands of innocent employees." At headquarters, executives portrayed CA as a changed company eager to have this difficult chapter behind them. "We are a much different company than we were four years ago, when these improper practices occurred," said interim CEO Ken Cron. "And, we are a much different company than we were even just a year ago, when the board of directors authorized its audit committee to investigate these matters. Change will continue at CA, I can guarantee that." In addition to committing itself to full-scale cooperating in ongoing government requests for information, the company agreed to elect two new independent board members by December of 2005, implement a series of management, accounting and information system controls, and pursue ill-gotten gains of past executives who benefited from the wrongdoing. At the same time, Comey said the investigation remained open "and continues." Woghin's guilty plea means he'll cooperate with the government probe. Choking back tears in an emotional pleading before U.S. District judge I. Leo Glasser, Woghin said, "Your honor, I am ashamed to be standing here today," and called his actions "entirely inconsistent with my behavior during my 30-year legal career." Woghin, who worked at the U.S. Justice Department for 10 years before joinging CA in 1992, was charged with overseeing a team of CA attorneys who "routinely" drafted software licensing contracts with clients after a quarter had closed, and with drafting at least one of the contracts himself. Woghin's attorney, Matthew Fishbein, said in a statement: "Steve Woghin is a good and decent man who regrettably got swept up by the corrupt culture at Computer Associates. He has been cooperating fully with the government's investigation and he is looking forward to putting this unfortunate chapter behind him." Staff writer Anthony DeStefano contributed to this story. Copyright © 2004, Newsday, Inc. |
