OutFront
Wyly's War
Elizabeth MacDonald, 04.25.05

Enraged by the accounting mess at Computer Associates, Texas billionaire Sam E. Wyly wants revenge-and is suing just about everybody to get it.

Computer Associates general counsel Steven Woghin was unrepentant in defeat when he signed a shareholder settlement in August 2003, dispensing with charges that executives had cooked the books to bolster their own bonuses. Though CA had agreed to terms that would cost it $174 million in stock-and later would pay another $225 million to shareholders to avoid criminal prosecution-Woghin declared in court papers: The company denies "any wrongdoing whatsoever," rejecting any "fault or liability or wrongdoing."

A year later Woghin was back in court, this time utterly contrite as he stood before a judge in U.S. District Court in Brooklyn to plead guilty to two charges related to fraud and obstruction. Contrary to his earlier defiance, Woghin confessed that he had taken part in the accounting fraud, had covered it up to elude government investigators and had ordered employees to do likewise. He could get five years in prison.

"Your honor, I am ashamed to be standing here today," he told the judge on Sept. 22, 2004. By then the full extent of the fraud at Computer Associates was clear. CA admitted that, desperate to avoid falling short of Wall Street estimates, execs had prematurely booked $2.2 billion in sales in fiscal 2000 and 2001. The feds say the fraud was $3.3 billion and involved more than 360 contracts. The practice was so institutionalized that insiders called it "the 35-day-month."

Fifteen CA people were fired or forced to resign; five have pleaded guilty to charges including fraud, conspiracy and obstruction of justice. The ousted chairman and chief executive, Sanjay Kumar, awaits trial. Why, then, was CA brass allowed to stick around for months after the scandal broke, running up tens of millions of dollars in company legal bills and overseeing a settlement made necessary by their own alleged misdeeds?

That question enrages Sam E. Wyly, a big CA shareholder hurt in this scandal. He sold his company, Sterling Software, to CA for $4 billion in 2000 and has been a painful presence ever since. He argues CA further abused its investors by failing to force the sullied execs to cover the settlement's costs. Wyly sees a three-sided conspiracy: the company officials who fried the financials; the outside lawyers they hired, ostensibly to unearth the fraud, but who, he says, protected the wrongdoers; and plaintiff lawyers who led the shareholder case.

This month Wyly filed a motion against Milberg Weiss Bershad & Schulman and two other plaintiff firms in New York state court, alleging they willfully and wrongfully withheld from him documents, which he says would help him in his fight to force the conspirators, not the company, to cover the settlement. Meanwhile he pursues the suit he filed last summer in federal court in Brooklyn, aimed now at 22 former and current CA execs and directors. He has also sued the company in Texas state court. And he has pending two other legal motions to crack open the $174 million settlement, paid with CA's own stock, so as to force the culprits to pay the tab. For now the bad guys haven't had to pay a dime toward the company's litigation costs, although some have returned a fraction of their ill-gotten bonuses.

"How is it that this company paid hundreds of millions of dollars to settle lawsuits and for legal fees, when these guys had walked away with all of this money?" Wyly says. In fiscal 1999 former chairman Charles Wang earned $655 million in total compensation, Kumar $330 million; both are named in Wyly's suit against the brass. (Wang has not been charged but has been a defendant in earlier lawsuits.) A lawyer for Wang declined comment; Kumar's attorney says his client denies all wrongdoing and will be exonerated.

As scandals go, Computer Associates was comparatively small. WorldCom fraudulently claimed $11 billion in profits that didn't exist. CA, for the most part, prematurely recorded sales. This, in turn, inflated executive bonuses. Company execs had begun the premature booking of sales in 1998, backdating sales contracts after a quarter ended to include the extra business, court filings state.

The problem worsened in 2000 as tech stocks collapsed and orders began to fade. In July 2000 CA told Wall Street it would miss earnings estimates, and the next day the stock plunged 44% to $29. Wyly says he and his family trusts lost $50 million in one day. (He says the scandal cost him $120 million in stock value, but CA's stock price fell less than the Nasdaq from the market peak in March 2000 to April 2004, when the company restated.) He pored over the financials but found them impossible to decipher.

So in 2001 Wyly launched a proxy fight to fire CA management; he failed. Then he waged a second effort in 2002 to remove certain executives and directors; the proxy battles cost him $14 million out of the total $22 million he has spent on his fights. In a settlement, Wyly received $10 million and the assurance that ca would clean up its accounting. In return, he agreed to forgo publicly criticizing the company. But other shareholders continued waging war, filing a class action in February 2002 alleging financial misstatements. CA issued a statement denying any wrongdoing.

By June 2002 federal investigators were looking into CA's accounting. Kumar & company-Kumar wasn't forced out until June 2004-eventually hired two law firms to defend against the allegations: Wachtell, Lipton, Rosen & Katz to handle the government investigation for the company and Piper Rudnick to handle shareholder suits. The board's audit committee hired Sullivan & Cromwell.

In 2003 prosecutors informed the company's lawyers they had evidence that senior execs had been booking sales prematurely. In early fall, when he was pleading innocence, Woghin sent Wachtell, Lipton 23 boxes of material, much of it incriminating. As the feds descended, Wachtell handed the boxes over to Sullivan & Cromwell. Milberg Weiss settled the shareholder class action without ever reviewing thousands of pages of evidence showing the fraud was broader than previously believed, charges Wyly's attorney, William Brewer of the Dallas firm Bickel & Brewer.

"Was Sullivan helping to ferret out the fraud for investors, or was Sullivan playing down the fraud to protect company executives?" Wyly wonders. Sullivan & Cromwell says it "served in the best interest of all shareholders in uncovering wrongdoing and resolving the government investigations." Wachtell says it withheld nothing and that the boxes were in Sullivan's care; Sullivan says a company press release during the settlement took care of disclosing problems and it wasn't defending CA in the shareholder case; and Milberg Weiss says it never knew about the boxes before it settled the case. Milberg Weiss and some 20 other firms got an estimated $30 million in CA stock for its litigation role.

But, says Brewer, Wyly "would never have agreed to that $174 million settlement" if he had known of the unseen documents.

Two months after settling, CA announced on Oct. 8, 2003 that the company had "recognized certain revenue prematurely" in 2000 and that a "number of software contracts" were improperly booked. In April 2004 CA restated $2.2 billion in sales for fiscal 2000 and 2001.

Now CA is helping the feds build their case against former execs. "I'm just as mad as Wyly is at these guys," says Lewis Ranieri, CA's new chairman. "But I want the money; I don't want to be suing for the rest of my life with a chance we may see it." He adds: "I want to be cool and rational ... because I want to win." But Sam Wyly feels anything but cool and rational, and CA recently formed a "special litigation" board committee to fight him yet again. This battle, it seems, is far from over.