Based in Islandia, N.Y., Computer Associates dominated the market for mainstream utility software, programs that helped the computers used by big companies run more efficiently. The company also offers security & storage software. Computer Associates used variety of tricks to inflate its reported profits during the 1990’s. In October 2000, the company changed the way it sold software and the way it reported its sales.
The Securities and Exchange Commission announced securities fraud charges against Computer Associates International, Inc. and three of the company's former top executives -- Sanjay Kumar, former CEO and Chairman, Stephen Richards, former Head of Sales, and Steven Woghin, former General Counsel. The SEC alleges that from 1998 to 2000, Computer Associates routinely kept its books open to record revenue from contracts executed after the quarter ended in order to meet Wall Street quarterly earnings estimates. In total, Computer Associates prematurely recognized $2.2 billion in revenue in FY2000 and FY2001 and more than $1.1 billion in premature revenue in prior quarters. In addition, Computer Associates, through former executives Kumar, Richards and Woghin and others, obstructed the SEC's investigation into the company's accounting practices.
The SEC's complaints, filed in the United States District Court for the Eastern District of New York, allege as follows: •With no regard for generally accepted accounting principles (GAAP) or their financial reporting obligations, the defendants manipulated Computer Associates' quarter end cutoff to align Computer Associates' reported financial results with market expectations. •During the period from at least Jan. 1, 1998, through Sept. 30, 2000, Computer Associates prematurely recognized over $3.3 billion in revenue from at least 363 software contracts that Computer Associates, its customer, or both parties, had not yet executed, in violation of GAAP. •Executives, including defendants Kumar, Richards, and Woghin, held Computer Associates' books open for several days after the end of each quarter to improperly record in that quarter revenue from contracts that were not executed by customers or Computer Associates until several days or more after the expiration of the quarter. As a result of this improper practice, Computer Associates made material misrepresentations and omissions about its revenue and earnings in SEC filings and other public statements. For example, in the first, second, third and fourth quarters of FY2000, respectively, Computer Associates inflated its properly recorded revenue by approximately 25%, 53%, 46%, and 22% by improperly including prematurely recognized revenue. •After Computer Associates substantially refrained from recognizing revenue prematurely from contracts that its customers had signed after quarter end during the first quarter of its fiscal year 2001, the company missed its earnings estimate and Computer Associates' stock price dropped over 43% in a single day. •Computer Associates continued the improper practice of improperly recognizing revenue from contracts that Computer Associates signed after quarter end through the fiscal quarter ending Sept. 30, 2000.
The victims in the case were the shareholders who were led to believe the company was more profitable than it was. They paid more than they should have for the stock, or kept in when, had they known the truth, they would have sold. These shareholders suffered enormous losses once the practices were revealed. When the company stopped the practice at the end of the first quarter of 2001, it fell short of the Wall Street earnings estimate and the share price fell by more than 43% in a single day. There was another class of victims as well - employees. The company said it would trim its workforce by 800 people, or 5%, in order to pay the $225 million settlement to SEC.