Sanjay Kumar, the former CEO of Computer Associates International Inc., pleaded guilty to financial fraud charges today when he appeared in federal court in Brooklyn, N.Y., according to a spokesman for the U.S. attorney handling the case.
Kumar and co-defendant Stephen Richards, the company's former worldwide sales head, both pleaded guilty to all eight counts against them, including securities fraud, obstruction of justice and perjury, according to the U.S. Attorney's office.
Sentencing is set for Sept. 12. Both men faced the prospect of up to 20 years in jail prior to their guilty pleas. That maximum sentence will be reduced because of the pleas, according to the U.S. Attorney's spokesman.
Kumar and Richards had been accused of fraudulent accounting practices, including falsely reporting hundreds of millions of dollars in revenue for licensing agreements during fiscal quarters in which the deals had not yet been finalized.
"The guilty pleas today of Computer Associates’ former CEO and its former head of worldwide sales are the culmination of the government’s successful investigation into a culture of corruption and fraud at Computer Associates,” said U.S. Attorney Roslynn Mauskopf.
"By choosing to lie repeatedly about Computer Associates’ financial position, the defendants violated their shareholders’ trust and the federal securities laws," Mauskopf said in a statement. "They then compounded those lies, and further damaged the corporation, by presiding over a massive cover-up."
“The pleas entered today are admissions of guilt in one of the largest corporate accounting fraud schemes on record,” said FBI Assistant Director-in-Charge Mark Mershon. “The actions of these defendants, along with others who have already pled guilty, led to the deliberate misstatements of Computer Associates’ revenues to the tune of over $2 billion. This apparent but ephemeral performance by the company propped up its stock price, causing investors to suffer untold losses when the scheme collapsed."
According to a statment from Mauskopf's office, Kumar and Richards admitted obstructing the government’s investigation by offering false explanations for fraudulent accounting practices to the company’s lawyers, with the intent that those lawyers would repeat the explanations to government investigators. The two men also lied to federal agents in an effort to conceal the scheme, the statement said.
Several former CA executives have already pleaded guilty to related charges and were expected to testify against the two men. CA, which earlier this year changed its name from Computer Associates International Inc. to CA Inc. as part of an attempt to improve its image in the wake of the fraud charges, was forced to pay $225 million in 2004 to compensate victims.
"It's about time," said Dale Ross, senior database consultant at Polaris Technologies Ltd. in Calgary, Alberta, and a user of CA products. "Once you see guys like Sanjay led away in handcuffs, maybe it will put the fear of God in others."
Ross has been an enthusiastic early adopter of a new CA product, Unicenter Database Command Center, announced today, and has been familiar with CA and its products for years.
Since Kumar was charged and CA began making efforts to reform -- including hiring new top managers and an ethics officer -- the company has been "taking the right steps," Ross said, adding that he never felt CA had a cultural problem with poor ethics.
Rich Ptak, an analyst at Ptak, Noel & Associates in Amherst, N.H., said he was "surprised to some extent" to hear of Kumar's guilty plea. Ptak, who has met with Kumar in the past and has followed CA extensively, said the plea and the initial charges "are obviously not a nice thing for Sanjay."
Ptak said he "always respected Sanjay, since he seemed to be doing the right thing for the company and was moving it out from under the image of the old CA run by Charles Wang. That old image of CA seems to be in the past, although some competitors like to keep reminding people of CA's past."
Sanjay was "very customer-friendly, people-oriented, and was getting things away from Wang's restricted management style by giving more responsibility to the managers," Ptak said. CA's current CEO, John Swainson, has gone even further with Sanjay's customer focus, he said.
"CA has done remarkably well, especially with getting reorganized with Swainson and company," Ptak said. "There is no question in my mind that the company has strong leadership and has made significant progress going forward. Clearly they were shell-shocked for a year or so, but now customers are pleased with the way things are working out."
In February, lawyers for Kumar and Richards had asked the judge in the case to dismiss charges that they interfered with government probes into fraudulent accounting practices at the Islandia, N.Y.-based software company.
But U.S. District Court Judge I. Leo Glasser denied that motion.
Last summer, while preparing for their case, government prosecutors filed a superceding indictment that outlined some of the charges and evidence against Kumar and Richards.
In that revised indictment, the government asserted that Kumar and Richards knowingly distorted CA's accounting and took steps to hide their actions.
In early 2000, for instance, CA signed a $44.5 million license deal with a "nearly insolvent" customer in which it also had an ownership stake. It then back-dated the contract so it could be recorded in the prior quarter, according to the indictment. In the next quarter, expecting that it would not be able to collect on the contract, CA reversed the revenue in its internal records but did not publicly restate its results.
Kumar was also accused of authorizing a $3.7 million consulting contract in early 2003 that essentially amounted to hush money for an unnamed executive at a CA customer company who knew of CA's accounting improprieties. According to the indictment, this executive had arranged a $27 million license contract with CA in March 2000, but as part of the deal, CA spent a similar amount on software from the executive's company. Neither software package was ever used, making the deal a "revenue swap" that can't legally be treated as a sale.
When the unidentified executive threatened to alert government investigators to the arrangement, Kumar conspired with CA's general counsel to arrange the consulting payoff, the indictment said.
CA reached a deferred prosecution agreement with the government in September 2004, under which it agreed to pay $225 million to a restitution fund to compensate victims of its fraud and take various steps to strengthen its corporate governance and cooperate with government investigators. If after 18 months CA is deemed to have complied with its obligations, the U.S. Attorney's Office will seek to dismiss charges against the company.