Kumar and Richards plead guilty in CA fraud case

Sanjay Kumar, the former CEO of Computer Associates, and New Zealand-born head of worldwide sales Stephen Richards have pleaded guilty to fraud charges in a New York court

Sanjay Kumar, the former CEO of Computer Associate, pleaded guilty to financial fraud charges Monday when he appeared in federal court in Brooklyn, New York, according to a spokesman for the US attorney handling the case.

Kumar and co-defendant New Zealander Stephen Richards, the company's former worldwide sales head, both appeared in court this afternoon. Richards also pleaded guilty to charges in the case.

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 finalised.

Several former CA executives have already pleaded guilty to related charges and were expected to testify against the two men. CA, which changed its name from Computer Associates International to CA in the wake of the fraud charges, was forced to pay US$225 million to compensate victims.

"It's about time," says Dale Ross, senior database consultant at Polaris Technologies in Alberta, Canada, 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, Unicentre Database Command Centre 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 says, adding that he never felt CA had a cultural problem with poor ethics.

Rich Ptak, an analyst at Ptak, Noel & Associates says 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 says 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, was getting things away from Wang's restricted management style by giving more responsibility to the managers," Ptak says. CA's current CEO, John Swainson, has gone even further with Sanjay's customer focus, he says.

"CA has done remarkably well, especially with getting reorganised with Swainson and company," Ptak says. "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 software company.

But US District Court Judge I Leo Glasser denied that motion.

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 US$44.5 million licence 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 authorising a US$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 says.

CA reached a deferred prosecution agreement with the government in September 2004, under which it agreed to pay US$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.

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