CA to Award Stock in Shareholder Suits Settlement

August 26, 2003 ( - Computer Associates International (CA) has decided to wrap up its raft of pending litigation by settling shareholder lawsuits with awards of 5.7 million shares to the plaintiffs who had charged the software maker with accounting malfeasance.

The settlement covers two consolidated class-action suits in federal court representing investors; a class-action brought under ERISA representing CA employees who purchased company stock through a 401(k) plan (See CA Hit with Retirement Plan Lawsuit ) , and a derivative suit filed in Delaware.  The Islandia, New York company said it would take a charge of $144 million before taxes in the current quarter to cover the cost of the settlement, according to Reuters.

Under the terms of the deal, plaintiffs – who number in the tens of thousands – and their attorneys would get 5.7 million shares if the settlement is approved by the court. Should the share price fall below $23.43, the plaintiffs have the option of taking as many as 2.2 million of the 5.7 million shares in cash – to a maximum $51.5 million.

In addition to the stock payment, Computer Associates agreed to maintain for at least three years several corporate-governance changes it had made, including limiting the number of inside directors to three.

No Admission of Wrongdoing

Despite the settlement, CA continues to insist that its accounting was proper. “The settlement is not an admission of any wrongdoing on the part of CA or its officers and directors,” a spokesman told the Wall Street Journal. CA Chief Executive Sanjay Kumar wrote in a memo to employees: “Today’s settlement is an important step forward, because with this potentially expensive, protracted legal battle now off the table, we can move ahead free of this major uncertainty and distraction,”

Many of the complaints aimed at CA stemmed from a change in accounting policy the company instituted in October 2000. Dubbed the “New Business Model” by the company, the change spread the cost of a software contract equally over the contract’s term. Before that, CA charged a large upfront fee that was recognized in the contract’s first year, then smaller maintenance fees in the remaining years.  Critics contended that, under that system, CA “rerolled” revenue from software contracts by renewing them before their terms ended in exchange for greater upfront payments, thus giving the appearance of higher revenue and an increased volume of deals.

Cover Up?

In reality, plaintiffs contend, the New Business Model, which effectively cut annual revenue to about $3 billion from about $6 billion, was a means of covering up a sharp revenue decline that management knew would happen when the economy softened and customers stopped doing rerolls.

The software maker has also been slapped with separate shareholder complaints that its board was beholden to management, particularly after it approved in 1995 a plan that in 1998 awarded more than $1 billion in restricted stock to Kumar, company founder Charles Wang and Executive Vice President Russell Artzt. The executives later returned part of the grant to settle a shareholder suit.

The agreement comes the firm as Computer Associates is taking pains to improve an image tarnished by years of questions about its revenue-recognition policies and executive-compensation practices, as well as a joint Department of Justice and Securities and Exchange Commission probe of its accounting The government inquiries are continuing.