New York Times

3 Plead Guilty in Computer Associates Case

By ALEX BERENSON Published: April 9, 2004

As three former executives of Computer Associates pleaded guilty to securities fraud yesterday, the federal prosecutors investigating the company's accounting practices left little doubt that they were zeroing in on Sanjay Kumar, the company's chairman and chief executive.

Federal prosecutors indicated yesterday that they hoped to charge Sanjay Kumar, right, shown with Charles B. Wang in a 2001 meeting. Associated Press

Ira H. Zar, the former chief financial officer at Computer Associates, is cooperating with federal prosecutors.   Stephanie Keith for The New York Times

Mr. Kumar was the second-ranking executive at Computer Associates throughout the late 1990's, a period when current and former employees say the company used accounting tricks to overstate its sales and profits.

Charles B. Wang, the company's founder and its top executive during that period, retired in 2002. In 1998, Mr. Wang, Mr. Kumar and a third executive received a $1.1 billion bonus tied to the performance of the company's stock.

The three men who pleaded guilty yesterday are all cooperating with federal prosecutors in Brooklyn. They include Ira H. Zar, the former chief financial officer, who said in his plea that he reported directly to Mr. Kumar. Prosecutors rarely offer defendants shorter sentences in return for their cooperation unless they think that the defendants have information that may be valuable in pursuing higher-ranking executives.

Roslynn R. Mauskopf, the United States attorney for the Eastern District of New York, said yesterday that prosecutors were continuing to investigate the company. A lawyer for Mr. Kumar said his client was cooperating with the government's investigation and looked forward to continuing to run Computer Associates.

Besides Mr. Zar, the other executives to plead guilty yesterday were David Kaplan and David Rivard, lower-ranking Computer Associates executives. Standing before Judge I. Leo Glasser at Federal District Court in Brooklyn, Mr. Kaplan and Mr. Rivard each pleaded guilty to one count of conspiracy to commit securities fraud and one count of conspiracy to obstruct justice. Mr. Zar pleaded guilty to three counts of securities fraud and obstruction of justice.

Mr. Zar faces up to 20 years in federal prison, and Mr. Kaplan and Mr. Rivard face 10 years. But the sentences for all three could be greatly reduced if they continue to cooperate with the investigation.

In their pleas, the men depicted a wide-ranging conspiracy at Computer Associates to falsify the company's books and hide the falsifications from prosecutors, as well as from private lawyers that the company hired in 2002 to help it cooperate with the federal investigation.

Mr. Zar said he had met with two other senior Computer Associates executives on Jan. 6, 2000, to discuss the company's sales for the previous quarter. The sales fell short of Wall Street analysts' forecasts, so the men decided to continue to book new sales as if they had taken place in the previous quarter, according to the plea. To hide the backdated sales from auditors, employees of Computer Associates deleted time stamps that showed when the contracts had actually been faxed to the company.

"I knew my conduct was wrong at the time," Mr. Zar said. "I knew that what I was doing was wrong, and I accept full responsibility."

Mr. Zar and his lawyer hurried out a side door of the courtroom after his plea and refused to comment to reporters.

The actual accounting fraud to which the men pleaded guilty is relatively narrow. They admitted deliberately booking sales and profits for Computer Associates on contracts that were signed shortly after the end of the quarter in which the sales were booked. Unlike the esoteric accounting gimmicks that current and former employees have said Computer Associates used to inflate its reported profits, the practice of backdating contracts is not uncommon at publicly traded companies.

But Computer Associates carried the practice to an extreme, according to the guilty pleas. In some quarters, more than 20 percent of the company's revenue came from backdated contracts. In any case, prosecutors have focused on the backdating of contracts in lieu of trying to win convictions on the more complicated techniques that they suspect Computer Associates used.

In a parallel action, the Securities and Exchange Commission charged Mr. Zar, Mr. Kaplan, and Mr. Rivard with civil violations of the securities laws. The three men accepted part of the commission's findings, agreeing to be barred permanently from serving as officers or directors of a public company. Litigation to determine civil penalties and to decide whether the men will have to give up any profits is continuing.

Computer Associates also said yesterday that it had fired Steven Woghin, its general counsel, who is also a target of the federal investigation. In a complaint, the S.E.C. said that Mr. Woghin had told Mr. Kaplan "to respond to questions from Wachtell with half-truths and vague answers." Mr. Woghin could not be reached for comment

Wachtell, Lipton, Rosen & Katz is the law firm that Computer Associates hired in 2002 to conduct its internal investigation.

Computer Associates also said yesterday that the federal investigation could result in charges against it or its officers. But the company said it thought that its current business practices and financial results "are unaffected by the accounting practices that were in place" before October 2000. At that time, Computer Associates changed the way it sold software.

Computer Associates, based in Islandia, N.Y., dominates the market for mainframe utility software, programs that help the computers used by big companies run more efficiently. The company also offers security and storage software.