On February 25, 2002, Wolf Haldenstein Adler Freeman & Herz LLP announced that it filed a class action lawsuit in the United States District Court for the Eastern District of New York on behalf of shareholders of Computer Associates International, Inc. ('CA' or the 'Company') (NYSE:CA) securities between May 28, 1999 and February 25, 2002, (the 'Class Period') for violations of the federal securities laws.
The Complaint alleges that defendants violated sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, by issuing materially false and misleading statements to the market.
Specifically, the Complaint alleges that beginning prior to May 1999 the Company falsely indicated that it had penetrated the distributed systems market when, in fact, it was giving away its distributed system software free, or at nominal additional cost, to customers who were also extending mainframe software licenses, and attributed large portions of the resulting revenue to the non-mainframe products. Also, beginning prior to May 1999 and ending in October 2000 when the Company extended a license during its term, it recognized revenue for the entire new license. Until June 2000, when CA began using new auditors, CA did not 'back out' the revenue from the unexpired portion of the old license, double-counting this revenue. After June 2000, CA began backing out this figure in an obscure line item -- but never disclosed that this caused revenue to be overstated by more than one hundred million dollars each quarter prior June 2000.
Defendants, in order to hide a severe drop in revenue as measured by Generally Accepted Accounting Principles ('GAAP'), announced a 'new business model,' which they represented involved offering more flexible licensing terms to customers. In fact, the 'new business model' was a cover to institute new, non-GAAP compliant accounting (which the Company called 'pro forma, pro rata'), and to obscure the fact that the switch from long-term licenses to flexible subscriptions was not a pro-active move, but a symptom of the obsolescence of CA's main product line. While the stated goal of the 'new business model' was to provide customers more flexible terms, the real purpose was to cover up the fact that CA could no longer get many of their mainframe customers to purchase the long-term licenses of mainframe software which had been the Company's mainstay.
After the announcement of the 'new business model' in October 2000 the Company issued press releases heralding moderate growth, though the GAAP figures showed a revenue decrease of nearly sixty percent. The 'pro forma, pro rata' method counted revenue from old license sales in current and future periods, using old revenues to buttress the current, deteriorating sales.
Defendants have attempted to have their cake and eat it, too. In a strong economy, CA recognized all the revenue from its sales immediately, even double-counting some revenue, showing impressive numbers. Now, in a sagging economy, they have obscured the real loss of sales by changing to a method of accounting so back-loaded that it does not conform to GAAP. The 'pro forma, pro rata' method also did not make the distinctions between product and service revenue required by GAAP, obscuring the distinction and further hiding the deterioration in sales.
CA has continued to report its GAAP figures, as required by the Securities and Exchange Commission ('SEC'). Incredibly, defendants have falsely stated that the GAAP figures are not reflective of the Company's financial position, and that the 'pro forma, pro rata' figures do accurately reflect the Company's financial position.
The Company's true condition, however, is shown by the conduct of defendants during the Class Period. After announcing the 'new business model' but before reporting under it for the first time, and contrary to the Company's representations that the rosy picture created by the 'pro forma, pro rata' figures was an accurate portrayal of the Company's position, the defendants engineered a clandestine, firm-wide layoff, hiding the terminations as individual performance-based firings. They fired possibly as many as a thousand employees with no severance package, and continue to deny that the firings constituted a layoff, even though executives involved in the layoff have confirmed it to the New York Times (as reported on March 20, 2001).
More recently, the Company was forced to withdraw a planned debt offering after Moody's questioned the quality of the Company's credit. As a result, CA admits, it was forced to draw down $600 million on one credit line to pay another.
The desperate cost-cutting by secret layoff, use of its new unrecognized accounting just when its revenue had dropped sharply, and the use of credit lines to service existing debt, demonstrate that defendants are keenly aware of the precarious financial condition of the Company, and have deliberately mislead the investing public.
The misleading picture the Company has presented has not gone unquestioned. On February 22, 2002, the Company confirmed that it was aware that both the Securities Exchange Commission and the Federal Bureau of Investigation were investigating the Company's accounting for civil, and in the case of the FBI, criminal violations. News of the criminal and civil probes, which began to surface on February 20, caused investors to flee the stock, which fell from a February 19 closing price of $25.31 to a February 22 close of $15.99, a drop of 36.8%.
Additional cases were filed on behalf of investors. On April 26, 2002, motions were made to consolidate the various cases and appoint lead plaintiff and counsel. Lead plaintiff and counsel have been appointed.
The parties agreed to settle the litigation for 5,700,00 freely tradable shares of common stock (valued at $133,551,000 based on "collar price" of $23.43) for the benefit of a class of CA common stock and options purchasers and transactors between January 20, 1998 and February 25, 2002. Please click on the links to the right to view and print the Notice of Settlement and Claim Form in this action. In order to share in the proceeds of this settlement, you needed to have submitted a valid proof of claim form to the claims administrator no later than December 31, 2003. On December 31, 2003, the Court entered judgment finally approving the settlement. As of December 23, 2004, the settlement was disbursed. The case is now concluded.
Wolf Haldenstein has extensive experience in the prosecution of securities class actions and derivative litigation in state and federal trial and appellate courts across the country. The firm has approximately 60 attorneys in various practice areas and offices in Chicago, New York City and San Diego. The reputation and expertise of this firm in shareholder and other class litigation have been repeatedly recognized by the courts, which have appointed it to major positions in complex securities multi-district and consolidated litigation.
If you wish to discuss this action or have any questions, please contact Wolf Haldenstein Adler Freeman & Herz LLP at 270 Madison Avenue, New York, New York 10016, or by telephone at (800) 575-0735 (Fred Taylor Isquith, Esq., Gregory M. Nespole, Esq., Thomas Burt, Esq., Michael Miske, Esq., George Peters, Esq., or Derek Behnke).