Computer Associates 2004 Annual Report Download - page 37

May 30, 2003, asserted claims of breach of fiduciary duty under ERISA, the federal Employee Retirement Income
Security Act. The named defendants were the Company, the Company’s Board of Directors, the CASH Plan, the
Administrative Committee of the CASH Plan, and the following current or former employees and/or directors of the
Company: Charles B. Wang; Sanjay Kumar; Ira Zar; Russell M. Artzt; Peter A. Schwartz; Charles P. McWade; and various
unidentified alleged fiduciaries of the CASH Plan. The complaint alleged that the defendants breached their fiduciary
duties by causing the CASH Plan to invest in Company securities and sought damages in an unspecified amount.
A derivative lawsuit was filed against certain current and former directors of the Company, based on essentially the same
allegations as those contained in the February and March 2002 stockholder lawsuits discussed above. This action was
commenced in April 2002 in Delaware Chancery Court, and an amended complaint was filed in November 2002. The
defendants named in the amended complaints were the Company as a nominal defendant, current Company directors
Messrs. Artzt, Lewis S. Ranieri, and Alfonse M. D’Amato, and former Company directors Ms. Shirley Strum Kenny and
Messrs. Wang, Kumar, Willem de Vogel, Richard Grasso, and Roel Pieper. The derivative suit alleged breach of fiduciary
duties on the part of all the individual defendants and, as against the current and former management director defendants,
insider trading on the basis of allegedly misappropriated confidential, material information. The amended complaints
sought an accounting and recovery on behalf of the Company of an unspecified amount of damages, including recovery
of the profits allegedly realized from the sale of common stock of the Company.
On August 25, 2003, the Company announced the settlement of all outstanding litigation related to the above-referenced
stockholder and derivative actions as well as the settlement of an additional derivative action filed in the Federal Court in
connection with the settlement. Following the approval of the Federal Court, which was granted in December 2003, the
Company agreed to issue a total of up to 5.7 million shares of common stock to the shareholders represented in the
three class action lawsuits, including payment of attorneys’ fees. The settlement provides that if the Company’s share
price is below $23.43 per share at the time of distribution, up to 2.2 million of the 5.7 million shares will be payable in
cash at that price — or approximately $52 million in cash. In that case, the stock portion of the settlement would be
reduced to no less than 3.5 million shares. In January 2004, approximately 1.6 million settlement shares were issued
along with approximately $3.3 million to the plaintiffs’ attorneys for attorney fees and related expenses. In March 2004,
approximately 0.2 million settlement shares were issued to participants and beneficiaries of the CASH Plan. The remaining
3.8 million settlement shares, less any additional administrative expenses, will be issued to class members in the stockholder
class action lawsuits upon completion of the claims administration process. At the time of the distribution to the class
members, if the price of the Company’s stock is below $23.43 per share, a portion of the remaining settlement shares
(currently up to 1.5 million shares) will be distributed to the class members in cash at the price of $23.43 per share.
Therefore, as of March 31, 2004, the Company’s maximum cash distribution would have been approximately $35 million.
In settling the derivative suit, the Company committed to maintain certain corporate governance practices. Under the
settlement, the Company and the individual defendants are released from any potential claim by shareholders relating to
accounting-related or other public statements made by the Company or its agents from January 1998 through February 2002
(and from January 1998 through May 2003 in the case of the employee ERISA action), and the individual defendants are
released from any potential claim by the Company or its shareholders relating to the same matters. Ernst & Young LLP
is not a party to the settlement. The settlement was reviewed by the independent directors who chair the Company’s
Governance, Audit, and Compensation and Human Resource Committees of the Board of Directors as well as by all
non-interested, independent directors who were not named in any of the suits. It was also approved by the Board’s
independent directors as a whole.
The Company has been providing documents and other information to the United States Attorney’s Office for the Eastern
District of New York and the staff of the Northeast Regional Office of the SEC in connection with an ongoing investigation
concerning certain of the Company’s accounting practices, including its revenue recognition procedures in periods prior to
the adoption of the Company’s Business Model in October 2000. On January 8, 2004, the Company received a “Wells Notice”
from the staff of the SEC. The Wells Notice notifies the Company that the staff of the SEC is considering recommending
that the SEC bring a civil enforcement proceeding against the Company for possible violations of the federal securities
laws arising from the Company’s premature recognition of revenue from software license agreements in periods prior to
the adoption of the Company’s Business Model, including revenue from contracts that were not fully executed or otherwise
finalized until after the quarter in which the revenue associated with such contracts had been recognized. On April 14, 2004,
the Company responded to the Wells Notice and is discussing with the United States Attorney’s Office for the Eastern
District of New York and the staff of the SEC a resolution of the investigation against the Company.
In response to the investigation described in the preceding paragraph, the Board of Directors authorized the Audit
Committee to conduct an independent investigation into the timing of revenue recognition by the Company. On October 8,
2003, the Company reported that the ongoing investigation by the Audit Committee had preliminarily found that revenues
were prematurely recognized in the fiscal year ended March 31, 2000, and that a number of software license agreements
appeared to have been signed after the end of the quarter in which revenues associated with such software license
CA 2004 FORM 10-K | PAGE 9