Computer Associates 2005 Annual Report Download - page 128

Table of Contents
Note 7 — Commitments and Contingencies (Continued)
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., Lewis S. Ranieri, and Alfonse M. D’ Amato, and former
Company directors Ms. Shirley Strum Kenny and Messrs. Wang, Kumar, Artzt, 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.
As part of the class action settlement, which was approved by the Federal Court 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. 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. On October 8, 2004, the Federal Court signed an order approving the distribution of the
remaining 3.8 million settlement shares, less administrative expenses. The order was amended in December 2004. The Company issued
the remaining 3.8 million settlement shares in December 2004. Of the 3.8 million settlement shares, approximately 51,000 were used for
the payment of administrative expenses in connection with the settlement, approximately 76,000 were liquidated for cash distributions to
class members entitled to receive a cash distribution and the remaining settlement shares were distributed to class members entitled to
receive a distribution of shares.
In settling the derivative suit, which settlement was also approved by the Federal Court in December 2003, the Company committed to
maintain certain corporate governance practices. Under the settlement, the Company and the individual defendants were 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 were 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 Corporate
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.
On October 5, 2004 and December 9, 2004, four purported Company shareholders filed motions to vacate the Order of Final Judgment
and Dismissal entered by the Federal Court in December 2003 in connection with the settlement of the derivative action. These motions
primarily seek to void the releases that were granted to the individual defendants under the settlement. On December 7, 2004, a motion to
vacate the Order of Final Judgment and Dismissal entered by the Federal Court in December 2003 in connection with the settlement of
the 1998 and 2002 stockholder lawsuits discussed above was filed by Sam Wyly and certain related parties. The motion seeks to reopen
the settlement to permit the moving shareholders to pursue individual claims against certain present and former officers of the Company.
The motion states that the moving shareholders do not seek to file claims against the Company. These motions have been fully briefed.
On June 14, 2005, the Federal Court granted movants’ motion to be allowed to take limited discovery prior to the Federal Court’ s ruling
on these motions. No hearing date is currently set for the motions.
The Government Investigation
In 2002, the United States Attorney’ s Office for the Eastern District of New York (USAO) and the staff of the Northeast Regional Office
of the Securities and Exchange Commission (SEC) commenced an investigation concerning certain of the Company’ s past accounting
practices, including the Company’ s revenue recognition procedures in periods prior to the adoption of the Company’ s Business Model in
October 2000.
In response to the investigation, the Board of Directors authorized the Audit Committee (now the Audit and Compliance 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 agreements had been recognized in that fiscal year. Those revenues, as
the Audit Committee found, should have been recognized in the quarter in which the software license agreements were signed. Those
preliminary findings were reported to government investigators.
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