Computer Associates 2006 Annual Report Download - page 145

Note 7 — Commitments and Contingencies (Continued)
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 that had
been pending in Delaware. 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 stockholders
represented in the three class action lawsuits, including payment of attorneys’ fees. The Company has completed
the issuance of the settlement shares as well as payment of $3.3 million to the plaintiffs’ attorneys in legal fees and
related expenses.
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 stockholders arising from 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 stockholders relating to the same matters.
On October 5, 2004 and December 9, 2004, four purported Company stockholders served 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 stockholders to pursue individual claims against certain present and
former officers of the Company. The motion states that the moving stockholders do not seek to file claims against
the Company. These motions (the 60(b) 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 the 60(b)
Motions. No hearing date is currently set for the 60(b) 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 and Compliance
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 and Compliance 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.
Following the Audit and Compliance Committee’s preliminary report and at its recommendation, four executives
who oversaw the relevant financial operations during the period in question, including Ira Zar, resigned at the
Company’s request. On January 22, 2004, one of these individuals pled guilty to federal criminal charges of
conspiracy to obstruct justice in connection with the ongoing investigation. On April 8, 2004, Mr. Zar and two other
former executives pled guilty to charges of conspiracy to obstruct justice and conspiracy to commit securities fraud
in connection with the investigation, and Mr. Zar also pled guilty to committing securities fraud. The SEC filed
related actions against each of the four former executives alleging that they participated in a widespread practice
that resulted in the improper recognition of revenue by the Company. Without admitting or denying the allegations
in the complaints, Mr. Zar and the two other executives each consented to a permanent injunction against violating,
or aiding and abetting violations of, the securities laws, and also to a permanent bar from serving as an officer or
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