Four class-action law firms say they have filed lawsuits against Computer Associates International Inc. (CA), accusing the company of misrepresenting its sales and adopting its new business model solely to conceal dwindling revenue.
All four lawsuits charge CA with falsely indicating that it was expanding its sales in non-mainframe markets when it was actually giving free or discounted distributed systems software to customers extending their mainframe software licenses, according to the firms.
Until June 2000, when it changed auditors, CA also double-counted revenue, according to summaries of the lawsuits provided by the litigating firms. When CA extended a customer license during the contract’s term, the company would recognize revenue for the entire new license without removing from its books revenue from the unexpired portion of the old license, the firms said.
CA’s new business model, adopted in late 2000, also came under fire. Under the new business model, CA sells its software on a subscription basis and recognizes revenue from sales ratably, apportioning income throughout the term of its contracts.
CA says the new model more accurately reflects its operations and provides analysts and investors with greater visibility on its future revenue. The four firms charge that the new model was designed to mask declining revenue by allowing CA to use pro forma, pro rata accounting to recount revenue from old contracts and mask its declining sales.
“Defendants have attempted to have their cake and eat it, too,” said litigant Wolf Haldenstein Adler Freeman & Hertz LLP in a prepared statement. “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 (Generally Accepted Accounting Principles).”
CA offers two sets of numbers in its financial reports: a GAAP accounting of its operations and an accounting in accordance with its own pro forma, pro rata formula. CA says its own formula better allows for historical comparisons of operations before and after its switch to the new business model.
New York-based Wolf Haldenstein announced its lawsuit Feb. 25. Hartford, Connecticut-based Schatz & Nobel PC and Bala Cynwyd, Pennsylvania-based Schiffrin & Barroway LLP announced their own lawsuits late Wednesday. Little Rock, Arkansas-based Cauley Geller Bowman & Coates LLP added its own lawsuit to the pile Thursday.
All four firms are seeking to represent investors who purchased CA stock between May 28, 1999 and Feb. 25, 2002. The lawsuits were filed in the U.S. District Court for the Eastern District of New York, the firms said.
A CA spokeswoman referred to a letter to shareholders posted on CA’s Web site as the company’s official comment on the various charges levied against it in recent weeks. CA learned late last month it is the subject of preliminary investigations by the U.S. Federal Bureau of Investigation, the U.S. Attorney’s Office and the U.S. Securities and Exchange Commission. Moody’s Investors Service Inc. downgraded CA’s credit rating Friday and changed its outlook to “negative.”
“Despite recent media reports, you should know CA is healthy. We are growing and continue to have strong cash flows,” CA chief executive officer Sanjay Kumar and chairman Charles Wang wrote in a letter to shareholders dated Monday and posted on CA’s Web site.
The letter also says that while CA provides its much-criticized pro forma figures as an aid to analysts, it’s comfortable having its performance evaluated on the basis of the GAAP numbers it also provides in its financial reports.
“We want analysts and investors to gauge our progress using our audited GAAP numbers. We provide pro forma numbers purely as a convenience to the many investors and analysts who still say they want them in order to make meaningful comparisons of our financial performance during a period of transition,” the letter says.
CA has had trouble before with class-action lawsuits, which are legal actions initiated on behalf of a group of litigants with a common grievance.
A jury found CA guilty in Sept. 2000 of violating the “best price rule” in its acquisition of On-Line Software Inc., a purchase that took place in the early 90s. The Brooklyn jury determined that CA had paid a greater consideration per share to one On-Line stockholder, violating a provision requiring that all shareholders in a tender offer receive the best price offered to any other shareholder.
Earlier that year CA settled shareholder litigation arising from a stock-option grant awarded to three of its top executives, including Wang and Kumar. The three executives returned 4.5 million shares of CA stock, roughly a quarter of the number that had been awarded to them. At the time, the 4.5 million shares were valued at US$260 million.
CA, based in Islandia, N.Y., is at http://www.ca.com/
