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CA hit with flurry of lawsuits

Computer Associates International (CA) has been hit with four lawsuits that accuse the company of misrepresenting its sales and adopting its new business model solely to conceal dwindling revenue.

All four lawsuits charge CA with falsely claiming 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 licences.

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 licence during the contract's term, the company would recognise revenue for the entire new licence without removing from its books revenue from the unexpired portion of the old licence, 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, apportioning income throughout the term of its contracts.

CA says the new model reflects its operations more accurately and provides analysts and investors with greater visibility on its future revenue. The four lawsuits charge that the new model was designed to mask declining revenue.

"Defendants have attempted to have their cake and eat it, too," said litigant Wolf Haldenstein of Adler Freeman & Hertz. "In a strong economy, CA recognised 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 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 rata formula. CA says its own formula better allows for historical comparisons of operations before and after its switch to the new business model.

Wolf Haldenstein announced its lawsuit on 25 February. Schatz & Nobel and Schiffrin & Barroway announced their own lawsuits on 6 March. The law firm Cauley Geller Bowman & Coates added its lawsuit to the pile on 7 March.

All four firms represent investors who purchased CA stock between May 28, 1999 and Feb. 25, 2002.

CA recently became the subject of preliminary investigations by the FBI, the US Attorney's Office and the US Securities and Exchange Commission. On 1 March Moody's downgraded CA's credit rating, 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," said CA chief executive officer Sanjay Kumar and chairman Charles Wang in a recent letter to shareholders.

The letter also says that while CA provides its much-criticised pro forma figures as an aid to analysts, the company is comfortable with having its performance evaluated on the basis of the GAAP numbers it also provides.

"We want analysts and investors to gauge our progress using our audited GAAP numbers," said Kumar and Wang. "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."

CA is no stranger to the courtroom.

In September 2000 a jury found CA guilty of violating the "best price rule" in its acquisition of On-Line Software. The jury determined that CA had paid a greater consideration per share to one On-Line stockholder, thus 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.

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