6/01/2007

STEPHEN RICHARDS AND THE CA FRAUD

My Weekend Herald exclusive on Stephen Richards, the New Zealander caught up in the Computer Associates securities fraud scandal is out now. You can read it here.

The overall feeling I'm left with after meeting Stephen again and researching the story is that a huge amount of good talent was frittered away in his whole debacle.

Kumar was already a wealthy man before the period covered by the indictment. Stephen was making serious money himself. I just can't explain what possessed these men to
let this go on and to be complicit in it. It's do to with the lust for power, wealth and prestige within the industry and is something only men as ambitious and confident as these would understand.

As a companion piece to the article, here is an abridged excerpt from the 12,000 word transcript of my San Francisco interview with Stephen Richards...

STEPHEN RICHARDS INTERVIEW – MONDAY DECEMBER 4, 2006


PG: Through the 90s at CA, how sales driven were they? Was there a huge amount of pressure to get sales in with pretty aggressive sales targets?


SR: Yeah, always aggressive sales targets and the culture was always very sales focused. Everybody was focused on doing that. Remember that in the early to mid nineties, access to internet was not as strong as it is today. So the whole concept of the stock price and how the company was performing, you were kind of a little distant from that. There was an element of knowing that you were only a small fish in a big sea and that beating your number by 20 per cent was going to make a difference but not a great deal of difference. I think Australia was doing a hundred million in revenue a year and when you think the company was doing four or five billion in revenue, it’s a pretty small percentage.

PG: So it wasn’t until you came to the US that those types of things really started to become more apparent to you, stock price movements and things like that?


SR: Yeah, and one of the things that I tried to do as far as my reports around the world were concerned, was give them a level of visibility as to why this was important. What a difference Italy or Hong Kong or China could make to the overall performance of the business. You’d let them know that their contribution was important versus irrelevant to the overall business.

PG: Being in the states in 1998, we’re coming into dotcom boom era, people more focused on stock price movements, could you see that people were hanging more on these quarterly earnings, hanging more on the stock price? Was it something the company became increasingly sensitive about?

SR: In the industry that’s very true. CA was never considered to be part of the dotcom boom. They were a legacy provider in legacy markets so they didn’t see the explosive growth in their stock price that a Sun Microsystems or Oracle or Microsoft saw during that timeframe. Growth was good but much more stable as far as revenue growth was concerned and certainly stock price growth. I don’t think we saw a change in the organisation based on those markets. Unicenter was just coming to be a real force in that area. That was probably the main product we had to approach those sorts of technology companies with.

PG: As far as analysts were concerned, were you seeing more of an obsession with the share performance of the company?

SR: I didn’t have exposure to the analysts until around the North American business. But they were very interested in customer satisfaction because that had been a challenge for the business historically. Because we were considered a legacy player, they had a number of other legacy players they followed as well, BMC, Compuware, to a lesser extent IBM. Their focus was very much on the acquisition of competitive replacements versus not necessarily the revenue growth you were seeing, but they were worried about the sustainability and growth of those markets. There’s no doubt those markets are big markets but there’s also, when you look at the mainframe base as an example, only so many mainframes in North America, only so many worldwide, if you’re going to continue increasing your revenue, you’ve got to be taking business from other companies in order to continue to grow your business. They were focused on which deals did you replace BMC on, or IBM or Compuware. That was their predominant focus as we moved forward.

PG: So leading up to the millennium, the perception was that it was a legacy company trying to change and there was a little conservatism on the street about the prospects of the company. But there were other things going on in the company, Wang made that huge pay out to himself and a couple of others. What did you think when you saw that happening?

SR: I had a different level of knowledge about it than most people did. In hindsight, I think everybody would agree it was about the dumbest thing the company ever did. Not the least of which was a level of anger that the market and the customers expressed over that size of a transaction. But you know, I knew for the previous three years, those three guys had not received any options at all. The reality is if they’d received consistent grants in line with what they’d received previously, the numbers would have been much the same based on the growth of the business and the growth of the stock price. It was a dumb thing for the compensation committee to do, it was a dumb thing for those three leaders to accept that it was the way they were going to have it done. They’d have been much better just taking options like everyone else in the industry does. Nobody bats an eye at the size of the option payments the CEO of eBay or Yahoo gets because they’ve been earned over a period of time. It’s not just one big number put out there as a chunk of money and I think there was a very negative reaction to that in the marketplace.

PG: That reflected badly on the company, but did you feel, that if you played your cards right, you could expect a similar sort of remuneration yourself?

SR: No. I thought it was a one-off. Frankly, I thought it was irresponsible. And the company learnt some lessons through that process. I didn’t have an expectation that one day I could take in something like that. I was happy earning the money, the option allocations I was getting. I was focused on growing the profitability and stock price of the company and being able to benefit that way.

PG: It was your ambition to lead CA?

SR: Yes.

PG: Sanjay was grooming you as his right hand man?


SR: I believe so, yes.

PG: This brings us up to the time covered by the indictment. If this was going on so long, why did they only focus on those quarters in 1999 and 2000? Why did they hone in on that timeframe?


SR: I really don’t know. I think it was the last two years of the old business model. The Government has neve expressed any concern over the new business model and the way those transactions worked. Those were probably the last two fiscal years they could look at and say “this is the behaviour that existed in the company for a long time, these were the last two years that it existed.”

PG: If they’d looked back earlier, the policy would have been the same in the 1990s?


SR: Yep. Absolutely, even back into the ‘80s.

PG: Do you think from your interaction with other software companies that the sales guys in those organisations were doing exactly the same type of thing?

SR: Absolutely. It was an industry-wide practice. I think it’s important that people understand the difference between some of these types of transactions and the way that business was conducted and the way some of the other bigger names that had significant problems. CA is still a viable and thriving business today. The transactions were not made up, they were not fraudulent. They were legitimate transactions, customers paid for the software, they had valid licence agreements. It wasn’t a case of dreaming up something out of nothing then sticking it in the books or pulling it out of the following quarter. These were legitimate transactions that carried cash with them. The cashflow of the company was never affected by any of the processes.

PG: Even in the restating it was only a couple of million dollars –

SR: A couple of million dollars on the earnings, but from a cashflow perspective no change. We’ve argued that the valuation of the company is obviously tied to cashflow as opposed to the earnings aspect of the business. Fundamentally, I’m not sure that there was a tremendous amount of impact on CA’s ongoing viability associated with this.

PG: So you think it’s unfair to tar CA with the same brush as Enron, WorldCom, Adelphia and all those others?


SR: Yeah. They’re radically different. WorldCom bankrupt, Enron bankrupt, Adelphia bankrupt, it’s a radically different environment to those. There were no shell companies where liabilities were hidden or liabilities converted into assets or any of that kind of stuff. This was simply a timing issue of a deal coming in and being recognised two or three days earlier as opposed to two or three days later. You talked about the restatement. When you go back and restate, it nets out to zero, because it a quarter starts on the fourth and finishes on the fourth, you’ve still got 90 days. It’s the fact that at some point in time someone had started that process of cutting it off on the fourth as opposed to the 30th or the 31st. The quarters didn’t get any longer, you still had that 90 day period, you’re just lagging by those three or four days. If the company decided, say, it was going to do a quarter or year-end close on the 4th of April and not on the 31st of March, none of this would be a problem. The company would report it in the normal course of business.

PG: Mark Schonfield from the SEC summed up CA’s actions when he released he released the indictment as: “like a team that plays on after the final whistle has blown, Computer Associates kept scoring until it had enough points to make every quarter look like a win.” Some of the percentages of revenue taken from the next quarter were significant percentages, 20 or 30 per cent. It’s implied in the indictment that towards the end of each quarter, you and Sanjay met with Ira to discuss how you were looking for the end of the quarter. What were those meetings like?

SR: I always viewed those meetings as something of a game. I was never sure if I was being motivated to go out and close more business, get stuff in that had slipped so it could be counted in the following quarter. Ira was always very tight-lipped about the overall performance of the business. Anytime he would talk about ‘this is how much we need’ or ‘here’s how much we’ve got’, there would be rounding involved. ‘How much is maintenance for the quarter Ira?’ ‘Well, let’s say it’s $300 million for the quarter.’ ‘Well, it’a either $300 or it’s $290 or it’s $310. It’s not $300.’ There was always a lot of flex in the positions that he would report. Because of that, I felt it was almost a tool to keep the motivation of the sales organisation as high as possible and drive them to close as many transactions as they could. When you look at any software company and the revenue that they generate, you get towards the end of the final month of the quarter, it’s not unusual to see 70 per cent of revenue delivered in the final month of the quarter and of that 70, 70 or 80 percent delivered in the final few days of the quarter. From a business process perspective, we used to focus very hard on making sure once a quarter had ended there were deals that were just about closed but hadn’t been closed, and the danger was always that if you let those transactions slip, and consistently slip, you didn’t see them again until the last ten days of the following quarter. The purchasing offices of the buying company weren’t motivated to get a transaction done. They thought they’d have more leverage towards the end of the quarter. They’ve all been trained in the way of US software companies which means you negotiate at the last minute to get the best price. So we worked very hard on the concept of ensuring that once a quarter had closed, that any deals that had slipped, or that we had missed in that particular timeframe, were things that we’d go after aggressively in the first 14 days of the following quarter so you weren’t chasing the same deals quarter after quarter in the last ten days of the quarter.

PG: What role did you play in setting the sales targets for the company, the targets on which those analyst made forecasts for the company’s performance for the quarter?

SR: The process of analysts setting a forecast for the company is actually very unscientific. A whole bunch of them go out and identify what they think is going to be a reasonable number for the company to earn. In many respects they lead you to the number rather than you leading them to the number. We’d sit down at the start of each fiscal year and look at what the consensus estimate was for the next 12 months from a revenue perspective and set the internal quotas based on those numbers. You have a little bit of flexibility in terms of being able to talk down the top guy or talk up the bottom guy to get him more in line, but invariably, if you want the company to perform to the expectations of Wall Street, then you really need to end up taking their numbers rather than using yours.

PG: During those quarters, CA either hit the analyst forecasts or exceeded them by a cent or two, so it was very much driven by analyst expectations.

SR: Yeah and that’s a reflection of any sales-driven culture. But when you get to the number, even if it’s a psychological thing, there’s a drop off in intensity, deep-breathe, I made it, now I can focus on the next quarter. Whether you beat it by a penny or two pennies, the business itself had so many components of revenue, whether it’s channel revenue or maintenance revenue, the way that they were recognising revenue back in those days had interest income, had revenue from older contracts that came in over time. So the actual new component of revenue, as in new deals that you were doing, was probably only 40 per cent of the overall revenue for the business for the quarter. So to be able to beat the street by a penny or two pennies, you’d need to be $20 - $30 million over the revenue number. That’s still a pretty big number and miss by a penny or two pennies and you’re $30 - $40 million short of that number. There’s been a lot made of hitting the number exactly or one or two pennies over. What people need to understand is that there’s a lot of money that goes into one or two pennies. Just because of the culture of the organisation being so sales-focused, we’d give a number at the start of every quarter to people and they would be aggressively pushed to deliver on that number. That’s the way the business had always performed.

PG: What was the atmosphere like in those meetings you had with Sanjay and Ira towards the end of the quarters? Were they incredibly stressed if they could see there was going to be a shortfall that meant they’d miss that earnings expectation from the analysts? Was there an atmosphere in the company that you had to get there no matter what?


SR: No, I don’t think so. There were a number of occasions where we pre-announced having missed results and that’s a stressful situation to go through. But every quarter would be reasonably controlled and well managed. One of the things I was always frustrated with was the financial organisation and looking at the projection of the sales numbers and saying ‘that’s never going to happen, we’ll take half of that or we’ll take a quarter of this,’ and over time we built up a better level of credibility with the finance organisation, so that when we said we were going to deliver another $200 million before the end of the quarter, we could be counted on to deliver that. Those meetings in many respects, were a tool to motivate me and motivate the sales organisation than anything else.

PG: This whole thing about the 35 day month, was that a generally accepted thing at CA that was widely known about?

SR: From a sales perspective, the concept of having some time to close out the transaction and make sure you closed out your slipped deals was something that was very common in the company, but also very common in the industry. It’s just good practice. It’s just the mentality of both the sales organisations and the procurement offices.

PG: So you didn’t see anything wrong with this, it was a practice before you became VP or worldwide sales, it was something you thought was happening widely across the industry, so saw no problem in going to your sales people in the first few days of the following quarter and saying ‘hurry up guys, we need to get this accounted for because we’ve got to make our figures for the quarter.

SR: No, I don’t think I ever reflected it as that, more, that we needed to continue to push the transactions, because if we don’t close that transaction we’ll be looking at it in 90 days time. That level of intensity was more about making sure that any deal that had slipped was a deal we’d continue to focus on and try to close in a reasonable timeframe. Was there a knowledge of it within the organisation? Probably, but certainly not one that I fostered.

PG: The indictment implied that there was a distinct move by the senior executives to make the paperwork look like it was signed on the last day of the quarter as opposed to the first few days of the next one. The indictment talks about changing time stamps on faxes. We’re you involved in that?

SR: No, no. Not at all. One of the things you learn is that there are things going on in a business you just have no knowledge of whatsoever and that was one of those things. I fired teams of salespeople for participating in programmes like that, where they had either forged a signature of a customer or had changed the date on a contract. It was a dismissible offence and I dismissed people for doing that. At the same time, I had no idea the finance organisation was running around doing similar things.

PG: As to the serious allegations about booking revenue on the last day of the month as opposed to the following quarter, you were the head of sales at the time, but you weren’t aware that practice was going on?


SR: [A long pause]. That’s a hard question to answer. Everybody has feelings ‘maybe this is happening, maybe that’s not happening’. I guess I’d always had confidence in the internal systems and controls, that there were things in place that would be able to differentiate between a deal on the 30th versus a deal on the 1st. I’ve been proven wrong on that. Ultimately, it’s my responsibility, the sales organisation reported to me, the processes and practices, either I put in place or I supported the implementation of and ultimately we came to find out that those things were part of the problem rather than part of the solution. For that I’ve got to take responsibility and I said to the judge and other interested parties, I accept that this is my responsibility, I accept there’s going to be a punishment associated with it. I’m not trying to walk away from it in any way, shape or form. It was my job and I should have done it better and I understand that there’s a price to pay for that.

PG: What you’re effectively saying is that you pled guilty to being negligent rather than conspiring with those people to do things like alter dates. You’re guilt is that you let those things go on, rather than participating in them yourself?

SR: In that specific instance, yes, that’s my guilt. There were things that we did in the sales organisation that allowed that process to occur more easily. The fact that we chased deals and closed them, the fact that if we had a contract out in a customer that had a month’s-end date on the contract and we didn’t return it until the 3rd of the month, we didn’t send it back and tell them to re-sign it. There were things that we did from a sales perspective, because you don’t want to pull a contract and take it back to the customer again, if they sign it, they sign it. There were things we did in sales that in hindsight that facilitated an initiative inside of finance.

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