Messages have been coming in sporadically since my Herald piece about New Zealander Stephen Richards and his part in the US$2.2 billion accounting fraud at Computer Associates. Richards goes to jail in California on February 27 and despite what he has done I really feel for him - I met his wife and youngest son and could tell he has a wonderful, supportive family. He has to get used to the fact he'll now spend six years away from his kids who live in Australia.

Some of the emails are scathing of Richards management style and personality. I knew some of this already, through postings on the Yahoo Finance message boards that accuse him of racing his sports car around the CA carpark, showing contempt for customers and generally being arrogant in his dealings with staff. I kept those things out of the article because the bigger facts of the case speak for themselves and it would be hard to verify them anyway.

Other emails, such as the one below from a former CA employee I'll refer to as "Tom" paint an interesting picture of just how corrupt the culture of CA had become by 2000 - 2001. I've run the email in full and its worth reading if you're at all interested in what underpinned the downfall of CA


I enjoyed your piece on Steven Richards and the downfall of CA. I wish you had been able to ask Richards about the other scheme that CA was running - booking mainframe software maintenance contracts as server software sales. CA has software that most large organization use to run their mainframe computers. It's vital to the continued success of those organizations, so the CA clients could not (or with extreme difficulty) get rid of the CA software.
When the contracts came up for renewal, they might have been backdate to get the sales into the past quarter. That was a widespread practice and everybody was aware of it, even down to my low level in sales.

More important, when these multi-million dollar contracts were renewed (for mainframe maintence of existing software), CA would throw in some FREE software for the clients server systems. The most common free software was Unicenter TNG. It was good software but didn't sell well and had competition from IBM.

When the multi-million dollar sales were reported to the Wall Street analysts, they were represented as SERVER software and CA was touting themselves as the company that kept the internet running, etc... It's not too sexy to be a mainframe software company and CA wanted to be connected with the growing internet business.

You said:
"In July 2000, CA advised that it would miss the earnings forecasts, because "several large contracts that were expected to close in the final days of the quarter have been delayed".

The next day, CA's share price opened 43 per cent down, at US$29."

This actually was a critical point in CAs downfall.

On the last working day in June 2000, CA met with the analysts and reported that earnings were on track, etc, etc, etc. This was a Friday and the begining of the July 4th Holiday in the US. Because of the calendar, it would be a 4 day weekend, and CA expected the analysts to go to the beach and relax over the holiday weekend. The price of the stock at the end of June was also the price paid by all employees who had been with-holding pay for six months to buy company stock.

The next day CA, thinking the analysts were all drunk at the beach, made a small announcement that they would not hit their quarterly earnings predictions.

The analysts, misled by CA for the last time, reacted swiftly by dumping CA stock the following Wednesday
and the price was cut in half.

All employees who were in the stock purchase plan saw their six month savings cut in half in 4 days. Those who had only administrative incompetence to complain about in the past now had actual malfeasance, and became enemies of the management and began talking freely to the press.

The rest is history.

I believe that the DOJ and the SEC would never have gotten involved if CA had not had such a "screw you" attitude toward their customers and their employees, with Steven Richards leading the charge in this attitude. It's possible to be successful without being arrogant, but Richards - in your interview - seems to have lost none of that. Maybe 7 years in jail will bring some humility, but I doubt it.

Richards was correct in one respect - Charles Wang was right in the middle and dodged every bullet.

No comments: