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April 21, 2004

Kumar ousted as CEO, but still with CA

Computer Associates International Inc has bowed to building pressure from investors and regulators and removed Sanjay Kumar from the board and the CEO spot. He remains with the firm, in the newly created position of chief software architect.

By CBR Staff Writer

In a symbolic move, Lewis Ranieri has been elected chairman of the CA board of directors. Ranieri was drafted-in in 2001, and in 2002 named the firm’s lead independent director during a board reshuffle aimed at restoring investor confidence.

Ranieri called Kumar’s stepping down a fair and responsive reaction to the current controversy over CA’s accounting in fiscal 2000, which has been found by regulators, prosecutors and CA itself to be fraudulent.

The changes in Sanjay’s role are not based on the conclusion that he engaged in any wrongdoing, Ranieri said. Nonetheless, the conduct in question occurred during his tenure, and the Board felt this action was appropriate.

The conduct in question was widespread, going from sales managers and accountants to the CFO, Ira Zar, who Kumar fired in October. Lawyers have also been fired, following allegations that the firm orchestrated a cover-up of the accounting scam.

Nine lawyers and accountants were fired on Monday. At least four others lost their jobs late last year. Four have pleaded guilty to charges that they conspired to fraudulently boost CA’s quarterly revenue in the four quarters of its fiscal 2000.

Since the guilty pleas, there has been a prevailing feeling that whether Kumar knew what was going on or did not, either scenario made his continued occupation of the CEO/chairman role untenable.

According to the criminal filings, made by the US Attorney’s Office, and the civil complaints, filed by the Securities and Exchange Commission, there were three other CA executives, not named, directly involved in the scam.

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During the period concerned, CA executives would backdate contracts and keep sales accounts open for days after quarters ended, in order to meet or beat Wall Street estimates and keep the company’s share price buoyant.

The SEC complaints also suggest that the accounting fraud spilled over into other financial periods not covered by the charges. The practices stopped in the first quarter of CA’s fiscal 2001, which caused the firm to miss estimates and its shares to tank.

In 1998, then-COO Kumar and company co-founders Charles Wang and Russell Artz received bonuses totaling $1.1bn in stock options, as a result of a pay deal approved by the board in 1995 that linked bonuses directly to CA’s share price.

CA said yesterday that it has opened the search for a CEO, and expects to name an interim CEO shortly. The firm hired squeaky-clean former Compaq CFO Jeff Clarke earlier this month, the latest of a series of band-aids for its wounded reputation.

The company says the new business model it adopted in its fiscal 2001, which attracted scrutiny and criticism, has removed questions of impropriety from all reported periods from its fiscal 2002.

Market reaction was mixed. Standard & Poor’s Ratings Services cuts its corporate credit rating on CA to one step above junk as a result of the news, saying the lack of leadership presents a near-term management void and potential disruption.

Piper Jaffray analyst Gene Munster said in a research note yesterday that the moves removed a psychological hurdle to investing in CA, and that Kumar remaining on board means the firm retains his significant industry expertise.

This article is based on material originally published by ComputerWire

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