Read a book excerpt: https://amzn.to/2CIpk9v
Stephen D. Richards is a New Zealand-born technology industry business leader. Rising through the ranks of Computer Associates International, beginning at the help desk in Sydney, Australia in 1988 and climbing to be the Executive Vice President responsible for Worldwide Sales in New York in 2000, where he remained until 2004. Indicted on fraud charges in 2004, along with Computer Associates CEO Sanjay Kumar, he was subsequently sentenced to seven years in jail in 2006. Beginning in 2007 he spent 44 months in Taft Correctional Institution in Taft, California, before being re-sentenced to time served in 2010.
As part of the Harvard Business School curriculum, A Letter from Prison by Professor Eugene Soltes briefly details the history of the case and Stephen Richards insights into the financial management practices that saw him imprisoned.
On September 22, 2004, the Securities and Exchange Commission filed securities fraud charges against Computer Associates International, Inc., and three executives; Sanjay Kumar – CEO and Chairman, Stephen Richards – Executive Vice President, Ira Zar – Chief Financial Officer and Steven Woghin – General Counsel. Although widely blamed, no charges were ever filed against the founder and CEO Charles Wang.
The Commission's complaint against Computer Associates alleges that, based on this conduct, the company violated Section 17(a) of the Securities Act of 1933 ("Securities Act"), Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 ("Exchange Act"), and Rules 10b-5, 12b-20, 13a-1 and 13a-13 thereunder. The Commission's complaints against defendants Kumar, Richards and Woghin allege that, based on this conduct, they violated Section 17(a) of the Securities Act, Sections 10(b) and 13(b)(5) of the Exchange Act, and Rules 10(b)-5 and 13b2-1 thereunder. The complaints further allege that under Section 20(e) of the Exchange Act, Kumar, Richards and Woghin aided and abetted Computer Associates' violations of Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1 and 13a-13 thereunder.
The fraud that the SEC refers to was backdating of contracts to prop up quarterly revenues and earnings figures to meet market expectations. The contracts that were backdated by a few days were all real.
The SEC said the scheme began in 1998, possibly earlier, and continued through September 2000. In all, the company prematurely reported $3.3 billion in revenues from 363 software contracts. This violated Generally Accepted Accounting Principles, or GAAP, which state that revenues should not be counted until both parties have properly signed a contract. During the four quarters of fiscal 2000, for example, the practice improperly inflated revenues by 25%, 53%, 46% and 22%, respectively. The SEC said the goal was to meet or beat per-share earnings estimates of Wall Street analysts, a key to keeping a company’s stock price rising.
The most extreme incident was the second quarter of 2000, when the company reported $557 million in revenues beyond the $1.047 billion it could properly claim. The company thus reported 60 cents in earnings per share, beating the consensus Wall Street forecast of 59 cents. Without the padded revenue, earnings would have been a mere 5 cents per share and the stock price might well have fallen.
In April 2004 Computer Associates International restated $2.2 billion in sales that had improperly during 1999 and 2000. The restatement did not change the company’s overall past financial results or current sales and profits.