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IN RE COMPUTER ASSOCIATES CLASS ACTION SECURITIES

November 15, 1999

IN RE COMPUTER ASSOCIATES CLASS ACTION SECURITIES LITIGATION.


The opinion of the court was delivered by: Platt, District Judge.

MEMORANDUM AND ORDER

Defendants have moved to dismiss plaintiffs' Consolidated Amended Class action Complaint pursuant to Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure.

BACKGROUND

A. Parties

Lead plaintiffs Steven Sinsheimer, John Greco, Felix Glaubach, Mishel Tehrani, Jerry Wehmhoefer, Lillian Herschkowitz, Bruce Montague, Kerry Gillispie, John Biegen, Jixiang Wu, Richard Wadsworth, and Andrew Breiman all purchased stock in Computer Associates International, Inc. or transacted in such stock options from January 20, 1998, through July 22, 1998, the relevant period in this action.*fn1 Likewise, plaintiffs' putative class consists of over two-hundred individuals who purchased CA stock during the Class Period.

Defendant Computer Associates International, Inc. ("CA") is a Delaware corporation with its principal executive offices in Islandia, New York. CA is in the business of developing, marketing, licensing, and supporting standardized computer software for use in a broad range of computers on a variety of hardware platforms, operating systems, and application development environments. (Am.Compl. ¶ 12, 42.) CA's shares are traded on the New York Stock Exchange ("NYSE").

At all times relevant to this action, defendant Charles Wang was CA's Chief Executive Officer and Chairman of its Board of Directors. Defendant Sanjay Kumar was CA's President and Chief Operating Officer, as well as a member of the company's Board of Directors. Defendant Artzt, as CA's Executive Vice President of Research and Development and Senior Development Officer, also served on the company's Board of Directors. As officers and directors of CA, defendants Wang, Kumar, and Artzt (collectively, the "individual defendants") participated in the drafting, preparation, and/or approval of the various financial reports, press releases, internal shareholder communications, and Securities Exchange Commission ("SEC") filings at issue in this action. (Am.Compl. ¶ 19.)

B. Plaintiffs' Class Action Allegations

Plaintiffs commenced this action pursuant to Rules 23(a) and (b)(3) of the Federal Rules of Civil Procedure on behalf of a Class, consisting of all persons who purchased CA common stock from January 20, 1998, thought July 22, 1998. Excluded from the Class are the individual defendants, CA's officers and directors, and members of their families. Plaintiffs allege that this Class satisfies each of the requirements of Rule 23(a), namely, that (1) the Class is so numerous that joinder is impractical; (2) the Class members share common issues of law and fact; (3) the claims and defenses of the Class representatives are typical of those belonging to the class as a whole; and (4) the Class representatives will adequately protect the interests of the entire class. This Court has yet to certify the putative class.

C. Plaintiffs' Substantive Allegations

In 1995, CA adopted the Key Employee Stock Ownership Plan (the "1995 Plan"), the purpose of which was "to promote the creation of stockholder value by encouraging, recognizing and rewarding sustained outstanding individual performance by certain key employees who are largely responsible for the management, growth and protection of the business." (Defs.' Ex. B at 14.) Under the 1995 Plan, "three key executives," namely defendants Wang, Kumar, and Artzt, would receive approximately $1 billion in CA Common and Restricted Stock as long as the price for CA's Common Stock exceeded $53.33 (as adjusted after stock splits) for 60 days during any 12-month period by the end of the company's fiscal year 2000. (Defs.' Ex. B at 15.) Plaintiffs contend that as of January 1, 1998, CA stock traded above the threshold level for a mere 6 days since October 1, 1997, the date that CA stock first traded above the vesting price. (Am. Compl. ¶ 43.)

According to plaintiffs, immediately prior to and throughout the Class period CA began to experience financial problems, stemming from, inter alia: (1) the reluctance on the part of CA's largest customers to commit significant financial resources to CA's costly products in light of the Y2K problem and the Asian financial crisis; (2) the increased saturation in CA's markets, causing a decline in the demand for CA's technology; and (3) CA's inability to diversify its business by providing installation and maintenance services. (Am. Compl. ¶ 46.)

In an attempt to remedy the latter problem, CA sought to acquire Computer Sciences Corporation ("CSC"), which was in the business of implementing, servicing, and maintaining the kind of software produced by CA. Accordingly, on or about February 17, 1998, CA announced a cash-for-stock tender offer for all outstanding stock of CSC at $108 per share. (Am. Compl. ¶ 44.) In response, CSC mounted a defense to CA's takeover efforts, which led to a sharp decline in the price of CA's stock — from the mid to high $50s to the mid to high $40s — well below the price necessary for the stock grants provided to the individual defendants under the 1995 Plan to vest. (Am.Compl. ¶ 44.)

Plaintiffs claim that in order to restore the sagging value of CA stock, and therefore protect the stock interests of the individual defendants as provided under the 1995 Plan, CA began taking steps to artificially inflate its reported revenues and thereby conceal the deteriorating state of CA's business. (Am.Compl. ¶ 47.) Although general accounting procedures "provide that revenues should not be recognized until they are realizable, earned and the collection of the sales price is reasonably assured," CA allegedly recognized revenue from the sale of software on credit terms extending as long as 10 years. (Am.Compl. ¶¶ 82, 86.) CA also offered customers excessive discounts, placed an unusual amount of pressure on its sales force to "book" sales, and engaged in "improper revenue recognition practices that artificially inflated" CA's operating results. (Am.Compl. ΒΆ 47.) According to plaintiffs, each of these ...


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