Computer Associates confirms government inquiries

Ilaina Jonas

NEW YORK: Computer Associates International Inc. said on Friday it is the

subject of two government probes, sending its stock to a seven-year low as the

software company lurches from one crisis to the next.

The news of inquiries by the US Attorney's Office and the Securities and

Exchange Commission came one day after Computer Associates disclosed it had

drawn $600 million from one credit line to pay off another, amid signs that it

is having difficulty raising money through the debt markets.

Compounding the company's woes, credit rating agency Standard & Poor's

late on Friday cut its outlook on the company's "BBB-plus"-rated debt,

an investment grade three notches above "junk" status, to

"negative" from "stable."

With investor confidence fragile due to the Enron Corp. scandal and the

bankruptcy of telecommunications company Global Crossing Ltd, concerns about

Computer Associates' balance sheet weakness and accounting practices have

battered its stock. Shares of the world's No. 4 software company have lost about

half their value in the past 2 1/2 weeks.

Chief executive Sanjay Kumar said on Friday that the company did not know the

specifics of the preliminary investigations. "We have asked to meet with

both organizations," he said. "Obviously, we're still trying to

determine the full scope of those inquiries. We'd like to know what's going

on."

A former government prosecutor said that the involvement of both the SEC and

US Attorney's Office in the inquiries may mean there are civil and criminal

concerns.

"Where you have the SEC involved they typically handle the civil, the US

Attorney's is likely to be criminal" said Seth Taube, a former head of the

SEC's New York investigations bureau and a former assistant US attorney.

Company denies any inappropriate accounting



In the past week, the New York newspaper Newsday has reported that the
authorities are investigating whether Islandia, New York-based Computer

Associates recorded some of its maintenance agreements as software sales in

order to boost its recorded revenue.

The newspaper said unnamed sources stressed that the probe was in its early

stages and there was no firm evidence that the company did anything illegal.

"We flatly reject insinuations that CA in any way used inappropriate

accounting or that such accounting was used to boost our stock price,"

Kumar said. Government agency representatives have declined to comment on the

reports.

Shares of Computer Associates on Friday fell as low as $14.78, a level unseen

since January 1995, before recovering somewhat to close down $2.82, or 15 per

cent, at $15.99. It was among the top losers on the New York Stock Exchange.

The probes may be embarrassing for some of Computer Associates' board

members, who include New York Stock Exchange chairman Richard Grasso and former

US Senator Alfonse D'Amato.

"It's all a crisis of confidence that's grown out of Enron , Global

Crossing and some of these so-called new economy companies," said SoundView

Technology Group analyst Jim Mendelson. "CA is not one of those

companies."

SEC Insights, a research firm that combs records obtained under the Freedom

of Information Act, said the company's use of pro-forma, pro-rata accounting,

used to compare prior years and which excludes some charges, was a lightening

rod for scrutiny. Computer Associates also reports results using generally

accepted accounting principles.

"We think the headlines will clearly drive the trading on this name in

the short run," SEC Insights said in a report. "However, CA's GAAP

accounting may be cleaner than most companies'," John Gavin, the research

firm's president, said.

Credit line use raises questions



On Thursday, the company said it had planned to repay the credit line it had
drawn upon with proceeds from a $1 billion planned bond offering. That offering

was canceled earlier this month after Moody's Investors Service said it might

cut Computer Associates' "Baa1" debt rating, which is equal to

S&P's "BBB-plus" rating.

Liquidity concerns at No. 4 US local telephone company Qwest Communications

International Inc. and conglomerate Tyco International Ltd. surfaced when they

chose to draw down bank credit lines because they couldn't raise money through

the sale of short-term debt.

Investors are also watching the commercial paper market -- short term-debt

that typically expires in less than 270 days.

Traders wanting to buy Computer Associates' commercial paper on Monday had

been seeking yields of 115 basis points, or 1.15 percentage points, over the

London Interbank Offered Rate. In contrast, the identically rated commercial

paper of Walt Disney Co. late this week yielded only 20 basis points over Libor,

a person close to the matter said.

"Right now, nobody has confidence in audited financial statements, or

attestations by lawyers or auditors or analysts for that matter," Mendelson

said. So far, the accounting issues have not hurt Computer Associates' business,

analysts said.

"The question is ... have (customers) seen any evidence to suggest that

this is a company under duress, wheeling and dealing, aggressively trying to

close business," Mendelson said, "The hard part on this subject is

that all these companies are aggressively trying to close business."

Analysts said there is little risk that Computer Associates would lose

existing clients, which include just about all the Fortune 1,000 companies,

because the cost of switching software vendors can be prohibitive.

Because of those high costs, "once they're in the network, the client

can't change even if they wanted to " said Ahmet Okumus, president of

Okumus Capital LLC, a former Computer Associates investor.