ISLIP, N.Y. - A former employee has sued troubled Computer Associates International Inc. in U.S. District Court in New York for engaging in aggressive accounting practices that inflated the price of the company stock it sold to its $735 million 401(k) plan.
The complaint also alleges the company and its executives breached their duties of prudence and fiduciary responsibility
What distinguishes this case from others involving 401(k) plans - beginning with Enron and WorldCom - is that it includes the novel claim that the Islandia, N.Y.-based computer software firm's alleged book-cooking increased its company stock price and should be actionable as a prohibited transaction.
Should a court accept this claim, industry experts say, it could result in a huge windfall for Computer Associates participants. A successful prohibited transaction claim would allow the court to unwind the entire transaction and give the participants the money they originally paid for the company stock.
Representing the plaintiff, Washington-based McTigue Law Firm is pressing the same legal argument in cases it filed this year against Waste Management Corp., CMS Energy Corp. and Xerox Corp.
"This (the prohibited transaction allegation) is a very significant question," said Marcia Wagner, principal in the Boston-based law firm of Marcia Wagner and Associates, which specializes in pension law.
"I think it's about time," said Ms. Wagner. "Employers need to be more careful that they don't mess around with the stock in their plans.
"I certainly hope employers are more careful with their financials...It's gone on for years."
In the Computer Associates case, filed Nov. 27 against the company and senior management in the U.S. District Court, Eastern District of New York, Islip, plaintiff Dana L. King claims that between March 30, 1998, and Nov. 25, 2002, company executives engaged in accounting irregularities that artificially inflated the price of its stock.
Between March 1999 and March of 2000, Computer Associates contributed some 408,000 shares of its stock to the 401(k) plan - which had $827 million in assets as of March 30, 2000, according to Securities and Exchange Commission documents - explained Bruce Rinaldi, an attorney with McTigue. The allegedly overpriced shares dropped in price to $21.84 on March 28, 2002, from $56.77 on March 30, 2000, causing the value of the plan's company stock to plummet to $158 million from $305 million, according to the complaint.
According to documents the company filed with the SEC, much of the employer match was in company stock. Part of the match - 50% of participant's contributions up to a maximum of 2.5% - was in cash, partially funded by plan forfeitures, but the discretionary match was in company stock. So, for example, in the year ended March 30, the company paid $12.4 million in regular matching contributions and $23.6 million in the form of 1,188,569 shares of common stock.
Bob Gordon, a Computer Associates vice president and company spokesman, said the complaint is without merit and company executives believe the court will rule in their favor.