SEC NEWS DIGEST Issue 2004-15 January 23, 2004 COMMISSION ANNOUNCEMENTS COMMISSION MEETINGS CLOSED COMMISSION MEETING - THURSDAY, JANUARY 29 - 2:00 P.M. The subject matters of the Closed Meeting scheduled for Thursday, January 29, 2004, will be formal orders of investigation; institution and settlement of administrative proceedings of an enforcement nature; institution and settlement of injunctive actions; litigation matter; and adjudicatory matter. At times, changes in Commission priorities require alterations in the scheduling of meeting items. For further information and to ascertain what, if any, matters have been added, deleted or postponed, please contact the Office of the Secretary at (202) 942-7070. ENFORCEMENT PROCEEDINGS SEC FILES CHARGES AGAINST LLYOD SILVERSTEIN, A FORMER EXECUTIVE AT COMPUTER ASSOCIATES INTERNATIONAL, INC. On January 22, the Commission filed charges against Lloyd Silverstein, a former senior vice president of finance at Computer Associates International, Inc. (CA), for committing accounting fraud while at CA. The Commission's complaint, filed in the United States District Court for the Eastern District of New York, alleges that Silverstein participated in a widespread practice that resulted in the improper recognition of revenue by CA, one of the world's largest software companies. During at least CA's fiscal year 2000, which ran from April 1, 1999, through March 31, 2000 (FY2000), CA prematurely recognized revenue from software contracts that had not yet been consummated, in violation of Generally Accepted Accounting Principles (GAAP). The Commission's complaint alleges that, based on this conduct, Silverstein violated Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 and Rules 10b-5 and 13b2-1 thereunder. The complaint further alleges that Silverstein is also liable for aiding and abetting CA's violations of Sections 10(b), 13(a) and 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. Without admitting or denying the allegations of the complaint, Silverstein consented to a permanent injunction and officer and director bar as described more fully below. Specifically, the Commission's complaint alleges as follows. * Through the conduct of certain members of CA management, including Silverstein, CA engaged in a practice in which CA held its books open after the end of each quarter and improperly recorded, in that elapsed quarter, revenue from contracts that had not been finalized and executed before the expiration of the quarter. CA personnel sometimes concealed this practice by using licensing contracts that falsely bore preprinted signature dates for the last day of the quarter that had just expired, rather than the subsequent dates on which the contracts actually were executed. * As a result of this improper practice, CA made material misrepresentations and omissions about its revenue and earnings in Commission filings and other public statements for at least FY2000. For the second, third and fourth quarters of FY2000, respectively, at least 33%, 26% and 5.5% of CA's reported quarterly revenues pertained to contracts not executed by CA or the company's clients by the quarter's end. For all quarters of FY2000 combined, CA prematurely recognized over $1 billion in revenue from at least 95 contracts that the client or CA signed after the quarter close. * CA's FY2000 reported revenues and earnings per share appeared to meet or exceed the consensus estimates of Wall Street analysts, but CA failed to disclose that those reported results improperly included prematurely recognized revenue and did not comply with GAAP. When CA refrained from recognizing revenue prematurely during the second quarter of FY2001, the company missed its earnings estimate and CA's stock price dropped over 43% in a single day. The Commission further alleges that Silverstein facilitated CA's accounting fraud by, among other things, (1) advising CA's sales force of the number of days CA's management and Finance Department had decided to "extend" a particular fiscal quarter; (2) knowing or recklessly disregarding the fact that CA personnel were backdating contracts to conceal their true execution dates; (3) participating in the process of negotiating contracts after quarter's end while knowing or recklessly disregarding the fact that CA would record revenue from those contracts in the quarter that had just elapsed; (4) knowing or recklessly disregarding the fact that the purpose of extending fiscal quarters and backdating contracts was improperly to report in prior fiscal quarters revenue from contracts that were not executed and finalized until after those fiscal quarters elapsed, and knowing or recklessly disregarding the fact that such practices were improper under GAAP; (5) allowing personnel to forward false and misleading contracts and paperwork to CA's finance department for accounting purposes; and (6) advising CA's sales force about revenue recognition rules while he knew or should have known that GAAP required that both CA and the customer execute a software contract before CA could recognize revenue from that contract. In its lawsuit, the Commission seeks a judgment (a) permanently enjoining Silverstein from violating and aiding and abetting violations of the securities laws; (b) requiring Silverstein to disgorge his ill- gotten gains together with prejudgment interest; (c) imposing civil money penalties; and (d) barring Silverstein from acting as an officer or director of a publicly held company. Concurrently with the filing of the Commission's complaint, Silverstein, without admitting or denying the allegations of the complaint, consented to entry of a permanent injunction prohibiting him from violating Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2- 1 thereunder, and from aiding and abetting any violations of Sections 10(b), 13(a), 13(b)(2) of the Exchange Act and Rules 10b-5, 12b-20, 13a- 1 and 13a-13. Silverstein also consented to a permanent bar from serving as an officer or director of a publicly held company. Litigation against Silverstein with respect to the Commission's claims of disgorgement and penalties is continuing. The Commission acknowledges the assistance of the United States Attorney's Office for the Eastern District of New York and the Federal Bureau of Investigation in this matter. The Commission's investigation is continuing. [SEC v. Lloyd Silverstein, Civil Action No. 04 Civ. 255, E.D.N.Y., Glasser, I.L.] (LR-18552, AAER-1948) SELF-REGULATORY ORGANIZATIONS APPROVAL OF PROPOSED RULE CHANGES The Commission has approved a proposed Supplement filed by the Options Clearing Corporation pursuant to Rule 19b-1 of the Securities and Exchange Act of 1934 to amend its Options Disclosure Document's description of methods for assigning options exercises and of how to exercise options (SR-ODD-2004-01). Publication of the proposal is expected in the Federal Register during the week of January 26. (Rel. 34-49103) The Commission approved a proposed rule change (SR-NYSE-2003-40) submitted pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 and Rule 19b-4 thereunder by the New York Stock Exchange relating to the Listing and Trading of Certain 7 _% PEPSsm Units under Section 703.19. Publication is expected in the Federal Register during the week of January 26. (Rel. 34-49112) PROPOSED RULE CHANGES The Commission issued notice of filing of a proposed rule change and Amendment No. 1 thereto (SR-CBOE-2004-01) submitted by the Chicago Board Options Exchange under Rule 19b-4 of the Securities Exchange Act of 1934 relating to the UAM Calculation for the CBOE Hybrid System. Publication of the proposal is expected in the Federal Register during the week of January 26. (Rel. 34-49108) The Chicago Board Options Exchange has filed a proposed rule change (SR- CBOE-2003-51) under Section 19(b)(1) of the Securities Exchange Act of 1934 relating to the listing and trading of options on certain Russell Indexes. Publication of the proposal is expected in the Federal Register during the week of January 26. (Rel. 34-49111) The Fixed Income Clearing Corporation filed a proposed rule change (SR- FICC-2003-08) under Section 19(b)(1) of the Exchange Act that would allow FICC to add adjustable-rate mortgage pass-through securities (ARMS) to its GCF Repo service. Publication of the proposal is expected in the Federal Register during the week of January 26. (Rel. 34-49113) The NASD filed with the Securities and Exchange Commission a proposed rule change under Rule 19b-4 (SR-NASD-2003-201) to amend the Trading Activity Fee rate and add TRACE-eligible and municipal securities as covered securities. Publication of the notice in the Federal Register is expected during the week of January 26. (Rel. 34-49114) The Boston Stock Exchange has filed a proposed rule change (SR-BSE-2003- 31) under Rule 19b-4 to extend trading hours from 8:00 a.m. until 9:28 a.m., and from 4:16 p.m. until 6:30 p.m. to allow for the execution of matched orders only. Publication of the proposal is expected in the Federal Register during the week of January 26. (Rel. 34-49117)