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CA's Offer to Justice: Too Puny?

Embattled software maker Computer Associates International (CA) is trying to stave off a crackdown by the Justice Dept., but it may not be trying hard enough. The Islandia (N.Y.) software company revealed on May 25 that it has offered to pay $10 million to resolve federal accounting and obstruction-of-justice investigations. But if other companies' similar settlements with the government are a guide, CA may have to boost its offer considerably.

Last December, for instance, Vivendi Universal paid $50 million to settle accounting and securities fraud charges. And on May 18, the Securities & Exchange Commission fined Lucent Technologies (LU) $25 million for failing to cooperate fully with an investigation into its accounting practices.

Wall Street analysts scratched their heads when CA revealed that it had taken a special charge against earnings to cover a potential $10 million settlement. "It seems rather puny in light of the $2.2 billion in prematurely booked revenue the company restated," analyst Carol Levenson of stock research firm GimmeCredit wrote in a May 26 research note. "The good news is that CA is offering to settle and might be able to put this whole sorry mess behind it in the foreseeable future."

WHO'S PAYING? CA can easily afford to pay more, if need be. It has nearly $2 billion in cash and marketable securities, and it generated $1.28 billion in cash during the fiscal year ended Mar. 31.

Corporate-governance advocates object to the notion that CA's shareholders should pay for the crimes of some of the company's executives. Four execs, including former Chief Financial Officer Ira Zar, have pled guilty to obstruction-of-justice and accounting misdeeds. "Whatever happens here, it shouldn't be taken from the shareholders' money," says Gary Lutin, head of Shareholder Forum, a shareholder-rights advocacy organization. "It should be coming from the pockets of the guys who did it. They're taking the victims' money to settle a claim."

The government has plenty of leverage to get CA to pay up -- no matter where the money comes from. The Justice Dept. could bring a criminal indictment against the company. If it were found guilty, that could have serious effects on CA, including, potentially, preventing it from doing business with the federal government. Compared to that, a $10 million settlement seems puny indeed. By Steve Hamm in New York

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