Computer Associates: A Probe -- And A Bitter Feud

Prosecutors may try to exploit the rift among top execs at the software giant

It seemed like the ultimate expression of a deep friendship. Charles B. Wang, co-founder and chairman of software giant Computer Associates International Inc., stood on stage at the company's 2001 shareholder meeting beside his protégé, Chief Executive Sanjay Kumar. Together, they called on shareholders to defeat an attempt by a group called Ranger Governance to replace Wang and three other directors. An angry Kumar told the crowd: "There's a lot of rhetoric and negative energy focused on Charles Wang. I think it's extremely unfair for people to tear down 25 years of effort." Then Kumar, dressed nearly identically to Wang in a black suit and red tie, embraced the man who had plucked him from obscurity in a Texas software company 14 years before and turned him into the leader of what was then the world's fourth-largest software company.

Turns out, it was all a charade. Behind the scenes and known to only a handful of people, the two men were at war with one another, according to current and former CA board members and executives. Practically from moment Wang had handed over the CEO job to Kumar in mid-2000, they had been jousting over their roles. And just three months after they beat back the challenge from Ranger, their relationship blew up. During a confrontation one November day at an IHOP restaurant in East Norwich, N.Y., Wang told Kumar he was fired, according to sources told about the incident. Wang said the board had approved the move -- which was not the case, the sources add.

SHENANIGANS. The directors called an emergency meeting to sort things out. In the boardroom at CA's Islandia (N.Y.) headquarters, the directors stripped Wang of his day-to-day operational responsibilities and warned him to back off and let Kumar run the company. Says one former board member: "We told them: 'We don't want to be nannies. If you have problems, sit down and discuss them, and get them over with."' They agreed to cooperate, but there was no fixing their relationship. A year later, Wang resigned, embittered, his allies say, by how things turned out.

Now, a two-year federal inquiry into alleged accounting shenanigans at CA is coming to a head, and the rift between Wang and Kumar may play a role in the investigation. The U.S. Attorney in Brooklyn, N.Y., and the Securities & Exchange Commission are probing bookkeeping practices at the software company allegedly designed to make its performance look better than it actually was. Investigators will probably try to use the split to gather information they might otherwise have missed, say former prosecutors. On Jan. 22, the feds got a big break when Lloyd Silverstein, a former CA senior vice-president, pleaded guilty to obstruction-of-justice charges. He admitted that he had participated in a scheme to inflate CA's revenues and then lied to cover it up. He said senior execs pressured him to lie, but he didn't name names.

Will Wang or Kumar be implicated? Roslynn R. Mauskopf, the U.S. Attorney on the case, says the Silverstein plea is just the first step in a broadening investigation, and two lawyers close to the probe say questions from investigators indicate they're examining Wang and Kumar's possible roles. Mauskopf may try to build a case against one or both, even if they didn't directly participate in any wrongdoing. Former prosecutors say that it can be a crime for someone to choose to ignore illegal activities, especially if he has a financial incentive for doing so. "They can be criminally liable for the offense even if it's done by others," says Brad Simon, a former prosecutor in the Brooklyn U.S. Attorney's Office, now at the firm Simon & Partners.

Both Wang and Kumar, who would not comment for this story, have denied any wrongdoing. In October, as a result of its internal investigation, the company fired Ira Zar, the company's former chief financial officer and Silverstein's boss. Zar declined to comment. For the period when the alleged wrongdoing occurred, Wang was chief executive, and Kumar was president, and, according to former and current CA executives, both were deeply involved in day-to-day matters. Both have agreed to interviews with prosecutors and, given how closely and how long they worked together, they will be able to provide reams of information about each other's activities. "[The prosecutors will] absolutely try to exploit the enmity between these guys," says Simon.

The board stands behind Kumar. The directors reaffirmed their support during a special meeting on Super Bowl Sunday, just days after the Silverstein plea. "He has done a brilliant job of leading the company through this difficult time," says board member Alphonse D'Amato, the former U.S. Senator. A source close to CA's internal investigation -- which is expected to wrap up in a matter of weeks -- says no evidence has been found implicating Kumar in accounting misdeeds.

FATHER FIGURE. Why did this transfer of power end in such acrimony? The answer isn't simple. It was Wang's idea to hand the CEO title over to Kumar. He had trained him to be his successor during a decade-long apprenticeship. And it was his idea to let go when he did. In the end, both men deserve some blame, say several former board members. "Sanjay wanted to prove himself a little too much. He took every opportunity to make sure people knew he was making the decisions. And Charles had difficulty letting go," says Roel Pieper, a venture capitalist who was on CA's board from 1998 to 2002.

The drama could have been torn from the pages of Shakespeare. Wang, an immigrant from China who was nearly 20 years Kumar's senior, was something of a father figure to Kumar, whose family fled the violence of Sri Lanka when he was 14. In a sense, Wang is like Shakespeare's King Lear. Both turned their kingdoms over to the next generation, expecting that they would still be treated like kings. It didn't work out that way. Wang wasn't even invited to make a speech at the company's big annual users' conference in the spring of 2002, an event where he had held court in the past. "Charles was thinking they'd continue to work as closely as they ever had. Sanjay's view of being CEO seemed to be very different. He didn't see it as a partnership," says one former board member.

To management experts, this breakup shows how difficult it is to handle successions like these. It may make sense to keep a former CEO engaged in a company after he or she gives up the leading role. Yet, according to Jeffrey A. Sonnenfeld, associate dean at Yale University's School of Management, the egos of founders and longtime CEOs are so wound up in their jobs that they have a hard time ceding power. "It's very difficult for a creator who had control over the enterprise to step back and be a hired hand," says Sonnenfeld. These people have "heroic missions," he says, and it's nearly impossible for them to stand aside and watch somebody else tinker with their legacy.

At its essence, this is the story of a failed friendship. Here are two talented immigrants who scrambled to the top in their adopted land. Outsiders on Long Island's North Shore, they gained stature by teaming up to purchase the New York Islanders hockey team and supporting the arts and other charities. They needed each other's skills and support. Yet the very aggressiveness that brought them success also led to their breakup.

Wang and Kumar were so close for so long that board members thought this CEO transition would be different. When they first met, during CA's acquisition of software maker UCCEL Corp. in 1987, they took to each other immediately. Wang was impressed with the ambitious 25-year-old during a meeting between CA execs and UCCEL's development staff, where Kumar was an engineering supervisor. Unlike most technical people, Kumar didn't resist innovations that were foreign to him, Wang said in an earlier interview. Within months, Wang called Kumar to headquarters to be his assistant.

For a decade, they were inseparable -- the yin and yang of Computer Associates. Gradually, Wang handed Kumar more responsibilities, making him president in 1994. Wang was the passionate dreamer who had built CA into a powerhouse almost by force of will. Kumar was the cool, calculating technocrat who executed strategies that Wang mapped out. They worked in tandem throughout the 1990s as CA gobbled up dozens of companies to become the leader in the market for software that manages complex computer systems. Their bonds were so strong that later, after they were fighting behind the scenes, Wang still spoke warmly of Kumar. "Sometimes I think of him as my kid," he said during a 2002 interview. "I have more experience in life, and I can tell him things. I'm so proud of him."

In the earlier days, Wang and Kumar rarely disagreed about important matters, but they often took opposite sides of an argument to test their thinking. "Charles is famous for saying: 'If we agree on everything, then one of us is redundant, and it ain't me,"' Kumar recalled in a 1999 interview.

INDUSTRY PARIAH. But by 2000, their thinking started to diverge. CA's callous treatment of customers and the employees of companies it bought had made it the pariah of the computer industry. While Wang was sometimes combative with customers, Kumar began positioning himself as the reformer who would soften the company's image -- launching an annual customer survey and setting up a customer advocacy organization in early 2000.

Kumar also seemed determined to make his own mark as a takeover artist. In January, 2000, he cut a $4 billion deal to buy Sterling Software Inc. with the company's chairman, Sam Wyly, in the backyard of Wyly's Dallas home. Kumar never once mentioned Wang's name, Wyly recalled during a 2002 interview. "It was as if Charles didn't exist. I was surprised, since Charles raised Sanjay up from a pup," said Wyly.

Ultimately, it was the tech industry's boom and bust that persuaded Wang to loosen his grip. In 1998, CA's soaring stock price triggered a $1.1 billion stock incentive grant for the company's top three officers -- a showering of riches that prompted howls of outrage from shareholders and lawsuits that later reduced the award by 20%. Then, after CA warned of an earnings shortfall on July 3, 2000, its stock fell 42% in a few hours. Within days, Wang decided to step aside. "It was a move by Charles to say: 'I was at the helm when we didn't hit the numbers. I'm relinquishing to Sanjay,"' says D'Amato.

But would Wang really give up his baby? Several directors grilled him about his intentions during the August, 2000, board meeting at which Wang proposed Kumar's promotion. "Is this a real or a cosmetic change?" one of them remembers asking Wang. "If the two of you disagree, who wins?" Wang's answer: "Sanjay. He's the CEO." Wang was supposed to handle Asian operations and spin-offs, while Kumar ran the core business.

Immediately, frictions developed. Within weeks of taking over, Kumar proposed a massive restructuring of the company's business model. Instead of recognizing all software revenues at the time a sale closed, they would be spread out over the life of a contract. This would smooth out fluctuations in quarterly earnings. Wang went along with the plan, but he was skeptical because it would cut the company's revenues in half overnight, according to board members. During the ensuing months, Wang weighed in on marketing and product decisions, even though they weren't his responsibility.

That set the stage for Wang and Kumar's confrontation at IHOP, where they had a long tradition of holding breakfast meetings. Wang stunned Kumar by dismissing him on the spot, according to sources who were told about it. "When Charles realized he could not control Sanjay, he fired him," says one source.

Both men talked to directors and tried to line up support, say ex-directors. "Charles told me he was very unhappy, and he wanted control back. It was a mistake. He never should have given it up," says a board member. Says another, who spoke to Kumar: "Sanjay was ready not to have Charles there anymore. He was feeling that Charles was interfering."

After the emergency meeting, where Kumar came out on top, the two rarely spoke. Wang spent much of his time away from the office performing mostly ceremonial duties in Asia. He hung on for another year, and then, finally, he resigned. "He called me on the phone," says Russell M. Artzt, a CA co-founder and now executive vice-president. "He didn't feel he was part of it. He still was not happy that Sanjay was running the company."

PALTRY PERKS. Wang soon had another reason to be unhappy. The board granted him a severance that was paltry compared with the perk-laden packages handed out to General Electric Co.'s (GE ) Jack Welch and other retiring CEOs. It included just no-frills health insurance, a promise to help pay some legal bills, and an extension on the expiration date for his stock options. "Ha!" says an angry friend of Wang's. "It was Sanjay saying: 'F--- you!"' But a board member, who asked to be anonymous, fires back: "To give him a big severance would have been preposterous. He already got [part of] the $1 billion stock payout."

Since then, the two have gone their separate ways. Wang has been focusing on a new passion: being Long Island's sports mogul. In 2000, he had bought the New York Islanders and the New York Dragons Arena Football team, with a minority investment from Kumar. For his part, Kumar gets credit from Wall Street for putting CA back on track. Bear, Stearns & Co. (BSC ) expects CA's net income to more than double, to $555 million, this year, while revenues rise 12.7%, to $3.7 billion.

Looking back, board members understand they should have done things differently. "The lesson is very simple: You can have only one captain on the bridge," says Pieper, the venture capitalist. "We thought they could handle an unusual division of tasks. We were wrong." Today, prosecutors may try to use the animosity between the former friends to further their investigation. And Charles Wang, like Lear, finds himself banished to the hinterland of an empire that no longer is his.

By Steve Hamm in New York

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