KEY POINTS:
Standing on the steps of San Francisco's Union Square with his wife beside him and eight-month-old son nestled in a pushchair, Stephen Richards looks like any other father out for a spot of Christmas shopping with his family. His accent is New Zealand, with a hint of New York.
As he prepares to pose for photographs, his wife Jane teases him. Richards hasn't shaved and with his bald head and layer of stubble, Jane says, he looks like a convict. She suggests buying him an orange shirt. Richards smiles wryly and poses stiffly for the photos.
The jokes have an edge. The Upper Hutt College schoolboy who went on to earn millions as worldwide head of sales at the third largest software company in the world, is going to jail next month.
Richards was sentenced in November to seven years in prison after pleading guilty in April to securities fraud, obstruction of justice and perjury in a US$2.2 billion ($3.2 billion) accounting scandal uncovered at Computer Associates, the US company to which he devoted most of his working life.
He spent his last Christmas as a free man in San Francisco, parted from Jane, infant Max and his four other young children, who live in Australia. He hopes to be able to serve his sentence at Taft Federal Prison, a low-security facility about 200km north of Los Angeles. He's been given the guided tour.
"It's a little scary. There's a double fence, razor wire, the things you'd expect to see in a prison," says Richards, 41, in an exclusive interview with the Herald at San Francisco's King George Hotel.
Richards doesn't see himself as a typical white-collar criminal. He says he's not corrupt, but was naive and irresponsible, a man who suspected dodgy accounting in his company, looked the other way, then misled those investigating it.
The CA scandal has generated its fair share of headlines, but Richards sees it as being different to the other big fraud cases that helped taint corporate America's image and sent to jail some of the country's top executives.
"WorldCom bankrupt, Enron bankrupt, Adelphia bankrupt. CA is a radically different environment to those," he says.
"There were no shell companies where liabilities were hidden or converted into assets or any of that kind of stuff. This was simply a timing issue of a deal coming in and being recognised two or three days earlier as opposed to two or three days later."
The fraud at CA - which sold software to manage mainframe computer systems - sprang from what could seem an innocuous practice.
During 1999 and 2000, CA executives and sales people entered software deals on the company books, but backdated some so they would be counted in the previous quarter.
The backdating, known to insiders as the "35-day month" propped up quarterly revenue and earnings figures to meet the expectations of Wall St analysts and help boost CA's share price which in early 2000 was around US$70.
As a young salesman, Richards proved himself by running CA operations, first in Queensland, then New Zealand and ultimately Australasia.
In 1998, he was picked by chief executive Sanjay Kumar to head one of three US sales divisions. He and Jane moved to Long Island, and within two years he was vice-president of worldwide sales, responsible for thousands of employees and billions of dollars in revenue.
As the dotcom boom pushed the tech-oriented Nasdaq index to record highs, Richards was a young executive setting CA's revenue forecasts - figures the analysts then scrutinised to come up with quarterly forecasts for the New York Stock Exchange-listed company.
He says the methods analysts used to arrive at their forecasts were "unscientific".
"If you want the company to perform to the expectations of Wall St, you really need to end up taking their numbers rather than using yours."
To meet ambitious earnings targets and avoid disappointing investors, CA's executives had to keep taking contracts from the current quarter and backdating them so their revenue became part of the previous quarter's income.
If wasn't just a contract here or there. In the 2000 financial year, for instance, backdating of hundreds of contracts led to revenue being inflated by 25 per cent, 53 per cent, 46 per cent and 22 per cent for the four quarters.
Contracts dates were altered and paperwork was doctored to hide the practice from CA's external auditors.
To understand the CA frauds, it is necessary to understand the company's culture.
Many of Richard's salespeople made more than US1 million a year. Loyalty and ambition were rewarded. Closing the deal was everything. Not everyone could handle the pace, says Richards, but those who could were successful "beyond their wildest dreams".
Constantly hanging over him were the internal quarterly revenue targets. These were met during fiscal 1999 and 2000, the time covered by the indictment against him, enabling CA to match or exceed Wall St 's earnings forecasts.
"That's a reflection of any sales-driven culture," says Richards. "When you get to the number, even if it's a psychological thing, there's a drop off in intensity, deep breath, I made it, now I can focus on the next quarter."
He was paid well - about US$10 million up to his departure from CA in 2004, according to Government investigators. He was issued stock options worth millions.
"We lived very well," he says. "I was compensated well and we lived according to that compensation which is probably another dynamic of a sales person. We tend to spend as much as we earn. We don't think about what's going to happen tomorrow or the day after."
The wild ride was shared by his brother Andrew, another salesman who climbed the CA New Zealand ranks before moving to the US where, under Stephen, he ran the US$400 million West Coast sales operation.
"I know much has been said about working with family, but I would not swap the years that he and I worked together for anything," said Richards.
Andrew left CA soon after his brother and now lives with his wife and four children in Wellington.
Those above Richards became fabulously rich off CA. In 1998, founder and chief executive Charles Wang awarded himself, Kumar and executive vice-president Russell Artzt US$1.1 billion in restricted CA stock, a move that forced CA to make a huge write-off on its books and knocked 30 per cent off its share price. Wang's share was $670 million.
Richards says he never expected to cash in to the same extent himself.
"I think everybody would agree it was about the dumbest thing the company ever did. Not the least because of the level of anger that the market and the customers expressed over that size of transaction."
But he did want to lead CA and he believes Kumar was grooming him for the role. Every quarter the pair and CA's chief financial officer, Ira Zar, would meet to evaluate progress.
It was at those meetings, the US Securities and Exchange Commission says, the three discussed how much backdating was needed to meet their targets.
Richards says he was under pressure to close deals that had narrowly missed the quarter end, but backdating was never discussed. He would push his team to chase and close deals that had missed the quarterly cut-off.
"That process of the sales guys cleaning up the deals that they were working on and making sure that anything that slipped was closed as quickly as they could was in place for 20 years."
Richards says he wasn't responsible for the accounting that affected when revenue was recognised - that was Zar's job.
"Ira was always very tight-lipped about the overall performance of the business," says Richards.
"Any time he would talk about 'this is how much we need' or 'here's how much we've got', there would be rounding involved. There was always a lot of flex in the positions that he would report."
If Richards didn't personally alter dates on documents, something he says he had sacked sales people for doing, he knew it was going on.
"There were things we did in sales that in hindsight facilitated an initiative inside of finance."
The problems, says Richards, stemmed from that intense sales culture developed by Wang as he patched CA together from the best parts of hundreds of acquired companies.
"One of my first sales managers said the trick in getting a contract signed was to have the guy put pen on paper and then get out of his office before you say anything, because you don't want to run the risk of screwing it up," he says.
"You don't want to pull a contract and take it back to the customer again. If they sign it, they sign it."
But the 35-day month was running out of steam. By mid-2000 it was not bridging the gap between CA's revenue and the market's expectations.
In July 2000, CA advised that it would miss the earnings forecasts, because "several large contracts that were expected to close in the final days of the quarter have been delayed".
The next day, CA's share price opened 43 per cent down, at US$29.
Kumar was a key figure in overseeing the 35-day month, flying on the company jet to Paris to close a US$32 million deal that was later backdated.
But he knew CA had to tidy up its act it or face ruin.
Kumar did not respond to Herald requests for an interview. He was sentenced in November to 12 years in prison and fined US$8 million for his part in the fraud.
Richards says that throughout 2000, Kumar was planning sweeping restructuring of CA. On the cards was conservative treatment of revenue, which would be accounted for over the life of a contract, rather than in the quarter it was booked. Quarterly cut-off dates would mean nothing.
Richards says the CA board initially rejected Kumar's plan.
"I think there was an egotistical element, which said, 'we're a US$7 billion a year company now, if we go to this rateable revenue recognition model we're going to be a US$2.5 billion company. We'll go from being the second or third largest software company to being the sixth or seventh largest'."
The new revenue plan was eventually introduced in October, 2001. But if Kumar was hoping to put the loose accounting of the 1990s behind him, he was dreaming.
The Securities and Exchange Commission was investigating CA when I last met Richards, in April 2002. He was speaking to a room full of reporters and analysts at CA World, the company's annual hype-fest which that year was held in Orlando, Florida.
The SEC probe was public knowledge, but Richards and Kumar seemed untroubled as they hosted guest speaker Rudolph Giuliani, the former mayor of New York.
After Giuliani's emotional speech, Kumar took to the stage, bathed in purple and green lights, to tell the audience he was overseeing a radically changed company.
But Richards admits he was worried when the investigation began.
The SEC's initial interest, he claims, was sparked by a New York Times article. "I think the SEC started with 10 or 12 things it wanted to look at and one by one they were knocked off until it got down to this last thing, the 35-day month."
The 35-day month, or "three-day window" as it was also known as, was now firmly in the sights of investigators armed with information from disgruntled former CA salespeople.
To appease the SEC, the CA board in February 2002 hired a law firm to conduct an internal investigation - which is where it all went wrong for Richards.
If ever there was a time to speak up about his concerns over the reporting of revenue and the 35-day month it was then. Richards claims he didn't lie to the lawyers.
"I don't know if I deliberately concealed its existence. I answered the questions they asked and didn't provide more information that they were asking for. I think that's where the problem fell in my lap. I probably could have said more."
Richards did not know that everything he did say would be handed to SEC investigators and that his less-than-forthright answers about the 35-day month constituted a crime.
Under US law, anyone who "obstructs, influences, or impedes any official proceeding, or attempts to do so," can face fines or a prison term of up to 20 years.
Richards and Kumar thought their interviews would be for internal use only, and that the lawyers were there to protect them.
"What we didn't realise was that the company could decide to forgo that confidentiality," Richards says. The company decided to take this option, "and it effectively almost joined the SEC with the internal audit committee's lawyers in their pursuit of us".
Worse was to come when Richards gave evidence at an SEC hearing in October 2003. "It was a long day, almost 200 pages of deposition. Stressful."
Again he dodged the issue of the 35-day month, following his lawyers' advice to say as little as possible.
"I took that to a level that was beyond reasonable. Unless somebody asked me a question point blank, I wouldn't elaborate. That's one thing I deeply regret."
As he walked out of the Brooklyn courtroom, Richards thought there was still a way out of the mess.
But by then he'd perjured himself.
The SEC investigation was gathering steam. For months, the documentary evidence needed to prove top executives knew of the contract backdating and had altered paperwork to mask it from CA's external auditors, had eluded the SEC.
It finally arrived in 23 boxes of documents handed over by CA's general counsel, Stephen Woghin, one of five of Richards' colleagues who would later strike a plea bargain with the Department of Justice.
Subpoenaed documents from CA's customers and emails recovered from employees' computers added more incriminating evidence.
Those in the conspiracy to cover up the revenue manipulation included several senior executives and many in the lower ranks too.
But while Richards eventually pleaded guilty to lying to company lawyers and the SEC, he claims he never destroyed information to stymie the investigation.
"I provided them with my PC and hard drives. They got all the files and emails that were on them."
Preparing to fight the SEC, Richards recruited top New York white collar crime lawyer David Zornow.
CA paid his legal fees to the tune of US$8.5 million - a sum the company may sue him to try to recoup.
Richards said the CA board initially supported him, but cut him loose when the scale of the fraud became apparent and CA itself came to face prosecution.
"The discussion with the board was 'do the right thing, you'll be looked after, this is going to go nowhere' through to the board's realisation that unless these two people are jettisoned, we're never going to be able to settle with the SEC."
Richards left CA in April 2004, and he and Kumar were indicted that September.
CA got its settlement, which required it pay US$225 million in compensation to investors.
Five other executives, including Ira Zar, pleaded guilty to various charges arising from the investigation.
But Richards and Kumar decided to fight their charges.
The indictment painted an ugly picture - the repeated backdating of contracts with the knowledge of Kumar and Richards, sales and finance employees tampering with documents, obstruction of justice, perjury and, in Kumar's case, bribery.
Kumar was accused of organising a US$3.7 million bribe paid to a customer to conceal the existence of the 35-day month accounting.
Richards claims he knew nothing of Kumar's deal, but again, he's quick to defend his former boss.
"I know he went to the board on the need to clear up that situation. When you have somebody running around bad-mouthing the company, many organisations would find a way to quieten it," he says.
Richards realises now what a bad move he made in fighting the charges. Apart from the pile of evidence, basic statistics were against the pair.
About 94 per cent of those facing federal indictment make a deal in exchange for a guilty plea. Of those who go to trial, 75 per cent are found guilty. Why did they fight?
"At the time, there was a belief that when all the facts came out, people would look at it and say, 'is this such a big deal? It's been going on for so long are these the guys we should be holding accountable for it?"' says Richards.
But witnesses they had lined up to testify that the 35-day month existed for years before Kumar and Richards led the company let them down.
In particular, Richards was depending on the evidence of former CA senior vice-president Thomas Bennett. But Bennett was also indicted and pleaded guilty.
In April last year, weeks before the start of their trial and days after Bennett's guilty plea, Richards and Kumar changed their pleas to guilty. Richards says it was a relief - "I don't think any of us was looking forward to going through a trial".
But the late admissions of guilt hurt the pair when it came to sentencing in November.
"It clearly made the judge unhappy," says Richards. He was expecting a shorter sentence than that imposed by US District Judge Leo Glasser.
"It was higher on the scale than we were hoping for," says Richards.
"At the same time there's a level of relief associated with it. I just want to get back to my kids, my family and be able to start my life again."
But in relation to the cover-up that concealed the fraud, Richards points his finger squarely at those in the finance department - Ira Zar and two former vice-presidents of finance who are yet to be sentenced.
"They were the guys who were responsible for the deletion of fax headers, changing dates on things. That was a finance-led initiative."
He also resents the fact that CA founder Charles Wang avoided being drawn into the scandal, despite being chairman of the company until 2002.
"For him to walk away scot-free is just wrong. I understand there's a statute of limitations and that sort of thing, but the culture was created by him. He should be here too."
Richards and Kumar remain close friends. Richards could have bought himself a lighter sentence by turning on Kumar, but remained loyal.
"It's very difficult for people to comprehend the magnitude of these sorts of things," he says.
"Sanjay can for me and I can for him. It leads to a level of closeness that was not there in the past."
Upon release from prison, where he will have to serve a minimum of six years and one month, Richards will probably be deported to New Zealand.
Because he has held on to his New Zealand passport he won't be able to serve his sentence in a low security work camp or move to a half-way house towards the end of his term.
Even after being indicted, Richards kept working, at a small Californian software company. He resigned from it October. But he's adamant his career isn't over.
"Absolutely not. I'll be 48 when I get out - there are plenty of things to do between then and when I want to retire. I've made some serious mistakes, but it doesn't mean I'm a bad person. I hope I have the opportunity to prove to people that that is the case."
Coming to grips with the length of time he'll have to spend away from his family is the hardest part.
"To miss those years seven through 14 for my eldest daughter, from 11 to 18 for my eldest son, those are precious years that I'll never get back."
While he has many regrets, has he learned any lessons? Richards thinks about the question for a long time.
"That when you see things happening that you think aren't right, you need to do something about them, as opposed to accepting that it's the way it's always been so it must be okay.
"I should have been a little stronger of character than I was during the investigation and indictment."
35-day month
Richards and his fellow accused pleaded guilty to what was described in their indictment as the "systemic, company-wide practice of falsely and fraudulently recording" revenue by:
* Artificially extending months, particularly the last month of a fiscal quarter, beyond the true end of the month.
* Instructing CA sales managers and salespeople to negotiate and finalise software licence agreements which were backdated to disguise that they had been finalised after the end of the fiscal quarter.
* Concealing the existence of the 35-day month from CA's external auditors by altering sales documents and accounting paperwork.
The guilty executives
Sanjay Kumar: Chief executive and chairman. Pleaded guilty to conspiracy, securities fraud, obstruction of justice. Sentenced in November to 12 years in prison. Fined US$8 million. Restitution to be decided.
Stephen Richards: Vice-president of sales. Pleaded guilty to conspiracy, securities fraud, perjury and obstruction of justice. Sentenced to seven years in prison and three years of supervised release. Restitution amount to be decided.
Thomas Bennett: Senior vice-president for product development. Pleaded guilty to obstruction of justice. Sentenced to 10 months' home detention, 100 hours of community service and three years of supervised release.
Stephen Woghin, general counsel, Ira Zar, chief financial officer, David Kaplan, vice-president of finance and administration, David Rivard, vice-president of finance, and Lloyd Silverstein, vice-president of CA's global sales organisation, all gave evidence for the prosecution and admitted securities fraud, obstruction of justice and conspiracy charges. They are yet to be sentenced.
