On September 29, 2010, in the Computer Associates International Derivative Litigation, Judge Thomas C. Platt of the U.S. District Court for the Eastern District of New York granted a motion to dismiss derivative claims asserted against Ernst & Young LLP ("E&Y") and KPMG LLP ("KMPG"), the former and current auditors of Computer Associates ("CA"). In addition to dismissing claims against the auditors and other defendants, Judge Platt realigned CA as plaintiff to pursue settlements with other defendants and prosecute claims against Charles Wang and Peter Schwartz, CA's former CEO and CFO, respectively.
The dismissal of the derivative claims against the audit firms follows a long and complex litigation history arising out of CA's improper revenue recognition practices. The complaint alleges that CA, one of the largest software companies in the world, artificially inflated its revenue and earnings by extending the close of its quarters by several extra days – the so-called "35 day month practice" – in order to meet or exceed revenue and earnings estimates. In 2003, Judge Platt approved a settlement of a related federal securities class action and other derivative litigation arising out of CA's alleged accounting fraud, pursuant to which the former officers and directors were given broad releases. Claims against E&Y were dismissed for failure to comply with the statute of limitations applicable at the time. In mid-2004, certain former CA executives were charged by the U.S. Attorney's Office for the Eastern District of New York with securities fraud and obstruction of justice in connection with their involvement and cover up of the "35-day month practice." In 2004, CA entered into a deferred prosecution agreement in which it admitted to improper revenue recognition practices and obstruction of justice. CA's former executives subsequently pled guilty to the criminal charges. Meanwhile, in a related civil appeal, the Second Circuit held that Sarbanes-Oxley's extended limitations periods did not revive otherwise stale claims, and affirmed the dismissal of federal securities claims against E&Y for failure to comply with the shorter limitations period applicable at the time.
Subsequently, in 2004, certain CA shareholders filed derivative suits on behalf of CA, seeking to assert claims against former CA officers and directors for engaging in and covering up the "35-day month practice." The derivative plaintiffs also asserted claims against E&Y and KPMG for alleged accounting malpractice, breach of contract, aiding and abetting breaches of fiduciary duty, indemnification and contribution. In 2005, CA formed a Special Litigation Committee to investigate the derivative claims, and issued reports concluding, inter alia, that the claims against E&Y and KPMG lacked merit. After further proceedings, including a decision by the Second Circuit holding that derivative plaintiffs lacked standing to invoke the Rule 60(b) motion to reopen the class action settlement so that they may pursue the derivative claims, the Second Circuit remanded to the district court, which rendered its decision on the motion to dismiss and realign.