McAfee pays $50 million in accounting fraud case

The Santa Clara, Calif.-based network security provider agrees to a cash penalty to be distributed to harmed investors, per the Sarbanes-Oxley Act.

McAfee Inc. will pay $50 million to defrauded investors and appoint an independent consultant to clean up its internal accounting controls under a proposed settlement announced by the Securities and Exchange Commission.

In a prepared statement yesterday, the SEC said the settlement stems from accounting fraud charges of "channel-stuffing" that overstated revenue by $562 million, or 131%, from Q2 1998 through 2000. McAfee, then known as Network Associates Inc., was accused of leveraging that inflated value to buy other companies and boost its stock price.

Specific ploys outlined by the SEC include:

  • Improperly recording sales to distributors as revenue.
  • Providing deep price discounts and rebates as incentives for distributors to continue buying products, even though many channels already were overstocked.
  • Secretly paying distributors millions of dollars to hold on to excess inventory rather than return it to McAfee for credit.
  • Using Net Tools Inc., a wholly-owned subsidiary, to repurchase the overstock that was returned by distributors.

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"When the scheme began to unravel and McAfee announced, in December 2000, that it would miss its quarterly revenue projection by $190 million, the news slashed over $1 billion from McAfee's market capitalization," according to the SEC report.

McAfee didn't admit or deny the allegations but did agreed to the cash settlement and additional independent oversight, which still needs court approval, according to a news release.

"The settlement takes into account both the underlying misconduct and the resulting investor harm, as well as the significant benefit that accrued to McAfee from having articificially inflated the price of its stock and using it to acquire other companies, capitalizing on the artificial value McAfee had created through its fraud," Linda Chatman Thomsen, who heads the SEC's enforcement division, said in a statement.

Thomsen added that she hoped the stiff penalty will deter other public companies also tempted to cook their accounting books and ultimately cheat investors.

Former McAfee CFO Prabhat Goyal and former McAfee controller Terry Davis also were sued individually by the SEC. Those cases are on hold pending criminal trials in northern California.

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