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Former Network Associates Inc. corporate controller Terry Davis pleaded guilty Wednesday to securities fraud and now faces up to 10 years in prison. The charges are the result of an investigation by the FBI and the United States Attorneys Office into the companys accounting practices.
In his plea agreement, Davis admitted to heading up a far-reaching scheme to inflate the companys revenue and jack up its stock price. He also admitted to lying to NAIs outside auditor and selling stock worth about $1.4 million on the basis of non-public information about the companys financials.
In a related development, the Securities and Exchange Commission on Thursday announced that it filed a civil complaint against Davis as well.
The SEC said that Davis, to cover his actions, often improperly recorded payments and discounts to distributors in NAIs books. The SECs complaint also alleges that Davis took advantage by selling NAI stock worth about $1.4 million.
Davis left NAI in February 2002, according to a company spokeswoman. The SEC is seeking civil penalties against Davis, the return of any illegally obtained funds as well as an order barring him from acting as an officer of any public company.
According to the SECs complaint, Davis action was related to the fact that NAI, based in Santa Clara, Calif., was at the time using an accounting method under which it recognized revenue as soon as products were sold to distributors. In order to meet the companys quarterly revenue targets, Davis formulated a plan, with the help of the companys sales staff, to negotiate enough sales—or “buy-ins”—to distributors to reach the revenue goal.
“The buy-in deals were key to Network Associates meeting its sales targets because the company immediately recognized the revenue from these purported sales,” according to the complaint. “However, the buy-ins were largely a sham. In short, Network Associates was overselling its product to its distributors, while at the same time immediately recognizing the revenue from these inflated sales.”
Instead of allowing distributors to return the excess inventory, Davis offered them payoffs and discounts to hold the products and used a shell company and a tax reserve account to hide his activity, according to the SECs complaint. In one instance in 1999, Davis authorized eight separate payments in a single day to one distributor. The payments totaled $21 million. Seven months later Davis authorized payments totaling $11.9 million to the same distributor, the SEC complaint says.
Specifically, the SEC accuses Davis of paying distributors to hold excess inventory and buy more products; giving deep discounts to distributors through side agreements to contracts; fraudulently manipulating reserve accounts to cover payments and discounts to distributors; improperly recognizing revenue; and using a wholly-owned subsidiary to buy back products from distributors in order to reduce distributors inventory levels and product returns.
The NAI spokeswoman declined to comment on the specifics of the SECs investigation, but said the company continues to cooperate with the probe.