McAfee, SEC Settle for $50M

Security software vendor McAfee settles with the SEC, agreeing to pay a $50 million fine for charges that it inflated revenue between 1998 and 2000.

The U.S. Securities and Exchange Commission ordered McAfee Inc. to pay a $50 million penalty Wednesday, bringing to a close a long-running investigation into shady accounting practices at the anti-virus software maker.

The SEC filed securities fraud charges against the McAfee Inc., of Santa Clara, Calif., alleging that the company inflated revenue by $622 million between 1998 and 2000.

McAfee denied any wrongdoing as part of the settlement, but agreed to pay the hefty fine, in addition to hiring an independent auditor to review its accounting practices and expand a program that allows customers and business partners to anonymously report unethical behavior.

In a statement, McAfee CEO George Samenuk said that he was pleased to be able to reach a settlement with the SEC.

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The SEC investigation dates to 2002. The SEC concluded that McAfee defrauded investors into believing that it had met or exceeded Wall Street earning estimates.

The company was allegedly engaged in "channel stuffing," in which McAfee, then known as Network Associates Inc., improperly booked sales to its distributors as revenue, even though the distributors did not sell the products to customers.

McAfee then allegedly paid millions of dollars to the distributors to hold on to the excess inventory.

In another scheme, a wholly owned McAfee subsidiary, called Net Tools, Inc. purchased inventory from distributors so that it would not be returned to McAfee and discounted from the companys revenue, the SEC said.

In 1998 alone, McAfees accounting machinations added $562 million to the companys revenues, around 131 percent higher than they would have been otherwise.

The company also took steps to conceal the channel stuffing and other unethical business practices, improperly accounting for the payments to distributors and moving money from reserve accounts to cover the costs, the SEC said.

It was just over five years ago that then Network Associates CEO Bill Larson, President Peter Watkins and chief financial officer Prabhat Goyal announced their resignations from the company on the same day that NAI announced a fourth quarter revenue shortfall of $120 million and a new revenue recognition policy for sales through its distributors.

The SEC subsequently filed suit against Goyal, as well as Terry Davis, NAIs former Vice President and Corporate Controller and Evan S. Collins, a former senior financial officer for their roles in covering up the scheme, as well as insider trading.

Samenuk, who took over the helm of NAI after former CEO Larsons departure, is credited with cleaning up the companys business operations and returning it to profitability.

In a statement, Samanuk said he and the board were "dedicated to the important task of creating a corporate culture of ethics and compliance which permeates all of our relationships."

Samenuk said he looked forward to developing the companys Ethics First program as part of the settlement, which he called the "hallmark" of his tenure at McAfee since he joined the company in Jan, 2001.

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