The former chief financial officer of Network Associates, known for its McAfee anti-virus software, was charged Wednesday with 20 counts of securities fraud and conspiracy in connection with an alleged scheme to fudge the companys books to hide losses and inflate earnings in the late 1990s.
Prabhat Goyal served as the companys CFO from late 1997 through 2000, and federal prosecutors charge in an indictment that he regularly approved cash payments to Network Associates Inc. (NAI) distributors in return for the resellers agreeing to hold unsold inventory and buy more products than they could sell.
The plot also included a system whereby NAI invested money in its resellers in order to give the distributors the available cash to buy products from NAI, the indictment says.
In two separate cases, the indictment alleges that Goyal authorized payments of $15 million and $21 million to distributors in exchange for their agreements to buy more software from NAI and not return unsold products. These payments often were described as marketing expenses or promotional programs.
The goal of these machinations was to meet or exceed the companys quarterly and annual revenue projections “to artificially sustain Network Associates stock price, to permit the defendant to enrich himself by obtaining bonuses and stock options and to maintain the defendants position in the company and reputation with the investing public,” according to the indictment.
Goyal resigned from NAI in early 2001, at about the time when the current management team took over. During Goyals tenure, Santa Clara, Calif.-based NAI recognized revenue as soon as it sold a product to a distributor, instead of when that product was actually sold to a customer. The company has since restated its earnings and changed its accounting practices to only recognize sales once they are made to a customer.
The indictment, filed in U.S. District Court in the Northern District of California, also charges that Goyal consistently hid his actions from the companys board of directors and lied to NAIs outside auditors, PricewaterhouseCoopers.
“Mr. Goyal did nothing wrong. He is an honest and respected finance professional. He was instrumental in the creation of Network Associates and in its growth into one of the leading software companies in the industry,” said Stephen Jonas, Goyals lawyer. “What this case is really about is the government second-guessing accounting judgments using the blunt instrument of a criminal prosecution. That is terribly unfair. We expect that Mr. Goyal will be fully exonerated.”
If convicted, Goyal faces up to 10 years in prison and a $1 million fine for each of the 19 counts of securities fraud; the conspiracy charge carries a maximum penalty of five years in prison and a $250,000 fine.
Goyals indictment is part of a long-running investigation into NAIs business practices by both the Department of Justice and the Securities and Exchange Commission. The SEC filed a separate civil suit against Goyal on Wednesday.