January 4, 2006
McAfee Settles SEC Channel Stuffing Securities Fraud Suit
McAfee, Inc., then known as Network Associates, settled an SEC securities fraud action (complaint here) alleging that the company engaged in "channel stuffing" to report inflated sales and income from 1998 to 2000 -- wasn't that the height of the internet bubble, if memory serves? McAfee agreed to pay a $50 million civil penalty and to use an outside monitor to ensure that it properly accounts for its sales. The SEC has already sued three former Network Associates officers in connection with the fraudulent accounting, two of whom -- the former CFO and controller -- were charged with criminal violations. According to the SEC's Litigation Release (here):
McAfee defrauded investors into believing that it had legitimately met or exceeded its revenue projections and Wall Street earnings estimates during the 1998 through 2000 period. In reality, however, McAfee had used a variety of undisclosed ploys during the period to aggressively oversell its products to distributors in amounts that far exceeded the public’s demand for the products. While engaging in this “channel stuffing,” McAfee improperly recorded the sales to distributors as revenue. McAfee offered its distributors lucrative sales incentives that included deep price discounts and rebates in an effort to persuade the distributors to continue to buy and stockpile McAfee products. McAfee also secretly paid distributors millions of dollars to hold the excess inventory, rather than return it to McAfee for a refund and consequent reduction in McAfee’s revenues. In other instances, McAfee used an undisclosed, wholly-owned subsidiary, Net Tools, Inc., to repurchase inventory that McAfee had oversold to its distributors. All of these actions were inconsistent with Generally Accepted Accounting Principles and led to McAfee’s October 2003 restatement of its financial results for 1997 through 2003.
And we all believed companies with price/earnings ratios over 100 were good buys in 2000. Maybe not. (ph)
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