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US: McAfee to Pay $50 Million Fine To Settle SEC Fraud Charge

by Judith BurnsThe Wall Street Journal
January 4th, 2006

McAfee Inc. will pay $50 million to settle accounting fraud charges, ending a long-running investigation by the Securities and Exchange Commission.

The SEC said McAfee, formerly known as Network Associates Inc., misled investors and overstated earnings by hundreds of millions of dollars from the second quarter of 1998 through 2000.

The Santa Clara, Calif., supplier of computer security and antivirus tools, settled without admitting or denying the allegations. The settlement is subject to court approval.

In September, McAfee said it offered to pay a fine to the SEC and recorded a charge of $50 million for a potential settlement of the probe, which began in early 2002.

"We are pleased to be able to reach this settlement and will take this opportunity to reinforce and further institutionalize the strong message of putting ethics first," said George Samenuk, McAfee's chairman and chief executive, in a prepared statement.

In 2001, McAfee's former chief executive William Larson and two top lieutenants resigned after several accounting problems resulted in a surprise loss. McAfee had to twice restate its reported financial results, as more accounting problems surfaced.

According to the SEC, McAfee inflated its cumulative net revenue by $622 million over the period. It said in 1998 alone, McAfee inflated revenue by $562 million, a misstatement of 131%. When the scheme began to unravel and McAfee announced in December 2000 that it would miss its quarterly revenue projection by $190 million, the SEC said the news slashed over $1 billion from McAfee's market capitalization.

The SEC complaint alleged that McAfee used deep discounts and ploys such as "channel stuffing" to aggressively push its products to distributors. It said McAfee also secretly paid distributors millions of dollars to hold excess inventory and sometimes had its wholly-owned subsidiary, Net Tools, Inc., repurchase inventory McAfee had pushed on distributors. The complaint claims McAfee manipulated its accounting to conceal its practices from investors and defrauded them by issuing false and misleading financial results.

The SEC had previously sued McAfee's former chief financial officer and its former controller for their roles in the alleged accounting fraud. Those lawsuits have been stayed pending resolution of criminal proceedings against the former executives by federal prosecutors in California.





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