Prabhat K Goyal, vice president and chief financial officer of the computer security firm Network Associates, famous for the McAfee anti-virus software, faces criminal charges for masterminding an accounting scam that duped investors by inflating the company's sales figures and concealing losses worth $330 million.
According to the civil fraud charges filed against him by Securities and Exchange Commission yesterday, Goyal engaged in a fraudulent scheme to overstate the Santa Clara, California-based company's revenue and earnings in violation of the federal securities laws from the second quarter of fiscal 1998 through the fourth quarter of fiscal 2000.
The 20-count indictment presented at the San Francisco Court also alleged that Goyal sold stocks while in possession of material non-public information regarding the financial fraud at Network Associates.
The SEC complaint alleged Network Associates oversold products to its distributors and Goyal oversaw the improper recognition of millions of dollars of revenue.
Goyal and others at his direction used a wholly owned Network Associates subsidiary to repurchase products previously sold to distributors in order to reduce distributor inventory levels and limit product returns, the SEC said.
He made secret payments to distributors to induce them to hold excess inventory and buy more products, and offered deep discounts and rebates on amounts they already owed to Network Associates for prior product purchases from which the company already had recorded revenues. If convicted, Goyal faces up to 10 years in prison.
The U.S. Attorney for the northern District on Thursday announced criminal charges against Goyal arising from the charges in the Commission's complaint. There are 19 counts of securities fraud punishable with 10 years in prison and one count of conspiracy, punishable with five years in prison.
The commission's complaint says Goyal sold products to distributors on consignment in violation of his firm's written sales contracts and stated revenue recognition practices.
It also alleges Goyal took action to conceal the fraud, directing that payments and discounts to distributors be misrecorded in Network Associates's books, and directing the release of unrelated tax reserves to cover payments to distributors and to increase inadequate sales reserves.
Goyal knowingly or recklessly defrauded investors through the reporting of false and misleading financial information in periodic reports, financial statements, and securities registration statements that Network Associates filed with the Commission, it said.
This is the second lawsuit that the Commission filed in connection with accounting issues at Network Associates.
The Commission's complaint seeks to permanently enjoin Goyal from violating, or aiding and abetting future violations of the anti-fraud provisions of the federal securities laws.
It also seeks an accounting and disgorgement of ill-gotten gains and an order prohibiting Goyal from acting as an officer or a director of any reporting company. The SEC's investigation into these matters is continuing.
Network Associates has already restated its results and is planning to rename itself as 'McAfee.'
