U.S. Securities and Exchange Commission

Litigation Release No. 18748 / June 16, 2004

Accounting and Auditing Enforcement Release No. 2036 / June 16, 2004

Securities and Exchange Commission v. Prabhat K. Goyal, Civil Action No. C 04-2372 (MMC) (N.D. Cal.) (June 16, 2004)

SEC SUES FORMER NETWORK ASSOCIATES, INC. CHIEF FINANCIAL OFFICER FOR ACCOUNTING FRAUD AND INSIDER TRADING

The Securities and Exchange Commission today filed civil fraud charges in the United States District Court for the Northern District of California against Prabhat K. Goyal. Goyal was Vice President and Chief Financial Officer at Santa Clara, California-based software manufacturer Network Associates, Inc. until his departure in 2000. The Commission's complaint alleges that from the second quarter of fiscal 1998 through the fourth quarter of fiscal 2000, Goyal engaged in a fraudulent scheme to, among other things, overstate Network Associates' revenue and earnings in violation of the federal securities laws. The Commission's complaint also alleges that Goyal sold stock while in possession of material non-public information regarding the financial fraud at Network Associates.

According to the complaint, Network Associates oversold products to its distributors and Goyal oversaw the improper recognition of hundreds of millions of dollars of revenue. In particular, the complaint alleges that 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,

• made secret payments to distributors to induce them to hold excess inventory and buy more products,

• offered distributors deep discounts and rebates on amounts that distributors already owed to Network Associates for prior product purchases and from which Network Associates already had recorded revenues, and

• sold products to distributors on consignment in violation of Network Associates' written sales contracts and stated revenue recognition practices.

The complaint further alleges that 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. The complaint alleges that Goyal knowingly or recklessly defrauded investors through the reporting of false and materially misleading financial information in periodic reports, financial statements, and securities registration statements that Network Associates filed with the Commission, in press releases, and in other public statements.

The Commission's complaint seeks to permanently enjoin Goyal from violating, or aiding and abetting future violations of, the antifraud provisions of the federal securities laws, Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Exchange Act Rule 10b-5; from violating the provisions of the federal securities laws that prohibit falsifying corporate records and lying to accountants, Exchange Act Section 13(b)(5) and Exchange Act Rules 13b2-1 and 13b2-2; and from aiding and abetting future violations of certain reporting and recordkeeping provisions of the federal securities laws, Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B), and Exchange Act Rules 12b-20, 13a-1, and 13a-13. The complaint also seeks an accounting, disgorgement of ill-gotten gains both in the form of salary and bonuses and from sales of stock, prejudgment interest, civil money penalties, and an order prohibiting Goyal from acting as an officer or a director of any reporting company.

The United States Attorney for the Northern District of California today announced criminal charges against Goyal arising from the same conduct charged in the Commission's complaint.

This is the second lawsuit that the Commission filed in connection with accounting issues at Network Associates. See SEC v. Terry W. Davis, Litigation Release No. 18189 (June 12, 2003).

The Commission thanks the U.S. Attorney's Office for the Northern District of California and the Federal Bureau of Investigation for their cooperation in this matter.

The Commission's investigation into these matters is continuing.

SEC Complaint in this matter

http://www.sec.gov/litigation/litreleases/lr18748.htm