Former Network Associates Exec Pleads Guilty To Securities Fraud

The charges against Terry Davis, 41, of Portland, Ore., a former vice president and controller of security vendor Network Associates, based here, are the first coming out of a federal investigation into the company's accounting practices.

Between 1998 and 2001, Davis admitted that he and others "engaged in a wide-ranging accounting fraud designed to unlawfully inflate revenue generated from the sale of Network Associates products to its distributors in order to meet targeted quarterly revenue goals," said the U.S. Attorney's Office in statement.

The scheme to inflate revenue included using Net Tools, a wholly owned subsidiary of Network Associates, to buy products Network Associates previously sold to distributors to reduce inventory levels and products returns, officials said.

Davis also admitted that he and others paid distributors to hold excess or unsold inventory and paid fees to distributors--disguised as discounts and rebates--on money the distributors owed Network Associates to prevent them from returning product, officials said.

The scheme also included fraudulent accounting entries to release a tax reserve and increase inadequate sales return reserves to pay for the discounts and rebates and avoid reducing revenue already recognized, officials said.

The U.S. Attorney's Office said Davis acknowledged that he and others caused Network Associates to file false and misleading financial statements with the Securities and Exchange Commission from the second quarter of 1998 to the fourth quarter of 2000.

When Network Associates announced on April 25, 2002, that it would restate its financial statements from 1998 to 2000, the stock price dropped 17 percent, causing investors to lose more than $931 million, officials said.

The case against Davis is the result of a six-month investigation by the FBI and the U.S. Attorney's Office, in conjunction with an ongoing investigation by the Securities and Exchange Commission.

The SEC Wednesday filed civil fraud charges against Davis.

As part of his plea agreement, Davis agreed to cooperate with the U.S. Department of Justice's continuing investigation.