The United States Attorney's Office for the Northern District of California announced  that Terry W. Davis, a former vice president and controller of Network Associates, pled guilty yesterday afternoon to charges of securities fraud.  These are the first charges to emerge from an investigation into conduct at Network Associates.  On April 25, 2002, the company announced it would restate its earnings and revenue for 1998-2000, causing its stock price to drop approximately 17 percent, and causing a loss to investors of more than $931 million.  The company filed its restatement with the SEC on June 28, 2002.

Mr. Davis was formerly the Corporate Tax Director and then Vice President of Finance and Corporate Controller for Network Associates.  Network Associates, a Delaware corporation with principal offices in Santa Clara, California, is a manufacturer and seller of computer programs and hardware relating to network security and management. 

In pleading guilty, Mr. Davis admitted to orchestrating and actively participating in a scheme to defraud shareholders of Network Associates and the Securities and Exchange Commission.  Between 1998 and 2001, he admitted that he and others engaged in a wide-ranging accounting fraud designed to unlawfully inflate revenue generated from the sale of Network Associate's products to its distributors in order to meet targeted quarterly revenue goals. 

Specifically, Mr. Davis said that he and others inflated revenue by:

! directly assisting distributors in the resale of Network Associates product by using Net Tools, Inc. – a subsidiary wholly owned by Network Associates – to buy products Network Associates had previously sold to its distributors and thus alleviate high distributor inventory levels, and avoid product returns and resulting reductions in revenue;

! paying fees to distributors, disguised as discounts and rebates, on amounts they owed to Network Associates to prevent the distributors from returning the product they had bought from Network Associates and for which Network Associates had already recognized revenue, and to encourage the distributors to buy yet more product from Network Associates even though they were holding excess inventory;

! making false and fraudulent accounting entries in Network Associate's general ledger to release a tax reserve and increase inadequate sales return reserves to pay for these discounts, rebates and payments to avoid reducing revenue already recognized; and

! and selling to distributors on consignment in violation of the company's written sales contracts and purported revenue recognition practices, which allowed the distributors to pay Network Associates for product they purchased when the distributors sold the product to end-users instead of paying at the time they purchased from Network Associates.

As a result of the scheme, the company overstated its revenues and earnings, thus inflating its stock price, in violation of the federal securities laws.  Further, knowing that Network Associate's revenues and earnings had been improperly inflated and recorded in the books and records of the company, Mr. Davis acknowledged that he and others caused Network Associates to file materially false and misleading financial statements with the SEC from the second quarter of 1998 through the fourth quarter of 2000. 

In his guilty plea, Mr. Davis also admitted that he had made, or caused to made, false statements to Network Associate's independent auditor, PriceWaterhouseCoopers, and that he had concealed the true nature of the improper revenue-generating transactions from PriceWaterhouseCoopers.  Mr. Davis further admitted that between February 26 and March 8, 2002, after an internal investigation by Network Associates, he exercised stock options and sold 90,463 shares of Network Associate's common stock for net proceeds of approximately $1.4 million, trading on the basis of material, non-public information that the company's financial statements were false and misleading. 

Mr. Davis will be sentenced at a future date in San Francisco by Judge Jenkins.  Mr. Davis faces a maximum statutory penalty for 10 years in prison and a fine of $250,000, plus restitution up the amount of the loss caused by his conduct, including the insider trading proceeds in the amount of $1.4 million.  However, the actual sentence will be dictated by the Federal Sentencing Guidelines, which take into account a number of factors, and will be imposed in the discretion of the Court.

U.S. Attorney Kevin V. Ryan, a member of President Bush's Corporate Fraud Task Force, said that the Department of Justice was fully committed to the prosecution of corporate fraud.  "Once again, the U.S. Attorney's Office has demonstrated that, working in partnership with the FBI and SEC, criminals in the boardroom should be on notice that federal authorities will hold them accountable for criminal misconduct to the full extent of the law."  Mr. Davis becomes the twelfth defendant charged with criminal corporate fraud violations over the last 12 months, including securities fraud, insider trading or energy market manipulation, by the Securities Fraud Section of the U.S. Attorney's Office.  Over the same period, 18 defendants have been convicted.

The prosecution is the result of a six-month investigation by the Federal Bureau of Investigation along with the U.S. Attorney's Office, and in conjunction with an on-going investigation by the Securities and Exchange Commission.  On March 26, 2003, Network Associates announced that  it would restate its prior financial results a second time for 1998 through 2000 as a result of this investigation.  Eumi Choi and Jeffrey Bornstein are the Assistant U.S. Attorneys who are prosecuting the case.

All press inquiries to the U.S. Attorney's Office should be directed to Assistant U.S. Attorney Matthew J. Jacobs at (415)436-7181.