Former Network Associates CFO Convicted Of Securities Fraud

After a five-week trial and three days of jury deliberation, the former CFO of Network Associates was convicted late last week on 15 counts of securities fraud violations.

Prabhat Goyal, of Los Altos, Calif., was found guilty of committing securities fraud, filing false reports with the Securities and Exchange Commission, and making false statements to auditors. He faces a maximum of 10 years in prison for each charge -- or a potential 150 years behind bars.

His sentencing date will be set after a motions hearing on July 27.

Network Associates was formed in 1997 when McAfee Associates and Network General merged. In 2004, the company changed its name to McAfee.

A spokesman for McAfee said they have no comment about the conviction.

According to the indictment, the government contended that between 1998 and 2000, Goyal, while he was CFO of Network Associates, conspired with others to commit securities fraud. The charges included causing the company to make millions of dollars in payments to its distributors falsely disguised as discounts, rebates, and marketing fees in order to convince the distributors to hold excess inventory; not return unsold products; and purchase more products than the distributors could actually sell to customers during a given quarter.

Goyal was first indicted by a federal Grand Jury in San Francisco on 20 counts of securities fraud and conspiracy.

The indictment charged that Goyal concealed from Network Associates' outside auditors and its board of directors the "true nature, extent, and source of the improper payments to its distributors, as well as other special terms and conditions reflected in oral and written side agreements." If these and other matters had been disclosed, Network Associates would not have been permitted to recognize revenue on these software sales at the time that it did.

The indictment also pointed out that revenue was overstated by more than $470 million, and losses were understated by about $330 million between 1998 and 2000.

Goyal also was charged with filing false and misleading Form 10-Qs, Form 10-Ks, and other documents with the SEC, the indictment showed. It further noted that Goyal made fraudulent entries in Network Associates' financial books and records, false statements and material omissions to outside auditors, and materially false and misleading public statements about Network Associates' financial performance.