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Litigation Release No. 18189 / June 12, 2003

Accounting and Auditing Enforcement Release No. 1801/June 12, 2003

Securities and Exchange Commission v. Terry W. Davis, Civil Action No. C 03-2729 (WDB) (N.D. Cal.) (June 11, 2003)


On June 11, 2003, the Securities and Exchange Commission filed civil fraud charges against Terry W. Davis, the former Vice President and Corporate Controller at Santa Clara, California-based software manufacturer Network Associates, Inc. The Commission's complaint alleges that from the second quarter of fiscal 1998 through the fourth quarter of fiscal 2000, Davis engaged in a scheme to overstate Network Associates' revenue and earnings, and thereby inflate the company's stock price.

According to the complaint, Davis and other Network Associates employees actively participated in a multi-part scheme to artificially inflate the revenue generated from the sale of the company's products to distributors. The scheme included:

  • paying distributors so that they would hold excess inventory and buy more products;

  • giving deep discounts to distributors on amounts owed through side agreements to contracts;

  • fraudulently manipulating reserve accounts to, among other things, cover payments and discounts provided to distributors;

  • improperly recognizing revenue when selling to distributors on consignment in violation of GAAP and Network Associates' stated revenue recognition practices; and

  • using a wholly-owned subsidiary to buy products previously sold to distributors to reduce distributor inventory levels and product returns.
  • The complaint further alleges that Davis took action to conceal the fraud. For example, in many instances, the payments and discounts to distributors were recorded improperly in Network Associates' books and records. According to the complaint, Davis, encouraged by at least one other senior employee at Network Associates, made a series of fraudulent entries in Network Associates' general ledger to decrease a tax-related reserve in order to disguise the distributor payments and discounts and to increase inadequate sales reserves.

    The complaint alleges that while Davis was aware of the financial fraud at Network Associates, he sold Network Associates stock for proceeds of approximately $1.4 million.

    The Commission seeks to permanently enjoin Davis from violating certain 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 (Exchange Act) and Exchange Act Rule 10b-5) and from violating, or aiding and abetting violations of, certain reporting, books and records, internal controls, and representations to accountants provisions (Exchange Act Sections 13(a), 13(b)(5), 13b2-1, 13(b)(2)(A) and 13(b)(2)(B), and Exchange Act Rules12b-20, 13a-1, 13a-13 and 13b2-2). The complaint also seeks an accounting, disgorgement of ill-gotten gains, prejudgment interest, civil money penalties, and an order prohibiting Davis 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 Davis arising from the same conduct charged in the Commission's complaint.

    The Commission's investigation into these matters is continuing.

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

    SEC Complaint in this matter



    Modified: 06/12/2003