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U.S. Securities and Exchange Commission


Litigation Release No. 18986 / November 30, 2004

Accounting and Auditing Enforcement
Release No. 2146 / November 30, 2004

Securities and Exchange Commission v. Evan S. Collins, Civil Action No. C 04-5030 (FMS), N.D. Cal., November 30, 2004


On November 30, 2004, the Securities and Exchange Commission filed a complaint in the United States District Court for the Northern District of California against Evan S. Collins, a former senior financial officer for Network Associates, Inc., now known as McAfee, Inc. The complaint charges that Collins traded in the securities of Network Associates while in possession of material, nonpublic information concerning fraudulent accounting practices at Network Associates and that his profits from the illegal trading were approximately $253,000.

Also today, the U.S. Attorney for the Northern District of California filed criminal charges against Collins in connection with the same conduct.

Simultaneously with the filing of the complaint, Collins has consented, without admitting or denying the allegations of the complaint, to the entry of an order permanently enjoining him from violating, directly or indirectly, Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder, which are antifraud provisions of the federal securities laws. Collins also has consented to the entry of an order that bars him for five years from serving as an officer or director of a public company. Collins has further consented to disgorge his unlawful trading profits of $253,125, together with prejudgment interest thereon in the amount of $63,336, for a total disgorgement of $316,461, and to pay a civil penalty of $253,125.

The Commission's complaint alleges that, in September 2000, Collins, who formerly had served as Network Associates' Controller, was serving as Vice President and Chief Financial Officer of a Network Associates majority-owned subsidiary, McAfee.com. At about that time, Collins learned that his successor at Network Associates, Terry Davis, had made journal entries in Network Associates' general ledger that improperly inflated the company's accounts receivable reserve. By accessing the Network Associates accounting system from his computer at work, Collins confirmed this information and determined that Davis had transferred $15 million from the company's tax reserve account to an accounts receivable reserve account. Collins knew that Davis's $15 million transfer was not in conformity with Generally Accepted Accounting Principles (GAAP), which provide that accounts receivable reserves should only be increased by a corresponding reduction to Network Associates' revenue.

The complaint further alleges that, in October 2000, Collins learned that Davis was warning certain colleagues that they should sell their Network Associates stock. Based on this and his knowledge of the material, nonpublic information concerning the improper accounting entries, Collins concluded that Network Associates had misstated its financial statements and, as a result, was in danger of not meeting its publicly announced revenue targets for the fourth quarter ending December 31, 2000.

The complaint further alleges that on or about November 1, 2000, Collins exercised options on 30,000 shares of Network Associates stock and sold the shares in advance of Network Associates' fourth quarter earnings announcement. On December 26, 2000, Network Associates stated in a press release that its sales for the fourth quarter 2000 would be only $55 million, dramatically lower than the company's earlier prediction of $245 million. The news sent Network Associates' stock price down sharply and slashed more than $1 billion from the company's market capitalization. By trading in advance of the fourth quarter 2000 earnings announcement, Collins realized unlawful profits of $253,125.

The Commission's action against Collins is its third civil enforcement action related to the accounting fraud at Network Associates. Previously, the Commission filed civil actions against Network Associates' former Controller Terry Davis (Litigation Release No. 18189) and former Chief Financial Officer Prabhat Goyal (Litigation Release No. 18748). Both of these actions are pending.

The Commission acknowledges the assistance and cooperation of the U.S. Attorney's Office for the Northern District of California and the Federal Bureau of Investigation.

The Commission's investigation into matters related to the fraud at Network Associates, now known as McAfee, Inc., is continuing.

SEC Complaint in this matter


Modified: 11/30/2004