Speech by SEC Staff:
Statement regarding McAfee, Inc. and Applix, Inc.

by

Linda Chatman Thomsen

Director, Division of Enforcement
U.S. Securities and Exchange Commission

Washington, DC
January 4, 2006

Good Afternoon and Happy New Year.

I'd like to spend just a few minutes outlining the underlying facts of the two cases we filed today.

In Securities and Exchange Commission versus McAfee, Inc. the Commission charged McAfee with securities fraud in connection with a scheme to fraudulently overstate McAfee's revenues during the period from late 1998 through 2000. Without admitting or denying the allegations in the Commission's complaint, filed earlier today in federal district court in San Francisco, McAfee has consented to the entry of a final judgment that enjoins it from violating the antifraud and other provisions of the federal securities laws, and orders McAfee to pay a $50 million civil penalty. This settlement is, of course, subject to the Court's approval.

According to our complaint, McAfee engaged in this fraud in order to meet revenue projections and earnings targets. Its violative conduct was egregious and pervasive. The fraudulent scheme, which lasted for over a year and a half, was directed by the company's chief financial officer and implemented to a large extent by its controller, both of whom have been charged by the Commission in prior civil actions and by the Department of Justice in criminal proceedings. The fraud was implemented and concealed through the use of various artifices and accounting ploys, including:

• secret payments and discounts to McAfee's distributors as inducement to not return product to McAfee;
   
• the creation of a wholly-owned subsidiary to repurchase oversold McAfee product from its distributors while guaranteeing the distributors profits on such resales; and
   
• false entries on McAfee's books and records and the manipulation of reserve accounts to cover the costs of the distributor payments.
   

During the time period of the fraud McAfee used its overvalued stock to acquire other companies, capitalizing on the artificial value it had created through its fraud.

In the Commission's action against Applix, Inc., a company that develops and sells management software, the Commission alleges that Applix engaged in a fraudulent scheme to improperly recognize revenue on two transactions. In the first transaction Applix improperly recognized software licensing revenue under a Dec. 31, 2001, amendment to a reseller agreement. Because the agreement included the right to resell new products, Applix should have recognized the revenue ratable over the twelve month term of the agreement, that is, throughout 2002. Instead, it recognized all of the revenue upfront in 2001, allowing Applix to meet its previously announced revenue goals. By virtue of this conduct Applix understated its net loss for the year. In the second transaction, Applix recognized revenue in the second quarter of 2002 for a contract even though the customer had not accepted the product. As a result, Applix understated its net loss for the quarter by over 30%. Applix has agreed, without admitting or denying the findings in the Commission's order, to a cease-and-desist order and to certain undertakings to retain a financial policies consultant to review its policies and procedures. Separately, the Commission is suing three individuals, whom the Commission alleges also violated the securities laws in connection with Applix's fraud.

Let me take just a moment to look at these matters in light of the principles announced today. But before I do so, let me caution that these matters, like every matter the Commission considers, were considered in light of all the facts and evidence. With that caveat, let me run through some of the factors that informed our thinking about penalties in these two cases. McAfee benefited from its conduct, especially through acquisitions made with its inflated stock. Applix did not similarly benefit and there does not appear to be other direct benefits to it or its shareholders by virtue of the fraud. Today McAfee is financially strong and the penalty it has agreed to pay is unlikely to cause McAfee shareholders undue hardship. Applix is a relatively small company and a large financial penalty could have a disproportionate effect on its financial situation with hardship flowing to its shareholders. In McAfee we anticipate penalty monies can be effectively distributed to shareholders injured by the fraud. In Applix it would be difficult to impose a penalty that would be large enough to make distribution to victims practical without causing undue harm to the company and its current shareholders. In McAfee the conduct was pervasive and occurred over a significant time period; in Applix the conduct, while certainly fraudulent, was more limited.

We had terrific staff working on both of these cases and I want to thank all of them. In McAfee the team includes Paul Lane, Robert Peak, Lawrence Renbaum, Yuri Zelinsky, Russell Duncan, Susan Markel, and Antonia Chion. I also want to recognize the cooperation that we received from the United States Attorney's Office of the Northern District of California and the FBI in this and related matters. On the Applix case the team includes Anthony Jordon, Robert Barry, Celia Moore, Martin Healey and David Bergers.

http://www.sec.gov/news/speech/spch010406lct.htm