U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 19895 / October 31, 2006
Accounting and Auditing Enforcement
Release No. 2505 / October 31, 2006
Securities and Exchange Commission v. Eric G. Borrmann, Civil Action No. C-06-6722-MHP, N.D. Cal., October 30, 2006
SEC Charges Former McAfee, Inc. Financial Officer with Fraud
On October 30, 2006, the Securities and Exchange Commission filed a complaint in the United States District Court for the Northern District of California against Eric G. Borrmann, a former senior financial officer for McAfee, Inc., formerly known as Network Associates, Inc. The complaint charges that Borrmann aided and abetted a multimillion dollar financial fraud at McAfee from mid-1999 until his departure from the company in July 2000. The complaint further charges that Borrmann traded in the securities of McAfee while in possession of material, nonpublic information concerning the financial fraud and that his profits from the illegal trading were approximately $314,517.
Simultaneously with the filing of the complaint, Borrmann 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 the antifraud provisions of the federal securities laws. Borrmann 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. The order further requires Borrmann to pay $757,563, consisting of $314,517 in disgorgement of his unlawful trading profits, $128,529 in prejudgment interest thereon, and a civil penalty of $314,517.
The Commission's complaint alleges that mid-1999 until his departure in July 2000 Borrmann held various senior financial positions at McAfee, including serving as McAfee's treasurer, and was responsible for all financial planning and investor relations at the company. During that period, Borrmann routinely assisted other senior McAfee executives in calculating and forecasting the company's quarterly and yearly financial performance. Through regular meetings with McAfee's senior executives and managers, Borrmann learned of certain fraudulent schemes that McAfee was using during 1999 and 2000 to inflate its revenues. In the second quarter of 2000, Borrmann assisted McAfee's executives and senior managers in the preparation and dissemination to investors of false and misleading information about McAfee's financial results, including its inflated revenues and earnings.
The complaint further alleges that, after his resignation from McAfee, Borrmann engaged in insider trading when, during the period from July through September 2000, he sold McAfee securities while in possession of material, nonpublic information concerning the fraud and McAfee's deteriorating financial condition. Later, on December 26, 2000, after years of employing fraudulent schemes to inflate its reported revenues, McAfee 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, Borrmann realized unlawful profits of $314,517.
On October 31, 2003, McAfee restated its financial results to correct for, among other things, the fraudulent accounting and sales practices that had inflated McAfee's revenue and earnings during 1998 through 2000. Focusing on the second quarter of 2000 alone, the period during which Borrmann assisted in compiling the financial information that was relayed to investors and analysts in McAfee's earnings press release and subsequent conference calls, the effect of the October 2003 restatement on McAfee's financial statements was dramatic. Revenues of $233.7 million as reported in the second quarter of 2000 earnings release were reduced to $158.6 million, a forty-seven percent overstatement. Similarly, previously reported net income of $11.4 million was restated as a loss of $101.3 million, or a decrease of nine hundred and eighty-nine percent.
The Commission's action against Borrmann is its fifth civil enforcement action related to the accounting fraud at McAfee. Previously, the Commission filed civil actions against McAfee, Inc. (Litigation Release No. 19520), McAfee's former Chief Financial Officer Prabhat Goyal (Litigation Release No. 18748), and two former Controllers Terry Davis (Litigation Release No. 18189) and Evan S. Collins (Litigation Release No. 18986).
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.