The US Securities and Exchange Commission (SEC) has slapped an unusually heavy fine on McAfee for inflating its revenues during the dot.com era.
The SEC has stated that between 1998 and 2000 specifically, McAfee overstated its revenues by $622 million, and that for 1998 alone revenues were hiked 131 percent, or $562 million.
In order to settle the embarrassing episode quickly, the company has agreed to stump up $50 million as punishment for the mis-statements, though it has not admitted to the charges in a formal way.
The money will be distributed between McAfee shareholders reckoned by the SEC to have suffered as a result of the drop in the companys market capitalisation when it announced its need to re-state revenue in December 2000.
The current management - which is not implicated in the fraud - underlined its distance from the affair. "We are pleased to be able to reach this settlement and will take this opportunity to reinforce and further institutionalise the strong message of putting ethics first, which I have made the hallmark of McAfee since joining in January 2001,'' said CEO George Samenuk.
Criminal charges are ongoing against some members of the previous management team, including its chief financial officer Prabhat K. Goyal.
The charges are unambiguous in describing what went on at McAfee at the time to have been orchestrated fraud using almost every trick known to software accountancy.
These include the old technique of "channel stuffing" - recording high sales for products merely shipped to distributors - and offering large discounts to those agreeing to stock high levels of inventory. Channel partners wanting to return unsold inventory were offered money to hold on to it.
If this failed, the company used one of its own subsidiaries, Net Tools, to repurchase the inventory when it finally had to be returned. The whole financial shenanigan was concealed from investors by manipulating the company books on a large scale.
"The companys channel-stuffing and use of manipulative accounting artifices warrants a severe civil sanction that will act as a deterrent for other public companies," said the SECs Linda Chatman Thomsen.
The SEC is using McAfee as a warning to the industry that channel stuffing will be punished if uncovered. From time to time, other software companies have been discovered using similar inventory manipulation. But usually on a smaller scale.