The Securities and Exchange Commission has settled a civil fraud action against Veritas Software for engaging in a fraudulent earnings management scheme and filing false and misleading financial statements. The SEC also charged Veritas with securities fraud regarding an improper round-trip transaction with America Online, and with aiding and abetting AOL’s securities fraud.
Without admitting or denying the allegations, Veritas agreed to pay a $30 million civil penalty, which the SEC will distribute to harmed investors under the “fair funds” provision of Sarbanes-Oxley. The company also agreed to an injunction against further violations of securities laws.
The actions in question took place at the end of the dotcom era, before AOL became a division of Time Warner and before Symantec’s 2005 acquisition of Veritas.
In the fourth quarter of 2000, according to the commission, Veritas artificially inflated its reported revenues in connection with a $20 million transaction with AOL and two smaller transactions with two other Internet companies. All three were “round-trip” transactions, the SEC alleged; Veritas agreed to “buy” online advertising in exchange for the customer’s agreement to purchase software from Veritas at inflated prices.
The SEC maintained that Veritas structured and documented each round-trip transaction as if it were two separate, arm’s length transactions; lied to and withheld material information from its independent auditors; and aided and abetted fraud at AOL, which improperly recognized revenue and reported materially misstated financial results to its own investors.
During 2000 through 2002, the commission also charged, Veritas engaged in three improper accounting practices to manage its earnings and artificially smooth its financial results. Specifically, stated the SEC, the company improperly:
• recorded and maintained excess accrued liabilities, employing “accrual wish lists” and “cushion schedules”
• stopped recognizing professional service revenue it had fully delivered and earned upon reaching internal targets
• inflated its deferred revenue balance
The SEC also alleged that as with the round-trip transactions, Veritas concealed these practices from its independent auditors.
Symantec, which was not named in the SEC complaint, had already established a $30 million reserve in anticipation of the settlement, according to Reuters.