Network Associates Bugged by Lawsuit — Not Virus

A few days after Network Associates, Inc. — the No. 1 maker of antivirus software — pronounced the Galadriel virus a low risk, a class action suit was filed against the company in the United States District Court of California on behalf of stockholders.

Those affected by the suit are all stockholders who bought shares in Network Associates during the period between January 20, 1998 and April 6, 1999.

The complaint alleges that Network Associates and some of its officers “issued numerous false statements” about the company’s financial results and its business prospects — including that the company was experiencing strong pricing and its business was healthy. The filing further alleges that this pumped up the price of the stock, enabling several executive officers of Network Associates to sell over 825,500 shares at artificially inflated prices.

This comes only days after the Santa Clara, California company announced it would repurchase as much as $100 million of its shares over the next two years in an attempt to boost its plummeting stock price. In the last six months, Network Associates’ stock value has shrunk more than 70 percent from about $68 (US$) in December to about $13 last week. Some analysts attribute this nose-dive to investors concerns that the company’s earnings would be revised lower after an accounting review by the U.S. Securities and Exchange Commission.

On January 6, 1999, the company revealed that it had received a letter from the SEC questioning its accounting practices in a 1998-SEC filing. Network Associates admitted April 6, that its in-process research and development expenses were overstated by $45 million in 1997 and $169 million in 1998. In addition, analysts said fear that many businesses would continue to delay their antivirus software purchases because of Y2K costs — further exacerbated its stock’s slide.

Meanwhile some industry experts say the disturbing thing about the whole scenario is not whether any of the allegations against Network Associates are true. What’s more serious is the number of similar suits that have popped up over the last few years as Internet and e-commerce fever stimulates small investors to pump their hard-earned money into the market.

There’s no question, they add, that companies such as Network Associates — that live and die by each quarterly report — are under a lot of pressure to produce. But so are their stockholders.

What do you think? Let’s talk about it.