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Appeals Court Ruling in U.S. v. Goyal

Appeals Court Ruling in U.S. v. Goyal

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Published by DealBook
Opinion by the United States Court of Appeal for the Ninth Circuit overturning the conviction of Prabhat Goyal, the former chief financial officer of Network Associates.
Opinion by the United States Court of Appeal for the Ninth Circuit overturning the conviction of Prabhat Goyal, the former chief financial officer of Network Associates.

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Published by: DealBook on Dec 13, 2010
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12/13/2010

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FOR PUBLICATION
UNITED STATES COURT OF APPEALSFOR THE NINTH CIRCUIT
 
U
NITED
S
TATES OF
A
MERICA
,No. 08-10436
Plaintiff-Appellee,
D.C. No.v.
3:04-cr-00201-SIP
RABHAT
G
OYAL
,OPINION
 Defendant-Appellant.
Appeal from the United States District Courtfor the Northern District of CaliforniaMartin J. Jenkins andSusan Illston, District Judges, PresidingArgued and SubmittedJanuary 12, 2010—San Francisco, CaliforniaFiled December 10, 2010Before: Alex Kozinski, Chief Judge, J. Clifford Wallace andRichard R. Clifton, Circuit Judges.Opinion by Judge Clifton;Concurrence by Chief Judge Kozinski
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COUNSEL
Amber S. Rosen (argued), Brian Stretch, Elise Becker, Assis-tant United States Attorneys, San Jose, California, forplaintiff-appellee United States of America.Seth P. Waxman (argued), Jonathan E. Nuechterlein, CareyBollinger, Wilmer Cutler Pickering Hale and Dorr LLP,Washington, D.C., and Mark C. Fleming, Wilmer Cutler Pick-ering Hale and Dorr LLP, Boston, Massachusetts, fordefendant-appellant Prabhat Goyal.
OPINION
CLIFTON, Circuit Judge:Prabhat Goyal, former chief financial officer of Network Associates, Inc. (“NAI”), appeals from his convictions on fif-teen counts of securities fraud and making materially falsestatements to auditors. The government alleged that NAI,under Goyal’s supervision, violated generally acceptedaccounting principles (“GAAP”) by recognizing revenue fromcertain software sales earlier than it should have. Goyal wasindicted for concealing the allegedly improper accountingfrom NAI’s outside auditors and for filing reports with theSecurities and Exchange Commission that, because of NAI’saccounting, allegedly misstated revenue in certain reportingperiods between 1998 and 2000. Goyal argues that no jurycould have found him guilty beyond a reasonable doubt, asthe jury below did, based on the evidence the prosecution
19745U
NITED
S
TATES
v. G
OYAL
 
presented at trial. We agree, and we reverse his convictions onall counts.
I. Background
From approximately 1997 to 2001, Goyal was chief finan-cial officer of NAI. NAI, formerly known as McAfee, wasand remains a major vendor of antivirus and network securitysoftware.Before 1998, NAI used a “direct sales” business model,meaning that it primarily sold its software directly to endusers. In 1998, the company added a “distribution channel”model, selling products through distribution companies. Thesedistributors in turn sold NAI’s software to retail stores thatresold the software to end users.The prosecution’s case against Goyal challenged theaccounting method that NAI used, under Goyal’s supervisionas CFO, to recognize revenue from sales to its largest domes-tic distributor, Ingram Micro. In particular, the governmenttook issue with the accounting method NAI used to recognizelarge sales that it made to Ingram at the end of financial quar-ters between 1998 and 2000. Following a practice common inthe software industry, which the government did not contendwas illegal, NAI negotiated significant quarter-end deals withIngram, called “buy-in” transactions, to help meet its quar-terly revenue projections.
1
To close these sales, NAI grantedIngram substantial discounts, rebates, and other favorablesales terms. One enticement that NAI offered Ingram in thelast two quarters of 1998 and the first quarter of 1999, was aguarantee that its wholly owned subsidiary, NetTools, would
1
Quarter-end buy-in transactions took place every quarter between 1998and 2000, except for the second quarter of 1999, when Ingram and otherdistributors already had too much inventory.
19746U
NITED
S
TATES
v. G
OYAL

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