8 ms·

SEC charges VMware with misleading investors by obscuring financial performance

210 points by chmaynard 4y ago

noknownsender 4y ago
I guess we finally know why Dell spun them off.
- wmf 4y ago
  Dell and Intel got busted for playing their own revenue smoothing games via co-marketing funds.
  - bigtex 4y ago
    Yep all those years in the mid 2000’s when Dell servers were super cheap made so much sense after in was revealed that Intel was subsidizing it all.
wmf 4y ago
I've heard of companies bringing revenue forward but I've never heard of postponing revenue to a later quarter. I guess it makes sense if you can already know next quarter is going to be bad.
- jldugger 4y ago
  > I've heard of companies bringing revenue forward but I've never heard of postponing revenue to a later quarter. Or, if you want to demonstrate quarter after quarter growth. i.e. https://en.wikipedia.org/wiki/Crazy_Eddie#Fraud https://en.wikipedia.org/wiki/Crazy_Eddie#Fraud, where sales were slowly put back on the books.
  - fakethenews2022 4y ago
    I thought this was pretty much standard practice in public B2B companies (not the illegal part but pushing sales around). Public companies want to beat quarterly estimates every quarter lest investors dump their stock. So if you might not have enough, you throw switches like promotions and try to get contracts signed before quarter end. If you have more than enough, you slow walk so you get the contract signed right after the end of the quarter so that it makes the next quarter easier to hit.
    - jldugger 4y ago
      Theres a material difference between taking actions to affect how the business will perform in the final weeks of a quarter and lying about what actually happened.
- metaphor 4y ago
  > I've heard of companies bringing revenue forward but I've never heard of postponing revenue to a later quarter. Schilit et al on Financial Shenanigans is instructive here. Management might try playing this game to reach future bonuses staked to earnings targets. Microsoft did it in the late 90s with unearned revenue reporting as a way to avoid bringing additional regulatory attention to their anti-competitive practices. Enron did it in the early oughts using undisclosed reserve accounts to smooth income while manipulating the energy markets after landing huge windfall profits in its trading division to the tune of over $1 billion. USRobotics did it when they merged with 3Com in 1997 by not booking over $600 million in revenue during a two-month stub period---instead reporting $15.2 million, compared to $690.2 million in the preceding quarter---for 3Com's benefit after the merger closed. A few months ago, Broadcom announced plans to acquire VMware for ~$61 billion in cash and stock[1]. Speculating, suppose VMware were to pull a similar stunt into the merger, but rather than using it to conceal bad faith projections circa 2019, a variant of the 1997 USRobotics+3Com merger playbook were to pan out undetected. There's a part of me that (perhaps naively) wants to believe this press release isn't really about some weak $8 million penalty, but a warning shot to both VMware and Broadcom that the SEC is watching very closely. [1] https://www.broadcom.com/company/news/financial-releases/60271 https://www.broadcom.com/company/news/financial-releases/602...
emptysea 4y ago
Wow I'm surprised they only got a $8 million penalty. I wonder how much the execs benefited from it
jtchang 4y ago
This is fairly common for public companies but sadly not many get caught. Also the fine is hilariously tiny compared to say this instance almost 2 decades ago: https://www.sec.gov/news/press/2004-134.htm https://www.sec.gov/news/press/2004-134.htm I almost wonder if the SEC is slowly losing its teeth.
- munk-a 4y ago
  Well, the SEC and IRS have both been repeatedly defunded and appointments made to make them as ineffective as possible - so yea, I think those efforts are paying off.
  - deleted 4y ago
    [deleted]
atlas_shrugged 4y ago
Good work by their auditors PWC on not finding this back in 2019. Amazes me they got away with it
- nickff 4y ago
  Auditors almost never find any fraud, and the SEC only rarely detects it on its own. Almost all cases of investor deception are revealed by short-sellers or insiders.
  - arminiusreturns 4y ago
    Sure would be nice to know who shorted all those airline stocks right before 9/11...
    - usednet 4y ago
      Shh… you’re not allowed to talk about that stuff.
- jmoak3 4y ago
  You should see what KPMG signed off for GE 15 years or so ago Click any of the links within https://money.cnn.com/2018/04/24/investing/ge-annual-meeting-kpmg-accounting/index.html https://money.cnn.com/2018/04/24/investing/ge-annual-meeting... I wonder if PWC missed it by design, but then again I've been pessimistic about stuff like this after reading Lights Out, the book on the GE failure.
  - q7xvh97o2pDhNrh 4y ago
    Thanks for name-dropping that book. I've always wondered what exactly happened to GE, and I love history books that speak to the modern corporate era we inhabit. My personal favorites of the genre are Titan (about Rockefeller and Standard Oil), The Organization Man (an anthropological study of the "company man" archetype from post-WW2 America), and Shoe Dog (much lighter reading than the other two, and a great read about the founding of Nike). Anyway, I just grabbed a copy. More history book recommendations welcome!
metadat 4y ago
$8 million USD penalty? What kind of joke is this? Is the intention to serve as a deterrent or a not-so-subtle endorsement? Honestly, seems like the latter. SEC seems to be full of industry insiders these days. I pulled my positions and exited all stock market investments recently, that shit is rigged. I'm thinking of adhering to a new policy where I only invest into things where I can hunt them down and hit them with a stick or at least call a particular individual human being in real life. Otherwise incentives tend to get too perverse.
- nickff 4y ago
  Well, remember that the SEC is actually penalizing the victims (investors), not the perpetrators (management).
  - metadat 4y ago
    All the more reason not to participate in the grand sham.
    - nickff 4y ago
      I understand your exasperation/frustration, but my fix would be to have the SEC charge individuals rather than corporations (though the settlements would be much smaller).
      - metadat 4y ago
        100% with you my friend @nickff, fix the system. Ship the perps off to a non-white-collar prison, pretty please. They have abused and continue to abuse the public trust for their own personal gain. Sentencing should take macro trends and effects into account. Unfortunately, the United States has a long and sordid history of letting the upper echelon go to town on the public without any significant consequences. Just look at how light Lizzy Holmes is getting off for hundreds of millions in fraud and willingly posing a negligent danger to the public. 20 years or less, and in the meantime she roams free. The system is broken at every level.
hangonhn 4y ago
Anyone with more expertise know if this will have any material impact on their acquisition by Broadcom?
remote_phone 4y ago
Revenue recognition 101. This is about as basic as it comes. Moving revenues to subsequent quarters was “fixed” during the dotcom era. I’m surprised the CFO and CAO doesn’t get sacked for this. And PWC should have caught this. Will the engagement partner get sacked too?
ncmncm 4y ago
Now if only they would charge the fusion companies and NRGV.
xyst 4y ago
> VMware consented to a cease-and-desist order and to pay an $8 million penalty They learned absolutely nothing and it will happen again. $8M can be found between the couch cushions at VMWare HQ
twirlock 4y ago
babyshake 4y ago
What exactly is the charge - is it that they "cooked the books" or is obscuring financial performance more subtle than that?
baq 4y ago
who was the CEO and CFO at the time?
- metaphor 4y ago
  Pat Gelsinger (CEO) and Zane Rowe (CFO; incumbent) according to the 8-K filing[1] that kicked off four consecutive earnings call misses at the time. [1] https://www.sec.gov/Archives/edgar/data/1124610/000119312519161313/d756335dex991.htm https://www.sec.gov/Archives/edgar/data/1124610/000119312519...
ruskyhacker 4y ago
Anyone ever had a VMware audit? Let's just say, Deloitte - the absolute shit show they contract to do the audits are dumber than a box of rocks. I know a company that had to pay ~600k because their contractor (Deloitte) flagged several environments as "production" even though they were provided with all the data proving otherwise. By the time VMware laid down the hammer it was apparently "too late" to argue as it should've happened "a month ago". Neither VMware or their contractor could apparently do anything about it. The 600k was apparently worth it to the business to just take it in the nuts to maintain partnership/status/whatever. Straight extortion / scammy. There was even one environment which consumed about 70k of the 600k fine that straight up was licensed properly with proof of all purchasing - but their shitty vb scans were mixed up with another environment (in the same overall biz) and falsely marked as not compliant. I get it, I'm sure NFR licensing is being used rampant and improperly by all-sorts of business and there were certainly cases here and there with this org, but nothing even remotely close to 600k That whole process was worse than the "v dash trash" you would have to put up with ok a m$ audit.
- sokoloff 4y ago
  Paying $600K not owed could be a valid business decision to just move on. However, if you’re in a position to burn $600K on this, I’d much rather stand on principle and threaten to burn $500K (or even $800K) of your own money and a similar sum on the vendor side to stand up against improper audit findings. I’m willing to flex on cases that are 60/40 or 40/60, but if we think we’re 100% right, you’ll get more blood from a stone.

210 points by chmaynard 4y ago

noknownsender 4y ago

I guess we finally know why Dell spun them off.

wmf 4y ago
Dell and Intel got busted for playing their own revenue smoothing games via co-marketing funds.
- bigtex 4y ago
  Yep all those years in the mid 2000’s when Dell servers were super cheap made so much sense after in was revealed that Intel was subsidizing it all.

wmf 4y ago

I've heard of companies bringing revenue forward but I've never heard of postponing revenue to a later quarter. I guess it makes sense if you can already know next quarter is going to be bad.

jldugger 4y ago
> I've heard of companies bringing revenue forward but I've never heard of postponing revenue to a later quarter. Or, if you want to demonstrate quarter after quarter growth. i.e. https://en.wikipedia.org/wiki/Crazy_Eddie#Fraud https://en.wikipedia.org/wiki/Crazy_Eddie#Fraud, where sales were slowly put back on the books.
- fakethenews2022 4y ago
  I thought this was pretty much standard practice in public B2B companies (not the illegal part but pushing sales around). Public companies want to beat quarterly estimates every quarter lest investors dump their stock. So if you might not have enough, you throw switches like promotions and try to get contracts signed before quarter end. If you have more than enough, you slow walk so you get the contract signed right after the end of the quarter so that it makes the next quarter easier to hit.
  - jldugger 4y ago
    Theres a material difference between taking actions to affect how the business will perform in the final weeks of a quarter and lying about what actually happened.
metaphor 4y ago
> I've heard of companies bringing revenue forward but I've never heard of postponing revenue to a later quarter. Schilit et al on Financial Shenanigans is instructive here. Management might try playing this game to reach future bonuses staked to earnings targets. Microsoft did it in the late 90s with unearned revenue reporting as a way to avoid bringing additional regulatory attention to their anti-competitive practices. Enron did it in the early oughts using undisclosed reserve accounts to smooth income while manipulating the energy markets after landing huge windfall profits in its trading division to the tune of over $1 billion. USRobotics did it when they merged with 3Com in 1997 by not booking over $600 million in revenue during a two-month stub period---instead reporting $15.2 million, compared to $690.2 million in the preceding quarter---for 3Com's benefit after the merger closed. A few months ago, Broadcom announced plans to acquire VMware for ~$61 billion in cash and stock[1]. Speculating, suppose VMware were to pull a similar stunt into the merger, but rather than using it to conceal bad faith projections circa 2019, a variant of the 1997 USRobotics+3Com merger playbook were to pan out undetected. There's a part of me that (perhaps naively) wants to believe this press release isn't really about some weak $8 million penalty, but a warning shot to both VMware and Broadcom that the SEC is watching very closely. [1] https://www.broadcom.com/company/news/financial-releases/60271 https://www.broadcom.com/company/news/financial-releases/602...

emptysea 4y ago

Wow I'm surprised they only got a $8 million penalty. I wonder how much the execs benefited from it

jtchang 4y ago

This is fairly common for public companies but sadly not many get caught. Also the fine is hilariously tiny compared to say this instance almost 2 decades ago: https://www.sec.gov/news/press/2004-134.htm https://www.sec.gov/news/press/2004-134.htm I almost wonder if the SEC is slowly losing its teeth.

munk-a 4y ago
Well, the SEC and IRS have both been repeatedly defunded and appointments made to make them as ineffective as possible - so yea, I think those efforts are paying off.
- deleted 4y ago
  [deleted]

atlas_shrugged 4y ago

Good work by their auditors PWC on not finding this back in 2019. Amazes me they got away with it

nickff 4y ago
Auditors almost never find any fraud, and the SEC only rarely detects it on its own. Almost all cases of investor deception are revealed by short-sellers or insiders.
- arminiusreturns 4y ago
  Sure would be nice to know who shorted all those airline stocks right before 9/11...
  - usednet 4y ago
    Shh… you’re not allowed to talk about that stuff.
jmoak3 4y ago
You should see what KPMG signed off for GE 15 years or so ago Click any of the links within https://money.cnn.com/2018/04/24/investing/ge-annual-meeting-kpmg-accounting/index.html https://money.cnn.com/2018/04/24/investing/ge-annual-meeting... I wonder if PWC missed it by design, but then again I've been pessimistic about stuff like this after reading Lights Out, the book on the GE failure.
- q7xvh97o2pDhNrh 4y ago
  Thanks for name-dropping that book. I've always wondered what exactly happened to GE, and I love history books that speak to the modern corporate era we inhabit. My personal favorites of the genre are Titan (about Rockefeller and Standard Oil), The Organization Man (an anthropological study of the "company man" archetype from post-WW2 America), and Shoe Dog (much lighter reading than the other two, and a great read about the founding of Nike). Anyway, I just grabbed a copy. More history book recommendations welcome!

metadat 4y ago

$8 million USD penalty? What kind of joke is this? Is the intention to serve as a deterrent or a not-so-subtle endorsement? Honestly, seems like the latter. SEC seems to be full of industry insiders these days. I pulled my positions and exited all stock market investments recently, that shit is rigged. I'm thinking of adhering to a new policy where I only invest into things where I can hunt them down and hit them with a stick or at least call a particular individual human being in real life. Otherwise incentives tend to get too perverse.

nickff 4y ago
Well, remember that the SEC is actually penalizing the victims (investors), not the perpetrators (management).
- metadat 4y ago
  All the more reason not to participate in the grand sham.
  - nickff 4y ago
    I understand your exasperation/frustration, but my fix would be to have the SEC charge individuals rather than corporations (though the settlements would be much smaller).
    - metadat 4y ago
      100% with you my friend @nickff, fix the system. Ship the perps off to a non-white-collar prison, pretty please. They have abused and continue to abuse the public trust for their own personal gain. Sentencing should take macro trends and effects into account. Unfortunately, the United States has a long and sordid history of letting the upper echelon go to town on the public without any significant consequences. Just look at how light Lizzy Holmes is getting off for hundreds of millions in fraud and willingly posing a negligent danger to the public. 20 years or less, and in the meantime she roams free. The system is broken at every level.

hangonhn 4y ago

Anyone with more expertise know if this will have any material impact on their acquisition by Broadcom?

remote_phone 4y ago

Revenue recognition 101. This is about as basic as it comes. Moving revenues to subsequent quarters was “fixed” during the dotcom era. I’m surprised the CFO and CAO doesn’t get sacked for this. And PWC should have caught this. Will the engagement partner get sacked too?

ncmncm 4y ago

Now if only they would charge the fusion companies and NRGV.

xyst 4y ago

> VMware consented to a cease-and-desist order and to pay an $8 million penalty They learned absolutely nothing and it will happen again. $8M can be found between the couch cushions at VMWare HQ

twirlock 4y ago

babyshake 4y ago

What exactly is the charge - is it that they "cooked the books" or is obscuring financial performance more subtle than that?

baq 4y ago

who was the CEO and CFO at the time?

metaphor 4y ago
Pat Gelsinger (CEO) and Zane Rowe (CFO; incumbent) according to the 8-K filing[1] that kicked off four consecutive earnings call misses at the time. [1] https://www.sec.gov/Archives/edgar/data/1124610/000119312519161313/d756335dex991.htm https://www.sec.gov/Archives/edgar/data/1124610/000119312519...

ruskyhacker 4y ago

Anyone ever had a VMware audit? Let's just say, Deloitte - the absolute shit show they contract to do the audits are dumber than a box of rocks. I know a company that had to pay ~600k because their contractor (Deloitte) flagged several environments as "production" even though they were provided with all the data proving otherwise. By the time VMware laid down the hammer it was apparently "too late" to argue as it should've happened "a month ago". Neither VMware or their contractor could apparently do anything about it. The 600k was apparently worth it to the business to just take it in the nuts to maintain partnership/status/whatever. Straight extortion / scammy. There was even one environment which consumed about 70k of the 600k fine that straight up was licensed properly with proof of all purchasing - but their shitty vb scans were mixed up with another environment (in the same overall biz) and falsely marked as not compliant. I get it, I'm sure NFR licensing is being used rampant and improperly by all-sorts of business and there were certainly cases here and there with this org, but nothing even remotely close to 600k That whole process was worse than the "v dash trash" you would have to put up with ok a m$ audit.

sokoloff 4y ago
Paying $600K not owed could be a valid business decision to just move on. However, if you’re in a position to burn $600K on this, I’d much rather stand on principle and threaten to burn $500K (or even $800K) of your own money and a similar sum on the vendor side to stand up against improper audit findings. I’m willing to flex on cases that are 60/40 or 40/60, but if we think we’re 100% right, you’ll get more blood from a stone.