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VMware Violated US Securities Act To Hit Targets, SEC Says: What You Need To Know

O’Ryan Johnson

‘The SEC Staff has confirmed that it does not intend to recommend enforcement action against any current or former VMware officers or other member of management in connection with the investigation, and this settlement concludes the matter,’ VMware says, refusing to answer further questions.

VMware would have missed its earnings targets numerous times since May 2019 if it had not shifted “tens of millions of dollars” in revenue into future quarters and “obscured” a slowdown in demand for its product from investors, all in violation of the U.S. Securities Act, authorities said earlier this month.

The U.S. Securities and Exchange Commission issued a “cease and desist order” to force the Palo Alto, Calif.-based virtualization leader to stop the practice of “discretionary holds” where a company withholds reporting all of its revenue until the following quarter so that its sales teams are given a “buffer” to meet future targets.

“VMware misleadingly reassured investors on quarterly earnings calls and in earnings-related press releases and other earnings materials … that its revenue growth was meeting expectations, when revenue actually would not have met expectations or would have missed expectations by a larger amount without VMware’s continual net reductions in its discretionary backlog,” the SEC wrote Sept. 12.

VMware told CRN it is not commenting beyond a statement issued last week, saying it agreed to pay $8 million in penalties to the government “without admitting or denying the SEC’s findings.”

[RELATED: VMware Pursuit Brings Broadcom’s ‘Illegal’ Past Into Focus]

“The SEC’s findings do not include any findings that the company failed to comply with generally accepted accounting principles,” VMware wrote in the statement. “The SEC Staff has confirmed that it does not intend to recommend enforcement action against any current or former VMware officers or other member of management in connection with the investigation, and this settlement concludes the matter.”

However, the SEC says that VMware violated Sections 17(a)(2) and (3) of the U.S. Securities Act, which Cornell Law School calls “a key anti-fraud provision” on its website.

According to the SEC, the 1933 law would “prohibit any person from directly or indirectly obtaining money or property by means of any untrue statement of a material fact … or engaging in any transaction, practice, or course of business which operates or would operate as a fraud,” the SEC said. Additionally, the commission found that VMware violated several of its rules around securities.

Here’s what else you should know about the SEC’s allegations against VMware.

 
O’Ryan Johnson

O’Ryan Johnson is a veteran news reporter. He covers the data center beat for CRN and hopes to hear from channel partners about how he can improve his coverage and write the stories they want to read. He can be reached at ojohnson@thechannelcompany.com..

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