VMware Fraud Allegations Lead to $8 Million SEC Settlement

Previously disclosed VMware fraud allegations have resulted in the company settling with the Securities and Exchange Commission.

On Monday, the SEC said VMware has paid an $8 million penalty and consented to a cease-and-desist order for reportedly misleading investors by obscuring financial performance.

VMware did not admit to or deny findings in the SEC order. That order found that the cloud computing company violated antifraud provisions of the Securities Act of 1933 and some reporting provisions of federal securities laws.

The VMware fraud allegations stemmed from an SEC investigation that VMware did disclose, tying to the company’s backlog disclosures from Feb. 3, 2018, through Jan. 31, 2020. The SEC contended that VMware’s order backlog management practices allowed the company to “push revenue into future quarters by delaying product deliveries to customers, concealing the company’s slowing performance relative to its projections.”

Regulators said VMware started doing this in fiscal year 2019, “delaying the delivery of license keys on some sales orders until just after quarter-end so that it could recognize revenue from the corresponding license sales in the following quarter.”

Those moves shifted “tens of millions of dollars in revenue into future quarters, building a buffer in those periods and obscuring the company’s financial performance as its business slowed relative to projections in fiscal year 2020,” the SEC said.

VMware did tell investors it was managing those backlogs, but did not tell them – per the SEC – that the timing was meant to manage revenue recognition.

“As the SEC’s order finds, by making misleading statements about order management practices, VMware deprived investors of important information about its financial performance,” said Mark Cave, associate director in the SEC’s enforcement division. “Such conduct is incompatible with an issuer’s disclosure obligations under the federal securities laws.”

VMware’s Response to Fraud Allegations

Again, VMware has not admitted wrongdoing. Here’s what the company has to say in its Sept. 12 press release:

“The SEC’s findings do not include any findings that the company failed to comply with generally accepted accounting principles. 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.”

When it comes to the $8 million, VMware called the settlement “the right course of action.” It also said it “continues to be committed to operating at the highest level of integrity, including with respect to its public filings and communications with investors.”

News of the VMware fraud allegations settlement comes as VMware prepares to be acquired by Broadcom for $61 million. Interestingly, a memo has leaked from VMware that indicates leaders are slowing sales cycles to maintain value for the new owner.

Channel Futures has reached out to Broadcom with questions about what the company knew regarding the VMware fraud allegations prior to the merger agreement, and how executives might view the company in light of the settlement. We have not yet heard back.

That settlement, keep in mind, is chump change when looking at VMware’s market cap and $3.34 billion second-quarter revenue. As of midday Eastern time on Sept. 13, VMware’s stock had dropped about 2.75%, lowering its market cap to $49 billion.