VMware settles securities fraud class suit with $102.5M payout Old accusations of securities fraud continue to dog VMware, with the virtualization juggernaut agreeing to pay $102.5 million to settle a shareholder suit over its alleged creation of an artificial sales backlog to hide slowing sales. Court documents [PDF] filed last week indicate that VMware and lawyers for a massive …
When I worked at a division of Sun Microsystems in the late 1980s, our division's VP of sales was notorious for inflating sales. Before Sun, he worked at dBase. He told me he used to "stuff the channel" there to make his quarterly sales targets. And he did it at our division of Sun.
He'd call in favors at distributors (back then you needed distributors to stock boxes of your software) so they'd buy more product than they needed (more product than end users were buying from the distributor). He said this worked at dBase and our Sun division because they counted revenue when product was sold into the distribution channel instead of all the way through to end users.
The result was distributors accumulated more and more days of inventory. Days became months. Meanwhile, he'd apply to new jobs and brag on his resume that he always hit his sales targets. He said that soon after he left dBase, the distributors finally said "enough!" and returned the excess product, causing a huge revenue reversal.
He repeated this at our division of Sun (but not Sun overall). When it became clear our hit product wasn't a hit anymore, he crammed the channel for 3-4 quarters until he could land another job. He bragged on his resume that he hit all his sales targets. He jumped ship then distributors returned the mass of excess inventory and got their money back.
That Sun division sales exec laughed when he told me all that. Once, I saw how he coaxed distributors into buying/accepting more product than they needed: he had our company rent a luxury box suite at an American baseball stadium for a playoff game and invited distributors. He showed me the purchase order.
After Sun, I worked at Symantec. When I interviewed there, I asked, "Do you count revenue when you sell product into the distribution channel or when it sells all the way through to end users?" It was a deal breaker for me and Symatec didn't do that so I accepted their offer.
BUT at Symantec in the early 1990s, they did hold orders near the end of the quarter so they could process them the next quarter if we'd already hit our quarterly earnings targets, which stock analysts worship.
I didn't see this first hand like at our Sun division, but it was widely discussed. The CFO seemed to spend most of his time courting stock analysts, who didn't like surprises. They'd rather you hit your quarterly estimate exactly than exceed it, which would imply you didn't know what was happening in your own market and company and weren't a master of the universe after all. CFOs and CEOs manipulated stock analsysts like that all the time. Apparently, some still do.
I happily left big tech after that.
Wrong incentives lead to undesirable outcomes, e.g., trying to stop a rat infestation by paying citizens for each dead rat they bring in, leading some citizens to breed rats for that purpose.
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