Former Gateway CEO, two others charged with fraud

John Todd, former chief financial officer, and Robert Manza, former controller, also were charged with fraud.

The SEC announcement caps an investigation that began in late 2000. The highly touted Weitzen and Todd were brought in to aid the troubled company in the late 1990s.

"The former Gateway executives the commission charges today were preoccupied with meeting analysts' expectations, to the extent that they fraudulently reverse-engineered Gateway's financial results to do so," Randall Lee, regional director of the SEC's Pacific Regional Office, said in a statement. "This action also demonstrates the commission's resolve to prosecute those executives, including CEOs, who mislead investors about the underlying health and business prospects of their companies."

The commission filed a lawsuit in U.S. Federal District Court in San Diego, specifically alleging the executives engaged in fraudulent earnings manipulation, false statements and concealing important information about Gateway's PC business during the second and third quarters of 2000.

Weitzen also was charged with allegations he violated antifraud and reporting provisions as a "control person" of Gateway. Todd and Manza also were charged with violating record-keeping and internal controls provisions, as well as aiding and abetting alleged Gateway violations of reporting and record-keeping provisions.

The SEC alleged that in May 2000, the three executives worked to "close the gap" between their quarterly results and Wall Street's expectations when they realized they would fall short of analysts' revenue and earnings estimates.

The company then allegedly contacted prospective customers with credit applications that previously had been denied by Gateway and offered preapproved financing to generate sales. These "high risk" customers contributed more than 5 percent of the company's second-quarter revenue, the SEC said.

But when that measure failed to adequately close the gap, Todd allegedly authorized improper accounting methods that did not comply with generally accepted accounting principles.

The SEC said the improper methods included reducing loan loss reserves, recognizing revenue from a consignment sale, recognizing revenue from a purported bill-and-hold sale, and recording revenue from the sale of the company's fixed assets. The executives also allegedly accelerated revenue from America Online payments, which involved bundling AOL's Internet service with the purchase of a Gateway PC.

As a result of these alleged actions, the SEC contends, Gateway exceeded analysts' third-quarter revenue expectations by $30 million. Although the company posted a 16 percent increase in revenue growth and earnings of 46 cents a share, the results later had to be restated. Gateway's third-quarter earnings were overstated by 30 percent and its revenue by 6.5 percent, the SEC said.

Former execs to fight back
Richard Marmaro, an attorney at Proskauer Rose in Los Angeles who is representing Weitzen, said the CEO instituted a series of internal and external policies and procedures designed to promote corporate responsibility and ensure fair and accurate disclosure and accounting of Gateway's financial condition. Those policies remain in effect at the company today, he said.

"The SEC's allegations against Mr. Weitzen are baseless," Marmaro said. "In bringing an enforcement action against Mr. Weitzen, the SEC's desire to appear to be pursuing corporate executives has for the moment trumped both the evidence and the law. Mr. Weitzen is eager to defend his record of integrity at a trial."

James Sanders, a partner with McDermott Will & Emery who represents Manza, said his client denies the charges and will fight this case "vigorously" in court.

Robert D. Rose, an attorney with Sheppard Mullin Richter & Hampton who is representing Todd, said: "John Todd and his fellow managers worked hard, improved internal controls, accelerated the release of information to the markets, hired capable people, listened to them and relied on professionals. He did nothing to hurt Gateway or its shareholders. He engaged in no insider trading. Rather, he kept his stock. He didn't line his pockets with money. He didn't destroy or falsify records, and didn't ask anyone to do anything like that."

In a separate proceeding, also announced Thursday, Gateway reached a settlement with the SEC to cease and desist--without admitting or denying the commission's findings--from violations of the antifraud; reporting; books and records; and internal controls provisions of the federal securities laws.

The commission had alleged Gateway violated the internal controls provision by failing to use consistent cut-off dates to end the quarter, which resulted in varying lengths for consecutive quarters.

The SEC also noted that it "found that the company's cooperation was not exemplary during the early stages of the staff's investigation."

But in accepting Gateway's settlement offer, the SEC took into consideration the company's effort to provide further cooperation and recent "remedial measures" by its current management and board of directors.

"We are very pleased to put this issue from our past behind us," Ted Waitt, Gateway founder and CEO, said in a statement. Waitt had relinquished his management role at the company in late 1999 but returned as CEO in early 2001. "We are a completely new Gateway, and bringing this issue to closure allows us to now focus completely on serving our customers."

Gateway also noted that no member of current management was ever a target of the investigation.

Meanwhile, the U.S. Attorney General also is investigating the matter.

"The U.S. Attorney said they wanted to see what the SEC concludes. We don't know if they will reach the same conclusions," Rose said.