Former Gateway Execs Manipulated Earnings, Jury Says

Two former executives with Gateway, the nation’s third-largest PC vendor, are guilty of manipulating earnings and revenues to meet Wall Street expectations, according to a verdict delivered Wednesday by a federal jury in California.

The company’s former chief financial officer, John J. Todd, and former controller, Robert D. Manza, also concealed important information about Gateway’s business success from investors, according to a statement from the U.S. Securities and Exchange Commission (SEC).

The U.S. District Court for the Southern District of California will announce sanctions against the two men at a later date, the SEC said.

The verdict strikes Gateway less than six months after the company hired a new chief executive officer and decided to reject a $450 million buyout offer. Company executives now have the challenge of regaining trust investors may lose in the face of sharp criticism of the company’s business ethics.

“The desire to meet Wall Street analysts’ expectations is no excuse for accounting tricks and other deceptive practices,” said Randall Lee, director of the SEC’s Pacific regional office in Los Angeles, in a statement. “Gateway executives failed to discharge one of their most important responsibilities: to communicate with investors fairly and accurately about their company’s financial and business performance.”

However, the company said the court decision would affect only the defendants, not Gateway itself.

“The reality is that Gateway resolved the case long ago with the SEC,” said company spokesman David Hallisey. “This was in 2000, and the Gateway-eMachines merger was in March 2003, so there’s been pretty significant regime change since then.”

Gateway does not plan to restate any earnings, or make any further changes to its management team because of this verdict, he said.

This is the last chapter in a case that began in 2003 when the SEC filed fraud charges against Todd, Manza and former CEO and Chairman Jeffrey Weitzen. That case also hinged on the executives’ behavior in manipulating earnings figures during the second and third quarters of 2000. As a result, they inflated third-quarter revenues by US$154 million and earnings by $0.10, the SEC said.

According to the SEC complaint, Todd used “improper and extraordinary transactions” as part of a plan to “close the gap” between analysts’ expectations and Gateway’s revenues. Manza assisted in the scheme by preparing financial statements that he knew did not comply with generally accepted accounting principles.

In addition to twisting the numbers, the two executives hid significant business trends from their investors, the SEC said. In one part of the plan, Todd began in the second quarter of 2000 to offer financing deals to customers whose credit applications Gateway had previously denied. He then boasted of rising sales without warning stockholders that Gateway was making such risky loans. Company insiders called that plan “the DDS program” in a reference to “deep, deep sh[**],” according to the SEC complaint.

The jury found both defendants guilty on all charges, including fraud, making false statements to accountants, violating recordkeeping provisions of federal securities laws, and aiding and abetting Gateway’s violations of those laws.

-Ben Ames, IDG News Service (Boston Bureau)

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