Capital Markets

”Deep, Deep Sh[–]” at Gateway

Former CFO and controller are found liable in an earnings manipulation scheme for which the CEO was cleared; "DDS program" granted credit to risky ...
Dave Cook and Stephen TaubMarch 8, 2007

Two former Gateway finance executives have been found liable by a federal jury on charges stemming from an earnings manipulation scheme to meet analyst expectations.

The Securities and Exchange Commission originally filed charges in 2003, in U.S. District Court in San Diego, against former Gateway chief executive officer Jeffrey Weitzen, former chief financial officer John J. Todd, and former controller Robert D. Manza. The SEC stated at the time that the three executives “were preoccupied with meeting analysts’ expectations, to the extent that they fraudulently reverse-engineered Gateway’s financial results to do so.”

Weitzen was tried separately last May. In a case that might have been argued differently if Sarbanes-Oxley came into play, Judge Roger Benitez granted Weitzen’s request for summary judgment. Indeed, the judge ruled that the SEC failed to prove that management’s desire to close an earnings gap was in itself “anything but common and sound business practice.”

Judge Benitez also presided over the trial of Todd and Manza, but they were less fortunate. After a three-week trial in the same San Diego courtroom, on Wednesday the jury found them liable for violating the antifraud, false statements to accountants, and recordkeeping provisions of the federal securities laws, and for aiding and abetting Gateway’s violations of the reporting and recordkeeping provisions of the securities laws.

The court will determine appropriate sanctions and remedies at a later date, according to the SEC.

“The desire to meet Wall Street analysts’ expectations is no excuse for accounting tricks and other deceptive practices,” said Randall R. Lee, director of the commission’s Pacific Regional Office, in a statement. “Yet as the jury’s verdicts show, in their drive to meet analysts’ expectations, these 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.”

The SEC alleged that Todd was the architect of a plan to “close the gap” between analysts’ expectations and Gateway’s anticipated revenues through a variety of improper and extraordinary transactions. The commission also alleged that Manza prepared financial statements knowing that the transactions failed to comply with generally accepted accounting principles.

Todd and Manza also failed to disclose significant trends in Gateway’s business, the commission alleged.

Beginning in the second quarter of 2000, the SEC charged, Todd propped up sales by offering pre-approved financing to individuals whose credit applications had previously been denied by Gateway.

This effort allegedly continued into the third quarter with even riskier credit candidates. According to an SEC statement, which cited documents as well as testimony for company insiders, this became known within Gateway as the “DDS program,” which stood for “deep, deep sh[–].”

As a result, the commission charged, Gateway misleadingly announced that its consumer sales had increased substantially, but the management’s discussion and analysis section of its SEC filings did not disclose that sales were made to a far riskier credit class of consumers.

In a separate administrative proceeding in 2003, Gateway settled fraud charges with the SEC without admitting or denying the commission’s allegations. The company agreed to cease and desist from further violations, and the SEC assessed no penalty or fine.

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