Risk Management

Ex-CEO of Gateway Wins Dismissal

In a case that predates Sarbanes-Oxley, the SEC fails to prove that management's desire to close an earnings gap was in itself "anything but common...
David KatzJune 1, 2006

In a case that might have been argued differently if Sarbanes-Oxley came into play, a federal judge has dismissed Securities and Exchange Commission fraud charges against former Gateway chief executive officer Jeffrey Weitzen.

In November 2003, the SEC had charged that for the third quarter of 2000 — two years before the passage of the landmark legislation — Weitzen and two other executives had improperly attempted to manipulate earnings to bridge the gap between the company’s revenue and analyst expectations.

Specifically, the commission alleged, Weitzen made material misstatements on the 10-Q and in an earnings release regarding the company’s increased, higher-risk consumer lending; a contractual change in the bundling of AOL software with Gateway computers; and a sale of computers used by Gateway to its information-technology provider, Lockheed Martin Integrated Business Solutions.

In his ruling this week, Judge Roger Benitez of the U.S. District Court for the Southern District of California granted Weitzen’s request for summary judgment, finding that the SEC failed to provide sufficient evidence to support its allegations. Charges are still pending against the other former Gateway executives, chief financial officer John Todd and controller Robert Manza.

Notably, Judge Benitez found, the SEC failed to prove that management’s desire to close an earnings gap was in itself “anything but common and sound business practice.”

Weitzen’s attorney, Richard Marmaro of Skadden, Arps, Slate, Meagher & Flom, observed that “before you charge a CEO with SEC fraud based on things that happen in accounting and finance, you better be sure you have evidence for the alleged misconduct.” Karen Matteson, senior trial counsel in the SEC’s Pacific regional office, would not comment, noting that the commission’s attorneys were still studying the decision.

Some aspects of the case sound dated, even quaint, given all that has transpired since the enactment of Sarbanes-Oxley in 2002. The judge took notice, for example, that the SEC claimed Weitzen made material misrepresentations of fact yet acknowledged that he didn’t sign Gateway’s 10-Q for the third quarter of 2000. The point would be moot today, of course; under Sarbanes-Oxley Section 302, both CEOs and CFOs must certify their companies’ quarterly and annual reports.

Judge Benitez also found wanting the SEC’s assertion that Weitzen had acted with “scienter” — that is, an “intent to deceive, manipulate, or defraud.” The judge noted that “Weitzen was not an accountant, nor has evidence been proffered that he had any reason to have accounting expertise sufficient to challenge the treatment given to any particular transaction.” Even today, it’s true, not many CEOs can claim such knowledge, but many now insist that lower-level managers “subcertify” the company’s financials before they sign off themselves.

Marmaro contends that even if Weitzen had signed off on the 10-Q, it would have made no difference to the case; he still would be attesting to the accuracy of the facts “to the best of his knowledge and belief.” However, he recognizes that standards of accountability have changed; a top executive may be liable, says Marmaro, if he claims not to have knowledge of a situation that a lower-level manager has subcertified.

As for Todd and Manza, defense attorneys feel that Judge Benitez’s ruling augers well for their clients, too. Jim Sanders of McDermott, Will and Emery, who represents Manza, notes that the judge’s dismissal of the AOL deal as a basis for fraud charges applies to all three individuals. Likewise, says Sanders, the judge’s finding that the Lockheed-related charges might not be supportable is “positive for Bob [Manza] and for John Todd, too.”

Robert Rose of Sheppard, Mullin, Richter & Hampton, who represents Todd, the former CFO, apparently agrees with Marmaro that the lack of an accounting background is helpful to the defense. Rose asserts that in running a very large finance department at Gateway, Todd relied on internal and external accountants, just as he depended upon the leaders of business units to help him boost revenue.

The people who reported to Todd told him the transactions in question “were ready to go, were legally sound,” and had the approval of Gateway’s auditor, PricewaterhouseCoopers, argues the attorney. “Todd was the CFO,” says Rose. “He isn’t an accountant.”