The Securities and Exchange Commission (SEC) on Thursday charged three former Gateway Inc. executives with fraud for an earnings manipulation scheme engineered to meet the expectations of Wall Street analysts.
In a civil suit filed in federal court in San Diego, the SEC stated that the computer maker, in the second and third quarters of 2000, created the false impression that Gateway, unlike many of its competitors, was bucking an industry trend of decreasing sales of personal computers.
The suit names Jeffrey Weitzen, former chief executive officer, John J. Todd, former chief financial officer, and Robert D. Manza, who served as controller at the time. All three were fired in early 2001. Attorneys for all three defendants denied the charges, and Gateway itself was not charged.
The SEC complaint states that sometime around May of 2000, when the executives realized that the company would not meet the expectations of the Wall Street analysts who followed Gateway's stock, they decided to "close the gap" between analysts' expectations and the company's actual revenue and earnings.
According to the complaint, in the second quarter of 2000, the scheme included contacting individuals whose credit applications had previously been rejected by the company, and offering them pre-approved financing to aid sales. The sales campaign contributed more than 5 percent of Gateway's second quarter revenues. And when Todd recognized that he could not close the gap by these means alone, he authorized a wider variety of improper accounting actions.
For the third quarter of 2000, the SEC alleges that Gateway announced that it exceeded analysts' expectations for revenue by $30 million, met analysts' expectations for earnings per share, and experienced year-over-year revenue growth of 16 percent. In fact, Gateway had inflated reported revenue by $154 million, or 6.5 percent, and overstated earnings per share by 30 percent.
Without admitting or denying guilt, Gateway settled the case, agreeing not to violate securities laws in the future. Even though the SEC said the company’s cooperation was “not exemplary” in the early stages of the investigation, Gateway paid no fines. Gateway has since improved its cooperation and internal controls, the SEC said.