Washington, D.C., March 8, 2007 – LAWFUEL – US Securities Law – The Securities and Exchange Commission announced that a federal court jury late yesterday returned a verdict in the SEC’s favor on all charges against the former chief financial officer, John J. Todd, and the former controller, Robert D. Manza, of Gateway Inc., the personal computer manufacturer. Todd and Manza were accused of engaging in a fraudulent revenue and earnings manipulation scheme to meet Wall Street analysts’ expectations in 2000, and for concealing from the investing public important information about the success of Gateway’s PC business.
The verdicts followed a three-week trial in San Diego before the Honorable Roger T. Benitez, United States District Judge for the Southern District of California.
“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 SEC’s Pacific Regional Office in Los Angeles. “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’s complaint alleged that Todd, as Gateway’s CFO in 2000, 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 SEC further alleged that Manza, formerly Gateway’s controller and a certified public accountant, initiated one of the unusual transactions and assisted in the scheme by preparing financial statements knowing that these transactions failed to comply with generally accepted accounting principles (also known as GAAP).
The SEC also charged that the defendants failed to disclose significant trends in Gateway’s business. For example, starting in the second quarter of 2000, Todd took steps to prop up sales with a scheme to offer pre-approved financing to individuals whose credit applications had previously been denied by Gateway. This effort continued into the third quarter with even riskier credit candidates and became known within Gateway as the “DDS program,” which stood for “deep, deep sh[–],” according to documents and testimony from company insiders. As a result, Gateway misleadingly announced that its consumer sales had increased substantially without disclosing in the Management’s Discussion and Analysis (MD&A) portion of its SEC filings that sales were made to a far riskier credit class of consumers.
The jury found Todd and Manza 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 district court will determine the appropriate sanctions and remedies at a later date.