Former Gateway execs charged with fraud

The Securities and Exchange Commission Thursday charged three former Gateway senior executives with fraud for allegedly cooking the company’s books to meet Wall Street expectations.

Charges were filed in federal court in San Diego against former CEO Jeffrey Weitzen, former Senior Vice President and Chief Financial Officer John Todd and former Controller Robert Manza, the SEC said in a statement Thursday.

The SEC is seeking an unspecified fine and orders for the defendants to pay back any money they received as a result of fraud. It also seeks orders barring the individuals from committing further fraud or taking up positions as directors or officers at public companies, according to the statement.

Thursday’s actions by the SEC are the result of an investigation the agency that began in December 2000.

The SEC accuses the three men of being so preoccupied with meeting analysts’ earnings expectations that they “fraudulently reverse-engineered” Gateway’s financial results to do so in the second and third quarters of 2000, according to the statement.

The scheme to “close the gap” and meet earnings estimates included offering financing to customers whose credit applications were previously denied and accelerating purported revenue from a deal with America Online Inc. for bundling of the company’s Internet service on Gateway PCs, among other accounting adjustments, the SEC said.

The complaint alleges the former executives misrepresented or failed to disclose significant trends in Gateway’s business, that PC sales growth was declining, that by the end of the third quarter only a small percentage of the company’s net income came from PC sales and that earnings and revenue included various one-time transactions.

While pursuing the individuals who allegedly manipulated Gateway’s earnings, the SEC has settled with the company. Gateway, without admitting or denying any wrongdoing, has agreed to an order prohibiting it from any future violations of U.S. securities laws, the SEC said.

Gateway replaced its top management in early 2001 and has restated its results for the applicable periods. The company in a statement Thursday said it is pleased to put the SEC investigation behind it and that it can now focus fully on its transition from being a PC company to a becoming vendor of broader technology products.

Weitzen will “vigorously fight” the SEC lawsuit, said Richard Marmaro, an attorney at Proskauer Rose LLP in Los Angeles, in a statement issued on behalf of Weitzen. The allegations are “baseless,” as Weitzen in fact instituted policies and procedures to promote corporate responsibility and ensure fair and accurate disclosure and accounting of Gateway’s financial condition, according to the statement.

Marmaro accuses the SEC of letting a desire to pursue corporate executives trump the evidence and the law. “The SEC seeks to snare an executive who did nothing wrong or illegal,” Marmaro said.

Attorneys representing the two other former Gateway executives could not immediately be reached for comment.