Securities and Exchange Commission
has filed civil fraud charges against
former chief executive officer, Jeffrey Weitzen, as well its former chief financial officer and controller.
The SEC says the trio, all of whom were replaced in early 2001, manipulated earnings to meet Wall Street expectations and lied to cover up trouble in Gateway's PC business.
The three officers sought to conceal the fact that Gateway's PC sales growth was on the wane and that, in the third quarter of 2000, only a small percentage of its net income was coming from PCs.
They tried to create the impression that Gateway was bucking an industry trend of decreasing PC sales, though in fact the company was relying on one-time transactions to juice up revenue and earnings, the SEC said.
The commission's suit, filed in a federal San Diego court, seeks to force the accused to turn over their ill-gotten gains and impose civil penalties. It also aims to disbar them from serving as officers or directors of public companies.
In a statement, Gateway said it's reached a final agreement with the SEC in which it will neither admit nor deny wrongdoing. It won't have to pay a penalty.
In May 2000, when the former managers realized Gateway would miss Wall Street's expectations, they hit upon a number of schemes to try to close the gap. They tracked down potential customers whose credit applications had previously been turned down and offered them preapproved financing to boost sales, according to the SEC suit.
More than 5% of Gateway's second-quarter sales ended up coming from the high-risk group.
The SEC says then-Chief Financial Officer John Todd gave the thumbs up to other improper accounting schemes to help the company make its quarterly numbers.
In the third quarter of 2000, Gateway boasted it had exceeded Wall Street's revenue expectations by $30 million, posted 16% year-on-year sales growth, and met the consensus estimate for 46 cents a share. But in fact, its net revenue was inflated by 6.5%, or $154 million. Net income for the period was overstated by more than 30%, equivalent to over 10 cents, according to the SEC.
Gateway has already restated its financial results for the period in which the problems took place.
"We are very pleased to put this issue from our past behind us," saidGateway CEO Ted Waitt, who left the company in late 1999 and returned as its lead officer in early 2001. "We are a completely new Gateway, and bringing this issue to closure allows us to now focus completely on serving our customers."