Former Gateway Execs Face Charges as Dell Charges

Three former Gateway executives face civil suitscharging they manipulated the computer maker’searnings in mid-2000 as the onetime market darlingstruggled to keep up with expectations amid slumpingsales.

The U.S. Securities and Exchange Commission filed suitThursday against former CFO John J. Todd, whom thecomplaint charges was the “principal architect” of theplan to recast earnings results, as well as former CEOJeffrey Weitzen and former controller Robert D. Manza.

The three are alleged to have hidden “significanttrends in Gateway’s business,” including the fact thatPC sales growth was dropping, and to have disguisedearnings by lumping one-time transactions into ongoingrevenue bookings.

“Through these actions, the defendants gave the falseand misleading impression that Gateway, unlike many ofits competitors, was outpacing an industry trend ofdecreasing sales of personal computers,” said RandallLee, who oversees the SEC’s Pacific regional office.”The former Gateway executives the Commission chargestoday were preoccupied with meeting analysts’expectations, to the extent that they fraudulentlyreverse-engineered Gateway’s financial results to doso.”

No Enron, But Still Bad

The SEC sought to distinguish the Gateway case fromother recent corporate fraud scandals, but thecommission also said the executives’ alleged actionsstill damaged the credibility of publicly tradedcompanies and misled investors. “A fraud achievedthrough numerous small accounting tricks, as here, isjust as harmful to investors as any other,” said SECenforcement director Stephen M. Cutler.

For its part, Gateway quickly issued a statementnoting that none of the accused executives iscurrently employed by the company. Gateway also saidit has been told that the SEC’s lengthy probe into itsaccounting practices is now considered closed.

Moving Forward

The SEC probe of Gateway is one of severalhigh-profile inquiries into tech-company earnings,most of which focus on the time frame at the end ofthe dot-com boom. For example, an investigation hasbeen under way at AOL for well over a year, and IBMacknowledged last summer that the SEC was looking atits books.

“The best-case scenario in these situations is to beable to treat it as a historic anomaly, a blip in timethat the company puts behind itself and moves on,”Morningstar.com stock analyst Joseph Beaulieu told theE-Commerce Times. “Gateway can point to three straightyears of earnings that the SEC has not questioned andget back to executing its strategy of diversifyingaway from [being] a pure-PC company.”

Dell-Gateway Contrast

However, while Gateway can argue it has put the SECprobe behind it, the timing of the news underscoresthe company’s competitive struggles.

Also on Thursday, Gateway rival Dell postedthird-quarter earnings that were in line with orslightly ahead of most analysts’ expectations, withhigher sales in several key product areas, includingservers and storage devices.

CEO Michael Dell said his company is starting to winmore customers among major enterprises that previouslyhad postponed replacing aging computer systems but noware starting to make plans to buy new equipment.

Dell’s revenue in the quarter totaled US$10.62billion, up from $9.14 billion in the same quarterlast year and slightly ahead of the consensusestimates of Wall Street analysts. The company saidnotebook computer sales rose 31 percent, desktopmachines shipped 20 percent faster than a year ago,and server and storage system sales jumped 30 and 68percent, respectively.

Dell also said its newer product categories, which gota big push from the company earlier this year, aregaining footholds in the market. Computer printersales were up 70 percent from the previous quarter,while the category that includes Dell’s own brand ofhandheld computers saw revenue increase 26 percent.