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Former Gateway Execs Face Charges as Dell Charges

By Keith Regan
Nov 14, 2003 7:57 AM PT

Three former Gateway executives face civil suits charging they manipulated the computer maker's earnings in mid-2000 as the onetime market darling struggled to keep up with expectations amid slumping sales.

Former Gateway Execs Face Charges as Dell Charges

The U.S. Securities and Exchange Commission filed suit Thursday against former CFO John J. Todd, whom the complaint charges was the "principal architect" of the plan to recast earnings results, as well as former CEO Jeffrey Weitzen and former controller Robert D. Manza.

The three are alleged to have hidden "significant trends in Gateway's business," including the fact that PC sales growth was dropping, and to have disguised earnings by lumping one-time transactions into ongoing revenue bookings.

"Through these actions, the defendants gave the false and misleading impression that Gateway, unlike many of its competitors, was outpacing an industry trend of decreasing sales of personal computers," said Randall Lee, who oversees the SEC's Pacific regional office. "The former Gateway executives the Commission charges today were preoccupied with meeting analysts' expectations, to the extent that they fraudulently reverse-engineered Gateway's financial results to do so."

No Enron, But Still Bad

The SEC sought to distinguish the Gateway case from other recent corporate fraud scandals, but the commission also said the executives' alleged actions still damaged the credibility of publicly traded companies and misled investors. "A fraud achieved through numerous small accounting tricks, as here, is just as harmful to investors as any other," said SEC enforcement director Stephen M. Cutler.

For its part, Gateway quickly issued a statement noting that none of the accused executives is currently employed by the company. Gateway also said it has been told that the SEC's lengthy probe into its accounting practices is now considered closed.

Moving Forward

The SEC probe of Gateway is one of several high-profile inquiries into tech-company earnings, most of which focus on the time frame at the end of the dot-com boom. For example, an investigation has been under way at AOL for well over a year, and IBM acknowledged last summer that the SEC was looking at its books.

"The best-case scenario in these situations is to be able to treat it as a historic anomaly, a blip in time that the company puts behind itself and moves on," Morningstar.com stock analyst Joseph Beaulieu told the E-Commerce Times. "Gateway can point to three straight years of earnings that the SEC has not questioned and get back to executing its strategy of diversifying away from [being] a pure-PC company."

Dell-Gateway Contrast

However, while Gateway can argue it has put the SEC probe behind it, the timing of the news underscores the company's competitive struggles.

Also on Thursday, Gateway rival Dell posted third-quarter earnings that were in line with or slightly ahead of most analysts' expectations, with higher sales in several key product areas, including servers and storage devices.

CEO Michael Dell said his company is starting to win more customers among major enterprises that previously had postponed replacing aging computer systems but now are starting to make plans to buy new equipment.

Dell's revenue in the quarter totaled US$10.62 billion, up from $9.14 billion in the same quarter last year and slightly ahead of the consensus estimates of Wall Street analysts. The company said notebook computer sales rose 31 percent, desktop machines shipped 20 percent faster than a year ago, and server and storage system sales jumped 30 and 68 percent, respectively.

Dell also said its newer product categories, which got a big push from the company earlier this year, are gaining footholds in the market. Computer printer sales were up 70 percent from the previous quarter, while the category that includes Dell's own brand of handheld computers saw revenue increase 26 percent.

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