(CN) The 9th Circuit revived a federal jury’s verdict that two former Gateway executives had intentionally misrepresented the computer company’s earnings and general financial health in the second and third quarters of 2000.
The Securities and Exchange Commission (SEC) began investigating Gateway, now a subsidiary of Acer Inc., after the company continued to claim record earnings and growth in 2000 despite a weakening personal computer market.
The commission eventually charged three Gateway executives with misrepresenting earnings to cover a $110 million gap between actual revenues and analysts’ expectations.
A jury agreed with the SEC in 2007, finding that Chief Financial Officer John Todd and Controller Robert Manza had committed securities fraud by lying about the company’s health in federal filings and statements.
U.S. District Judge Roger Benitez, of California’s Southern District, set aside most of the verdict, however. He ruled that the SEC lacked evidence that the executives had evil intent.
Specifically Benitez found that the SEC’s expert had failed to cite any provision that prohibited the recording as revenue of a $47 million sale of IBM and Sun servers to Lockheed, which Gateway then leased back. The judge also found that, since Manza had told the company’s auditor about the “unusual transaction,” there was no intent to deceive.
The Pasadena-based federal appeals panel disagreed, reversing Benitez.
“Substantial evidence was presented to the jury that enabled it to properly find that GAAP [Generally Accepted Accounting Principles] did not permit Gateway to book the Lockheed transaction as it did,” wrote Judge Milan Smith for the three-judge panel. “Moreover, technical compliance with GAAP does not preclude a finding that an accounting treatment was a material misrepresentation.”
The panel also reversed the District Court’s grant of summary judgment to former Gateway Chief Executive Officer Jeffrey Weitzen for his role in the case.
The court had ruled that the SEC lacked proof that Weitzen had knowingly misrepresented Gateway’s financial growth as “accelerated.” The SEC claimed that the CEO had to have known that the Lockheed transaction, as well as $72 million windfall from a deal with AOL, should have been recorded as one-time deals instead of represented as ordinary growth.
“The SEC argues that Weitzen failed to publicly disclose in an analysts’ conference call and an earnings press report that Gateway’s ability to meet analysts’ revenue growth expectations was based largely on the one-time Lockheed and AOL transactions,” Smith wrote.
“We agree with the SEC that there are genuine issues of material fact, precluding summary judgment, as to these elements,” Smith continued. “Here, a rational trier of fact could find that Weitzen misled investors by publicly describing Gateway’s growth as ‘accelerated’ without simultaneously disclosing the unusual nature of the Lockheed and AOL transactions. There is evidence in the record showing that Weitzen participated in the ‘gap filling’ program that led to the two transactions.”