“DDS program” – The Key to Liability or Lack of Liability

Yesterday, the SEC announced that a jury found former CFO, John J. Todd, and the former controller, Robert D. Manza, of Gateway Inc., liable on all charges for violating the antifraud, false statements to accountants, and recordkeeping provisions of the federal securities laws, and for aiding and abetting Gateway’s violations of the reporting and recordkeeping provisions of the securities laws. http://sec.gov/news/press/2007/2007-35.htm  In June 2006, Judge Roger Benitez of the U.S. District Court for the Southern District of California found that the SEC failed to provide sufficient evidence to support its allegations of similar conduct against  Gateway’s former CEO, Jeffrey Weitzen.

A key difference in proof offered against Messrs. Todd and Manza and Mr. Weitzen appears to have been a program recorded in documents offered by the SEC.  Throughout the three week trial, the jury heard testimony detailing the fraudulent revenue and earnings manipulation scheme of John Todd and Robert Manza and their concealment of important information about the success of Gateway’s PC business.  The release states that the jury learned of the  scheme of Messrs. Todd and Manza to offer pre-approved financing to individuals whose credit requests had previously been denied and that “[t]his effort continued into the third quarter with even riskier credit candidates and became known within Gateway as the ‘DDS program,’ which stood for ‘deep, deep sh[–],’ according to documents and testimony from company insiders.  

In contrast to Messrs. Todd and Manza and their DDS program reflected in company documents, the court found no evidence linking Mr. Weitzen to the DDS program leaving one to wonder why he was named as a defendant in the first place – particularly when the SEC had a clear case based on the admissions of the  wrong doers.