Former Gateway executive wins summary judgment in accounting fraud case
Judge Roger Benitez, Southern District of California, granted former Gateway executive Jeffrey Weitzen’s motion for summary judgment, ending the SEC’s enforcement action ageist him which had alleged violations of the antifraud and reporting provisions of the securities laws and accrued him of making a false statement to company auditors. In its complaint against Weitzen, and two other former Gateway executives, the SEC claimed that “[t]his case involves a fraudulent earnings manipulation scheme to meet Wall Street analysts’ expectations. .. During the second and third quarters of 2000.”
The court rejected each of the SEC’s claims as to Weitzen. First, the court concluded that the SEC failed to present evidence demonstrating that Weitzen acted with scienter. While the court found that Weitzen had knowledge of the accounting issues the SEC claimed were fraudulent, the court concluded that “knowledge of the existence of the transactions does not allow a reasonable fact-finder to draw an inference that Weitzen had knowledge of their impropriety, or was reckless in not knowing. Weitzen was not an accountant, nor has evidence been proffered that he had any reason to have accounting expertise sufficient to challenge the treatment given to any particular transaction.” The parties agreed that Weitzen was “aware of management’s desire to close the anticipated gap between revenue and analyst consensus expectation. But the SEC fails to provide any evidence or authority that this is anything but common and sound business practice. . . ” the court concluded.
Second, the court rejected the SEC’s claim that Weitzen was liable under SEA Section 20(a), for control person liability. Gateway, the court noted, was not a defendant, and the SEC was not entitled to rely on the consent decree executed by the company to establish a primary violation as required by Section 20(a). In any event, the court found that “Weitzen’s status as CEO is not conclusive on the issue of whether he was a controlling person . . . It is Weitzen’s lack of specific control of the transactions at issue here that serves to separate him from any potential control person liability.” In addition, the evidence demonstrated that Weitzen acted in good faith, the court concluded, by making reasonable inquiry of the persons in-charge of the transactions at issue and relying on their advise.
Finally, the court rejected the SEC’s claim that Weitzen violated Rule 13b2-02 by signing a false management representation to the auditors. While the SEC claimed that the letter was false because the financial statements were not properly prepared, it failed to demonstrate that Weitzen had knowledge of any potential misrepresentations. SEC v. Todd, et al., Case No. 03CV2230 BEN (WMc) (S.D.CA May 30, 2006).