Sec. v. Todd
| Decision Date | 23 June 2011 |
| Docket Number | 07–56193,Nos. 07–56098,07–56196.,s. 07–56098 |
| Citation | 642 F.3d 1207 |
| Parties | SECURITIES AND EXCHANGE COMMISSION, Plaintiff–Appellant,v.John J. TODD; Robert D. Manza; Jeffrey Weitzen, Defendants–Appellees.Securities and Exchange Commission, Plaintiff–Appellee,v.John J. TODD, Defendant–Appellant,andRobert D. Manza; Jeffrey Weitzen, Defendants.Securities and Exchange Commission, Plaintiff–Appellee,v.John J. TODD, Defendant,Jeffrey Weitzen, Defendant,andRobert D. Manza, Defendant–Appellant. |
| Court | U.S. Court of Appeals — Ninth Circuit |
OPINION TEXT STARTS HERE
Randall Quinn, Assistant General Counsel, Washington, D.C., for plaintiff-appellant Securities and Exchange Commission.Vincent J. Brown and Robert D. Rose, Sheppard, Mullin, Richter & Hampton, LLP, San Diego, CA, for defendant-appellee John J. Todd; James L. Sanders, McDermott Will & Emery, LLP, Los Angeles, CA, for defendant-appellee Robert D. Manza.Clifford M. Sloan, Skadden, Arps, Slate, Meagher & Flom, LLP, Washington, DC, for defendant-appellee Jeffrey Weitzen.Appeal from the United States District Court for the Southern District of California, Roger T. Benitez, District Judge, Presiding. D.C. No. CV–03–02230–BEN.
Before: MARY M. SCHROEDER, RICHARD C. TALLMAN, and MILAN D. SMITH, JR., Circuit Judges.
The Securities and Exchange Commission (SEC) brought suit against senior officers of Gateway Incorporated (now a subsidiary of Acer, Inc.) claiming that they unlawfully misrepresented Gateway's financial condition in the third quarter of 2000 in order to meet financial analysts' earnings and revenue expectations. After a three-week trial, a jury found two former Gateway financial executives, John J. Todd and Robert D. Manza, liable on all claims by the SEC.
The SEC appeals the district court's order granting, in part, Todd's and Manza's motions for judgment as a matter of law, following the jury verdict. The SEC also appeals the district court's order granting the motion by Jeffrey Weitzen, former Gateway President and CEO, for summary judgment concerning certain alleged securities violations. On cross-appeal, Todd and Manza appeal the district court's order denying in part their motions for judgment as a matter of law, and denying their motions for a new trial.
We affirm in part, reverse in part, and remand. We reverse the district court's order granting in part Todd's and Manza's motions for judgment as a matter of law on the antifraud claims under the Securities Exchange Act of 1934 Section 10(b), 15 U.S.C. § 78j(b), and Rule 10b–5, 17 C.F.R. § 240.10b–5, and misrepresentation to auditors claims under Rule 13b2–2(a)(1), 17 C.F.R. § 240.13b2–2. Substantial evidence supports the jury's verdict that Todd and Manza at least recklessly misrepresented revenue related to the Lockheed transaction, and that Todd recklessly misrepresented revenue as to the VenServ transaction, in the third quarter of 2000.
We also reverse the district court's order granting Weitzen's motion for summary judgment as to the Section 10(b) and Rule 10b–5 violations because there are genuine issues of material fact regarding whether Weitzen knowingly misrepresented Gateway's financial growth as “accelerated” given his knowledge of the unusual Lockheed and AOL transactions. There are also issues of material fact as to whether Weitzen was a “control person” under Section 20(a), 15 U.S.C. § 78t(a). We affirm the district court's order granting Weitzen's motion for summary judgment as to the Rule 13b2–2 claim because there is no evidence that Weitzen signed a letter to Gateway's auditors knowing that it misrepresented Gateway's financial position.
We also affirm the district court's order denying in part Todd's and Manza's motions for judgment as a matter of law on the aiding and abetting claims under Sections 13(a), 15 U.S.C. § 78m(a), 13(b)(2)(A), 15 U.S.C. § 78m(b)(2)(A), and Rule 13b2–1, 17 C.F.R. § 240.13b2–1, and their motions for a new trial.
Gateway is a manufacturer and seller of personal computers. In 2000, Weitzen was Gateway's president and chief executive officer (CEO), Todd was its chief financial officer (CFO), and Manza was its controller. In addition to maintaining its own internal accounting systems, Gateway retained PricewaterhouseCoopers (PwC) as its outside accounting and auditing firm.
Todd was responsible for Gateway's financial reporting, which included reviewing and signing financial reports. Todd also reviewed press releases, made accounting decisions, and managed Gateway's relationships with outside auditors and investors. Manza was the company's highest-ranking CPA. His responsibilities included booking transactions and preparing financial statements, such as Gateway's 10–Q (quarterly) and 10–K (yearly) reports.
Todd and Manza signed the third-quarter 2000 management representation letter to PwC, which claimed that Gateway's quarterly financial statements were a “fair presentation” of Gateway's financial position, and that they were prepared in “conformity with generally accepted accounting principles [GAAP].” Also in the third quarter of 2000, Weitzen and Todd represented in a conference call with analysts that Gateway was experiencing “accelerating revenue growth.” Weitzen also participated in preparing a press release claiming that Gateway had “accelerated year-over-year revenue growth.”
In 2000, the personal computer market was weakening substantially, yet Gateway continued to claim record earnings and revenue growth. Skeptical, the SEC began investigating whether Weitzen, Todd, or Manza had misrepresented Gateway's financial condition during the second and third quarters of 2000 in order to meet Wall Street analysts' expectations. In the SEC's view, Weitzen, Todd, and Manza had misrepresented Gateway's financial status in order to cover a $110 million gap in the third quarter between the analysts' expectations and its actual revenue. Three transactions are at issue in this appeal.1
In the third quarter of 2000, Gateway recorded $47.2 million in revenue from a sale of fixed assets to Lockheed Martin. Contrary to Gateway's customary practice of selling Gateway-branded personal computers, the sale was mostly comprised of IBM and Sun servers. The essence of the transaction was that Lockheed would acquire the equipment for $47.2 million, and Gateway would lease it back from Lockheed. The deal was to be cash neutral for Lockheed.
The parties agree that this was an unusual transaction because Gateway normally sold its own computers to consumers from its inventory, whereas this was a one-time transaction involving fixed assets manufactured by other companies. Gateway booked the sale of the fixed assets as gross revenue. Thereafter, the $47.2 million transaction was publicly reported as gross revenue in Gateway's Form 10–Q report, the third-quarter earnings release, and in a conference call with analysts.
At trial, the parties disputed whether Gateway's booking of the transaction as revenue violated GAAP. They also clashed over whether the booking was at odds with the policy disclosed in Gateway's 1999 Form 10–K report, in which Gateway indicated that fixed-asset sales would be included as gains or losses in net income, whereas product sales and services would be recorded as gross revenue. What no one disputes is that absent the $47.2 million in revenue booked by Gateway from the Lockheed transaction, Gateway would not have met analysts' quarterly expectations.
Gateway's third-quarter earnings in 2000 also included $21 million derived from an incomplete sale of computers to VenServ, booked as revenue. The sale was incomplete because, according to a referral agreement, VenServ was not required to pay Gateway for the computers until Gateway referred enough customers to VenServ to buy them. Because Gateway had not yet referred the requisite number of customers to VenServ, the sale could not properly be recorded as revenue. None of the parties presently disputes the fact that the VenServ sale was improperly booked.
In the third quarter of 2000, Gateway and AOL contractually changed the timing of when fees were payable by AOL to Gateway. Prior to the change, AOL agreed to pay a fee to Gateway whenever a buyer of a Gateway computer registered with AOL. Under the modified agreement, the AOL fees were payable as soon as a Gateway computer was shipped to a customer, permitting Gateway to book revenue upon shipment. While the transaction itself was not improper, it gave Gateway a one-time revenue boost of $72 million. The SEC claimed that Weitzen misrepresented Gateway's growth as “accelerated” in the conference call with analysts and in a press release when he did not disclose that the third-quarter revenue was based in part on this unusual, one-time transaction, rather than on ordinary sales growth.
On November 13, 2003, the SEC filed a civil enforcement complaint alleging that Weitzen, Todd, and Manza had violated various securities antifraud and reporting provisions under the Securities Act of 1933, 15 U.S.C. § 77a, et seq., and the Securities Exchange Act of 1934 (Act), 15 U.S.C. § 78a, et seq. On May 30, 2006, the district court granted Weitzen's motion for summary judgment as to (1) the antifraud provisions of Section 10(b), 15 U.S.C. § 78j(b), and Rule 10b–5, 17 C.F.R. § 240.10b–5; (2) the Rule 13b2–2 prohibition against making misrepresentations to auditors, 17 C.F.R. § 240.13b2–2; and (3) control person liability under Section 20(a), 15 U.S.C. § 78t(a).
On March 7, 2007, after a three-week trial, the jury handed down a verdict against Todd and Manza on all claims against them. On May 30, 2007, the district court granted Todd's and Manza's motions for judgment as a matter of law and ...
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