by T. GormanPosted on Posted in SECActions

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).

by T. GormanPosted on Posted in SECActions

Fannie Mae reached a settlement in its $11billion accounting scandal with the Securities and Exchange Commission and the Office of Federal Housing Enterprise Oversight (“OFHEO”).  Under the terms of the settlements the company agreed to pay a total civil penalty of $400 million.  

The SEC complaint, based on alleged violations of the antifraud and reporting provisions of the securities laws, stated that from 1998 to 2004 Fannie Mae failed to comply with FAS 91, which requires companies to recognize loan fees, premiums and discounts as an adjustment over the life of the applicable loans.  In the fourth quarter of 1998 by not recording the full FAS 91 adjustment, the company overstated income to meet certain targets and understated expenses.  In the following periods, according to the complaint, Fannie Mae used a “precision threshold” to determine the amount of the FAS 91 adjustment despite the fact that there is no support in the literature for such an adjustment.  The company also misapplied FAS 133, which concerns accounting for derivate instruments and failed to comply with the requirements of that statement.   The complaint alleged other accounting irregularities including improper practices involving the estimation and eminence of the loan loss reserve, the amortization of debt issuance costs and the consolidation of certain securitization transactions. These acts and practices were directed and/or implemented with the knowledge or approval of Fannie Mae’s senior management according to the complaint.  The company’s historical financial statements will be restated.
The report by OFHEO stated that Fannie Mae’s financial results were “illusions deliberately and systematically” created by its top executives.  During the period approximately half of the CEO’s compensation was tied to earnings targets.  According to the OFHEO report the company had an “unethical and arrogant culture” at the top during the period of the accounting irregularities.  OFHEO, which suggested in its report that Fannie Mae tried to interfere with its investigation, gave the company 60 days to determine whether those involved in the irregularities should remain with the firm.  

The SEC stated that “the Commission considered the cooperation that Fannie Mae provided the Commission staff during its investigation” in determining to accept the offer of settlement which resulted in the entry of a statutory injunction and payment of the fine. SEC v. Federal Nation Mortgage Association, Case No. 06-00959 (RBW) D.D.C. (May 23, 2006).  LR-19710.

http://sec.gov/litigation/complaints/2006/comp19710.pdf