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U.S. Attorney Investigates Gateway Accounting

May 15, 2003 | USA Today

Yet another accounting scandal by a once highflying company has expanded to a criminal probe, this time at personal computer-maker Gateway.

The U.S. attorney's office in San Diego, where Gateway is based, is probing Gateway's books primarily related to fiscal year 2000. That year, Gateway did a series of deals with America Online, now called AOL, which later led to a restatement.

Gateway revealed the probe Wednesday in a Securities and Exchange Commission filing. WorldCom, Enron and Qwest are also being investigated in improper accounting cases during that time.

Gateway says no current officers are being investigated, including CEO Ted Waitt, the Gateway co-founder who returned to the company in 2001 and replaced much of the management team.

The probe piggybacks on a 2-year-old SEC accounting investigation. The involvement of federal prosecutors is ''a strong indication that there is sufficient evidence to obtain a criminal conviction,'' says Christopher Bebel, a former federal prosecutor.

The extra scrutiny could also further damage Gateway's reputation, making it harder for the already struggling PC maker to turn its business around. It has lost $509 million the past five quarters and continues to lose market share to Dell.

Gateway says it's cooperating with authorities. It has already restated earnings from 2000 twice. In February 2001, it lowered them by $75 million, citing investment write-offs and ''accounting irregularities.''

In April 2003, it also restated $476 million in revenue for 1999, 2000 and 2001, saying it was changing the way it booked revenue from a joint marketing deal with AOL. During that period, Gateway sold PCs equipped with AOL's Internet service.

Gateway booked all the Internet revenue, then deducted the fees it paid AOL for the service as a ''cost of goods sold.'' In the restatement, it deducted that cost first before it booked the revenue, resulting in lower revenue. Gateway also shifted some revenue among years. Despite the restatements, the SEC investigation remains open, Gateway says.

The probe doesn't appear to be related to separate investigations into AOL's accounting. It is being investigated by federal officials for transactions that could have artificially inflated its advertising revenue.

Waitt was not running Gateway during most of the period being examined. He left in late 1999 and was replaced by Chief Operating Officer Jeffrey Weitzen. After Gateway ran into trouble, Waitt returned and replaced most managers, including CFO John Todd.

Gateway's stock, which plunged 5% shortly after the news came out, closed at $3.15 Wednesday, down 1.3% for the day.

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