Securities & Exchange Commission v. Todd
642 F.3d 1207
| 9th Cir. | 2011Background
- Gateway Inc. officers: Weitzen (president/CEO), Todd (CFO), Manza (controller); PwC acted as outside auditor.
- Todd supervised Gateway's financial reporting and signed the third-quarter 2000 financials; Manza booked transactions and prepared statements.
- In Q3 2000, Todd and Weitzen publicly touted accelerating revenue growth; Gateway issued a press release and held analyst calls.
- Unusual 2000 transactions: Lockheed fixed-asset sale booked as $47.2 million revenue; VenServ incomplete sale booked as $21 million revenue; AOL contract changed timing boosting revenue by $72 million.
- Without these one-time items, Gateway would not have met analysts' Q3 2000 expectations; SEC sued in 2003 for antifraud and reporting violations.
- District court granted some summary judgments; a jury found Todd and Manza liable on all claims; on appeal the SEC cross-appealed and Weitzen sought summary judgment liquidation on certain claims.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Lockheed revenue was a material misrepresentation under 10(b)/10b-5 | SEC contends misrepresentation by booking fixed-asset sale as revenue, misleading investors. | Todd/Manza rely on GAAP flexibility and trial testimony showing acceptable treatment and disclosures. | Reversed judgment as to material misrepresentation; substantial evidence supports misrepresentation. |
| Whether VenServ revenue recognition supports scienter against Todd | Todd knowingly booked incomplete sale as revenue to meet targets. | GAAP violation alone insufficient for scienter; lack of direct admission limits liability. | Substantial evidence supports recklessness/scienter as to Todd for VenServ treatment. |
| Rule 13b2-2 liability for false statements to auditors | Todd/Manza knowingly signed false management representation letter to PwC. | Requires knowledge of falsity; defendants may lack actual knowledge of falsity. | We reverse as to Rule 13b2-2 claim; there is sufficient evidence of scienter on 10(b) violations, but not required here. |
| Weitzen's Section 10(b)/Rule 10b-5 and control person liability under 20(a) | Weitzen participated in misrepresentations; control person liability should attach given his role. | Control status and good-faith defense disputed; summary judgment improper due to material facts. | Summary judgment inappropriate; genuine issues of material fact on misrepresentation, scienter, and control; good-faith defense not established. |
| Whether 20(a) control person liability and lack of good-faith defense foreclose summary judgment | Weitzen controlled Gateway and induced or participated in fraud; good-faith defense not proven. | Defendant argues lack of scienter and inability to prove control/inducement. | There is a genuine issue of material fact on control; good-faith defense not dispositive at summary judgment. |
Key Cases Cited
- Ernst & Ernst v. Hochfelder, 425 U.S. 185 (Supreme Court, 1976) (defining scienter as intent to deceive; recklessness may suffice)
- In re GlenFed, Inc. Sec. Litig., 42 F.3d 1541 (9th Cir., 1994) (GAAP flexibility; accounting judgments can be misleading)
- Thor Power Tool Co. v. Comm'r of Internal Revenue, 439 U.S. 522 (Supreme Court, 1979) (GAAP allows range of accounting treatments; not all are fraudulent)
- Basic Inc. v. Levinson, 485 U.S. 224 (Supreme Court, 1988) (materiality: substantial likelihood disclosure would alter total mix)
- United States v. Reyes, 577 F.3d 1069 (9th Cir., 2009) (evidence sufficiency for omissions/misstatements)
- SEC v. Dain Rauscher, Inc., 254 F.3d 852 (9th Cir., 2001) (defines material misrepresentation and scienter standards)
- Ronconi v. Larkin, 253 F.3d 423 (9th Cir., 2001) (materiality and forward-looking statements context)
- United States v. Ebbers, 458 F.3d 110 (2d Cir., 2006) (gap-closing programs and revenue recognition issues)
- United States v. Sarno, 73 F.3d 1470 (9th Cir., 1995) (adherence to GAAP does not shield from liability)
- Goyal v. United States, 629 F.3d 912 (9th Cir., 2010) (knowing submission required for Rule 13b-2(b) liability)
- Nordstrom, Inc. v. Chubb & Son, Inc., 54 F.3d 1424 (9th Cir., 1995) (good-faith defense in control-person liability context)
- Howard v. Everex Sys., Inc., 228 F.3d 1057 (9th Cir., 2000) (test for control status and good-faith defense in 20(a))
- Paracor Fin., Inc. v. Gen. Elec. Capital Corp., 96 F.3d 1151 (9th Cir., 1996) (defendant can show good-faith defense if no scienter and no induced violation)