It's been a very tough week for Vitesse Semiconductor Corp., during which it fired three top executives, announced it is in default of a bank loan and discovered it is the focus of federal investigations and a class action lawsuit concerning its stock option practices and other accounting irregularities.
The board of directors of Vitesse, a maker of integrated circuits for communications and storage networks, appointed a special committee to conduct an internal investigation into past stock option grants and related accounting and documentation issues. After the investigation started, its scope expanded to include its practices with credits given to and requested by customers (for returned products and other issues) and how that money was accounted for. Now it has expanded the investigation even further and included a review of the "company's revenue recognition policies and practices and practices that may have affected its cash position at the end of certain reporting periods," Vitesse said in a statement.
The company received notice from Silicon Valley Bank this week that it was in default of its credit facility because the company failed to file its financial report for the quarter that ended March 31, failed to meet liquidity covenants and there were "alleged misrepresentations under the credit facility." Also, the bank said Vitesse owed the bank more money than it was authorized to borrow. As of Monday, the bank said, Vitesse had borrowed $10 million, with another $4.2 million in issued but undrawn standby letter of credits, while the company's unrestricted cash and cash equivalents totaled $13.2 million. Vitesse said it was in discussions with the bank for more time while it works with an investment banking firm to obtain additional financing and is considering paying the bank $5 million toward the outstanding loan as part of the agreement.
On Wednesday, the company announced it fired CEO Louis R. Tomasetta, CFO Yatin Mody and Executive VP Eugene F. Hovanec. The three had been placed on administrative leave in April by Vitesse because of their involvement in Vitesse's stock option grant process. In the same statement announcing the firings, Vitesse said it named Christopher R. Gardner, the acting CEO, as CEO. Gardner has been with the company since 1986 and was vice president and general manager of the Network Products Div. for the past four years. Vitesse also announced that acting CFO Shawn C.A. Hassel had been given the job permanently. Hassel is a managing director of Alvarez & Marsal, a company that develops operational and financial solutions for companies in transition.
Gardner said in the statement, "In spite of the recent challenges we face with respect to our financial reporting and other issues, Vitesse remains focused on executing our strategic business plan to capitalize on the investments we've made. I'm pleased that we continue to see broad-based growth in customer demand across our three business units and I'm encouraged by the ongoing support shown by our employees, suppliers and customers."
On Thursday, Vitesse announced it received a grand jury subpoena from the office of the US Attorney for the Southern District of New York requesting documents from 1999 through the present regarding the granting of its stock options. In the same statement, the company said the enforcement division of the US Securities and Exchange Commission is also investigating its granting of stock options, and wants documents dating as far back as Jan. 1, 1995. The company said it will "cooperate fully" with both investigations.
The federal probe is reported to be part of a recent crackdown on companies that "back-date" stock options, used to pay senior executives, by setting the grant price retroactively to maximize potential profits for the executives. The federal investigators served subpoenas to five companies this week to find out if the effective dates of some of their stock options were improperly changed to ensure their executives would receive a certain amount of money irregardless of how the stock fared.
Also on Thursday, the Philadelphia-based law firm of Spector, Roseman & Kodroff announced it filed a securities class action lawsuit against Vitesse in the US District Court for the Central District of California on behalf of those who purchased shares of the company's stock between Jan. 28, 2003, and April 26, 2006. The lawsuit alleges that the company made false statements about its financial performance that concealed its improper accounting methods and back dated stock option grants for executives.
The firm's statement said that when Vitesse finally disclosed its accounting problems on April 26, saying its financial statements for at least the last three years were inaccurate, the price of its stock dropped 27 percent. For more information, visit: www.vitesse.com