Saturday, January 8, 2005

SEC Starts Informal Inquiry into TASER

TASER International, Inc. announced on Jan. 7 that is has received a letter of inquiry from the SEC regarding the company's public announcements regarding the safety of its products and a recent order from Davidson's Inc.  The company's press release states:

"We are confident our statements are supported by the safety studies of our products," said Rick Smith, CEO of TASER International, Inc. "We are in the process of compiling the information requested by the SEC and look forward to working with them as we have with other independent entities interested in the safety of TASER devices such as the United States Department of Defense, the Home Office of the United Kingdom and other governmental agencies in the United States and abroad. Our public statements about the safety of TASER devices are consistent with those of medical experts that we have consulted, or in the case of the Department of Defense, were reviewed and approved prior to release by the very agencies that have commissioned the research."

The safety issue appears to involve whether the company's earlier public announcements were accurate or complete, an issue that is also being investigated by the SEC concerning Merck and its knowledge about problems with the pain relief drug Vioxx that it recently withdrew from the market. TASER's statement is already staking out the position that its disclosures were complete and truthful. The purchase order issue appears to be more of an accounting concern, and may involve the timing of revenue recognition or even channel-stuffing (get your green eyeshades for this one).

An informal inquiry is an SEC request for information, and at this point the Division of Enforcement does not have subpoena power so the company's response is voluntary, although few if any companies refuse to cooperate.  If the Commission staff runs into any roadblocks in obtaining information, or if it appears that the company is being less-than-forthcoming, then it will seek (and almost always receive) authority from the full Commission to issue civil subpoenas.  Once an inquiry becomes formal, it takes on a life of its own and it is hard to predict how it will end. (ph)


UPDATE (Jan. 8): An article in the New York Times quotes an internal TASER document regarding the large sale at the end of the quarter:

An internal company document suggests, meanwhile, that Taser was struggling to meet its sales goals at the end of 2004. The document shows that in another sale, a distributor bought $700,000 in Tasers and accessories on Dec. 30, the last business day of the fourth quarter, about 3 percent of the sales that Taser expected for the quarter.

"Hope this will help out!!!!!" the distributor noted in the purchase order, which was provided by a person who will profit if Taser's shares fall.

The sale was to a distributor who would sell the company's weapons to civilians, a market that is quite small (almost nonexistent) and would not appear to support such a larger order on the last day of the fiscal year--in other words, channel stuffing or even a fraudulent sale if there was no payment for the goods.  The information in the New York Times article comes from a source that is shorting TASER's stock--i.e. betting it will decline--and any number of investigations have been triggered by the "shorts" seeking to undermine a company's share price. (ph)

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