Friday, April 28, 2006
On April 17, Vitesse Semiconductor Corp. announced that it placed its CEO, executive vice president, and CFO on leave while it conducted an investigation of the timing of stock options grants to the executives (see 8-K here). The SEC has begun looking at companies, such as UnitedHealth Group Inc., that engaged in what appears to be backdating of stock options issued to senior officers so that the issuance date is at the low price for the shares, thus enhancing the value of the option grant. Just nine days later, on April 26, Vitesse announced that its internal investigation had turned up much more significant accounting problems which appear to involve its senior executives in conduct much worse than tinkering with the dates for pricing the stock options. Issues have now arisen regarding revenue recognition and recording credits, leading the company to announce that its financial statements for the past three years should no longer be relied on by investors, a sure sign of material problems with its accounting. According to the company's 8-K (here):
The Board has appointed a Special Committee of independent directors to conduct an internal investigation relating to past stock option grants, the timing of such grants and other related accounting and documentation issues. In the course of its investigation, issues have arisen relating to the integrity of documents concerning the Company's stock option grants. Also during the internal investigation, issues have arisen concerning the Company's practices in connection with credits issued to or requested by customers (for returned products or otherwise) and the related accounting treatment, as well as the application of payments received to the proper accounts receivable. The Special Committee is reviewing these issues and, pending further investigation, believes that the Company's accounts receivable and revenues may have been misstated during certain periods. Whether the Company's accounts receivable and revenues were misstated and, if so, the extent of such misstatements are still under investigation.
The SEC no doubt will be sending its subpoena shortly, if it hasn't been served already, and don't be surprised to see a federal grand jury begin an inquiry into Vitesse's accounting after the Enforcement Division completes an initial inquiry along with the company's internal investigation. For shareholders, their stock has dropped by almost 50% in the last month, and an extended investigation could result in a delisting of the company's shares from NASDAQ if the financial statements cannot be filed. (ph)