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Option Probes Come at Inopportune Time for Vitesse, and Its Stockholders

After years of struggling, the networking chip maker only recently had shown signs of recovery.

October 01, 2006|E. Scott Reckard | Times Staff Writer

CAMARILLO -- Vitesse Semiconductor Corp. was in high gear in 2000. With the fiber-optic industry booming, telecom and networking giants including Cisco Systems Inc. and Lucent Technologies Inc. were snapping up its microchips to use in systems that propel data over the Internet.

The company's shares topped $100 that year, putting its executives in the chips as well. Its top five officers made $35.5 million on stock options during fiscal year 2000, including $15.2 million for Louis R. Tomasetta, its longtime chief executive.

Tomasetta, an MIT-trained electrical engineer, was enjoying success at a company he had helped start in 1984 and had nursed through several near-collapses. The Bronx transplant had purchased a 42-acre citrus and avocado orchard overlooking the Ojai Valley and was preparing to build a 15,000-square-foot mansion on it.

Six years later, Vitesse is struggling for survival. Since the Internet bust of 2001, sales have shriveled, profits have turned to huge losses and shareholders have become restive as the stock has sunk amid a series of downsizings. And just as Vitesse was showing signs of recovery, another temblor hit.

Vitesse turned up last spring as one of the companies suspected of manipulating stock options to secretly benefit key employees. Tomasetta and two other executives soon were fired over "issues related to the integrity" of option documents. A federal grand jury issued a criminal subpoena for the company's files. And Vitesse's largest shareholder is prodding board members to walk the plank.

Under investigation by the Securities and Exchange Commission and the federal grand jury in Manhattan, Vitesse has stopped filing financial reports, warning that its books can't be trusted back to September 2002 "and possibly earlier." Corporate leaders have provided only a few details about the problems while a squad of high-priced lawyers and accountants grinds out the internal probe, now in its sixth month.

The silence, analysts say, has hurt morale among the telecommunication chip maker's 600 employees worldwide -- down from a high of more than 1,400 employees in 2001 -- and has brought investor anger to a boil.

"I wish I could talk to the shareholders -- not being able to report to them is just an awful thing," said James A. Cole, a 19-year Vitesse director. However, he added, "Our role is to let the investigation go on unimpeded and try to keep the wheels on the company to preserve whatever shareholder value remains, and if possible increase it."

He declined to wouldn't discuss the case further, and the rest of Vitesse's board, along with the current and previous top managers, declined interviews.

Vitesse is among more than 130 companies undergoing federal or internal probes into the possible manipulation of stock option grants to executives and other employees. But few among the companies embroiled in the stock options scandal have been battered as badly by the controversy.

The chipmaker's stock has plunged 68% since Vitesse announced an internal investigation in April, closing Friday at 99 cents, wiping out more than $460 million in shareholder value. Bondholders are demanding immediate repayment of $97 million, saying Vitesse has violated its agreements with them.

Stock options give recipients the right to buy shares at a set price for a specified period of time. They are intended to link employees' fortunes with those of their employer: The higher the stock rises, the more the options are worth.

The investigations are examining whether the companies secretly rewarded executives and key employees by backdating grants to days when the stock was trading at a low price, or awarding options just before the disclosure of positive news that would drive up the share price.

The Securities and Exchange Commission and special committees of corporate directors are steering most of the probes. But many of the companies, Vitesse among them, also have disclosed Justice Department subpoenas -- an indication that criminal charges may be brought. The FBI disclosed this week that it was conducting criminal investigations of the stock-option practices of 52 companies, but did not identify them.

On Wall Street, Vitesse is faring worse than the two companies where former executives have been charged with criminal wrongdoing, Brocade Communications Systems Inc. and Comverse Technology Inc. Comverse shares are down 19% this year, closing Friday at $21.44, compared with a 48% loss for Vitesse stock. And shares of Brocade are up 74% since Jan. 1, closing Friday at $7.06, near their 52-week high of $7.10.

Analysts and investors say the scrutiny of options has dealt Vitesse more of a blow for several reasons.

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