BEHIND THE SCANDAL AT SPECTRUM
Spectrum was in sorry shape when Peter T. Caserta was named chief executive in July, 1992. The small Dallas-based company had developed a patented technology that would allow wireless data transmission among computers. But in 10 years it had yet to make a profit. It was Caserta's job to change all that. A self-styled investment banker who claimed to have extensive contacts in the worlds of finance and high tech, Caserta vowed to win Spectrum Information Technologies Inc. the recognition--and riches--it deserved.
Two years later, Spectrum is indeed well-known, though not for its technology. Former Apple Computer Inc. Chairman and CEO John Sculley's announcement on Oct. 18 that he was taking over as Spectrum's boss, and his subsequent decision--just four months later--to resign have certainly gained the company notoriety. And Spectrum continues to make headlines. Sculley has sued Caserta, alleging that Caserta had concealed Spectrum's regulatory and accounting problems. In turn, Spectrum has sued Sculley for reneging on his employment contract.
OUTSIDE TIES. While he was undertaking such high-profile maneuvers as hiring Sculley, Caserta was enriching himself and his associates, a business week investigation has found. Soon after taking charge, Caserta moved Spectrum's headquarters from Dallas to Manhasset, N.Y., where his consulting firm is based. He spent $500,000 of cash-strapped Spectrum's money on a lavish remodeling of its offices, including a 30-foot black marble conference table. Caserta's contract gave him a $250,000 salary--nearly double the former CEO's pay--a company-owned Mercedes-Benz, and options to purchase 2 million shares of stock. During Caserta's first year on the job, expenses rose 55%, to $14.6 million, while sales declined 8%, to $100 million, and losses widened to $10 million from $2 million.
In addition, Caserta handed out high-paying jobs and lucrative options to more than a dozen relatives and friends, according to interviews, public documents, and lawsuits. He also apparently failed to disclose the tight relationship between his private consulting firm, Caserta Group, and Spectrum. Spectrum's latest proxy statement makes no mention of Caserta's ongoing outside activities--a possible violation of securities laws. But former clients of Caserta Group say the firm often cited Caserta's position at Spectrum to drum up business for the consulting firm.
Caserta declined to be interviewed, and Sculley refuses to comment on his dealings with the company. But Spectrum's general counsel, Christopher Franco, says Spectrum's acting CEO denies any wrongdoing. "Peter is definitely a colorful character, but he's an honest man," says Franco.
If nothing else, Peter Caserta has always been ambitious, according to those who know him. "Creative and entrepreneurial" is the way Frank Caserta describes his 53-year-old brother, a snappy dresser given to gold chains and rings. The son of a Manhattan jewelry store owner, Peter Caserta received an associate degree from the now-defunct RCA Institute of Technology in 1959 and 1960. In 1976, he and his brother founded Interglobal Technical Services Inc., a Scottsdale (Ariz.) company that offered temporary technical and engineering help to companies. Interglobal prospered. In 1988, it was acquired by cdi Corp., a Philadelphia-based competitor, for $2.6 million.
While his brother Frank remained at cdi, Caserta started the Caserta Group. The firm bills itself as an investment bank specializing in high-tech startups, mergers and acquisitions, and management consulting. Its long-term goal, put forth in promotional materials, was to accumulate a net worth of $300 million, largely by taking equity stakes in client companies. And the firm wasn't above embellishing its resum to woo clients. In an apparent reference to Interglobal, the firm's literature boasts that Caserta founded a technical and engineering firm with a staff of 10,000 and sales of $100 million. Interglobal had annual revenues of $40 million and employed 2,000. The firm also boasts of its wealthy international investors and offices around the world, including Hong Kong, Saudi Arabia, and Zurich. A business week search showed no trace of the foreign offices. The Caserta Group declined comment on its sales tactics.
"HIGHLY MISLEADING." It was through his consulting business that Caserta first became familiar with Spectrum. Founded in 1982 by Dana C. Verrill, the company secured its first patent in 1987 on a technology that allowed computers to communicate over cellular phone systems. But the company was struggling. In 1991, Spectrum averted bankruptcy with a public offering. That's when the board told Verrill to broaden Spectrum's management and find new outside directors. He turned to Caserta, who had advised Spectrum on how to raise money.
Not everyone was happy with Caserta. A group of outside directors fought Caserta's appointment as an executive vice-president at a May, 1992, board meeting. They believed Caserta was attempting to grab control of the company, say former directors. Indeed, at the same meeting, Caserta had nominated three new directors to Spectrum's board. Each had close ties to the Caserta Group. The dissenting directors were outvoted, and Caserta joined Spectrum's management. Two months later, he was elevated to chief executive, pushing Verrill into the chairman's job.
Caserta quickly filled out management ranks with allies. His 29-year-old daughter, Diana, and son, Peter Jr., 25, were hired as vice-presidents of Spectrum subsidiaries. Franco says there was nothing inappropriate in Caserta's hiring of friends and relatives. Caserta's daughter and son declined to comment. Other family members also did well by Spectrum. In November, Spectrum paid $4.2 million for Yield Enterprises Inc., an engineering contracting company owned by Caserta's nephew, James Paterek. The company, based in Staten Island, N.Y., has revenues of $6 million. Paterek denies suggestions of nepotism, saying that the acquisition was authorized by Sculley.
While his management style didn't do much for the company's bottom line, Caserta turned out to be a master at selling Wall Street on Spectrum. "With the equivalent of over 200 patents in its quiver, and more applications pending, Spectrum is shooting for major success in its licensing program during 1993," crowed a company press release dated Dec. 30, 1992. Spectrum's patent attorney acknowledges that the company had only three patents at the time. The "equivalent" patents were pending claims, the company says. The release went on to quote University of Washington law professor Donald S. Chisum, an expert on patent law, to back up the claim. But a director acknowledges that Spectrum lifted the quote from a book by Chisum on patent law. Chisum, who says he was never contacted by Spectrum, says the press release is "highly misleading."
Spectrum's stock really took off last May, after the company made statements concerning an agreement by American Telephone & Telegraph Co. to increase royalty payments to Spectrum for use of the company's wireless technology. The amount was never disclosed. But in a press release dated May 11, Caserta proclaimed that the agreement with AT&T would result in "millions of dollars" of payments to Spectrum. In interviews the next day, he said that the deal would yield "hundreds of millions of dollars" in royalties. The day of the announcement, 34 million shares of Spectrum stock changed hands, the most active trading ever for a nasdaq stock. By May 19, Spectrum's share price had tripled, to 113 4.
AT&T won't comment on Spectrum, but at the time, it publicly disputed the contract's value, putting it at a few million dollars. The sec launched an inquiry into stock manipulation, according to Spectrum. Franco confirms that the U.S. Attorney in New York has subpoenaed company records.
Meanwhile, Caserta continued to work at his consulting business--though Spectrum previously indicated to shareholders that he had left Caserta Group. Spectrum's latest proxy, dated Sept. 28, 1993, states that Caserta had been chairman and CEO of Caserta Group from 1988 to 1991. It made no mention of any continued involvement with the firm. But as late as December, 1992, Caserta wrote and signed a letter on Caserta Group stationery that identified him as president of the firm. The fact that four Spectrum directors are paid members of Caserta Group's advisory board also hasn't been disclosed. Franco says that Caserta sold Caserta Group to his son-in-law, John Bohrman, late last year. As for the directors' role at the firm, Spectrum's attorney says disclosure wasn't required.
HEAVYWEIGHT. Clients and people close to the firm describe the Caserta Group as a high-pressure sales operation that made thousands of cold calls to high-tech companies each year. During their sales pitches, Caserta Group staffers made repeated references to their close ties to Spectrum to show that they understood the problems of small companies, according to executives at companies that have been approached by the firm.
One executive who was intrigued by the sales pitch was David Vangeison, president of Life Medical Technology Inc. Vangeison wanted to raise $1 million for his company. But before he hired the firm, he insisted that the Caserta Group provide the name of a former client he could check with. Eventually, he was told to call Joseph Musacchio of cmi Inc., a consulting company and client of Caserta Group. But Vangeison wasn't informed that Musacchio was working for Spectrum. cmi's chief was working as a vice-president of sales by June, 1992, according to later sec filings.
Musacchio, who couldn't be reached for comment, spoke approvingly of the firm's abilities. So in December, 1992, Vangeison agreed to pay Caserta Group fees totaling $18,000 for its help in lining up $1 million in financing. Caserta never did get Life Medical its financing. And Vangeison says Caserta approached up to 15 investment firms to discuss, without his approval, a possible initial public offering. Then, Life Medical's president says, Caserta wanted $30,000 a year to serve as his investment banker. That's when Vangeison cut the firm loose. "The Caserta Group misrepresented themselves," Vangeison says. Caserta Group refuses to comment about past clients.
Signing Sculley on as Spectrum's CEO was the most lucrative deal of Caserta's career, say former Spectrum insiders and shareholders. News that Sculley, an industry heavyweight, was coming aboard sent Spectrum's share price up 46% in a single day, to 111 8. That set the stage for Caserta to sell his stock and leave the company, according to the shareholder lawsuit filed in federal court in New York last May. sec filings suggest that Caserta and other Spectrum executives had been making plans to leave the company: They had revised their employment agreements in August, 1992, according to the filings. For one thing, the striking price for their options on Spectrum stock was lowered 40%, to just $1.12 a share. A year later a provision was added allowing Caserta to keep his stock options if he left the company.
ROCKY ROAD. In November, Caserta and three executives and directors cashed in 1.7 million options for a tidy profit of $16 million, according to sec documents. Caserta alone pocketed $8.4 million. And to ensure a big payoff, the shareholder suit claims, he didn't disclose the sec investigation that began after the AT&T episode, even though the company had known of it for three months. Spectrum waited until January to disclose the probe.
By December, however, Sculley apparently was having second thoughts. Soon after joining the company, he discovered Spectrum's earnings had been inflated through questionable accounting practices, according to Sculley's lawsuit against Caserta. In one bookkeeping tactic, the suit alleges, Spectrum booked licensing revenue of $3.8 million for an agreement with modem maker U.S. Robotics Inc. and Rockwell International Corp. in the quarter before the deal was signed last November.
Spectrum, which says Sculley's suit has no merit, maintains its former auditor, Arthur Andersen & Co., had approved counting the revenue. But a spokesman for Andersen says the firm didn't review or audit any financials after Mar. 31, 1993. Moreover, Andersen says it raised more than 60 questions about internal controls and practices at a June 23 Spectrum board meeting. Spectrum says Sculley later dismissed Arthur Andersen so he could hire kpmg Peat Marwick. The new auditors told Spectrum to restate its first and second quarters. It then posted a combined loss of $5.3 million. On Feb. 7, Sculley announced his resignation.
And the bad news continues for Spectrum. For the quarter ended Dec. 30, it reported a loss of $12 million, its largest ever. Its stock price has plummeted to about 3. More significantly, its future looks rocky at best. Its wireless modems face competition from several companies, including Data Race Inc. of San Antonio and the Paradyne unit of AT&T. Worse, Spectrum's patents pertain to today's analog cellular systems and may not bear much weight as the industry switches to digital cellular systems. Spectrum hasn't pumped much money into updating its technology. In interviews, Caserta has claimed that Spectrum has spent more than $50 million on research and development over the past dozen years. But a review of company documents shows it spent less than $3 million. Like so many other ambitious claims by Caserta, this one, too, comes up short.Michael Schroeder in Washington