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December 16, 2005
One of the screens I run regularly in CapitalIQ checks for companies with negative gross margins, negative cash flow, negative earnings--and a stock price that's up 100% or more for the year. I'm always curious when apparent dog stocks have big run-ups. Until recently, the results of this screen regularly included Motient Corp., a Lincolnshire (Ill.)-based provider of two-way wireless communications with a $1.3 billion market cap and a stock that trades on the Pink Sheets (an unusual combination). What knocked the company off the list wasn't an improvement in its fundamentals, which still stink, but rather a mysterious end to its stock rally. When I dug a little deeper, I found a web of intrigue so tangled that Peter Parker couldn't find his way out of it. Even in this scandal-a-day era, the backstage drama at this company is off the charts.
The current brouhaha centers on a legal battle between Motient's board and its largest shareholder, Dallas (Tex.)-based hedge fund Highland Capital Management. To complicate matters, Highland president James D. Dondero is a member of Motient's board and is pitted against the other six directors, who allege that he voted to approve some of the measures he now condemns.
In August, Highland sued Motient's officers and directors in Chancery Court of Delaware, claiming the defendants tried to line their pockets with Motient's cash by paying exorbitant fees to firms in which they held interests. The suit focuses especially on Motient chairman Steven G. Singer, his brother and convicted felon Gary A. Singer, and former Motient director Jared E. Abbruzzese.
According to the complaint, Motient hired Abbruzzese's Albany (NY)-based consultancy Communication Technology Advisors (CTA) in May 2002 to provide financial advice while Abbruzzese was still a director at Motient. At the time, two other CTA employees, Peter D. Aquino and Gerald S. Kittner, were also Motient directors. Since then, CTA has functioned as Motient's de facto executive management and has received over $3 million in fees and tens of millions of dollars worth of warrants to buy Motient stock, Highland's complaint says.
The complaint further claims that Abbruzzese and CTA in 2004 pressured Motient's board to hire a small Austin (Tex.)-based investment bank, Tejas Inc., to raise money for Motient. However, Abbruzzese allegedly failed to disclose that he owned options to buy 100,000 shares of Tejas. As a result of fees and warrants paid by Motient, Tejas' annual profit increased over 2,600%, and the Tejas shares underlying Abbruzzese's options appreciated 900% in one year. In March 2005, Motient appointed Barry A. Williamson to its board, a Tejas director who owns over 51,000 Tejas shares. In May 2005, Tejas announced it would acquire CTA for $65 million. Abbruzzese was appointed vice chairman of Tejas and granted a generous employment agreement and stock-option package.
Abbruzzese's alleged conflicts run deeper. In fiscal year 2004, Motient lost $72 million on revenues of $36.9 million. What, then, accounts for its $1.3 billion market cap? The company has a 40% stake in Mobile Satellite Ventures (MSV), a Reston (Va.)-based provider of mobile satellite communications that owns valuable spectrum licenses. MSV is a limited partnership, and its general partner is Motient Satellite Ventures GP, Inc., whose managers are Abbruzzese and Kittner of CTA. "Motient?? purchases of MSV units in 2004 at prices that reflected ever increasing valuations of MSV enriched Kittner, Abbruzzese and CTA through their ownership of MSV units," Highland's complaint says.
As if that weren't enough, Highland's complaint disputes the independence of Motient directors with ties to Motient chairman Steven Singer, who also serves on the boards of New York-based Internet infrastructure company Globix Corp. and Englewood Cliffs (NJ)-based secure printing company American Banknote Corp. Motient director Raymond L. Steele is on the boards of Globix and American Banknote, too, and Highland's complaint says "Steele is controlled and dominated by the Singers, and dependent on the Defendants for compensation he receives as a director of Singer-affiliated entities Globix and American Banknote." Motient director C. Gerald Goldsmith is an American Banknote director and "is controlled and dominated by the Singers and has a history of business with them," the complaint adds.
Hovering in the background of this power struggle is Steven Singer's brother, Gary Singer, who in the mid-1990s spent nearly two years in federal prison for fraud, money laundering, and racketeering as part of a junk-bond insider trading scheme while he was co-chairman and CEO at Cooper Companies, Inc., a healthcare products maker in Pleasanton (Calif.). At the time of the crime, Steven Singer and a third brother, Brad Singer, were also executives at Cooper and were later sued on civil charges related to the trading scheme.
The SEC has permanently barred Gary Singer from acting as an officer or director of any public company. Nevertheless, Highland's complaint says that he "shares an office with Steven Singer, has participated in many Motient board meetings and conference calls, and even acted in a managerial role on behalf of the company." Gary Singer has allegedly pressured Motient's board for compensation and owns warrants to acquire Motient shares.
As for the Motient board, it has denied Highland's charges and in November counter-sued Highland and Dondero in U.S. District Court of Northern Texas, claiming that Dondero disclosed material non-public information to Motient shareholders in order to drive down the company's stock price and acquire additional shares cheaply. The suit also alleges that Dondero is trying to replace Motient's board and management in violation of federal law. Dondero has denied the charges.
Separate from the lawsuits, Dondero and the Motient board have taken to trading potshots in SEC filings. In an August filing, the Motient board implied that Highland had filed the Delaware suit in retaliation for the board forming an executive committee that does not include Dondero. It also mentioned that Dondero and Highland have filed over 50 lawsuits since 2002. In a subsequent filing, Dondero denied the charges and said the 50 lawsuits were routine filings in bankruptcy cases. Most recently, Dondero filed a copy of a letter in which he accused the Motient audit committee of hiring a law firm where the wife of Motient's general counsel works to conduct an independent investigation of the concerns he has raised. "How can the Audit Committee continue to maintain that it retained 'independent counsel'?" the letter asks.
Investors sick of the squabbling might want to make up their own minds about Motient. But then they'd have to rely on financial statements that are dubious at best. In 2002, Motient's former auditor, PricewaterhouseCoopers, found that the company's internal controls were sorely lacking. Various ledgers were not being reconciled with each other in a timely fashion. Supervisors weren't reviewing accounting adjustments. No formal policy existed for impairment of long-lived assets.
In 2003, Motient's management claimed it took steps to fix the problems but also decided to fire PricewaterhouseCoopers and replace the firm with Ehrenkrantz Sterling & Co. LLC--the company's third auditor in two years. Motient had disagreed with PwC over how to account for proceeds from transactions with MSV and sales of assets to wireless startup Aether Systems. After some back and forth, the SEC signed off on Motient's accounting but objected to some of its prior treatments of the transactions in question.
But Motient still couldn't get its accounting right. In an amended annual report filed in April 2005, the company revealed that as of December 31, 2004, it had found two material weaknesses in its financial controls related to information security and lack of oversight. In May 2005, the company had to file three amended quarterly reports and one amended annual report in response to comments from the SEC about insufficient disclosures.
What happens next? Beside the continuing court battles, it looks like a proxy war could be brewing, with Highland running a slate of directors against the current Motient board. But Dondero will have a tricky tightrope to walk, managing dual roles as Motient director and gadfly shareholder. All this panoply of greed requires to push it into the realm of genuine black comedy is a little sex. Perhaps there's a female intern we haven't heard about yet?
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