Big Shots Go Down at Gun Show

The setting was Las Vegas, but no one was expecting fireworks at this year's Shot Show, the annual gun industry trade convention. Sure, sales of firearms and ammunition rose in the wake of Barack Obama's victory, as Second Amendment buffs—fearing a Democratic Administration would push new restrictions on weapon ownership—rushed to stock up. Yet what the industry calls the "Obama stimulus" had already started to tail off by the time gun marketers converged on Las Vegas.

Then the feds crashed the party. The FBI used the convention to round up 21 industry executives who allegedly fell for an undercover sting in which they agreed to pay illegal kickbacks to the defense minister of an African nation. In exchange, the small arms marketers thought they were securing the opportunity to sell millions of dollars in weapons and body armor. Unfortunately for them, they were transacting business with FBI operatives posing as middlemen, according to indictments unsealed by a federal judge in Washington. A 22nd suspect was picked up in Miami. "This is one case where what happens in Vegas didn't stay in Vegas," said Assistant Attorney General Lanny Breuer at a news conference.

One of the men arrested in Las Vegas was Amaro Goncalves, a vice-president of sales for Smith & Wesson (SWHC), the largest U.S. manufacturer of handguns. A federal grand jury alleged that Goncalves agreed to pay a 20% kickback to clinch the sale of 1,825 pistols for use by the presidential guard of the African government (the name of the nation is not revealed in the court filings). Goncalves and the others stand accused of violating the Foreign Corrupt Practices Act, which prohibits bribery in seeking overseas business.

Goncalves' employer has not been charged, and neither has any other company. Smith & Wesson said in a written statement that it has "no information beyond what has been reported" and is "prepared to cooperate fully with law enforcement."

"Obama Stimulus" Fizzles

The arrests created a stir among attendees at the Shot Show. The FBI gave the organizers no warning and caught everyone by surprise, says Mark Thomas, spokesman for the National Shooting Sports Foundation, the show's sponsor. But Thomas denies the raid cast a pall over this year's proceedings. "It's business as usual," he says.

The gun industry still faces the fizzling of the Obama sales rally. While Smith & Wesson and competitors such as Sturm Ruger (RGR) and Glock reported strong financial results in 2009, many executives expect a cooling off in 2010, especially in sales of semiautomatic rifles, which had surged last year.

Reliable statistics are hard to come by in an industry where many players are private companies, but one set of data confirms that a shift is already under way. The federal government reported that mandatory criminal background checks, which gun retailers must carry out in advance of a sale, dropped 7.6% in December, to 1.41 million, from the previous year. "Things are getting back to normal, meaning they are slowing down," says Cameron Hopkins, a gun marketing consultant based in suburban Las Vegas who attended the Shot Show. "The good times never last forever."

    Before it's here, it's on the Bloomberg Terminal.