A hedge fund that is the majority shareholder of Vitesse Semiconductor Corp. wants the Camarillo-based computer network chipmaker to rescind all improperly granted stock options to top executives, oust a director and put itself on the auction block.
Robert Chapman, who heads El Segundo-based Chapman Capital LLC, claims an auction of the company would boost the firm’s valuation to more than $4.50 a share. Vitesse last week traded at $1.47 a share on the Pink Sheets after being delisted from the Nasdaq last month in the wake of disclosures it had provided executives with backdated stock options.
Vitesse, which develops storage networks for manufacturers such as Cisco Systems Inc. and Alcatel SA, is under investigation by the Securities and Exchange Commission, which is looking into whether the backdated options were improperly granted to at least three executives.
An internal investigation in April found that the options were improperly backdated and that led to the firing of founder and chief executive Louis Tomasetta, chief financial officer Yatin Mody and executive vice president Eugene Hovanec. The company also has stated that three years of financial statements could not be relied upon.
In June, Vitesse was forced to get $52 million in financing from mezzanine lender Tennenbaum Capital Partners LLC after its primary lender, Silicon Valley Bank, said it had violated terms of its credit agreement.
“Chapman Capital demands that Vitesse, following financial restatement and rescission of all improperly granted stock options, conclude with a full scale auction of the company,” stated Chapman, a former Goldman Sachs trader who manages $300 million, in a Securities and Exchange filing last week.
Chapman, who has launched campaigns against more than 17 companies in the past decade, has turned his sights on Vitesse’s chairman John Lewis, director Jim Cole, and newly-appointed chief executive Chris Gardner.
“At the core of each and every one of our campaigns is the belief that the targets of our activism are worth multiples of our purchase price if controlled by others than current management,” Chapman said in an interview.
Vitesse executives could not be reached for comment.
Stock options become more valuable to an executive as the market price rises above the so-called “strike,” or exercise price. Backdating stock options can give executives a larger spread when they eventually sell their stock.
During the 1990s, stock options were a popular incentive for executives at technology firms, who often received options in lieu of cash salaries. Most recipients have to wait at least a year for the options to “vest.”
The backdating inquiry was prompted by an article in the Wall Street Journal in March. The article states that Tomasetta received nine option grants from 1994 to 2001 that were dated just before double-digit price surges in its stock over the following 20 trading days. The Journal cited the odds of such a pattern occurring as about “one in 26 million.”
Chapman Capital, which owns 7.3 percent of Vitesse, bought shares in the company at roughly $1.51 a share.
“One of the jobs of an activist is to get very involved in these companies,” he said. “We want the board to honor its fiduciary duty to shareholders.”
