Two former Vitesse Semiconductor Corp. (VTSS:US) executives face a second trial over charges they conspired to misstate earnings at the chipmaker in a pared-down case after an earlier trial failed to produce a verdict.
Louis Tomasetta, a co-founder and former chief executive officer of Vitesse, the Camarillo, California-based maker of integrated circuits, and former chief financial officer Eugene Hovanec went on trial today in Manhattan federal court, charged with orchestrating a scheme to meet financial targets by backdating stock options and falsely inflating sales from 2001 to 2006.
“They cooked Vitesse’s books and lied to the public about Vitesse’s performance,” Assistant U.S. Attorney David Miller told jurors in his opening statement.
In April, U.S. District Judge Paul Crotty declared a mistrial on the fourth day of deliberations after jurors said they couldn’t reach a unanimous decision on any of the seven counts against the two men.
Prosecutors in the office of U.S. Attorney Preet Bharara filed a new indictment last month, dropping most of the counts and charging each of the men with a single count of conspiracy to commit securities fraud. If convicted, Tomasetta and Hovanec face as long as five years in prison. Both men have pleaded not guilty.
Miller told jurors that the former executives shipped millions of dollars’ worth of products to Nu Horizons Electronics Corp., a distributor, near the end of financial quarters and fraudulently recorded the shipments as revenue. Vitesse and Nu Horizons had secret side agreements that let the distributor make unlimited returns of the products to Vitesse, he said. The practice allowed Vitesse to meet unrealistic sales targets set by Tomasetta, according to Miller.
“At Vitesse, there was constant pressure to meet these revenue targets quarter after quarter,” Miller said.
Lawyers for Tomasetta and Hovanec, in their opening statements today, said other employees decided how to treat returns for accounting purposes. They said the jury shouldn’t believe the testimony of two former Vitesse employees who will appear as government witnesses.
Tomasetta and Hovanec also conspired to grant backdated, “in-the-money” options as compensation for themselves and other Vitesse employees without disclosing the options to regulators and investors, Miller said. The practice permitted them to underreport compensation expenses, making the company appear more profitable than it was, he told jurors.
Prosecutors said the men created phony documents, including compensation committee minutes, to show the options were approved at earlier meetings and weren’t backdated.
Tomasetta and Hovanec were both fired in May 2006.
Jurors will hear testimony from Yatin Mody, Vitesse’s former vice president of finance, and its ex-director of accounting, Nicole Kaplan. The two former executives pleaded guilty to securities fraud in 2010 and are cooperating with prosecutors in hopes of leniency when they’re sentenced. They both also testified in the first trial.
“These people will give you the inside story about how Tomasetta and Hovanec committed their crime,” Miller said.
Lawrence Gerschwer, a lawyer for Tomasetta, told jurors his client is an engineer who was focused on the company’s technology, relying on others for decisions on how to account for revenue. He said jurors should be skeptical of Mody and Kaplan.
“Their stories have, to put it charitably, evolved,” Gerschwer said.
Gerschwer said Tomasetta admits that during an internal investigation into options backdating in 2006, he and Mody planted electronic copies of meeting minutes they had created on the computer of a Vitesse employee. They turned back the computer’s internal clock to make it appear that minutes approving options grants were created in 2001 rather than 2006.
Gerschwer told jurors that a plan by Vitesse to acquire an Intel Corp. unit was being delayed until the completion of the internal investigation. Tomasetta backdated the computer files to try to resolve the investigation and move the deal forward, not to cover up a fraud, as prosecutors claim, according to the defense lawyer.
“It was a huge mistake, but it was not a crime,” Gerschwer told jurors.
Hovanec’s lawyer, Gary Lincenberg, called Mody and Kaplan “admitted liars” who shouldn’t be trusted. He said his client checked with one of them before accepting big returns of merchandise from Nu Horizons because that was their responsibility.
Both sides last week selected a jury of 12, with four alternates, to consider the case. One juror was excused before the start of the trial today because of a medical matter that wasn’t disclosed in court. The trial may last three or four weeks, Crotty told jurors today.
Vitesse agreed in 2007 to pay $8.75 million to settle shareholder suits related to the alleged accounting fraud and in 2010 settled claims by the U.S. Securities and Exchange Commission for $3 million.
The case is U.S. v. Tomasetta, 10-1205, U.S. District Court, Southern District of New York (Manhattan).
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