Ex-Vitesse Executives Face Second Trial Over Fake Numbers

By Bob Van Voris – Jan 22, 2013 12:00 AM ET

Two former Vitesse Semiconductor Corp. (VTSS) executives face a second trial over charges they conspired to misstate earnings at the company in a pared-down case set to come before a jury today.

Louis Tomasetta, a co-founder and former chief executive officer of Vitesse, the Camarillo, California-based maker of integrated circuits, and former Executive Vice President Eugene Hovanec are charged with orchestrating a scheme to meet financial targets by backdating stock options and falsely inflating sales from 2001 to 2006.

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 verdict on any of the seven counts against the two men. Prosecutors in the office of Manhattan 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 and to make false statements in regulatory filings.

“The false representations concerning both Vitesse’s revenues and stock options were made for the same basic purpose — to make Vitesse’s financial condition look better than it actually was,” the government said in the indictment.

If convicted, Tomasetta and Hovanec face as many as five years in prison. Both men have pleaded not guilty. In the first trial, they claimed others in the company were responsible for the accounting decisions targeted by the government.

Dan Marmalefsky, a lawyer for Tomasetta, and Gary Lincenberg, a lawyer for Hovanec, declined to comment on the case.

Missing Targets

Lawyers for both sides last week selected a jury of 12, with four alternates, to consider the case. The trial, which begins with opening statements today, may take as long as four weeks.

“Missing Tomasetta’s targets was not an option because it would hurt the company’s stock price and embarrass management,” Assistant U.S. Attorney Katherine Goldstein argued to the jury in closing arguments in the first trial. Goldstein told jurors that the two former executives were motivated by pride and greed.

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 new indictment names as co-conspirators Yatin Mody, Vitesse’s former chief financial officer, and its ex-director of accounting, Nicole Kaplan. Both pleaded pleaded guilty to securities fraud in 2010 and agreed to cooperate with prosecutors. Both testified against Tomasetta and Hovanec in the first trial.

Product Shipments

Prosecutors claimed the former Vitesse 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, according to the government.

Tomasetta and Hovanec also conspired to grant backdated, “in-the-money” options as compensation for themselves and other Vitesse employees, according to prosecutors. The practice permitted them to underreport compensation expenses, making the company appear more profitable than it was, they claim.

Prosecutors said the men created phony documents, including compensation committee minutes, in an attempt to show the options were approved at earlier meetings and weren’t backdated.

Tomasetta and Hovanec were fired in May 2006 in an internal probe of options backdating.

The case is SEC v. Vitesse, 10-9239, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Bob Van Voris in Manhattan at rvanvoris@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net