A Beautiful Fraud

The latest communique out of bar-code reader and radio frequency identification (RFID) system maker Symbol Technologies (NYSE: SBL) starts like this: "This is a good day for Symbol Technologies in many ways." As the saying goes, beauty is in the eye of the beholder.

Symbol went on to announce that it will pay $42 million in cash and $96 million in stock to settle investigations by the U.S. Attorney's Office and the Securities and Exchange Commission. Some will see beauty in the fact that reserves have been established. Shareholders will have to appreciate the beauty of $42 million flying off, to be replaced by an increased number of shares outstanding. Good days, indeed.

No doubt, it's relative. The bad days (and years), which started in 1998, saw $230 million in revenue erroneously reported. In response, the SEC will charge 11 former executives, including the former CEO, with securities fraud.

Worse yet, state law demands that Symbol pay the executives' court costs! Yes, the company can try to recover legal fees, salaries, bonuses, and stock options but must prove wrongdoing to do so -- or get the executives to "proactively" agree to a settlement. More likely, shareholders will pay again for an ugly fraud.

Meanwhile, the company refuses to say whether action will be taken against its former auditor. The settlement press release states that the company is trying to dramatically improve the "corporate culture," but when an auditor is not held accountable for overlooking overstated revenue, that is poor culture in my book.

The good news, I guess, is that "no criminal complaint will be filed against the Company." OK, but a big price has been paid and is still being paid.

For investors considering an investment in Symbol, there is the RFID technology being tested by Wal-Mart (NYSE: WMT) and others, which could explode over the coming years. The company's core business, however, is growing slowly and, with a return on equity of less than 5%, results are unimpressive.

Based on 2005 estimates, the stock trades at 18 times 2005 earnings. But, be careful. Don't forget the executive suite is filled with new people who are as yet unproven. It might be a "good day" for them, but what investors need is a series of good quarters -- that's the real measure.

Talk to other investors about Symbol Technologies or New Technology (RFID) out on our rockin' discussion boards.

Fool contributor W.D. Crotty rocks but does not own any of the companies mentioned.