TASER Takes the Stage

On Sept. 28, Fool contributor Tim Beyers wrote an article that asked three tough questions of TASER International (Nasdaq: TASR) CEO Rick Smith, who graciously responded. The Motley Fool has edited Smith's comments, mostly for brevity and clarity, but granted Smith the ability to accept or reject the final article. That you see this online is evidence that Smith has acceded to its publishing in this form. The thoughts expressed below are Rick Smith's and do not represent the views or positions of The Motley Fool or its authors or employees.

Dear Tim,

I'd like to take this opportunity to respond to the questions you raised in your article on Sept. 28. I have great respect for The Motley Fool because analysts like you generally don't blindly follow the crowd. So you can imagine my disappointment when you picked up your pitchfork and joined the mob last week.

The truth is that this story is far more complex than your article suggests. And that's why I'm here: to set the record straight. Let's start by tackling your second question, which I feel is the most important of the three.

Q: What, specifically, was this "unauthorized acquisition of material non-public information," and who did it? Please don't blame this on an undisclosed Sith Lord.

As you know, I cannot speak on behalf of the Securities and Exchange Commission and what it, specifically, is investigating. I can, however, speak to incidents that we consider suspicious. One such incident relates to a Jan. 8, 2005, article (abstract only; fee required for complete story) in TheNew York Times by Alex Berenson. In that article, Mr. Berenson describes details of a $700,000 purchase order document that "was provided by a person who will profit if TASER's shares fall." That suggests that someone who was actively short-selling our stock may have improperly obtained a copy of a confidential internal document describing a material, non-public piece of information related to our revenues.

Similarly, a few days earlier -- on Jan. 6, to be precise -- someone leaked the information about the existence of the SEC's informal inquiry to TheArizona Republic. It seems likely to us that the same source who provided the copy of the purchase order to the short seller as reported in TheNew York Times may have been the same person(s) who disclosed to TheArizona Republic the confidential letter from the SEC to TASER initiating the inquiry. Keep in mind that we were told by the SEC that the inquiry was to be a confidential matter.

Let me be very clear: We have no problem with the SEC investigating the controversy surrounding TASER International. We support over 8,000 law enforcement agencies that use our products every day. We respect the investigative process. But let's also not forget that material non-public information may have been stolen from TASER and that a confidential governmental process was inappropriately disclosed.

Unfortunately, some members of the media have decided our guilt long before the investigative process is completed. The resulting media frenzy has significantly disrupted our business.

Why did we also mention that TASER International has been continuously on the Regulation SHO threshold list of companies? Because naked short sales violate securities regulations. You might think it's no big deal, but in light of the events above, we believe it is evidence of another securities regulation violation by persons seeking to profit from drops in TASER's stock price.

On a personal note, I am a big believer in efficient markets. In this respect, conventional short selling can be a valuable contributor to an efficient market. However, efficient markets require equal access to information and predictable supply and demand. Naked short selling can be much more problematic. Naked short selling can allow for the instantaneous creation of excess supply, enabling the potential short-term manipulation of share prices.

You may point out that, in the long term, things should all equal out. But in the short term, supply-side manipulation of stock prices, coupled with short sellers improperly acquiring and controlling the timing and release of material non-public information, could allow for significant short-term disruptions in stock prices. And that can cause small investors to lose confidence, further driving down prices as small investors "bail out." The result could be a significant transfer of wealth from smaller investors to those attempting to manipulate the stock price through the flow and timing of information released to the markets and through naked short selling. I would think this market imperfection would be a significant interest for The Motley Fool as well, as you clearly seek to look out for the individual investor.

I believe all securities regulations should apply to both those who seek to profit through the creation of value and those who seek to profit through the destruction of value. It's much harder to build a house than to try to burn it down.

We believe a full discussion of the impact of naked shorts should be a very important part of the public discourse relating to TASER and the significant changes in the stock price this year.

Q: What was TASER's relationship to companies that performed safety tests related to your products? How many did you pay for? How much?

By way of providing background, I would first like to point out that TASER International has a Scientific and Medical Advisory Board with world-class experts including Richard Luceri, M.D. (director of the Arrhythmia Center, Holy Cross Hospital in Florida); Hugh Calkins, M.D. (director of the Arrhythmia Service, Johns Hopkins Hospital); Mark Kroll, Ph.D. (adjunct professor at California Polytechnic State University and inventor of more patents on cardiac devices than any other person in the world); and James Sweeney, Ph.D. (associate professor at Arizona State University and recognized expert on nerve and muscle stimulation). To my knowledge, TASER International is the only non-lethal weapons company in the world with a medical advisory board, much less one so qualified. More than a dozen additional world-class researchers and medical doctors have provided expert reports supporting the general safety of our devices and refuting claims to the contrary. These experts agree that while no use of force is risk-free, including TASER devices, our products offer one of the safest use of force alternatives available today.

As to your question on the topic of "independent medical studies," we wish to correct the misconception that all of these studies were paid for or funded by TASER. In fact, you can go here (opens a PDF file) to find a listing of the studies we have relied upon in evaluating the safety and effectiveness of our products. Note that out of more than 80 studies, review articles, and review letters of TASER-type devices or related basic science, TASER provided financial support to only seven. In five additional studies, TASER consultants or personnel attended data-gathering meetings associated with the research project to provide data and answer questions.

Some critics have attacked the results of the Department of Defense's Human Effectiveness and Risk Characterization (HERC) study of TASER-type devices because several members of the company, including me, were asked to present data and to review preliminary findings to provide feedback and fact-checks. Gathering information and feedback from the experts who develop these devices is a necessary part of the safety analysis and, in fact, is consistent with the National Academies of Sciences and Society for Risk Analysis recommendations and standards.

Overall, the body of research covering TASER includes medical studies, data reviews from medical and scientific experts, and real-world results reported from police agencies evaluating the results from our products. We believe these reports support our view that our products reduce injuries and save lives compared to other use-of-force alternatives. We further believe there is no other non-lethal weapon that has been as widely analyzed as ours.

As to the studies we partially funded, our medical experts have informed us that it is prevalent in the field of medical devices and pharmaceutical products for studies to be paid for by the companies that manufacture those devices. Why is this suddenly an issue for TASER International in the field of non-lethal weapons? We are proud of the fact that we take medical safety seriously and that we invest in medical safety research. We sponsor grants for industry-leading research to ensure our products are as safe as possible.

For example, earlier this year, a groundbreaking study we developed and sponsored was published in the respected, peer-reviewed journal Pacing and Clinical Electrophysiology. This study was a technical breakthrough and allowed us to estimate the margin of safety between the electrical charge emitted from the TASER device and the charge required to cause cardiac arrest. It turns out it takes 15 times the charge of the X26 to cause cardiac arrest. That's a huge margin of safety. In fact, it's bigger than that of some over-the-counter cold medications, such as acetaminophen, where doses of approximately 10 times the standard can be lethal. This study was referred to by independent reviewers at one data-gathering meeting as "the gold standard for non-lethal weapons." Yet our critics chose to ignore the pioneering science confirming the safety margin of TASER technology. Instead, they blindly dismissed the data because the study was sponsored by us.

Now, in terms of our public statements relating to the safety of TASER products, please realize that we have largely been responding to ill-founded accusations that our products have proved deadly. For example, a primary critic of TASER products has been Amnesty International, which published a report that was little more than a collection of newspaper articles detailing incidents of suspects dying in police custody. For the record, this is the same allegation that the organization leveled 10 years ago against pepper spray, another law-enforcement tool.

Amnesty's report and numerous public statements have contained no scientific evidence but rather misleading innuendo in suggesting that the TASER devices are responsible for these unfortunate and tragic deaths. In fact, Amnesty's "body count" includes incidents where a TASER device couldn't possibly have been the cause of death -- such as a shooting or a lethal overdose of illicit drugs.

The Arizona Republic has now taken to maintaining this ever-expanding list of deaths. The circumstances don't appear to be taken into account, either. For example, in one incident cited in the list, a bag of cocaine ruptured in the suspect's stomach. The medical examiner attributed the death to a cocaine overdose but made a notation that said "the role of the TASER is undetermined."

Note, too, that recent scientific studies found no link between the TASER device and these in-custody deaths. In fact, one study (Jeffrey D. Ho, Deaths in Police Custody) showed that in almost 70% of tragic, unexpected in-custody deaths, no TASER device was even used.

The primary purported "expert" who has challenged the safety of TASER devices is an individual named James Ruggieri. He presented a paper at the American Academy of Forensic Sciences earlier this year where he asserted that the electrical output of the TASER device should kill 50% of the people exposed to it. Needless to say, this assertion is ludicrous in light of the approximate 200,000 human exposures. Nonetheless, The Arizona Republic ran a prominent, front-page story on Mr. Ruggieri's findings attacking the safety of our products.

As it turns out, Mr. Ruggieri admitted in a deposition that he is a high-school dropout with no degree in electrical engineering. He dropped out of high school in the 10th grade and never returned. His subsequent education includes a GED and online college courses. His only degrees are from that same online college and are in website development and computer information systems. He also has no medical training whatsoever and admits he has never done any testing of a TASER device. He has never experienced the discharge of a TASER device nor witnessed the discharge of a TASER device. (See more in this deposition.) [Editor's note: Link opens a PDF file.] Yet Mr. Ruggieri continues to be widely quoted in the media as a TASER "expert" alleging exaggerated lethality associated with our products.

I urge you to turn your critical eye to the antagonists on the opposite side of this debate. I think you'll be astonished at what you find.

Given the nature of these allegations and the fact they have been widely propagated by many members of the media, we could not sit idly by and allow them go unchallenged. Were we to fail to do so, I believe our business could have been unfairly and adversely affected.

We believe the facts support our case. We sell to the most skeptical market in the world: law-enforcement agencies. From Orange County, Fla., to the United Kingdom, many agencies have commissioned independent panels of medical experts to review the data. And they have concluded that TASER devices represent a valuable force option with a low degree of risk.

Q: The deal the SEC is referring to is described in this press release, issued Dec. 20. It says that Davidson's was going to buy 1,000 TASER X26 guns for $1.5 million and that the order would be shipped during Q4. The quarter ended 11 days later. Were all 1,000 guns shipped by then? If not, when did Davidson's ultimately take delivery?

Finally, to answer your inquiry about the Dec. 20 press release regarding the order from Davidson's for 1,000 X26C consumer products. The entire order was, indeed, shipped in the fourth quarter and has been paid in full. We feel the order made good business sense; the accounting for the transaction was audited, and we believe the accounting was done properly.

In conclusion, I am confident enough in the safety of our products that I have personally experienced the full exposure from our TASER devices on several occasions (including an extended 30-second exposure to our first product, the AIR TASER Model #34000). As a matter of fact, this belief is pervasive throughout the company, as every senior member of management has experienced the TASER device, as have many of our wives, family members, friends, and an estimated 100,000-plus police officer and citizen volunteers (not to mention the number of actual applications in the field, a number we think is on the order of another 100,000 exposures).

Does TASER International take medical studies seriously? Yes. We are proud of our commitment to groundbreaking research. Do we seek to find new markets and launch products to better serve our customers? You bet.

With all due respect, I was surprised that you would prematurely determine our guilt or innocence or be swayed by public innuendo without having all the facts. We should all let the SEC complete its investigation and the Arizona attorney general complete his inquiry. Then let's challenge the media to report the facts.

Sincerely,

Rick Smith

Chief Executive Officer

TASER International, Inc.

TASER is a Motley Fool Rule Breakers recommendation.

Rick Smith is co-founder and CEO of TASERT and owns a substantial number of shares in the company. The Motley Fool has an ironclad disclosure policy.