When I started writing this, I intended to describe what Taser International
That's better than famous, right?
Most of the country knew little of Bernard Kerik until President Bush made him his first-round draft pick for homeland security chief on December 3. Taking pokes at Kerik now is an overly easy pastime. The man withdrew his nomination after copping to a conveniently forgivable faux pas: hiring a nanny who was in the country illegally. There are plenty in the press and elsewhere who now think that mini-scandal was concocted in order to divert attention away from even dirtier laundry.
Since this is an investment site, I don't intend to belabor this baggage: the fines he received for using city cops to research his book, rumors of contracting irregularities after he quit his position as Iraq's top cop only halfway through his term, the allegations of multiple mistresses, his alleged use of a donated ground-zero apartment for sexual liaisons with his book publisher, the lawsuit over his alleged stonewalling of a corrections employee who'd reprimanded one of those mistresses -- another corrections officer, the third wife he left out of his autobiography, the million-dollar cigarette slush fund he allegedly administered while in charge of prisons in New York, and his alleged use of New York City Police Department muscle to try to regain a lover's "stolen" cell phone. (Newsday has an interesting library of the dirt here.)
Instead, I am fascinated -- and by fascinated I mean horrified -- by Kerik's non-Taser personal and business relationships. Let me warn everyone right from the top that the opinions expressed here are my own, and don't represent The Motley Fool. (Taser happens to be a pick of our Rule Breakers newsletter, an appellative irony I hope you don't savor too much as you get further down the page.)
Everything I discuss below has been sketched out, at least in part, by various other sources including a snazzy bit of reporting by Christopher Byron in the New York Post. What follows is a work of synthesis and hypothesis, but as an investor, that's all you have to go on most of the time. The dots may not connect. But anyone who's ever stepped back from a Van Gogh will tell you that a bunch of unconnected dots can still paint a vivid, scary picture.
Taser and beyond
According to the SEC filings, Kerik joined Taser's board in May 2002, eight months after he rode Rudy Giuliani's 9/11 coattails to a position as the media's latest glamour cop. Since that time, he's sold millions of dollars worth of stock options, including nearly $7 million worth in the final quarter of 2004. Following the recent investor uproars, Taser took the unusual step of defending Kerik's massive sales, pointing out that they were perfectly legal and claiming that Kerik took "significant risk" in joining Taser's board. You may come to your own conclusion about the amount of risk Kerik undertook by signing on to attend up to five meetings per year when he was ready to net big bucks as an executive in Giuliani's new consulting firm.
As a member of Taser's nominating committee, Kerik is charged with identifying candidates with "demonstrated character, judgment, relevant business, functional and industry experience, and a high degree of acumen."
A brief glance at some of Kerik's non-Taser business relationships has me wondering whether he's got the goods to make those calls, and what he would conclude if he honestly applied those standards to the guy staring back at him from the mirror.
Penny stocks and the New York mob
Let's pick the lowest-hanging fruit first. Kerik's attorney, Joseph Tacopina, is a well-known mob defender who can count John Gotti among his clients. This is, at the very least, an unfortunate coincidence. It's even worse in light of the fact that a former Kerik associate, Lawrence Ray, pleaded guilty to conspiracy in 2001 in a mob-inspired, $41 million stock pump-and-dump.
How close were those two? It's hard to say for sure, but according to reports, Ray gave Kerik $17,000 worth of financing and gifts for his 1998 wedding, back when Kerik was the city corrections commissioner. (Who gets money from friends for wedding costs, anyway?) A reputedly mob-operated, would-be city trash contractor eventually hired both Ray and Kerik's brother Don, reportedly to help convince the city that the firm wasn't mob-operated. According to a December story in the New York Post, the FBI is looking into that cozy situation.
Defense Technology Systems
To leave aside the mafia for a moment, Taser was not the only defense company scrambling to get Kerik on board following his post-9/11 notoriety. He was a key asset -- if not the key asset -- in the very public costume change made by a pink-sheet penny stock formerly called DataWorld Solutions. (For whatever reason, this relationship is not disclosed in Kerik's bio in Taser's April 29, 2004 proxy.)
Defense Technology Systems (DTS) as it's now called, is a company whose main business was computer cables. It went public following a "reverse merger" with bankrupted Vertex Computer and Cable Products. Two years after 9/11, it declared itself a security company, creating a subsidiary called DWS Defense Systems in order to capitalize on the growing market for all things homeland security. Fair enough, I suppose. This is a makeover that generated significant investor interest -- though little or no profit -- for companies like IPIX
To give you an idea of the "character, judgment, business experience, and acumen" of Kerik's close financial associates, you need only glance at DTS's financial statements. They are rancid.
This is the first publicly traded company I've ever seen that has less cash on the balance sheet than I do in my checkbook. I'm not kidding. There's $1,800 against $4.6 million in current liabilities, and the firm is delinquent on its bankruptcy obligations, and it's not making payments on some of its debt, and it owes state and federal agencies more than $350,000 worth of payroll and sales taxes it collected but did not pay out.
What does DWS actually sell? As you can tell from the financials, not much. But in 2003, it did have one amazing new product: hype.
A month after the security division was created, in November 2003, DWS put on a dog-and-pony show -- summarized in an exciting press release, natch -- to demonstrate the effectiveness of its "bullet-proof glass" against "terrorists." Never mind that bullet-resistant polycarbonate is something that has been widely available for decades, as evidenced by the fact that DWS simply brought in a supply from a "strategic partner."
What made DWS's glass so special? Nothing, except that Kerik was hawking it. The former commish presided over this new-technology farce, talking tough about terrorists before cueing an NYC cop to pump .44 Mag rounds into the plastic. I'm going out on a limb here, but I suspect the security industry is familiar with this product. The question then becomes, "Who's the target of this PR?" Anyone else guessing "gullible investors"?
Why would anyone take part in such a snow job? You need only look at Kerik's contract to see the motivation. The month before, on October 29, 2003, Defense Technology Systems signed Kerik to an "advisory" deal. Just a reminder, this was precisely the month that the cable maker decided that the future lay in security. In return for devoting only such time and effort as he "deemed necessary," Kerik's contract granted him the following:
- 2% of the gross receipts on contracts initiated by him or involving anyone "introduced by you" to the company
- A promise of an interest-free $150,000 loan repayable by sale of stock or options
- 400,000 shares of common stock, free and clear, plus 1,200,000 stock options vesting immediately at strike prices ranging from $0.50 to $5.00
For perspective, this was several times the compensation offered another advisory-board member who was signed at the same time. Here's what's worse: 1.6 million potential shares, vesting immediately, are not likely to encourage long-term thinking and shareholder value. Consider this: Doing the impossible and selling $10 million worth of product would have netted Kerik only $200,000. But what if a PR blitz could push the stock price up to a buck? That would yield a cool half million. Two bucks a stub? A quick $1.3 million. Five bucks? $4.9 million. Hey, what would you do? Yeah, I'd be shooting plastic and issuing press releases too.
The circle closes
It gets even stranger. DTS's latest quarterly report details the purchase (via stock) of a security-door patent from Georal International, Ltd. Georal is a firm that, for all intents and purposes, seemed to merge with DTS following an April 2004 door distribution deal. No surprise, in remarks attributed to him in the press release announcing the deal, Kerik hyped the "milestone event." (Keep in mind: This is the same time that Kerik was using his new pulpit to warn that terrorists were plotting against just about every building in America. Security doors, anyone?)
Even more interesting to me is the way he managed to slip in a none-too-subtle reference to his position as a director of the Street's new glamour stock, Taser. By then, everyone knew about Taser's huge run-up, and Wall Street was positively lousy with companies trying to be "the next Taser." Could Kerik be lucky enough to get in on another moonshot?
Not likely. The door company in question, Georal International, was old news to New Yorkers. And Kerik was one of its few customers, not without controversy. According to Newsday, a 2001 purchase of the doors that occurred under Kerik's watch -- and which was opposed by an officer familiar with the doors because of their high maintenance costs -- nipped the city for $1.5 million. Most of the doors ended up in storage, and the company's president, a man Kerik had reportedly known for years, ended up pleading guilty to bilking the city out of an extra $50,000 in maintenance fees.
Following the trail of the door company sends us further down the rabbit hole. As pointed out in a New York Post article -- and confirmed by SEC filings -- in the summer of 2003, Georal International was the only supplier to yet another penny-stock security firm, The Finx Group, a company that, at the beginning of 2003 had zero cash on its balance sheets, $6,000 in revenues for the prior year, and declared a $5.2 million loss on continuing operations.
On a July 2003 form S-8, one "sales consultant" named Larry Ray is listed among potential sellers in a stock compensation and incentive plan. He held 36.5 million shares and warrants for another 170 million. He had been with the company only four months. If that name rings a bell, it's because this is the same Lawrence Ray who plead guilty in 2001 to that mafia pump-and-dump. It's the same guy who gave Kerik the $17,000 worth of wedding lucre back in 1998. (No wonder the FBI is intrigued.)
Why do you suppose Kerik's old buddy, the admitted stock fraudster, was involved with a company with no sales and mountains of liabilities? Do you suppose there was a chance for a quick score on some kind of security-related stock run-up? You think it's just a coincidence that this outfit was trying to hawk the same doors as Kerik's DTS?
File it all under "Hmmm."
The final tally
I need to stress that none of this motley patchwork points to securities fraud on the part of Bernard Kerik, DTS, or Taser. But the facts seem to be: A one-time buddy of Kerik's just happens to be a mob-affiliated stock cheat. This fellow has also been a major holder of a marginal security company that is directly linked to another marginal security company, DTS. DTS just happens to have signed Kerik to shill its unremarkable wares, with the main potential payoff being stock options. And now Kerik, the board member charged with vetting others for "character" and "acumen," is dropping his own shares of Taser like they're hot coals.
In the end, Kerik seems to have gotten a big goose egg for his "work" for DTS. Although he reportedly told the Feds that he severed his ties with the company back in the spring of 2004, DTS issued a press release describing the breakup on December 15, 2004, only after the press firestorm that resulted from his homeland security nomination. In it, DTS claimed that Kerik had in fact left the firm's advisory board back in August, and that he had returned all his shares and options. There was no explanation for the four-month delay in reporting this key news.
The obvious question is this, "Do I want to invest in a company that has Bernard Kerik on its board?"
But there's an even subtler question that doesn't require moralizing. "Do I want to bet against Bernard Kerik?" Obviously, Kerik has a pretty keen sense of how to network his way to riches. If you want to get rich too, he might seem to be the ideal guy to have on your team.
But I've got news for you. At the rate he's selling, he ain't on your team. He's the opposition, and he was lucky enough to get out before the big meltdown. Do you really want to invest where Kerik won't?
For related Foolishness:
- Taser's rebound stunning, or will it stun you?
- Review Taser's unwanted buzz.
- Is your portfolio issuing a terror alert?
Seth Jayson was once considering becoming a Taser shareholder. No longer. At the time of publication, he had no positions in any company mentioned. View his stock holdings and Fool profile here . Fool rules are here . Taser International is a Motley Fool Rule Breakers pick.