SC 13D/A 1 formsc13d.htm CHAPMAN CAPITAL VTSS SC 13D/A3 06-15-2007 formsc13d.htm
 
 

 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
SCHEDULE 13D
(Amendment No. 3)
 
Under the Securities Exchange Act of 1934
 

 
Vitesse Semiconductor Corporation
(Name of Issuer)
 
Common Stock, $.01 Par Value
(Title of Class of Securities)
 
928497106
(CUSIP Number)     
 
Robert L. Chapman, Jr.
Chapman Capital L.L.C.
222 N. Sepulveda Blvd.
El Segundo, CA 90245
(310) 662-1900
(Name, Address and Telephone Number of Person Authorized to Receive Notices and Communications)
 
June 5, 2007
(Date of Event which Requires Filing of this Statement)
 
If the filing person has previously filed a statement on Schedule 13G to report the acquisition which is the subject of this Schedule 13D, and is filing this schedule because of Rule 13d-1(e), 13d-1(f) or 13d-1(g), check the following box  ¨.
 
Note: Schedules filed in paper format shall include a signed original and five copies of the Schedule, including all exhibits. See Rule 13d-7(b) for other parties to whom copies are to be sent.

*
The remainder of this cover page shall be filled out for a reporting person’s initial filing on this form with respect to the subject class of securities, and for any subsequent amendment containing information which would alter disclosures provided in a prior cover page.
 
The information required on the remainder of this cover page shall not be deemed to be “filed” for the purpose of Section 18 of the Securities Exchange Act of 1934, as amended (“Act”) or otherwise subject to the liabilities of that section of the Act but shall be subject to all other provisions of the Act (however, see the Notes).


 
 
SCHEDULE 13D
 
CUSIP No. 928497106
 
 
 
 
 
  1
 
NAME OF REPORTING PERSON
I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
 
 
 
 
            Chap-Cap Activist Partners Master Fund, Ltd. - 98-0486684
 
 
  2
 
CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (See instructions)
 
 
 
 
(a)  x
 
 
 
 
(b)  ¨
 
 
  3
 
SEC USE ONLY
 
 
 
 
 
 
 
  4
 
SOURCE OF FUNDS (SEE INSTRUCTIONS)
 
 
 
 
 
 
 
            WC
 
 
  5
 
CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) or 2(e)
 
¨
 
 
            Not Applicable
 
 
  6
 
CITIZENSHIP OR PLACE OF ORGANIZATION
 
 
 
 
 
 
 
            Cayman Islands
 
 
NUMBER OF
SHARES
BENEFICIALLY
OWNED BY
EACH
REPORTING
PERSON
WITH
  7  SOLE VOTING POWER
 
                0
  8  SHARED VOTING POWER
 
     6,953,061  Common Shares
  9  SOLE DISPOSITIVE POWER
 
     6,953,061  Common Shares
10  SHARED DISPOSITIVE POWER
 
                0
11
 
AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
 
 
 
 
            6,953,061  Common Shares
 
 
12
 
CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES (SEE INSTRUCTIONS)
 
¨
 
 
 
 
 
13
 
PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
 
 
 
 
 
 
 
            3.1%
 
 
14
 
TYPE OF REPORTING PERSON (SEE INSTRUCTIONS)
 
 
 
 
 
 
 
            CO
 
 

SCHEDULE 13D
 
CUSIP No. 928497106
 
 
 
 
 
  1
 
NAME OF REPORTING PERSON
I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
 
 
 
 
            Chap-Cap Partners II Master Fund, Ltd. - 98-0486687
 
 
  2
 
CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (SEE INSTRUCTIONS)
 
 
 
 
(a)  x
 
 
 
 
(b)  ¨
 
 
  3
 
SEC USE ONLY
 
 
 
 
 
 
 
  4
 
SOURCE OF FUNDS (SEE INSTRUCTIONS)
 
 
 
 
 
 
 
            WC
 
 
  5
 
CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) or 2(e)
 
¨
 
 
            Not Applicable
 
 
  6
 
CITIZENSHIP OR PLACE OF ORGANIZATION
 
 
 
 
 
 
 
            Cayman Islands
 
 
NUMBER OF
SHARES
BENEFICIALLY
OWNED BY
EACH
REPORTING
PERSON
WITH
_______________
  7  SOLE VOTING POWER
 
                0
  8  SHARED VOTING POWER
 
     4,888,720 Common Shares
  9  SOLE DISPOSITIVE POWER
 
      4,888,720 Common Shares
10  SHARED DISPOSITIVE POWER
 
                0
11
 
AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
 
 
 
 
           4,888,720 Common Shares
 
 
12
 
CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES (SEE INSTRUCTIONS)
 
¨
 
 
 
 
 
13
 
PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
 
 
 
 
 
 
 
            2.2%
 
 
14
 
TYPE OF REPORTING PERSON (SEE INSTRUCTIONS)
 
 
 
 
 
 
 
            CO
 
 
 
 

SCHEDULE 13D
 
CUSIP No. 928497106
 
 
 
 
 
  1
 
NAME OF REPORTING PERSON
I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
 
 
 
 
            Chapman Capital L.L.C. - 52-1961967
 
 
  2
 
CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (SEE INSTRUCTIONS)
 
 
 
 
(a)  x
 
 
 
 
(b)  ¨
 
 
  3
 
SEC USE ONLY
 
 
 
 
 
 
 
  4
 
SOURCE OF FUNDS (SEE INSTRUCTIONS)
 
 
 
 
 
 
 
            WC
 
 
  5
 
CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) or 2(e)
 
¨
 
 
            Not Applicable
 
 
  6
 
CITIZENSHIP OR PLACE OF ORGANIZATION
 
 
 
 
 
 
 
            Delaware
 
 
NUMBER OF
SHARES
BENEFICIALLY
OWNED BY
EACH
REPORTING
PERSON
WITH
_______________
  7  SOLE VOTING POWER
 
                0
  8  SHARED VOTING POWER
 
                11,841,781 Common Shares
  9  SOLE DISPOSITIVE POWER
 
                0
10  SHARED DISPOSITIVE POWER
 
                 11,841,781 Common Shares
11
 
AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
 
 
 
 
             11,841,781 Common Shares
 
 
12
 
CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES (SEE INSTRUCTIONS)
 
¨
 
 
 
 
 
13
 
PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
 
 
 
 
 
 
 
           5.3%
 
 
14
 
TYPE OF REPORTING PERSON (SEE INSTRUCTIONS)
 
 
 
 
 
 
 
            IA
 
 
 
 

SCHEDULE 13D
 
CUSIP No. 928497106
 
 
 
 
 
  1
 
NAME OF REPORTING PERSON
I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
 
 
 
 
            Robert L. Chapman, Jr.
 
 
  2
 
CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (SEE INSTRUCTIONS)
 
 
 
 
(a)  x
 
 
 
 
(b)  ¨
 
 
  3
 
SEC USE ONLY
 
 
 
 
 
 
 
  4
 
SOURCE OF FUNDS (SEE INSTRUCTIONS)
 
 
 
 
 
 
 
            Not Applicable
 
 
  5
 
CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) or 2(e)
 
¨
 
 
            Not Applicable
 
 
  6
 
CITIZENSHIP OR PLACE OF ORGANIZATION
 
 
 
 
 
 
 
            United States
 
 
NUMBER OF
SHARES
BENEFICIALLY
OWNED BY
EACH
REPORTING
PERSON
WITH
_______________
  7  SOLE VOTING POWER
 
                0
  8  SHARED VOTING POWER
 
                11,841,781 Common Shares
  9  SOLE DISPOSITIVE POWER
 
                0
10  SHARED DISPOSITIVE POWER
 
                11,841,781 Common Shares
11
 
AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
 
 
 
 
             11,841,781 Common Shares
 
 
12
 
CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES (SEE INSTRUCTIONS)
 
¨
 
 
 
 
 
13
 
PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
 
 
 
 
 
 
 
            5.3%
 
 
14
 
TYPE OF REPORTING PERSON (SEE INSTRUCTIONS)
 
 
 
 
 
 
 
            IN
 
 

 
INTRODUCTION
 
This Schedule 13D Amendment ("13D Amendment #3") amends the original Schedule 13D filed July 7, 2006 (the "Original 13D") and all subsequent amendments thereto (collectively, the "13D Filings"), and is being filed on behalf of Chap-Cap Partners II Master Fund, Ltd., and Chap-Cap Activist Partners Master Fund, Ltd., Cayman Islands exempted companies (collectively, "the Funds"), Chapman Capital L.L.C., a Delaware limited liability company ("Chapman Capital"), and Robert L. Chapman, Jr., an individual ("Mr. Chapman" and, together with the Funds and Chapman Capital, the "Reporting Persons"). The 13D Filings relate to the common stock, $.01 par value per share, of Vitesse Semiconductor Corporation, a Delaware corporation (the “Issuer” or "Company").  Unless the context otherwise requires, references herein to the "Common Stock" are to such common stock of the Company. Chapman Capital is the investment manager and adviser to the Funds. The Funds directly own the Common Stock to which the 13D Filings relate and over which Chapman Capital may be deemed to have control by virtue of the authority granted by the Funds to vote and to dispose of securities held by the Funds, including the Common Stock. Except as set forth herein, the Original 13D filing is unmodified.

ITEM 1. Security and Issuer
 
The 13D Filings relate to the Common Stock of the Company.  The address of the principal executive offices of the Company is 741 Calle Plano, Camarillo, CA 93012.
 
ITEM 2. Identity and Background
 
(a)   This statement is being filed by the Reporting Persons.

(b)   The address of the principal business and principal office of the Funds, Chapman Capital and Mr. Chapman is Pacific Corporate Towers, 222 N. Sepulveda Blvd., El Segundo, California 90245.

(c)   The Fund’s present principal business is investing in marketable securities.  Chapman Capital's present principal business is serving as the Investment Manager of the Funds.  Mr. Chapman's principal occupation is serving as Managing Member of Chapman Capital.

(d)   None of the Reporting Persons, nor, to the best of their knowledge, any of their directors, executive officers, general partners or members has, during the last five years, been convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors).

(e)   None of the Reporting Persons, nor, to the best of their knowledge, any of their directors, executive officers, general partners or members has, during the last five years, been a party to a civil proceeding of a judicial or administrative body of competent jurisdiction and as a result of such proceeding was or is subject to a judgment, decree or final order enjoining future violations of, or prohibiting or mandating activities subject to, federal or state securities laws or finding any violation with respect to such laws.

(f)   Mr. Chapman is a citizen of the United States.
 

 ITEM 3. Source and Amount of Funds or Other Consideration
 
The total amount of funds used by Chap-Cap Partners II Master Fund, Ltd., to purchase the 4,888,720 Common Shares reported hereunder was $5,295,033 (including brokerage commissions).  All of such funds were derived from working capital.
 
The total amount of funds used by Chap-Cap Activist Partners Master Fund, Ltd., to purchase the 6,953,061 Common Shares reported hereunder was $7,340,665 (including brokerage commissions).  All of such funds were derived from working capital.
 
 ITEM 4. Purpose of Transaction
 
The purpose of the acquisition of the securities of the Issuer beneficially owned by The Funds was to acquire such securities in the ordinary course of their trade or business of purchasing, selling, trading and investing in securities.
 
The Reporting Persons may in the future consider a variety of different alternatives to achieving their goal of maximizing shareholder value, including negotiated transactions, tender offers, proxy contests, consent solicitations, or other actions.  However, it should not be assumed that such members will take any of the foregoing actions. The members of the Reporting Persons reserve the right to participate, alone or with others, in plans, proposals or transactions of a similar or different nature with respect to the Issuer.
 
The Reporting Persons intend to review their investment in the Issuer on a continuing basis and, depending on various factors, including the Issuer's business, affairs and financial position, other developments concerning the Issuer, the price level of the Common Stock, conditions in the securities markets and general economic and industry conditions, as well as other investment opportunities available to them, may in the future take such actions with respect to their investment in the Issuer as they deem appropriate in light of the circumstances existing from time to time.  Such actions may include, without limitation, the purchase of additional shares of Common Stock in the open market, in block trades, or in privately negotiated transactions or otherwise, the sale at any time of all or a portion of the Common Stock now owned or hereafter acquired by them to one or more purchasers, the purchase or sale of Common Stock derivatives, or the distribution in kind at any time of all or a portion of the Common Stock now owned or hereafter acquired by them.  The reasons for the Reporting Persons’ past or prospective increase or decrease in hedged or unhedged exposure to Common Stock now or once owned, or hereinafter acquired, may include, without limitation, the implementation of risk management procedures that involve the purchase or sale of Common Stock into depreciating or appreciating market conditions.  Parties that purchase or sell Common Stock (or derivatives thereof) following the filing of the 13D Filings may be purchasing or selling Common Stock (or derivatives thereof) that is being sold or acquired by the Reporting Persons, respectively.
 
The Reporting Persons are engaged in the investment business.  In pursuing this business, Chapman Capital personnel analyze the operations, capital structure and markets of companies, including the Issuer, through analysis of documentation and discussions with knowledgeable industry and market observers and with representatives of such companies (often at the invitation of management).  From time to time, Chapman Capital may hold discussions with third parties or with management of such companies in which the Reporting Person may suggest or take a position with respect to potential changes in the operations, management or capital structure of such companies as a means of enhancing shareholder value.  Such suggestions or positions may relate to one or more of the transactions specified in clauses (a) through (j) of Item 4 of Schedule 13D under the Exchange Act, including, without limitation, such matters as disposing of or selling all or a portion of the Issuer or acquiring another Company or business, changing operating or marketing strategies, adopting or not adopting certain types of anti-takeover measures and restructuring the company's capitalization or dividend policy.
 

    
On July 7, 2006, Mr. Chapman sent a critical letter to Mr. John C. Lewis, Chairman and the Board of Directors of the Issuer.  The correspondence, dated July 7, 2006, was attached as Exhibit B to the Original Schedule 13D.  From July 2006 through the present time, Mr. Chapman and other employees of Chapman Capital have communicated to the Issuer's Chief Executive Officer Christopher Gardner, Chief Financial Officer Shawn Hassel, and Board of Directors the Reporting Persons’ views regarding Vitesse’s prospective financial restatement, governance remediation, and M&A participation.
 
On November 29 and 30, 2006, Chapman Capital communicated to Mr. Edward J. Rogas, Jr., head of the Special Committee of the Issuer, the Reporting Persons intention to commence a proxy solicitation to replace the Issuer’s Board of Directors should Issuer director James A. Cole not voluntarily resign his board seat.
 
On December 6, 2006, Chapman Capital issued a press release demanding resignation of Issuer's Director, James A. Cole. This press release is attached hereto as Exhibit B.
 
On December 12, 2006, Mr. Chapman was informed that the Issuer's Board of Directors had determined to replace Mr. Hassel as Chief Financial Officer, an action that Chapman Capital had advocated for several months following Mr. Hassel's failure to make demonstrable progress in completing the Issuer's financial restatements.  Mr. Chapman recommended to the Issuer that should Mr. Hassel be offered an alternative position (following the termination of his employment as Chief Financial Officer), the scope of and compensation for such assignment be limited.  Furthermore, Mr. Chapman recommended that Alvarez and Marsal, Mr. Hassel's temporary placement agent, not be utilized in any future capacity given the apparent imbalance between the firm's price and performance.
 
Based on the increased percentage of the Funds' capital being invested in semiconductor-related equities, the Reporting Persons determined it prudent to reduce their long semiconductor sector exposure via sales of Common Stock.  In addition, the Reporting Persons reduced their combined ownership position in the Issuer below the 5% threshold in order to relieve themselves of certain reporting requirements associated with Section 13D of the Securities Exchange Act of 1934.
 
On March 5, 2007, Mr. Chapman left a voicemail for Mr. Rogas requesting a call back immediately.
 
On April 19, 2007, Mr. Chapman left a voicemail for Mr. Gardner regarding Chapman Capital's 13D filing.
 
On April 20, 2007, Mr. Chapman left a voicemail for Mr. Gardner expressing his disappointment in Mr. Gardner's lack of responsiveness.
 
On May 17, 2007, Mr. Chapman telephoned Mr. Gardner regarding the Issuer’s owners’ demands for remediation to the Issuer’s flawed corporate governance policies.
 
On May 29, 2007, Mr. Chapman telephoned Mr. Gardner to discuss adding a “shareholders’ representative” to Issuer's Board, in addition to obtaining the resignation of Director James A. Cole. Mr. Gardner informed Mr. Chapman that Issuer Chairman Edward Rogas, who would need to participate in such a discussion, was on vacation and could not be reached as he had not left an itinerary. Mr. Gardner offered to have a "meeting" with Mr. Chapman and Mr. Rogas over the phone.  However, Mr. Chapman informed Mr. Gardner that Mr. Chapman had no interest in such a meeting without having a resolution to the corporate governance matter to consider.  Mr. Gardner explained that Mr. Gardner felt he had been given insufficient time to effect Chapman Capital’s demands. Mr. Chapman responded that Mr. Gardner and the balance of the Issuer’s Board had been blessed with six months since Chapman Capital’s most recent December 2006 Schedule 13D filing that made similar demands following Mr. Gardner’s assurances that improvements to the Board would be made during the Fall of 2006.
 
On June 1, 2007, Mr. Chapman telephoned Mr. Rogas demanding immediate action toward Board reconstitution, scheduling of an annual stockholder meeting, and issuance of long overdue audited financial statements.  Mr. Rogas claimed that a) the Issuer, according to the SEC, cannot hold an annual meeting or mail required attendant proxy statement unless a shareholder ‘pushes Vitesse’ with a request for an annual meeting; and b) director candidates identified by Elm Ridge Capital Management, LLC, the advisor to the largest ownership block of the Issuer, were not able to explain satisfactorily to Mr. Rogas the reason for their interest in Issuer Board membership, “never followed up,” just wanted the fees,” and “[he] was so bored with them.”  Mr. Chapman criticized Mr. Rogas for a) not reporting to the SEC Chapman Capital’s repeated past demands for an annual meeting and b) not following up with the candidates himself, to which Mr. Rogas responded, “I’m tired of this bullshit!”  Mr. Chapman then recommended the simple solution of Mr. Rogas's resignation from the Board.  The telephone conversation terminated abruptly soon thereafter.
 
On June 15, 2007, Chapman Capital issued a press release demanding that Vitesse Semiconductor hold an annual meeting.  This press release is attached hereto as Exhibit G.
 
Except as set forth above, the Reporting Persons do not have any present plans or proposals that relate to or would result in any of the actions required to be described in Item 4 of Schedule 13D.  Each of such members may, at any time, review or reconsider its position with respect to the Issuer and formulate plans or proposals with respect to any of such matters.

 
 ITEM 5. Interests in Securities of the Company
 
(a)   Together, the Reporting Persons beneficially own a total of 11,841,781 shares of Common Stock constituting 5.3% of all of the outstanding shares of Common Stock.
 
(b)   The Reporting Persons have the shared power to vote or direct the vote of, and to dispose or direct the disposition of, the shares of Common Stock beneficially owned by them.
 
(c)   The following transactions were effected by the Reporting Persons during the past sixty (60) days:
 
Chap-Cap Partners II Master Fund, Ltd.
 
Date
Security
Amount of Shares/Contracts
 Bought/(Sold)
Approximate Price per Shares/Contracts
 (inclusive of commissions)
04/17/07
CS
51,300
 $  1.04
04/19/07
CS
103,800
 $  1.10
04/19/07
CS
15,700
 $  1.10
04/20/07
CS
8,700
 $  1.17
04/20/07
CS
99,100
 $  1.16
04/23/07
CS
9,534
 $  1.14
04/23/07
CS
35,000
 $  1.14
04/25/07
CS
49,000
 $  1.16
04/26/07
CS
11,133
 $  1.16
04/26/07
CS
17,500
 $  1.15
04/26/07
CS
96,200
 $  1.16
04/27/07
CS
2,000
 $  1.15
04/30/07
CS
20,000
 $  1.16
04/30/07
CS
6,000
 $  1.16
05/01/07
CS
3,700
 $  1.15
05/01/07
CS
2,609
 $  1.16
05/01/07
CS
37,500
 $  1.16
05/02/07
CS
38,500
 $  1.18
05/02/07
CS
4,000
 $  1.18
05/09/07
CS
20,000
 $  1.17
05/10/07
CS
40,200
 $  1.16
05/10/07
CS
73,800
 $  1.15
05/11/07
CS
87,000
 $  1.15
05/14/07
CS
87,100
 $  1.15
05/15/07
CS
77,400
 $  1.17
05/15/07
CS
46,000
 $  1.17
05/15/07
CS
24,600
 $  1.17
05/16/07
CS
24,500
 $  1.18
05/16/07
CS
1,300
 $  1.18
05/16/07
CS
80,200
 $  1.17
05/16/07
CS
24,500
 $  1.18
05/17/07
CS
90,000
 $  1.18
05/17/07
CS
168,300
 $  1.18
05/18/07
CS
135,000
 $  1.18
05/18/07
CS
27,000
 $  1.17
05/18/07
CS
164,500
 $  1.17
05/21/07
CS
61,900
 $  1.19
05/21/07
CS
3,500
 $  1.18
05/22/07
CS
10,800
 $  1.21
05/23/07
CS
12,200
 $  1.23
05/23/07
CS
19,600
 $  1.20
05/23/07
CS
21,800
 $  1.20
05/24/07
CS
155,100
 $  1.19
05/25/07
CS
43,200
 $  1.18
05/25/07
CS
58,800
 $  1.19
05/29/07
CS
49,100
 $  1.18
05/29/07
CS
46,800
 $  1.17
05/30/07
CS
41,600
 $  1.17
05/30/07
CS
14,200
 $  1.16
05/31/07
CS
75
 $  1.16
05/31/07
CS
9,800
 $  1.16
05/31/07
CS
19,700
 $  1.16
06/01/07
CS
73,200
 $  1.17
06/01/07
CS
25,740
 $  1.16
06/05/07
CS
24,400
 $  1.19
06/05/07
CS
42,400
 $  1.19
06/06/07
CS
17,100
 $  1.18
06/06/07
CS
9,400
 $  1.18
06/06/07
CS
26,900
 $  1.18
06/07/07
CS
27,000
 $  1.19
06/07/07
CS
4,900
 $  1.19
06/08/07
CS
9,000
 $  1.19
06/08/07
CS
85,000
 $  1.19
06/11/07
CS
18,000
 $  1.19
06/11/07
CS
4,700
 $  1.17
06/11/07
CS
45,000
 $  1.19
06/12/07
CS
81,900
 $  1.18
06/13/07
CS
19,500
 $  1.18
06/13/07
CS
26,400
 $  1.19
06/14/07
CS
9,700
 $  1.18
06/14/07
CS
24,300
 $  1.18
06/14/07
CS
34,600
 $  1.18


Chap-Cap Activist Partners Master Fund, Ltd.
 
Date
Security
Amount of Shares/Contracts
 Bought/(Sold)
Approximate Price per Shares/Contracts
 (inclusive of commissions)
04/17/07
CS
48,700
 $  1.04
04/19/07
CS
192,800
 $  1.10
04/19/07
CS
29,300
 $  1.10
04/20/07
CS
16,300
 $  1.17
04/20/07
CS
184,000
 $  1.17
04/23/07
CS
17,700
 $  1.14
04/23/07
CS
65,000
 $  1.14
04/25/07
CS
91,000
 $  1.16
04/26/07
CS
20,800
 $  1.16
04/26/07
CS
32,500
 $  1.15
04/26/07
CS
178,800
 $  1.16
04/27/07
CS
3,000
 $  1.15
04/30/07
CS
80,000
 $  1.16
04/30/07
CS
24,000
 $  1.16
05/01/07
CS
11,300
 $  1.15
05/01/07
CS
7,900
 $  1.16
05/01/07
CS
112,500
 $  1.16
05/02/07
CS
71,500
 $  1.18
05/02/07
CS
12,000
 $  1.18
05/09/07
CS
80,000
 $  1.17
05/10/07
CS
74,800
 $  1.16
05/10/07
CS
137,200
 $  1.15
05/11/07
CS
89,750
 $  1.15
05/14/07
CS
90,400
 $  1.15
05/15/07
CS
80,000
 $  1.17
05/15/07
CS
47,500
 $  1.16
05/15/07
CS
25,400
 $  1.17
05/16/07
CS
25,500
 $  1.18
05/16/07
CS
1,300
 $  1.18
05/16/07
CS
83,500
 $  1.17
05/16/07
CS
25,500
 $  1.18
05/17/07
CS
10,000
 $  1.18
05/17/07
CS
18,700
 $  1.18
05/18/07
CS
15,000
 $  1.18
05/18/07
CS
3,000
 $  1.17
05/18/07
CS
18,300
 $  1.17
05/21/07
CS
64,100
 $  1.19
05/21/07
CS
3,600
 $  1.18
05/22/07
CS
11,200
 $  1.21
05/23/07
CS
12,800
 $  1.23
05/23/07
CS
20,400
 $  1.20
05/23/07
CS
22,800
 $  1.20
05/24/07
CS
161,574
 $  1.19
05/25/07
CS
44,678
 $  1.18
05/25/07
CS
61,200
 $  1.19
05/29/07
CS
50,900
 $  1.18
05/29/07
CS
48,600
 $  1.17
05/30/07
CS
43,500
 $  1.16
05/30/07
CS
14,800
 $  1.16
05/31/07
CS
75
 $  1.16
05/31/07
CS
10,200
 $  1.16
05/31/07
CS
20,700
 $  1.16
06/01/07
CS
76,800
 $  1.17
06/01/07
CS
25,740
 $  1.16
06/05/07
CS
25,600
 $  1.19
06/05/07
CS
44,500
 $  1.18
06/06/07
CS
17,900
 $  1.18
06/06/07
CS
9,800
 $  1.18
06/06/07
CS
28,100
 $  1.18
06/07/07
CS
28,600
 $  1.19
06/07/07
CS
5,100
 $  1.19
06/08/07
CS
1,000
 $  1.19
06/08/07
CS
9,400
 $  1.19
06/11/07
CS
2,000
 $  1.19
06/11/07
CS
500
 $  1.17
06/11/07
CS
5,000
 $  1.19
06/12/07
CS
9,100
 $  1.18
06/13/07
CS
20,500
 $  1.18
06/13/07
CS
27,600
 $  1.19
06/14/07
CS
10,300
 $  1.18
06/14/07
CS
25,700
 $  1.18
06/14/07
CS
36,500
 $  1.17
 
* CS = Common Shares, C = Calls, P = Puts
** A = Assigned, E = Exercised
 
The above transactions were effected by the Reporting Persons on the Pink Sheets.
 
Except as set forth above, during the last sixty days there were no transactions in the Common Stock effected by the Reporting Persons, nor, to the best of their knowledge, any of their directors, executive officers, general partners or members.

(d)   Except as set forth in this Item 5, no person is known to have the right to receive or the power to direct the receipt of dividends from, or the proceeds from the sale of, the shares of Common Stock beneficially owned by the Reporting Persons.

(e)   Not applicable.
 

 ITEM 6. Contracts, Arrangements, Understandings or Relationships with Respect to Securities of the Company
 
Not applicable.
 
ITEM 7. Material to be Filed as Exhibits
 
 
Exhibit A
 
Joint Filing Agreement, dated July 7, 2006, among Chap-Cap Partners II Master Fund, Ltd., Chap-Cap Activist Partners Master Fund, Ltd., Chapman Capital L.L.C., and Robert L. Chapman, Jr.
Exhibit B   Press release from Chapman Capital demanding resignation of Issuer's Director, James A. Cole. Press Release dated December 6, 2006, is attached hereto as Exhibit B.
Exhibit C
 
Letter from Robert L. Chapman, Jr., as Managing Member of Chapman Capital L.L.C., to Mr. John C. Lewis and Mr. Edward J. Rogas, Jr., Chairman and Director respectively of the Board of Directors of the Issuer. The correspondence, dated December 6, 2006, is attached hereto as Exhibit C.
Exhibit D
 
Correspondences from Mr. Chapman to Issuer's management including Mr. Edward J. Rogas, Jr., Chairman of the Issuer, Mr. Christopher R. Gardner, CEO of the Issuer, and Shawn C. Hassel, CFO of Issuer.
Exhibit E
 
Press release from Chapman Capital demanding that Vitesse Semiconductor hold an annual meeting. Press Release dated June 15, 2007, is attached hereto as Exhibit G.


 

 SIGNATURES
 
After reasonable inquiry and to the best of our knowledge and belief, we certify that the information set forth in this statement is true, complete and correct.
 
Dated: June 15, 2007
Chap-Cap Partners II Master Fund, Ltd.
 
By: Chapman Capital L.L.C.,
 
as Investment Manager
 
 
 
By:
/s/ Robert L. Chapman, Jr.
 
 
 
 
Name: Robert L. Chapman, Jr.
 
 
Title: Managing Member
 
 
 
 
Dated: June 15, 2007
Chap-Cap Activist Partners Master Fund, Ltd.
 
By: Chapman Capital L.L.C.,
 
as Investment Manager
 
 
 
By:
/s/ Robert L. Chapman, Jr.
 
 
 
 
Name: Robert L. Chapman, Jr.
 
 
Title: Managing Member
 
 
 
 
Dated: June 15, 2007
CHAPMAN CAPITAL L.L.C.
 
 
 
By:
/s/ Robert L. Chapman, Jr.
 
 
 
 
Name: Robert L. Chapman, Jr.
 
 
Title: Managing Member
 
 
Dated: June 15, 2007
/s/ Robert L. Chapman, Jr.
 
 
 
 Robert L. Chapman, Jr.
 

 

JOINT FILING AGREEMENT

The undersigned hereby agree that the statement on Schedule 13D with respect to the Common Stock of Vitesse Semiconductor Corporation. dated July 7, 2006, and any further amendments thereto signed by each of the undersigned, shall be filed on behalf of each of the undersigned pursuant to and in accordance with the provisions of Rule 13d-1(f) under the Securities Exchange Act of 1934, as amended.

Dated: July 7, 2006

 
CHAP-CAP PARTNERS II MASTER FUND, LTD.
 
By: Chapman Capital L.L.C.,
 
as Investment Manager
 
 
 
 
 
 
 
By:
/s/Robert L. Chapman, Jr.
 
 
 
 
Robert L. Chapman, Jr.
 
 
Managing Member
 
 
 
 
 
 
 
CHAP-CAP ACTIVIST PARTNERS MASTER FUND, LTD.
 
By: Chapman Capital L.L.C.,
 
as Investment Manager
 
 
 
 
 
 
 
By:
/s/Robert L. Chapman, Jr.
 
 
 
 
Robert L. Chapman, Jr.
 
 
Managing Member
 
 
 
 
 
 
 
CHAPMAN CAPITAL L.L.C.
 
 
 
 
 
 
 
By:
/s/Robert L. Chapman, Jr.
 
 
 
 
Robert L. Chapman, Jr.
 
 
Managing Member
 
 
 
 
 
 
 
/s/Robert L. Chapman, Jr.
 
 
 
Robert L. Chapman, Jr.
 
 

Exhibit B
 
[CHAPMAN CAPITAL L.L.C. LOGO]
 
PRESS RELEASE

CHAPMAN CAPITAL DEMANDS RESIGNATION OF VITESSE SEMICONDUCTOR CORPORATION DIRECTOR JAMES A. COLE
 
LOS ANGELES, CA. - DECEMBER 6, 2006 ... Chapman Capital L.L.C. today announced that it has filed an amended Schedule 13D with the United States Securities and Exchange Commission demanding the resignation of Camarillo, CA based Vitesse Semiconductor Corporation (Fmr. NASDAQ: VTSS) director James A. Cole, co-founder and General Partner of Windward Ventures, L.P. (http://www.windwardventures.com).
 
Robert L. Chapman, Jr., Managing Member of Chapman Capital L.L.C., commented, “Having conducted its own investigation of the Compensation Committee that seems to have approved the issuance of backdated stock options to former senior executives of Vitesse, Chapman Capital has followed a trail of circumstantial evidence and now finds itself on the doorstep of 20-year Vitesse director and Compensation/Audit Committees member Jim Cole.  Clearly, we are not alone in forming our opinion, with the majority of callers who spoke on Vitesse’s fourth fiscal quarter conference call referencing Mr. Cole’s prospective resignation from the Board.  Moreover, should the Vitesse Special Committee headed by former Teradyne senior executive Edward Rogas, Jr. have accumulated evidence that exposes Mr. Cole as having committed or been illicitly complicit in any criminal act, Chapman Capital demands that such information be turned over to federal authorities so that Mr. Cole may serve any prison sentence that may be dictated by the laws regulating such professional deportment.”
 
Chapman Capital L.L.C. is a Los Angeles, CA based investment advisor focusing on takeover and turnaround investing.  The firm currently manages over $300 million as the registered investment advisor to Chap-Cap Partners II Master Fund, Ltd. and Chap-Cap Activist Partners Master Fund, Ltd., the combined owners of over 5% of Vitesse Corporation common shares.  Over the past ten years, Chapman Capital has agitated successfully for the restructuring or sale of over seventeen publicly-traded companies.  Mr. Chapman previously was employed by Goldman Sachs & Co., Scudder Stephens, & Clark, and NatWest Bank USA. Interested parties should contact Mr. John Matthews at (310) 662-1900 and refer to http://www.hedgefunds.com or http://www.chapmancapital.com.
 
Vitesse Semiconductor Corporation designs, develops and markets a diverse portfolio of high-performance, cost-competitive semiconductor solutions for communications and storage networks worldwide. Engineering excellence and dedicated customer service distinguish Vitesse as an industry leader in Gigabit Ethernet LAN, Ethernet-over-SONET, Advanced Switching, Fibre Channel, Serial Attached SCSI (SAS), Optical Transport and other applications. Vitesse innovation empowers customers to deliver superior products for Enterprise, Access, Metro and Core applications. Vitesse news releases, as well as additional information on the Company, can be found at http://www.vitesse.com
 
CONTACT:
John K. Matthews
Phone: (310) 662-1900 x 102
E-Mail: matthews@chapcap.com
 

 
Exhibit C
 
[CHAPMAN CAPITAL L.L.C. LOGO]
 
Robert L. Chapman, Jr.
Managing Member
 
December 6, 2006

Mr. John C. Lewis
Mr. Edward Rogas, Jr. (65; 2000)
Chairman, Vitesse (~ 0.1% owner1)
Director, Vitesse (~ 0% owner2)
17616 Eaton Lane
1351 Blue Sail Circle
Monte Sereno, CA 95030
Westlake Village, CA 913361 
Director, Pinnacle Systems Inc.
Fmr. SVP, Teradyne, Inc.
Director, Cypress Semiconductor
Fmr. Dir. Unit Instruments, Inc.
Fmr. Ch./CEO/Pres., Amdahl Corp.
Fmr. Dir. Autoclave Engineers Inc.
Office: (408) 354-4328
Office: (805) 379-9822
Facsimile: (805) 987-5896
E-mail: edrogas@aol.com 
 
Via U.S. Postal Service & United Parcel Service
 
Messrs. Lewis and Rogas:

Chap-Cap Partners II and Chap-Cap Activist Partners (the “Chap-Cap Funds”), advised by Chapman Capital L.L.C., continue to own the largest reported stake3 in Vitesse Semiconductor Corporation (hereinafter, “Vitesse”, or the “Company”). Having filed its original Schedule 13D with the United States Securities and Exchange Commission some five months ago, Chapman Capital has been uncharacteristically patient in awaiting decisive actions by Vitesse’s Board of Directors (hereinafter, the “Board”) to rectify accounting, corporate governance, and legal besetments. Since July 2006, Chapman Capital has conveyed telephonically and via E-mail (see attached compilation of the latter) its recommendations regarding Vitesse’s prospective financial restatement, governance remediation, and M&A participation (as a target vs. acquirer) to Vitesse CEO Christopher Gardner, Tennenbaum-contracting CFO Shawn Hassel, and the Board via Mr. Edward Rogas, Jr. However, despite thus far paying Alvarez & Marsal over $150,000/month4 plus 150,000 stock warrants (for in-sourced CFO Hassel), Vitesse continues with neither restated financials nor a reconfigured board of directors, and remains un-attached via a premium change of control (as compared to competitor Agere Systems, Inc., which has announced it will be acquired by LSI Logic Corporation).
______________________
1John C. Lewis ownership stake: 115,000 shares per Vitesse 2006 Proxy Statement dated December 19, 2005. Total outstanding share count of 219,882,044 as of November 30, 2005.
2 Edward Rogas, Jr. ownership stake: unmentioned in Vitesse 2006 Proxy Statement, in which Mr. Rogas is first nominated to the Board.
3 Source: Form 13-F filings for period ending September 30, 2006.
4 Source: Form 8-K filed October 5, 2006; Alvarez & Marsal, LLC, since April 27, 2006, has been paid $90,000 per month, plus $300,000 with respect to the financing from Tennenbaum Capital Partners, LLC, plus $150,000 upon the setting of terms for the settlement of a dispute with holders of the Company’s 1.5% Convertible Subordinated Debentures due 2024; Amkor Technology, Inc., a semiconductor industry participant with a $1.8 billion market capitalization and similar options backdating issues and related debt renegotiations, last reported paying its CFO $293,000 in annual compensation.
 

 
Chapman Capital’s public face of quietude has not been motivated by altruism, but instead its desire to allow - without any public dissent - Messrs. Gardner and Hassel to confirm Vitesse’s health to the Company’s outstanding customers, suppliers, and employees. Consequently, it is our understanding that Vitesse has suffered not a single customer loss, and has celebrated several key design wins, including a notable deal in Serial Attached SCSI (SAS) announced with the Hewlett-Packard Company just this week. Following last month’s release and discussion of Vitesse’s encouraging fourth fiscal quarter 2006 financial metrics, and positive channel checks that Vitesse’s customers and suppliers remain increasingly comfortable with the Company as business counterparty, Chapman Capital feels sufficient stabilization has been attained to allow it to move forward with share maximizing efforts.
 
In order for any public company to transcend the turmoil created by past corporate transgressions, those individuals involved in any illegal or otherwise deviant acts must be removed from any association with the Company. Although the employments of former Vitesse CEO Lou Tomasetta, EVP/Finance Gene Hovenac and CFO Yatin Mody have been terminated, perplexingly Mr. Tomasetta remains a member of the Company’s Board of Directors. However, it appears that his continued Board membership is not the one most disconcerting to Vitesse’s owners. Having conducted its own investigation of the Compensation Committee that seems to have approved the issuance of backdated stock options to former senior executives of Vitesse, Chapman Capital has followed a trail of circumstantial evidence and now finds itself on the doorstep of 20-year Vitesse director Mr. James A. Cole, founder and General Partner of Windward Ventures, L.P. As a senior member of the a) Compensation and b) Audit Committees, and nonsensically c) the Chairman of the Nominating and Corporate Governance Committee, Mr. Cole serves on or chairs all three committees directly responsible for preventing a) the alleged options backdating, b) false revenue recognition, and c) lax corporate oversight actions (or inactions) that appear to have put Vitesse in its currently compromised position.  
 
Based on public outcry from a multitude of Vitesse’ owners, Chapman Capital is not alone in forming its opinion that Mr. Cole’s resignation from Vitesse’s Board is long overdue. No less than a majority of callers who spoke on Vitesse’s fourth fiscal quarter conference call held on November 6, 2006, referenced Mr. Cole’s prospective resignation from the Board. Fortunately, it is our understanding that the Vitesse special committee (the “Special Committee”) headed by former Teradyne senior executive Edward Rogas, Jr. belatedly has completed Vitesse’s resource-depleting investigation, including reviewing potentially complicit actions and negligent inactions of all members of the Compensation and Audit Committees. Should the Special Committee have accumulated evidence that exposes Mr. Cole as having committed, or been illicitly complicit in, any criminal act, Chapman Capital demands that such information be turned over to federal authorities so that Mr. Cole may serve any possible prison sentence that may be dictated by the laws regulating such professional deportment.
 
The volume of disconcerting data we have accumulated regarding Mr. Cole’s interesting professional background may overwhelm any reviewer thereof. Should Chapman Capital be forced to take further actions to remove Mr. Cole, it intends to make full disclosure of the results of that investigation. Until such time, I present herein certain troubling items related to Mr. Cole’s dossier for your consideration:
 
1)  
Cole Committee Membership or Chairmanship of Three Crippling Groups: Mr. Cole served on the Compensation Committee that allegedly issued backdated stock options, served on the Audit Committee that allegedly signed off on potentially misstated audited financials, and chaired the Nominating and Corporate Governance Committee that seems to have allowed corporate oversight to run terribly awry.
 
2)  
Cole Personal Relationship with Mr. Tomasetta and Hovenac: Mr. Cole, according to detailed background information provided by a variety of parties who have contacted Chapman Capital, enjoyed a close (and thus potentially compromising) personal relationship with Mr. Tomasetta (and reportedly with Mr. Hovenac), in our view making suspect his options-granting actions and inactions as a member of the Compensation Committee.
 

3)  
Cole Potential Conflicts of Interest between Mr. Tomasetta and Vitesse: Mr. Cole and Mr. Tomasetta shared a potentially-conflicting business relationship outside of Mr. Cole’s fiduciary duty of oversight of Mr. Tomasetta as CEO of Vitesse, evidenced by Mr. Tomasetta serving with Mr. Cole on the board of directors of at least one Windward Ventures’ portfolio company, Troika Networks, Inc.5 Chapman Capital, amongst other significant owners of Vitesse, finds it a dubious proposition that Vitesse director Cole, properly and without conflict, could oversee, reward and discipline Mr. Tomasetta while the latter served as a director himself of a private company in which Mr. Cole, via Windward Ventures, had a sizable financial and voting interest.
 
4)  
Cole Potential Conflicts of Interest between Mr. Hovenac and Vitesse: Mr. Cole and Mr. Hovenac shared a potentially-conflicting business relationship outside of Mr. Cole’s fiduciary duty of oversight of Mr. Hovenac as EVP of Vitesse, evidenced by their co-defendant status in litigation involving privately held KOR Electronics (Superior Court of California, County of Orange - Case No. 06CC07881)6. Chapman Capital, amongst other significant owners of Vitesse, finds it a dubious proposition that Vitesse director Cole, properly and without conflict, could oversee, reward and discipline Mr. Hovenac while the latter served as a director himself of a private company in which Mr. Cole, via Spectra Enterprise Associates, L.P., had a sizable financial and voting interest.
 
Chapman Capital believes that Messrs. Tomasetta and Cole are perpetuating their tenures on the Vitesse Board of Directors merely out of self serving (i.e., non-fiduciary) personal risk management. With ongoing investigations into whether both individuals either a) committed, b) were complicit in, or c) were negligent to prevent illegal or otherwise improper corporate acts, we believe their refusal to quit their residual affiliations with Vitesse is driven by the circumstance that this very Board essentially has been charged with policing itself. However illegitimate their directorships may be, Chapman Capital believes that Messrs. Tomasetta and Cole have ulterior (non-fiduciary) motives to keep their “sheriff badges” pinned onto their pinstriped lapels, and as such do not appear willing to resign on their own volition. On behalf of Vitesse’s entire ownership base, Chapman Capital demands that Mr. Lewis, as Chairman of the Board, immediately take actions to call a Special Meeting of shareholders to remove Messrs. Tomasetta and Cole from the Board. I have little doubt that requisite votes shall be tallied in support of such a referendum.
 
Sincerely,

/s/ Robert L. Chapman, Jr.
Robert L. Chapman, Jr.
 
 
 
______________________
5 Internet link for supporting evidence: http://64.233.161.104/search?q=cache:lH9FcfBVbrMJ:www.larta.org/lavox/articlelinks/2004/040712_rizzone.asp+windward+ventures+tomasetta&hl=en&gl=us&ct=clnk&cd=1.
6 Source: http://www.korlitigation.com/Complaint.pdf 
 
 


Exhibit D
From: Robert L. Chapman, Jr.
Sent: Tuesday, November 21, 2006 8:32 AM
To: 'Edward Rogas Jr. (edrogas@aol.com)'
Cc: 'Christopher R. Gardner (crg@vitesse.com)'; 'Shawn C. A. Hassel (shassel@alvarezandmarsal.com)'
Subject: Chapman Capital Activism: Vitesse Semiconductor (VTSS): Trident Microsystems Example

November 21, 2006

Mr. Edward J. Rogas, Jr.
1351 Blue Sail Circle
Westlake Village, CA 913361
Office: (805) 379-9822
E-mail: edrogas@aol.com

On November 16, 2006, I transmitted the attached correspondence to you as head of the Vitesse Semiconductor Corporation (hereinafter, “Vitesse” or “the Company”) Special Committee, CEO Christopher Gardner and CFO Shawn Hassel. Such correspondence reiterated Chapman Capital’s unwillingness to accept the long overdue completion of at least a preliminary report regarding the stock options backdating issues plaguing Vitesse and its market valuation. As I have stated repeatedly, many months and millions of professional expense dollars ago, Vitesse should have identified all parties who contributed to the options backdating violations, either via complicity (i.e., shirking their fiduciary duty of good faith) or negligence (i.e., shirking their fiduciary duty of due care), and subsequently remove them from any involvement with the Company. High on the list of suspects was Vitesse’s Compensation Committee, with a particularly spotlight being shined on long-time committee member Mr. James A. Cole given his close personal and outside business relationships with Messrs. Louis Tomasetta and Eugene Hovanec. Vitesse’s Board of Directors (hereinafter, “the Board”) wasted no time throwing under the bus Messrs. Tomasetta, Hovanec and Mody; however, the Board is proving to be far more hesitant policing and punishing itself.

On May 20, 2006, one month after Vitesse’s Special Committee had been appointed to “conduct an internal investigation relating to past stock option grants, the timing of such grants and related accounting,” Trident Microsystems, Inc. (TRID) began a similar process. Yet, despite TRID’s having a smaller business (in revenues) than Vitesse, it announced today (well before Vitesse’s estimated December target) that a preliminary report had been provided to TRID’s Board of Directors allowing the latter to remove complicit parties.

The timeline related to the TRID special committee process below exhibits the relative expediency undertaken by TRID’s Board of Directors:
.
1.  
5/20/2006: Trident announces that as of Friday afternoon, May 19, 2006, they became aware of a stock option pricing practices article to be published in the WSJ that mentions the Co.
2.  
5/22/2006: WSJ publishes article titled , and surveys SEC filing s going back 5-10 years when the company was still a struggling graphics chip enterprise.
3.  
6/16/2006: Trident Microsystems announces additional inquiries into stock options practices, by the U.S. Attorneys offices for Southern District of New York.
4.  
9/13/2006: Trident files to Delay their Form 10-K for the fiscal year ending 06/30/2006. Filing date had been 09/13/2006.
5.  
10/25/2006: Trident announces stock option grants special committee has not completed its work, nor reached final conclusion.
6.  
11/20/2006: Trident announces that on 11/14/2006, the special committee provided a preliminary report to the Board of Directors on the investigation into the Co’s historical stock option practices. Company announced departure of its CEO, and adoption of interim action.

The model of survival/success for a public company afflicted with back dated options violations is simple;
1.  
Find the perpetrators through expedient and thorough investigation, report to a special committee, and immediately address accountability.
2.  
Remove/punish those Executives involved that either directly participated or were complicit in its occurrence, or were negligent in preventing it;
3.  
Refocus of new management team and board of directors on core business, financial resolution/restatement, and business model moving forward.

Please see below how Wall Street research analysts reacted today to TRID’s resolution.

Jefferies & Co.
TRID :Option Overhang Largely Resolved as CEO Resigns, Restatement remaining hurdle
Trident announced after market close that its CEO and Chairman, Frank Lin, has resigned, effective Nov 15, Glen Antle was appointed as the interim CEO and Chairman of the Board, effective Nov 14, 2006. Mr. Antle has served as a director of Trident since July 1992. The Board of Directors intends to initiate a search for a new CEO. Mr. Lin will act as a consultant to assist the company with the executive transition and assist with respect to key customer and supplier relationships. Special Committee's review expected to be complete shortly with restatement completion likely not until February or March. Trident's Special Committee provided a preliminary report to the Board of Directors on Nov.14th. In the report, the Committee concluded that incorrect measurement dates were used in the accounting of some option grants and Trident now expects to record a non-cash charge in a range of approximately $40-50MM in the periods between 1994 and 2006. Although Trident's Special Committee expects to complete its review shortly, the process is now expected to extend beyond the time Trident would ordinarily report its FQ2 (Dec) earnings in January. TRID also announced that it plans to adopt a series of interim actions, best practices, and governance policies in response to the findings. * Option overhang largely resolved as management uncertainty is now lifted with restatement only remaining issue. We believe that the combination of Mr. Lin's resignation and the completion of the Special Committee's review shortly, should likely resolve the option issue for the most part with investors. Although we do not expect Trident to fully complete its restatement with the SEC until the February or March time frame, we believe investor concerns have largely been focused on potential management changes. Although we believe Mr. Lin's departure has been largely anticipated, we believe the resolution of this issue has been what investors have been waiting for before re-entering the stock.


CIBC
TRID: Trident Microsystems: Option overhang set to lit as CEO resigns and new
measures adopted
CIBC notes the resignation of TRID's CEO, the announcement of est options related charges, the adoption of corrective measures, and the imminent conclusion of the TRID Board's options review should bring firm's favorite DTV stock nicely back into favor. Firm says TRID ests non-cash charges related to the option grant review at $40-$50 mln over the 12 years 1994-2006. TRID also announced a series of corrective procedures related to the review. Based on the release, firm believes the options issue will be resolved in short order. At approx 16x their Y07 EPS of $1.30, TRID trades 25% below peers' 22x. As the options specter fades, TRID should rebound with a vengeance driven by surging sales in a 4Q rife with DTV promotions, rising top OEM penetration (especially
newly won Phillips) and share gains by TRID's top customers.

Please share this (and all past correspondences) with the other members of the Special Committee.

Robert L. Chapman, Jr.
Managing Member
Chapman Capital L.L.C.
Pacific Corporate Towers
222 N. Sepulveda Blvd.
El Segundo, CA 90245
Office: (310) 662-1900
Web: http://www.hedgefunds.com 

 

 From: Robert L. Chapman, Jr.
Sent: Sunday, November 19, 2006 9:48 AM
To: 'Christopher R. Gardner (crg@vitesse.com)'
Cc: 'Shawn C. A. Hassel (shassel@alvarezandmarsal.com)'
Subject: RE: Chapman Capital Activism: Vitesse Semiconductor (VTSS): Recoup Legal Expenses

November 19, 2006

Mr. Christopher R. Gardner
Chief Executive Officer
Vitesse Semiconductor Corporation
741 Calle Plano
Camarillo, CA  93012
Office:  (805) 388-7551

Chris,

On the November 6, 2006 “business results and trends” conference call sponsored and led by Vitesse Semiconductor (hereinafter, “Vitesse” or “the Company”), you announced Vitesse “demonstrate[d] best in class performance in dealing with the legal and financial restatement issues that face the Company,” sought to “perform this complex process as efficiently and cost effective as possible,” and were “pleased with the results we report today,” including the following two 4QFY2006 results:

1)  Cash burn:  “during the fourth quarter our cash burn was $2.8 million.”
2)  “Professional” Expenses: this cash burn came after “spending $4.9 million on professionals, specifically associated with Vitesse’s current situation.”

Thus, the extraordinary “professional expense” of $4.9 million (or nearly $20 million annually, just under 10% of a revenue base over $200 million per year) caused Vitesse to be cash flow negative in the 4QFY2006. As pleased as I may be with the Company’s estimated level of sales and gross income under your leadership, I must ask you how literally can you be “pleased with the[se] results”? I remain confused as to how Vitesse has demonstrated “best in class performance” when nearly $20 million annually of its owners’ scarce cash is being spent to rectify alleged improprieties of identified fiduciaries and current Compensation Committee members (e.g. James A. Cole) of  Vitesse’s Board of Directors (hereinafter “Board”) who were negligent, if not complicit, in crimes against the Company. Chapman Capital has provided you (and Messrs. Shawn Hassel as CFO, and Edward Rogas as Special Committee head) with a variety of financial news reports wherein members of “the ‘class’ of option backdaters” (which now exceeds 130 and has seen over 50 top executives and directors resign) were able to obtain disgorgement of ill-gotten profits.  Not only has Vitesse not received any such disgorgement, but, adding insult to injury, the Company essentially may be paying the legal bills of those who should return these falsely-obtained profits.  While I am aware of indemnification clauses that are standard in directors’ agreements, typically no company would be negligent enough to sign one that indemnifies directors who committed civil or criminal acts that were detrimental to the company employing and trusting these miscreants.
                       
Vitesse’s Board also should be aware that “best in class performance in dealing with legal and financial restatement issues” now includes the Company suing executives and directors to recoup legal fees (see attached WSJ article relating to this matter at Computer Associates).  Vitesse’s Board continues to leave virtually unprotected the Company’s open wallet on the desks of countless attorneys, accountants (e.g., KPMG) and other “professionals who have been engaged by the Special Committee” to clean up the mess made by past and current Company executives and directors, either via their complicity in committing or negligence in preventing various violations.  As Vitesse’s largest owner of record, Chapman Capital can say with confidence that all of Vitesse’s owners expect that you and the Board are forwarding copies of these extraordinary bills to the privately-retained and paid attorneys of Messrs. Tomasetta, Hovanec, Mody, and Cole so that they may begin raising the necessary funds to reimburse Vitesse’s owners for these astoundingly large cash draw downs, which may exist only due to the allegedly improper actions of these potentially corrupt fiduciaries themselves.

Late yesterday, I returned your voice message (left on the line of my executive assistant) to call me regarding these matters.  I appreciate your calling me back, and taking the time to review and respond to this correspondence.  Furthermore, please forward this correspondence to Mr. Ed Rogas (for whom I have left a voice message) and the other members of the Special Committee.

Robert L. Chapman, Jr.
Managing Member
Chapman Capital L.L.C.
Pacific Corporate Towers
222 N. Sepulveda Blvd.
El Segundo, CA  90245
Office: (310) 662-1900
Web:  http://www.hedgefunds.com

cc: Shawn C.A. Hassel

CA Sues Ex-CEO
To Recoup Legal Fee

By WILLIAM M. BULKELEY
November 17, 2006; Page B2
 
CA Inc. is suing convicted former Chief Executive Officer Sanjay Kumar for repayment of the $14.9 million it fronted for his defense, and a court agreed to lay claim to his house, sports cars, yacht and other assets as security that he will be able to repay the sum if he loses the suit.
 
Software maker CA, formerly Computer Associates International Inc., also said it plans to seek additional restitution.
 
CA filed suit against Mr. Kumar Nov. 9 in New York State Supreme Court for Nassau County in Mineola. Late Wednesday, Judge Stephen A. Bucaria granted CA a motion for an order of attachment. It covers Mr. Kumar's $9 million house in Upper Brookville, N.Y., two Ferrari 550 Maranello sports cars from the 1999 and 2001 model years and a 57-foot Italian Azimut yacht as well as a Land Rover and a Volvo.
 
The order also attached $9 million that the Islandia, N.Y, company says Mr. Kumar is owed by his mentor and predecessor, CA founder Charles B. Wang, in payment for a stake that Mr. Kumar owned in the New York Islanders hockey team. It also attached Mr. Kumar's bank accounts.
 
The total value of the properties sought in the attachment appears to exceed CA's demand for $14.9 million, but it isn't clear whether Mr. Kumar holds sole title to all of them. Jack Cooney, Mr. Kumar's attorney with the law firm Davis Polk and Wardwell, declined comment on the attachment order.
 
Mr. Kumar, 44 years old, was sentenced this month to 12 years in prison on charges of financial and securities fraud and obstruction of justice.
 
Gary Brown, director of litigation for CA, said the demand for repayment of legal expenses is a prelude to a more complex claim involving restitution to CA, its shareholders and other investors for damages caused by Mr. Kumar's actions in running a $2.2 billion accounting fraud and an elaborate scheme to mislead Justice Department investigators. Kenneth Handal, CA's general counsel, said in an affidavit that the restitution claim will probably top $100 million, "an amount that most likely he is unable to pay."
 
Federal prosecutors are due to file another restitution claim against Mr. Kumar in January, with U.S. District Court Judge I. Leo Glasser in Brooklyn, N.Y. Judge Glasser oversaw the criminal case. He fined Mr. Kumar $8 million but said the sum might be adjusted to make money available for restitution. The restitution would be made to victims of his crime, possibly including CA itself, shareholders and former shareholders.
 
The federal restitution claim is likely to have priority over CA's legal-fees request, according to one person familiar with the case. "We're making every effort we can to work with the government for the best interests of shareholders," Mr. Brown said.
 
Mr. Brown said CA has paid $225 million into a restitution fund for investors and $174 million in settlement of a class-action suit. He said that CA itself is a victim of Mr. Kumar's criminal actions, and he said payments to the company by Mr. Kumar will enhance the value of the company and benefit longtime shareholders. Its largest shareholder, Swiss investor Walter Haefner, has maintained his 22% stake even as the stock was buffeted by the aftershocks of the accounting manipulations.
 
CA said the order of attachment was necessary, based on evidence it found that Mr. Kumar had frequently transferred assets to his family members. CA said he transferred a $20 million bond portfolio to his wife in 2002, the day after a New York Times article revealed that the Securities and Exchange Commission had started an investigation of CA's accounting practices.
 
CA said it has paid $14.9 million to Mr. Kumar's law firm, Davis Polk, since November 2003, including $4.3 million in April shortly before Mr. Kumar surprised prosecutors by pleading guilty.
 
CA said, under New York state law, it was obligated to pay the legal expenses of Mr. Kumar and other defendants during investigations and court cases "if the person acted in good faith...and had no reasonable cause to believe the conduct was unlawful."
 
Mr. Brown said case law in Delaware, where CA is incorporated, "establishes that a person who is convicted in a criminal case is not entitled to indemnification" for legal costs.
 
Defense attorneys said such claims for repayment of legal fees are rare, in part because victims seldom have sufficient assets to pay for a major case.
 
Mr. Kumar's assets appear sufficient to at least cover the legal costs. Mr. Handal said Mr. "Kumar has taken and will continue to take steps," to move assets out of CA's view.
 
Write to William M. Bulkeley at bill.bulkeley@wsj.com
 

From: Robert L. Chapman, Jr.
Sent: Thursday, November 16, 2006 11:34 AM
To: 'Christopher R. Gardner (crg@vitesse.com)'
Cc: 'Shawn C. A. Hassel (shassel@alvarezandmarsal.com)'
Subject: RE: Chapman Capital Activism: Vitesse Semiconductor (VTSS): Disgorgement Issues

November 16, 2006

Mr. Christopher R. Gardner
Chief Executive Officer
Vitesse Semiconductor Corporation
741 Calle Plano
Camarillo, CA 93012
Office: (805) 388-7551

Chris,

Seven months ago, Vitesse Semiconductor Corporation (hereinafter, “Vitesse”) formed a special committee (the “Special Committee”) to investigate, among other matters, the potential, illegal backdating of stock option grants to various members of Vitesse’s management and Board of Directors (the “Board”). Since that time, a multitude of other similarly positioned public company committees have concluded their investigations, at times announcing the disgorgement of profits ranging from $13 million (KB HOME) to $300 million (UnitedHealth Group). Given the relative simplicity of examining the paperwork underlying an option grant, followed up with basic interviews of parties related thereto, I am incredulous of any story as to why the Special Committee has not identified those parties culpable (through fraud, negligence or other breach) and removed them from any affiliation with Vitesse or related entities.

I have made crystal clear my view that Mr. James A. Cole, as a member of the Compensation Committee who authorized the purportedly illegally backdated stock options and personal friend of both Mr. Louis Tomasetta and Eugene Hovenac, is highly suspect in these matters. We have compiled a dossier on Mr. Cole’s past business dealings (including his co-defendant status with Mr. Hovenac in the KOR Electronics litigation - Superior Court of California, County of Orange - Case No. 06CC07881), which when combined with his former-Vitesse management affiliations outside of Vitesse, and exhibited deportment with the media and Vitesse’s owners, lead us to conclude that Mr. Cole’s continuation on Vitesse’s Board of Directors is egregiously inappropriate. By this point in time seven months after starting this investigation, I strongly believe that the Special Committee has adequate information to lead it to the same conclusion.

According to SEC filings made as of September 30, 2006, Chapman Capital oversees entities that comprise the largest ownership base of Vitesse, with over 18 million shares owned. As such, Chapman Capital believes that it may not in Vitesse’s best short-term interests for a public battle to erupt involving Mr. Cole’s directorship. However, as Chapman Capital does not believe that Vitesse long-term cannot transcend its past transgressions (and thus obtain the long-term confidence of Wall Street) without the removal of all guilty parties, we are at a crossroads on what actions (e.g., Schedule 13D amendment with Cole dossier disclosure, Form 14A filing) we will take in order to a) protect our investment from clear Board conflicts of interest, and b) allow our investment’s value to be maximized via incremental public investment by prospective investors who currently may be unwilling to buy Vitesse shares given the status quo nature of the Board.

Earlier today, I left you a voice message to call me regarding these matters. I will appreciate your calling me back, and taking the time to review and respond to this correspondence. Furthermore, please forward this correspondence to Mr. Ed Rogas (for whom I have left a voice message) and the other members of the Special Committee.

Robert L. Chapman, Jr.
Managing Member
Chapman Capital L.L.C.
Pacific Corporate Towers
222 N. Sepulveda Blvd.
El Segundo, CA 90245
Office: (310) 662-1900
Web: http://www.hedgefunds.com

cc: Shawn C.A. Hassel

 

 
From: Robert L. Chapman, Jr.
Sent: Tuesday, November 14, 2006 3:58 PM
To: 'Shawn C. A. Hassel (shassel@alvarezandmarsal.com)'
Subject: Chapman Capital Activism: Vitesse Semiconductor (VTSS): KB Home CEO $13 MM Disgorgement

November 14, 2006

Mr. Shawn C. A. Hassel
Chief Financial Officer
Mr. Edward Rogas, Jr.
Chairman, Special Committee
Vitesse Semiconductor Corporation
741 Calle Plano
Camarillo, CA  93012

Shawn,

Please forward to Mr. Rogas the attached article regarding Mr. Bruce Karatz's $13 million disgorgement "in gains from the backdating" that was part of an agreement between him and KB Home. Clearly, disgorgement has become a standard starting point in the process of rectifying ill-gotten gains from illegally backdated stock options.

As always, please confirm this has been done.

Robert L. Chapman, Jr.
Managing Member
Chapman Capital L.L.C.
Pacific Corporate Towers
222 N. Sepulveda Blvd.
El Segundo, CA 90245
Office: (310) 662-1900
Web: http://www.hedgefunds.com

==========
KB Home CEO Resigns
Over Backdated Options

Bruce Karatz Will Forfeit
About $13 Million in Gains;
2 Other Executives to Leave

By JAMES BANDLER and CHARLES FORELLE
November 13, 2006; Page A3

The stock-options fraud scandal claimed one of the nation's most successful and highly paid chief executives, KB Home's Bruce Karatz, who agreed to leave the company after an internal investigation found that he backdated his own option grants to increase his pay.

KB Home, a home-construction company once known as Kaufman & Broad, said Mr. Karatz would immediately leave his posts as president, CEO and chairman. He will forfeit about $13 million in gains from the backdating as part of an agreement with the company, based in Los Angeles.

Also departing is Richard B. Hirst, executive vice president and chief legal officer, and Gary A. Ray, the head of human resources. Mr. Hirst resigned, and Mr. Ray was terminated, the company said. A person familiar with the investigation said both Mr. Karatz and Mr. Hirst cooperated with the internal investigation.

Messrs. Karatz, Hirst and Ray couldn't be reached to comment.

Mr. Karatz is one of the highest-profile casualties of the stock-options scandal, which has now claimed the jobs of more than 50 executives and directors, including William McGuire, the chief executive of UnitedHealth Group Inc. More than 130 companies, including KB Home, are under federal investigation in a wide government action. Five former executives at the companies have been charged with criminal wrongdoing.

KB Home didn't detail how the backdated options came to pass, though it said Mr. Karatz and Mr. Ray selected the dates for the options. A person familiar with the matter said that an investigation by KB Home's board determined that the dates were selected retroactively by the two men without permission of the board, though this person said the investigation didn't conclude that there had been intentional wrongdoing. The company said the misdated options were granted between 1998 and 2005.

KB Home said Mr. Karatz would be succeeded as CEO by Jeffrey T. Mezger, the company's chief operating officer. The company said Mr. Mezger wasn't involved in any options troubles. KB Home said it created the new post of nonexecutive chairman, and will conduct a search for the position.

Mr. Mezger takes the helm of the company amid a slow housing market, which has caused KB Home's sales and those of other home builders to plummet. He said in an interview that he expects the options investigation won't have any long- term effect on the company's operations or reputation and that its home-building brand remains "extremely strong." "I think this will be a seamless transition,'' Mr. Mezger said last night. "We see business as usual going forward."

MORE ON OPTIONS

 
• Options Scorecard: Companies under scrutiny
 
• Perfect Payday: Complete coverage
 
Options allow recipients to buy stock at a preset exercise price, generally set at the market price on the day they were granted. Backdating involves pretending that an option was granted on an earlier date when the market price was lower, conveying an opportunity for extra profit. The practice can lead to overstated profits and significant tax problems for the companies and executives involved.

Mr. Karatz, a 34-year veteran of KB Home, has been its chief executive since 1986. He has overseen tremendous growth, shepherding KB Home through a burgeoning real-estate market that had it building houses at a fast clip. From the end of 1995 through the end of last year, KB Home shares climbed tenfold. The company's stock has dived 40% this year as the property market rapidly chilled.

Along the way, Mr. Karatz has been among the nation's most highly compensated corporate executives. Since 1992, he has reaped nearly $180 million from exercising options, according to Standard & Poor's ExecuComp, a service that tracks executive compensation. Last year, he made more than $150 million from salary, bonus, restricted stock grants and options exercises, according to ExecuComp. The options exercises accounted for the bulk of his pay.

The backdating appears to have begun in 1998, when Mr. Karatz received more than 450,000 options. That year also apparently marked a shift to much larger options awards -- in each of several previous years, Mr. Karatz had received 100,000 options or fewer.

His grants between 1998 and 2001 appeared particularly well-timed. In that period, he recorded one grant dated the day the stock touched its lowest closing price of the year, another at a quarterly low, and two more at monthly lows.

One grant of 450,000 shares carried the date of Oct. 25, 1999, and an exercise price of $17.75, the year's lowest close. KB Home shares subsequently rocketed upward, rising 25% by the end of November.

KB Home disclosed in August it was conducting an internal probe of its options grants, after being contacted by The Wall Street Journal about an unusual pattern of well-timed grants. The company also was the target of a shareholder lawsuit filed in July in Los Angeles County Superior Court alleging manipulation of past stock-options awards. The company has said it is studying the suit.

KB Home appears to have concentrated its options grants at the top. Mr. Karatz received 500,000 options in 2000, which was 30.9% of all the awards to employees. They were dated at a monthly low. Mr. Karatz has cashed all of those options out, for a total profit of about $54 million.

The $13 million he will forfeit is part of an agreement reached to refund the excess profit from backdating to the company, KB Home said. Mr. Karatz will repay the company to cover extra profit on already-cashed-out options, and his remaining outstanding options will be repriced.

The company said that it and Mr. Karatz haven't negotiated any terms of his departure other than the agreement to repay profits from backdating. To correct its accounting for the backdating, KB Home said it expected to take charges of no more than $50 million.

As of Nov. 30, 2005, Mr. Karatz had options for about three million KB Home shares, of which about 2.2 million he could immediately exercise, according to securities filings. The negotiations with the company over his departure will likely determine how much of that total he will walk away with. Under his employment agreement, some of his options remain in force if his departure is deemed a retirement. If he is terminated for cause, he could lose at least some of his outstanding options. Other severance terms also depend on how his departure is characterized.

The home-building industry isn't typically known for flash, but Mr. Karatz cultivated a high profile. He made a name for himself in the 1970s building a model house on the top of a department store in Paris to promote the company's homes in France.

Last year, he was instrumental in partnering with Martha Stewart to build and market homes together -- a move seen as increasing KB Home's name recognition in an industry that isn't known for having well-known brand names.


November 13, 2006, 9:03 am

Backdating Scandal Fells Top Homebuilding CEO

Posted by Peter Lattman

The backdating scandal has claimed Bruce Karatz, the highly paid and high-profile CEO of KB Home. Karatz agreed to leave the homebuilder after an internal investigation found he backdated his own option grants to increase his pay. The L.A.-based KB Home said Karatz will forfeit about $13 million in gains from backdating options. Here’s the WSJ story.

Since 1992, Karatz has made nearly $180 million from exercising options, according to S&P’s ExecuComp. Last year, his total compensation came to $150 million. According to the WSJ, negotiations with KB Home over his departure will likely determine how much of that total he will walk away with.

Also resigning: Richard Hirst, KB Home’s chief legal officer. Gary Ray, the head of human resources, was terminated. None could be reached for comment. Hirst’s bio has already been scrubbed from KB Home’s Web site, but according to Forbes, he joined KB Home in 2004 after GC stints at Burger King and the Minnesota Twins.

Karatz has a legal background. According to a 1994 profile in Los Angeles Business Journal (link unavailable), Karatz graduated from USC Law School and became a securities lawyer before moving in-house, joining billionaire Eli Broad at Kaufman & Broad (which became KB Home). He became K&B’s corporate counsel before moving to the operations side. Said Karatz: “I was always more interested in helping my clients make their business deals and looking at how the deals affected them,” than in the legal issues involved.

Irell & Manella served as the board committee’s outside counsel in the internal investigation

 

 
From: Robert L. Chapman, Jr.
Sent: Thursday, November 09, 2006 10:16 AM
To: 'Christopher R. Gardner (crg@vitesse.com)'
Cc: 'Shawn C. A. Hassel (shassel@alvarezandmarsal.com)'
Subject: Chapman Capital Activism: Vitesse Semiconductor (VTSS): Disgorgement of Profits

November 9, 2006

Mr. Christopher R. Gardner
Chief Executive Officer
Vitesse Semiconductor Corporation
741 Calle Plano
Camarillo, CA 93012
Office: (805) 388-7551

Chris,

I am attaching today’s Wall Street Journal article regarding the forfeiture of $390 million in stock-option compensation by two top executives of UnitedHealth Group. The implications vis-à-vis Vitesse are obvious, particularly in light of Chapman Capital’s public demands to that effect in our original Schedule 13D filing dated July 7, 2006.

Please forward this correspondence to Mr. Ed Rogas and the other members of the Special Committee.

Robert L. Chapman, Jr.
Managing Member
Chapman Capital L.L.C.
Pacific Corporate Towers
222 N. Sepulveda Blvd.
El Segundo, CA 90245
Office: (310) 662-1900
Web: http://www.hedgefunds.com

cc: Shawn C.A. Hassel

=============

UnitedHealth Executives
Forfeit $390 Million in Options
By STEVE STECKLOW and VANESSA FUHRMANS
November 9, 2006; Page B1
 
The two top executives of UnitedHealth Group Inc. agreed to forfeit about $390 million in stock-option compensation, by far the biggest sum returned to a company under scrutiny for backdating options
 
 
The giveback was announced at the same time the giant health insurer disavowed more than a decade's worth of earnings statements.
 
 
Last month, an internal inquiry found that the two executives -- outgoing Chief Executive William W. McGuire and his successor, Stephen J. Hemsley -- received options that carried dates prior to the dates on which they were actually granted, making them more valuable than they otherwise would have been.
 
 
Other senior UnitedHealth executives will also return unspecified options gains. Paul Hodgson, senior research associate at Corporate Library, a corporate-governance research group in Portland, Maine, said the $390 million giveback by Dr. McGuire and Mr. Hemsley may be the largest voluntary forfeiture by corporate executives ever. "This is certainly the biggest that I'm aware of," he said.
 
 
UnitedHealth is one of the largest companies to be ensnared in the options-backdating scandal, in which companies manipulated the dates that options were awarded to provide additional compensation to executives. More than 130 companies are under investigation by the Securities and Exchange Commission, and many of those are also being probed by the Justice Department.
 
 
UnitedHealth also disclosed that it would have to take "significantly greater" charges related to its backdated stock options than it had previously estimated and that it expects the charges to affect the past 12 years of previously reported earnings. The Minnetonka, Minn.-based health-insurance giant didn't specify what the new charges would be. It had previously said it might have to restate up to $286 million in earnings, stemming from three years' worth of earnings.
 
 
UnitedHealth also said its chief financial officer, Patrick Erlandson, resigned his post and will be succeeded by G. Mike Mikan, the company's senior vice president of finance. Mr. Erlandson will be reassigned to other "operational duties," the company said. A UnitedHealth spokesman declined to say whether Mr. Erlandson's move was related to the stock-options issue.
 
 
More than 40 executives have lost their jobs to date in the options imbroglio, including Dr. McGuire, who agreed last month to step down as UnitedHealth's chairman. He will leave his post as chief executive by Dec. 1, after 15 years at the company. UnitedHealth's internal probe concluded that Mr. Hemsley, the company's chief operating officer, received backdated grants, but it made no finding that he had a role in their creation.
 
 
UnitedHealth's options troubles followed a page-one article in The Wall Street Journal in March that showed that Dr. McGuire had received stock options grants at favorable times, including awards received in 1997, 1999 and 2000 whose dates coincided with those years' lowest closing share price. The article reported that the odds of such a favorable pattern occurring by chance were at least one in 200 million. At the time, UnitedHealth called its options-granting process "appropriate."
 
 
Options are intended to give recipients the opportunity to profit if the company's share price rises in the future. Usually, the recipient can buy shares in the future at the price of the stock on the day the option was awarded. Backdating involves pretending that the grant was awarded on an earlier day, when the share price was lower, giving the recipient the potential for greater profit. If not disclosed to shareholders, the practice can result in serious accounting and tax consequences.
 
 
UnitedHealth, in fact, faces a slew of noncash charges related to stock-based compensation, as well as cash charges resulting from tax liabilities. It said yesterday it would have to further delay filing its third quarter Form 10-Q to the SEC.
 
 
Both Mr. Hemsley and Dr. McGuire agreed last month to allow the exercise prices of previously granted options to be reset to the highest share price during the grant year after a board-commissioned review concluded that several option grants had likely been backdated.
 
 
The company said Mr. Hemsley and other unnamed senior executives had agreed not only to give up paper gains on unrealized stock options with questionable grant dates, but also to forfeit some money already made on previously exercised options. For Mr. Hemsley, the actions -- including forfeiting a complex tranche of grants that were suspended and then reactivated in August 2000 -- will reduce his past stock compensation by $190 million in both unrealized gains and money he would return. "My decision is in keeping with my personal goal of avoiding even the appearance of any unintended benefit from any past option grants to me," he said in a statement. Before joining UnitedHealth in 1997, Mr. Hemsley was chief financial officer at the accounting firm Arthur Andersen LLP.
 
 
Dr. McGuire has also agreed not to benefit from any grants with problematic dates that he has already exercised, although it isn't yet clear how this will be done, according to a person familiar with the situation. His attorney, David Brodsky, said, "Dr. McGuire is pleased to have reached an agreement to reprice his options. The agreement to forgo approximately $200 million means that Dr. McGuire will receive no benefit at all from dating issues in connection with his options."
 
 
But Dr. McGuire hasn't yet agreed to forfeit the reactivated options in which he and other employees were effectively able to get the same options twice, at favorable prices. For Dr. McGuire alone, those extra options are now valued at about $250 million. The issue of those options hasn't been resolved between Dr. McGuire and the company, according to people familiar with the situation.
 
 
At the end of 2005, Dr. McGuire had a cache of unexercised options valued at $1.78 billion. Mr. Hemsley's options at the time were valued at more than $650 million.
 
 
UnitedHealth spokesman Mark Lindsay wouldn't provide any details on the formula the company is using to determine how much executives have to return to the company from previously exercised grants. He added that the company was still working out the details on how the money would be paid back.
 
 
However the payback is handled, executive compensation experts said the move to undo past compensation is likely to complicate the tax liabilities that UnitedHealth faces from backdated grants. "The IRS doesn't like that sort of thing," said James Reda, managing director of a New York-based pay consulting firm James F. Reda & Associates.
 
 
The company's board also set new rules for its independent directors, prohibiting business relationships that involve payments from company executives or any direct compensation from the company, other than for board service, within the prior three years. That is tougher than New York Stock Exchange requirements, which limit other direct compensation for independent directors to less than $100,000. The more stringent rules come amid the resignation last month of William Spears, a UnitedHealth board member for 15 years, after the company's probe revealed undisclosed financial entanglements with Dr. McGuire.
 
 
UnitedHealth also said it reached a new, four-year employment agreement with Mr. Hemsley that is remarkably spartan compared with his and Dr. McGuire's previous contracts. Under its terms, Mr. Hemsley will receive a base salary of $1.3 million, $1 million less than Dr. McGuire earned as CEO. Far from the power Dr. McGuire enjoyed to negotiate and, in some years, set the date for his own option awards, Mr. Hemsley's contract doesn't set any minimum or target level for bonuses or other incentive-linked compensation. Rather, any additional bonuses are "solely at the discretion" of the board's compensation committee, the company reported in a filing with the SEC. "It's unusual for someone to relinquish that much control over how his bonus gets set," Mr. Reda said.
 
 
Shares in UnitedHealth fell $1.57 to $48 in 4 p.m. composite trading on the New York Stock Exchange.
 
 

 
From: Robert L. Chapman, Jr.
Sent: Wednesday, November 08, 2006 12:11 PM
To: 'Christopher R. Gardner (crg@vitesse.com)'
Cc: 'Shawn C. A. Hassel (shassel@alvarezandmarsal.com)'
Subject: Chapman Capital Activism: Vitesse Semiconductor (VTSS): Cole Resignation

November 8, 2006

Mr. Christopher R. Gardner
Chief Executive Officer
Vitesse Semiconductor Corporation
741 Calle Plano
Camarillo, CA 93012
Office: (805) 388-7551

Chris,

As we have spoken on this matter extensively, I will not expound on it herein. Compensation Committee member and long-time personal friend of ousted Vitesse Semiconductor Corporation (“Vitesse” or “the Company”) CEO Louis R. Tomasetta must resign his seat on the Company’s Board of Directors. Vitesse will not be able to move forward into a healthy future until this cancer of its past has been removed. The fact that a majority of this week’s conference call participants cited Mr. Cole’s removal as a desirable event, combined with the views of the retail investor forum (as excerpted below), should telegraph the importance of accomplishing this “milestone.”

For the benefit of the Company’s owners, vendors, customers and employees, it is my sincere hope that you and the Special Committee will accomplish this outcome without my having to file an amended Schedule 13D disclosing the results of our ongoing investigation into Mr. Cole past and present business transgressions.

Please forward this correspondence to Mr. Ed Rogas and the other members of the Special Committee.

Robert L. Chapman, Jr.
Managing Member
Chapman Capital L.L.C.
Pacific Corporate Towers
222 N. Sepulveda Blvd.
El Segundo, CA 90245
Office: (310) 662-1900
Web: http://www.hedgefunds.com

cc: Shawn C.A. Hassel

Excerpt from E-mail from the “Public Vitesse Forum” - 11/08/2006

[Phobos]: I try to do four things when I invest. Two of the four are buy low and sell high. For me, the jury is still out on one of these counts, since my cost basis for my VTSS holding is $2.07, and where I sell will determine the outcome. I think my cost basis is still reasonable (of course, I wish I had bought at $0.68, but who of us has a working crystal ball?).


The third thing I try to do is know the business. . .know what is reasonable to expect, and try to know a little something about the business of that company that the Market, in general, would not know, thus giving me an edge as an investor. In other words, I try to find companies with beaten down prices, whose core business is strong, and whose value has not yet been recognized, or is otherwise mis-priced by the Market.


The fourth thing I try to cultivate in selecting an investment candidate is to be intuitive in terms of my selection process. This is a little hard to explain, but I also try to assimilate the subjective impressions that I might have while assessing the company more concretely. Some of these might be subjective impressions of various things, or the coalescing of seemingly disparate bits of information.


Anyway. . .I was listening to the Conference Call from work, and as Robert Chapman (who doesn't seem to be quite so gung-ho for a sale any more) and others slammed Jim Cole, my mind kept drifting to the scene in "The Godfather," where Tom Hagen and Vito Corleone are returning from their "sit-down" with the heads of the other five Mafia families to bring the gang war to an end. Tom Hagen asks if he should insist that all the people that Tataglia has dealing drugs should have clean criminal records, and Vito says to mention it, but don't insist, because Barzini is a man who will know this without being told. Tom Hagen then says: "You mean Tataglia?", to which the Don (Corleone) replies: "Tattaglia's a pimp. He never could've outfought Santino, but I didn't know until this day that it was Barzini, all along."


My mind then drifted to Geshe's impromptu interview with Tomasetta at his home, soon after the debacle, and at the time, I remember thinking that Lou gave the impression of a deer in the headlights, which I and others attributed to having to keep quiet for legal reasons. What if he was keeping quiet for legal reasons, but what if there is a little more to the story. Quickly and easily throwing Tomasetta "under the bus" would provide Cole with needed cover, while the Board orchestrated things behind the scenes. Tomasetta couldn't say anything, because the outcome of future legal action against him might depend upon him keeping quiet. Cole did not value Tomasetta as a CEO; in fact, during Cole's interview, Cole had nothing nice to say about Tomasetta. Some snippets are: "He (Lou) liked to play in the sandbox too much," and "Lou really screwed up this time." . . .But, Cole was on the Compensation committee. How could any of this take place without Cole's knowledge?


I don't see an engineer (Lou)--who was probably naive in the ways of business, whether MIT-trained or not--as pulling the wool over the eyes of Jim Cole. Even if you use an old dictum and "follow the money," the trail still leads to Jim Cole as a member of the Board, and a member of the Compensation committee. If Cole didn't know what was going on (I would personally find this hard to believe), then he should be fired for incompetence. It's his job to know what's going on, and if he DID know what was going on, then he should be prosecuted to the fullest extent of the law. In fact, I think that my last statement should apply to the entire Board. Whether they were asleep at the switch or enriching themselves with other people's money, they should all be one thing; GONE!


...It was Cole, all along.


[Par4crsfl]: Excellent post--my personal choice for "post of the day"! Guilty or "stupid," either way, we can & should do better! Let's clean up the Board & move on. Par


[Hoseaye123]: Par. . . three Conference Call questioners seriously after Jim Cole's bung hole; he's history and doesn’t even know it. Yes, Virginia, we would have been cash-positive this quarter, if not for the larceny. What I didn't understand--Colorado facility in late stage of a sale, but Chris said its sale would not meaningfully add to the bottom line. Am i missing something? Do the owe a lot on it?--The other Joe


[Cvh427]: Joe, the question was asked that if sold, how it would affect the operating cost. Chris answered by stating that the fab 2 facility in C. Springs was decommissioned several years ago; no product was running at fab, and it was only being used an an office space. Depending on who they sell the fab to, Vitesse may be leasing or renting some space back. Overall, the effect was net positive, but not material to the balance sheet. I had thought this fab was paid off. Anyone else have any comments on this?


[Sharpinvestments]: Excellent post, Phobos. The fact that Cole admitted that at least 2 of the 3 Amigos were investors in his fund raises questions. I do think he's covering his own ass. He gave Lou an "eyes closed green light," IMO, for years, and Lou took advantage. I think Cole is history. Judging by his personality type, he'll not resign, but will need to be kicked out. The sooner the better.

 

 
From: Robert L. Chapman, Jr.
Sent: Sunday, October 29, 2006 12:21 PM
To: 'Shawn C. A. Hassel (shassel@alvarezandmarsal.com)'
Subject: Chapman Capital Activism: Vitesse Semiconductor (VTSS): Self Policing Issues

October 29, 2006

Shawn,

Please forward to the entire VTSS Board this weekend’s WSJ story questioning whether those culpable (i.e., Vitesse’s Compensation Committee) will be punished legally given the self policing approach. Rest assured, Chapman Capital intends to make a “books and records” demand to obtain the investigation’s final report (and supporting documents).

Please confirm this E-mail was forwarded to the entire Board.

Robert L. Chapman, Jr.
Managing Member
Chapman Capital L.L.C.
Pacific Corporate Towers
222 N. Sepulveda Blvd.
El Segundo, CA 90245
Office: (310) 662-1900
Web: http://www.hedgefunds.com 


Legal Aid
In Options Probes,
Private Law Firms
Play Crucial Role

As More Than 130 Companies
Come Under Scrutiny,
Government Relies on Help
Questions About Fairness

By JAMES BANDLER and KARA SCANNELL
October 28, 2006; Page A1
 
With more than 130 companies under federal scrutiny, the investigation into stock-option backdating has rapidly become one of the broadest corporate scandals in decades. It is so broad, in fact, that federal authorities can't possibly do thorough examinations of every company.
 
 
Instead, they outsource a big chunk of the job.
 
 
Regulators and prosecutors are relying on suspect companies to investigate themselves by hiring outside law firms. The firms are supposed to hand over their findings to the Securities and Exchange Commission or federal prosecutors, who then use them to help decide which cases to pursue further. The feds often ask for any especially incriminating documents to be delivered in a handy folder they call a "hot binder."
 
 
That has long been a common practice for companies in potential legal trouble, partly because it can lead to leniency as reward for a self-examination well done. But not since the overseas bribery scandal of the 1970s have so many public corporations been in trouble at the same time. The federal investigation has enveloped icons of success like Apple Computer Inc., Home Depot Inc., giant insurer UnitedHealth Group Inc., and dozens of Silicon Valley companies.
 
 
"The sheer magnitude of the numbers of companies, executives and corporate boards that have disclosed options-related investigations is mind-boggling -- unequaled in recent years," says Lynn Turner, a former chief accountant for the SEC.
 
 
The mass exercise in self-policing already has produced some dramatic results. More than 40 executives or directors have resigned or been pushed out in the wake of internal probes that found options backdating problems. The most prominent is William McGuire, chief executive of UnitedHealth, who is leaving his post by Dec. 1. Outside lawyers hired by the company found evidence of rampant backdating of options that enriched him and other insiders. Dr. McGuire, who has said he did nothing improper, stands to lose more than $100 million alone after agreeing to reprice his options.
 
 
Nearly 70 companies already have said they will need to restate or otherwise reduce profits after acknowledging that faulty accounting of options had inflated the numbers, according to a tally by shareholder advisers Glass Lewis & Co. The firm put the total shaved off at $5.3 billion.
 
 
Still, the deputizing approach raises questions about how evenly justice will be applied. Such investigations are typically overseen by outside directors who may have close ties to the company's management -- and who may themselves have been involved in making the option grants at issue. The government risks focusing not on the worst offenders, critics say, but on those companies honest or frightened enough to perform scrupulous self-examinations.
 
 
In at least one case, federal officials have stepped in when they felt an internal probe wasn't getting to the bottom of the matter, according to a person familiar with the circumstances. At Affiliated Computer Services Inc., a Dallas-based technology outsourcing company, executives benefited from a tremendously unlikely pattern of timing grants. A Wall Street Journal analysis last March put the odds at 300 billion to one that the dates on which grants purportedly had been awarded to the company's former CEO were chosen randomly. The company used its longtime outside counsel to conduct the probe.
 
PERFECT PAYDAY
 
 Options Scorecard
 
 Complete coverage
 
 
In May the company announced a preliminary finding that there was no intentional backdating to enrich executives. Government officials prodded ACS to look harder, and the company hired a new team of lawyers with no connection to the firm. "From day one ACS has expected its legal counsel to leave no stone unturned and conduct a thorough, objective, and complete investigation of all the facts, and that is exactly what is occurring," said spokesman Michael Buckley.
 
 
In some cases, the outsourcing approach has allowed the government to move unusually swiftly. In August, prosecutors filed criminal charges against three former executives of Comverse Technology Inc., only five months after private lawyers had begun an internal options probe at the New York maker of telecommunications software. The outside lawyers found a key witness, obtained dramatic confessions from the three executives, unearthed a secret options "slush fund" -- and kept government officials informed every step of the way.
 
 
Federal officials say it is too early to predict how many cases they will bring. But the government has made it clear it won't pursue every backdater. With so many potential defendants, the government has decided to zero in on the most egregious, those involving self-enrichment by top executives, big sums of money, or brazen efforts to deceive directors, auditors and shareholders.
 
 
While the government has long had internal policies that permit it to reward companies for their cooperation, the expectations have been ratcheted up in recent years. Under controversial Justice Department policies in place since 2003, companies are more susceptible to criminal charges unless they are viewed as doing a good job on "cooperation and voluntary disclosure."
 
 
The threat of criminal prosecution "is a lot like the guillotine - it tends to focus the mind," says Joseph Grundfest, a former SEC commissioner and a professor of law at Stanford University. "Here you have over 140 companies spending millions each doing the equivalent of Maoist self-criticisms and turning the results over to the authorities."
 
 
Critics of the approach say using private lawyers to investigate on behalf of the government can place employees in an unfair position: talk, or you'll lose your job. When speaking to private lawyers hired by the company, employees don't have the legal protections -- against self-incrimination, for instance -- that apply in some government proceedings. The government has relied on internal probes at least since the 1970s bribery scandal, which resulted in hundreds of companies stepping forward, and led to enactment of the Foreign Corrupt Practices Act.
 
 
The current investigations are focusing on whether executives improperly enriched themselves through surreptitious backdating of stock options. Options give their recipient the right to buy a stock at a fixed price, and typically allow the recipient to profit if the market value of the stock rises from the day the option was granted. But it turns out many companies cheated by pretending that their options were granted on earlier dates, when the stock price was much lower, a practice that gives an instant paper profit for the grant recipients.
 
 
Backdating is illegal if not properly disclosed to shareholders. It also can cause serious accounting and tax problems for companies and executives. To date, five former executives have been charged with criminal fraud violations in connection with the practice, including the three at Comverse.
 
 
The government began to cast its eye on the timing of option grants more than three years ago, when the SEC's then-enforcement director, Stephen Cutler, read a news account suggesting that executives had issued grants just prior to the release of favorable news that caused a jump in their company's share prices.
 
 
SEC officials gradually began to suspect that something more nefarious was going on. A small number of academic researchers also were suggesting that backdating might explain the happy timing of many grants. An SEC unit in Washington began a limited probe, focusing on fewer than a dozen companies. Federal prosecutors in San Francisco also started examining one case, Brocade Communications Systems Inc., assigning a single prosecutor and one FBI agent.
 
 
Last March, The Wall Street Journal reported that statistical evidence strongly suggested backdating had taken place at six companies. Among them: UnitedHealth, ACS and Comverse. The Journal article sent the federal probe into high gear, officials say. All the companies got subpoenas. It also sparked unusual territorial skirmishes between rival U.S. Attorney's offices eager to show they were cracking down on the latest corporate scandal.
 
 
An initial volley came from federal prosecutors in Brooklyn, N.Y., who moved quickly to subpoena Comverse, which until recently was headquartered in its district. That prompted the office's crosstown rival in Manhattan to follow suit. Some companies ended up receiving subpoenas from more than one U.S. Attorney looking for the same information about options. Eventually, senior Justice Department officials ruled that cases generally would be handled along geographic lines.
 
 
Prosecutors in San Francisco were initially miffed that prosecutors in New York were reaching across the country to subpoena Silicon Valley companies. "Our preference here generally is to try and create a cooperative environment with the firm and entity we're looking at so we don't have to start the relationship with grand jury subpoenas," says Kevin Ryan, U.S. Attorney for the Northern District of California, who e didn't directly criticize his counterparts.
 
 
Last spring as waves of companies began to step forward to admit options troubles, Mr. Ryan contemplated his office's response. His thinking crystallized while on a family vacation this summer in southern France. There, he sounded out his father-in-law, James Klingbeil, a prominent San Francisco real-estate investor. While the pair sipped wine under an oak tree, Mr. Klingbeil told his prosecutor son-in-law that the arguments by some companies that backdating was acceptable "didn't pass the smell test," both men recall.
 
 
While in France, Mr. Ryan fired off a series of urgent emails to his deputy, Eumi Choi, saying that the office needed to jump on the matter. Soon after, the office formed a special task force of prosecutors and agents of the Federal Bureau of Investigation, an idea Mr. Ryan says he'd been weighing before the France trip.
 
 
Of more than two dozen cases his office is investigating, Mr. Ryan says "15% to 20% have raised serious issues. We're going to really drill down on those." An FBI agents on his task force, Brian Wickham, says that in the case of one company he declined to identify, an executive's calendar showed him to be out of the country when other documents claimed he was at a board meeting.
 
 
Nationally, at least nine U.S. Attorneys offices are probing backdating, assisted by agents with the FBI, Internal Revenue Service and the U.S. Postal Service. The SEC, which is taking the lead on most of the investigations, has assigned more than 150 lawyers and accountants to the task.
 
 
The scandal also has been a bonanza for law firms and forensic accountants. UnitedHealth's internal probe looked at almost four million documents and included more than 80 interviews of employees and other witnesses. Another company -- Mercury Interactive Corp. -- said the cost of its internal probe amounted to about $70 million.
 
 
The internal probes appear to run the gamut from exhaustive efforts to ferret out wrongdoing to more minimal examinations aimed mostly at correcting the mess backdating makes of a company's financial statements, say lawyers involved. Federal officials say they're well aware of the varying levels of depth of the in-house probes. "We critically evaluate the quality of the investigation. We don't just take their word for it," says Walter Ricciardi, a deputy director of enforcement at the SEC.
 
 
The SEC launched a computer-tracking system this week to help it keep tabs on lawyers conducting the probes. The idea is to let government investigators share information with each other about how responsive, independent and thorough they believe private lawyers have been, so the government can judge their credibility of their findings.
 
 
At Comverse, confessions elicited by outside lawyers from three senior executives sealed their fates. The company had for many years granted options to senior executives that bore unusually beneficial dates, just ahead of sharp increases in the company's stock price. The Journal story in March said the odds of that happening randomly were one in six billion. In March, a special board committee hired Howard Schiffman, a securities lawyer with the Washington, D.C., law firm of Dickstein Shapiro LLP, to head an internal investigation.
 
 
Dickstein put eight senior lawyers on the case and brought in AlixPartners, a forensic-accounting firm. Dozens of Dickstein associates were detailed to perform electronic searches through e-mails and other records.
 
 
Within days the Dickstein lawyers began summoning senior Comverse executives to the law firm's midtown Manhattan offices for sometimes grueling interviews. The lawyers spent hours with the company's then-chief executive, Kobi Alexander. At one of these sessions, he admitted to having backdated options grants, according to the government's later criminal case against him.
 
 
The private lawyers also found a key witness in Fran Rail, a stock-option administrator, who described efforts by the chief financial officer to hide a secret slush fund from the company's outside auditor. Under sharp questioning from the Dickstein lawyers, the executive, David Kreinberg, said he'd been instructed by Mr. Alexander to keep the account secret, according to a person familiar with Mr. Kreinberg's statements. Earlier this week, he pleaded guilty to fraud charges. Ms. Rail couldn't be reached for comment.
 
 
The Dickstein lawyers held regular meetings with the SEC to keep the government briefed on their findings. There was a "daily feeding of information -- millions of documents," says one person involved in the probe. This person said that after the Dickstein lawyers interviewed a key witness, the government had the information in "real-time."
 
 
The Dickstein probe was still going on in late July, when government investigators grew concerned that Mr. Alexander -- an Israeli citizen and U.S. resident -- would flee the country. Federal prosecutors rushed to file criminal charges before several important witnesses were called for interviews. The criminal charges rested on information from the Dickstein lawyers, including purported confessions from all three senior executives who were charged. The government hadn't yet interviewed any of them.
 
 
Mr. Alexander later was arrested in the African country of Namibia, where he is facing extradition proceedings.
 
 
--Charles Forelle contributed to this article.
 
 
Write to James Bandler at james.bandler@wsj.com and Kara Scannell at kara.scannell@wsj.com
 

 

From: Robert L. Chapman, Jr.
Sent: Wednesday, October 11, 2006 5:26 PM
To: 'Shawn C. A. Hassel (shassel@alvarezandmarsal.com)'
Subject: Chapman Capital Activism: Vitesse (VTSS): McAfee Chairman Resigns Due to Accountability

October 11, 2006

Shawn,

Please forward this to Vitesse's Board (with emphasis to the Compensation Committee), noting that the Chairman resigned due to his "regret that some of the stock-option problems identified by the special committee occurred on [his] watch."

Robert L. Chapman, Jr.
Managing Member
Chapman Capital L.L.C.
Pacific Corporate Towers
222 N. Sepulveda Blvd.
El Segundo, CA 90245
Office: (310) 662-1900
Web: http://www.hedgefunds.com 

McAfee Replaces Chief, to Restate 10 Years of Results (Update3)
2006-10-11 10:34 (New York)

By Rebecca Barr

Oct. 11 (Bloomberg) -- McAfee Inc., the second-biggest maker
of anti-virus software, replaced its top two executives and will
restate 10 years of results by as much as $150 million to account
for backdated stock options.

President Kevin Weiss was fired, and Chairman and Chief
Executive Officer George Samenuk retired, McAfee said in a
statement today. Board member Dale Fuller will take over as
president and interim CEO until a replacement is found. Director
Charles Robel will become non-executive chairman.

Samenuk and Weiss join at least 28 other executives or
directors who have lost their jobs in connection with the
widening scandal over stock options. Cnet Networks Inc. also
announced the resignation of its CEO today. McAfee decided to
replace management after presenting the findings of an internal
review of grant practices to the board.

``It's the first step for the company out of the penalty
box,'' said Daniel Ives, a New York-based analyst with Friedman
Billings Ramsey, He has an ``outperform'' rating on the stock.
``Investors can start focusing on the fundamentals again.''

Shares of Santa Clara, California-based McAfee rose 69
cents, or 2.7 percent, to $26.48 at 10:29 a.m. in New York Stock
Exchange composite trading. The stock had fallen 4.9 percent this
year before today.

McAfee Chief Financial Officer Eric Brown during a
conference call declined to elaborate on the firing of Weiss, 50.
The company has appointed a committee to find a new CEO and said
it will evaluate both internal and external candidates.

Scandal Widens

``I regret that some of the stock-option problems identified
by the special committee occurred on my watch,'' Samenuk, 51,
said in a statement today.

At least 140 companies have disclosed internal or federal
probes into whether they retroactively granted options to
coincide with dates when the stock price was low, creating a
built-in profit for recipients. The scandal has primarily
embroiled technology companies, which used options grants in the
1990s to lure new employees.

The results of McAfee's probe revealed errors went back
further than previously estimated. The company said in August
that an adjustment for the three years ended 2005 was likely
after starting the internal review of stock options in May.

The company also announced in May that it was in informal
talks with the SEC on the issue and fired general counsel Kent
Roberts in connection with the investigation. In June the SEC
subpoenaed McAfee and a formal probe began.

The investigation is now largely over and the company now
plans to file restated results ``as soon as practicable,'' Brown
said on the call today. McAfee won't buy back any more shares
until the restatement is complete, he said.

`Fresh Start'

Samenuk, hired in 2001, in previous years cleaned up
McAfee's accounting and settled lawsuits that claimed former CEO
William Larson misstated the company's financial condition. He
tightened financial controls and restated results almost every
year since 2002.

The former International Business Machines Corp. executive
also cut losses and won a reputation for beating forecasts.

``Samenuk has been the main ingredient for the success of
the company,'' Ives said. ``That said, some investors may think
the company deserves a fresh start.''

McAfee, which ranks behind Symantec Corp. in security
software, reported in July that second-quarter profit fell 25
percent to $31.4 million, or 19 cents a share, because of stock-
option costs. Sales rose 13 percent to $277.4 million.

Fuller said he doesn't expect the management changes to
affect growth at the company. The CEO spent last night and this
morning speaking to his senior management team and he plans to
spend this morning talking to McAfee customers, he said.

``McAfee has had to make some difficult decisions in the
last 24 hours, but they are in the best interests of the
shareholders,'' Fuller said on the conference call.

--With reporting by Ville Heiskanen and Ron Day in New York.
Editor: Sondag (tlb)
 

From: Robert L. Chapman, Jr.
Sent: Tuesday, October 10, 2006 1:23 PM
To: 'Shawn C. A. Hassel (shassel@alvarezandmarsal.com)'
Subject: Chapman Capital Activism: Vitesse (VTSS): Executive Plea Bargains

October 10, 2006

Shawn,

Please forward article below to the Board.

Robert L. Chapman, Jr.
Managing Member
Chapman Capital L.L.C.
Pacific Corporate Towers
222 N. Sepulveda Blvd.
El Segundo, CA 90245
Office: (310) 662-1900
Web: http://www.hedgefunds.com 

==========

Ex-Comverse Executives May Plead Guilty, U.S. Prosecutors Say
2006-10-10 15:35 (New York)


By Patricia Hurtado

Oct. 10 (Bloomberg) -- Two former Comverse Technology Inc.
executives charged with stock-option manipulation are in
negotiations to plead guilty, U.S. prosecutors said in court
filing.

David Kreinberg, 41, Comverse's former chief financial
officer, and William Sorin, 56, its former director and general
counsel, were charged in an Aug. 9 complaint with backdating
stock options so employees could buy shares at low prices.
Assistant U.S. Attorney Linda Lacewell asked for and got a month
delay in the Oct. 9 deadline to formally indict the men,
according to a court filing that disclosed the negotiations.

Lacewell said in a letter to a magistrate in charge of the
case that the Brooklyn U.S. Attorney's Office and lawyers for
Kreinberg and Sorin ``are engaged in plea negotiations which they
believe are likely to result in a disposition of this case
without trial,'' according to the filing, made public today.

The charges against the two executives and Comverse's former
chief executive officer are the most wide-ranging from more than
130 inquiries started by U.S. authorities and companies into
manipulations of stock-options timing. Comverse CEO Jacob
``Kobi'' Alexander is fighting extradition from Namibia to face
the charges in New York. Sorin and Kreinberg might agree to
testify against him as part of their negotiations.

Alexander, 54, was freed Oct. 3 by a Namibian judge on N$10
million ($1.3 million) bail as he fights extradition. A 32-count
indictment was unsealed against him Sept. 27. It doesn't name
Kreinberg or Sorin.

Sorin's lawyer, James Brochin declined comment. Kreinberg's
lawyer, Matthew Lang, didn't return a call seeking comment.

Reasonable Likelihood

Lacewell wrote in her Oct. 6 letter to the magistrate that
the defendants and their lawyers needed more time ``in order to
focus efforts on plea negotiations,'' according to the filing.

She said there was a ``reasonable likelihood'' that the
negotiations would result in pleas. The documents were approved
by U.S. Magistrate Judge Joan Azrack, the filing shows.

Scott Christie, a former federal prosecutor who is now a
lawyer at McCarter & English in Newark, New Jersey, said when
prosecutors seek such delays, it's a sign that the defendants
could plead guilty.

``Normally when you have a series of delays like this, it's
a strong indication there are serious discussions under way,'' he
said. ``Plea discussions are discussed as are forfeiture issues
and cooperation. The parties feel they need a little extra time
to finalize such issues.''

Another Sign

Christie said the fact that prosecutors indicted Alexander
and only charged Kreinberg and Sorin was another method
prosecutors use in a case to secure pleas.

``If the government believes there is a possibility of
working out a plea deal, they will hold off on indicting
someone,'' Christie said. ``Sometimes what they will do is to
show they're serious, they'll indict one of the co-conspirators
and speak to others and say, `You're next. Let's talk about
resolving your criminal liability or you'll face the same
fate.'''

At a hearing in August, Lacewell told U.S. District Court
Judge Nicholas Garaufis, who is presiding over a securities fraud
civil case against Comverse, that her office had agreed with
lawyers for Kreinberg and Sorin to extend the deadline until Oct.
9 on whether to indict the two men.

Alexander, Kreinberg and Sorin were accused in a criminal
complaint unsealed on Aug. 9 of backdating ``millions of stock
options'' so employees of the New York-based company could buy
shares at low prices. Both men pleaded not guilty and are free on
$1 million bail.

Under federal law, prosecutors had 30 days after filing the
criminal complaint to bring a criminal indictment Christie said.
They got a month delay of that first deadline.

Comverse is the second company whose executives have been
criminally charged over stock-option fraud. Former Brocade
Communications Systems Inc. Chief Executive Officer Gregory Reyes
was the first executive charged with securities fraud in a
growing U.S. probe into illegal options backdating.

The U.S. court case is U.S. v. Alexander, 06-CR-00628, U.S.
District Court, Eastern District of New York (Brooklyn).

--Editor: Oster


 

From: Robert L. Chapman, Jr.
Sent: Friday, October 06, 2006 5:14 AM
To: 'Shawn C. A. Hassel (shassel@alvarezandmarsal.com)'
Cc: 'Edward Rogas Jr. (edrogas@aol.com)'
Subject: Chapman Capital Activism: Vitesse (VTSS): A&M Incentive Compensation

October 6, 2006

Mr. Shawn C. A. Hassel
Chief Financial Officer
Vitesse Semiconductor Corporation
741 Calle Plano
Camarillo, CA  93012

Shawn,
 
Chapman Capital just reviewed the Form 8-K (attached below) finally describing A&M’s incentive compensation award.

As hard/smart as you seem to be working, I thought A&M’s $90,000/month in compensation was priced at high enough a level that it was assumed (i.e., included) that such extraordinarily-priced talent (i.e., many CFO’s at $300 MM market cap companies make that in a full year) would accomplish the financing (high priced as well) w/ Tennenbaum, complete financial restatements, implement a remediation plan and settle with the bond holders. What is most concerning about this incentive agreement is that there is no “quality test” of each of these “achievements”; instead, irrespective of high expensive the rescue financing, how long it takes to restate, how effective the remediation plan or how expensive the bond settlement, A&M gets paid in full.

Who specifically at VTSS negotiated this with A&M?

Robert L. Chapman, Jr.
Managing Member
Chapman Capital L.L.C.
Pacific Corporate Towers
222 N. Sepulveda Blvd.
El Segundo, CA  90245
Office: (310) 662-1900
Web:  http://www.takeovers.com

=============


UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION
  WASHINGTON, D.C. 20549
_____________________
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): October 2, 2006
VITESSE SEMICONDUCTOR CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation)
1-31614 77-0138960
(Commission File Number) (IRS Employer Identification No.)

741 Calle Plano, Camarillo, California 93012
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (805) 388-3700
Not applicable
Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any
of the following provisions (see General Instruction A.2. below):

[ ] Written communications pursuant to Rule 425 under the Securities Act
(17 CFR 230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act
(17 CFR 240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))

<PAGE>

Item 1.01 Entry into a Material Definitive Agreement.

On October 2, 2006, Vitesse Semiconductor Corporation (the "Company")
entered into an agreement (the "Agreement") with Alvarez & Marsal, LLC
("A&M"). The Company and A&M previously entered into an agreement, dated
April 27, 2006, pursuant to which, among other things, A&M agreed to
provide the services of Shawn C.A. Hassel as Chief Financial Officer of
the Company. The April 27, 2006 agreement provided that the parties would
negotiate to reach agreement regarding certain incentive compensation to
be received by A&M for its services. This incentive based compensation
was partially in consideration for a negotiated discount for ongoing fees.
The Agreement is the result of those negotiations.

Pursuant to the Agreement, a copy of which is included in this Form 8-K
as Exhibit 10.1 and incorporated hereby by reference, the Company has
agreed, among other things, to:

(1) issue to A&M warrants to acquire 150,000 shares of the Company's
Common Stock at a price of $1.20 per share, subject to adjustment.
The warrants will expire five years from the date of issue;

(2) issue to A&M warrants to acquire an additional 150,000 shares of
the Company's common stock at a price of $1.20 per share, subject
to adjustment. These warrants will be issued to A&M at the earlier
of the delivery of financial statements of the Company to KPMG LLP,
the Company's independent public accountants, or the occurrence of
an event that would give A&M the right to put the warrants back to
the Company as described below. The warrants will expire five years
from the date of issue;

(3) enter into a Warrant Registration Right Agreement pursuant to which
the Company will agree, among other things, to register the resale
of the shares of the Company's Common Stock issuable upon exercise
of the warrants and the Company will grant to A&M the right to put
the warrants back to the Company under certain circumstances set
forth in the Agreement at a price equal to the difference between
the then trading price of the Company's Common Stock and the
exercise price under the warrants; and

(4) pay to A&M (i) $250,000 upon execution of the Agreement as
compensation with respect to the completed financing with affiliates
of Tennenbaum Capital Partners, LLC; (ii) $50,000 upon completion
of a second financing of $25 million as permitted by the loan
agreement with the affiliates of Tennenbaum Capital Partners LLC;
(iii) $150,000 upon setting the terms for a proposed settlement of
a dispute with the holders of the Company's 1.5 % Convertible
Subordinated Debentures due 2024; (iv) $75,000 upon the approval
and implementation of a remediation plan resulting from the internal
investigation being conducted by the Special Committee of the Board
of Directors of the Company; and (v) up to $125,000 upon delivery
of financial statements of the Company to KPMG LLC.

<PAGE>

Item 9.01 Financial Statements and Exhibits

(d) Exhibits.

Item No. Description

10.1 Letter Agreement, dated October 2, 2006,
between Vitesse Semiconductor Corporation
and Alvarez & Marsal, LLC.

<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized, in the City of Camarillo, State of
California, on October 5, 2006.

VITESSE SEMICONDUCTOR CORPORATION

By: /s/ Christopher Gardner
Christopher Gardner
Chief Executive Officer

<PAGE>

EXHIBIT INDEX

Item No. Description
10.1 Letter Agreement, dated October 2, 2006,
between Vitesse Semiconductor Corporation
and Alvarez & Marsal, LLC.
 

From: Robert L. Chapman, Jr.
Sent: Tuesday, September 26, 2006 7:12 AM
To: 'Shawn C. A. Hassel (shassel@alvarezandmarsal.com)'
Subject: Chapman Capital Activism: Vitesse Semiconductor (VTSS): FBI Promises Crackdown

September 26, 2006

Shawn,

Please forward this to Vitesse's entire Board of Directors, particularly the Compensation Committee (particularly Jim Cole).

Robert L. Chapman, Jr.
Managing Member
Chapman Capital L.L.C.
Pacific Corporate Towers
222 N. Sepulveda Blvd.
El Segundo, CA 90245
Office: (310) 662-1900
Web: http://www.hedgefunds.com

==================

FBI Promises Crackdown on Stock-Option Fraud as Cases Increase
2006-09-26 00:16 (New York)


By Robert Schmidt

Sept. 26 (Bloomberg) -- The FBI is conducting probes of 52
companies that may have illegally backdated stock options and
more cases are on the way, its new criminal investigative chief
said.

The number of criminal cases has increased 16 percent in
less than two months, said Chip Burrus, an assistant director of
the Federal Bureau of Investigation. ``We're going to knock that
pretty good,'' he said in an interview. ``We're going to go after
those.''

Burrus signaled the Justice Department will oppose efforts
to water down the corporate-governance overhaul adopted in the
wake of the scandals involving Enron Corp., WorldCom Inc. and
others. In the interview, he praised the 2002 Sarbanes-Oxley
accounting law, which has been under attack from business groups
and Wall Street, and said the FBI is paying close attention to
fraud in the $1.2 trillion hedge-fund industry.

The FBI is investigating 486 corporate fraud cases this
fiscal year, up from 423 in 2005, according to the agency. It has
also opened 1,160 securities fraud probes, compared with 1,139
last year. Twenty of the bureau's corporate-fraud cases allegedly
involve more than $1 billion.

``There is a general idea that this has sort of gone away,''
Burrus said. ``It's not going away.''

The bureau works closely with the Securities and Exchange
Commission, U.S. attorneys' offices, the Justice Department's
fraud section and other agencies.

Burrus's comments echo those of Deputy Attorney General Paul
McNulty, who said in a June 29 interview that corporate fraud
remains a priority for the Justice Department.

FBI at the Door

For executives, Burrus said, a knock on the door from an FBI
agent sends a strong message.

``I'm not interested in civil fines,'' he said. ``If I'm
coming in and I'm looking, there are allegations of criminal
misconduct. There's obviously a different pucker factor that
comes when you start talking to an FBI agent.''

Illegal manipulation of stock options is one of the biggest
growth areas, Burrus said. Backdating occurs when companies
reward executives by retroactively setting the grant date to a
time when the stock was cheap, increasing the potential for
profit. At least 130 companies have disclosed internal probes or
federal investigations into their options practices.

The first criminal charges in the options scandal were
brought against former executives of Brocade Communications
Systems Inc., based in San Jose, California, and New York-based
Comverse Technology Inc.

Admit Wrongdoing

Burrus said the Justice Department is encouraging companies
to come forward and admit wrongdoing.

``Honest corporate executives want fast resolution to this
so they can move on with what they do best, and that's the
business that they're in,'' he said. ``If we linger around these
things, then it's not good for them, it's not good for us.''

On hedge funds, Burrus said the FBI is concerned about the
number of smaller investors gaining access, mostly through
pension funds, to the private partnerships meant for the wealthy.
President George W. Bush's corporate fraud task force, including
the FBI, has identified hedge funds as ``an emerging threat.''

The assets of largely unregulated hedge funds have more than
doubled over the past five years. An attempt by the SEC to set up
minimal requirements for the investment pools, such as periodic
inspections, was struck down in June by a federal appeals court
in Washington.

`Emerging Threat'

``It is an emerging threat because of the dollar value and
the number of institutions that are actively taking a look at
this,'' Burrus said. ``People that maybe aren't expecting to have
this type of a risky investment in their portfolio end up taking
a bath.''

Several high-profile hedge funds have collapsed in the past
two years, including Stamford, Connecticut-based Bayou Management
LLC and Atlanta-based International Management Associates LLC,
which counted professional football players among its investors.
Earlier this month, Greenwich, Connecticut-based Amaranth
Advisors LLC informed clients that it lost $6 billion on natural
gas trades.

As the Justice Department's investigative arm, the FBI has
some 260 agents working on corporate, securities and commodities
fraud cases.

Still, business investigations take a back seat to terrorism
and counter-intelligence probes. In Burrus's own division,
corporate fraud ranks third in importance behind combating gangs
and investigating public corruption, he said.

White-Collar Crime

That doesn't deter Burrus, 49, who said he ``cut his teeth''
at the bureau on white-collar criminal investigations in the
1980s and 1990s, especially bank fraud. He joined the FBI in 1983
and rose to head its office in Salt Lake City. Burrus became
acting head of the criminal investigative division in February
and was appointed to the permanent job last month by FBI Director
Robert Mueller.
``Our goal has always been to maintain the integrity of the
markets to protect the average investor,'' Burrus said, citing
retirees who ``just get fleeced right and left'' and those who
lose their jobs due to corporate malfeasance.
Burrus said the agency learned valuable lessons from the
accounting scandals, including where to locate resources. Most of
the bureau's financial expertise is in major cities like New
York, Los Angeles and San Francisco, and the agency was forced to
play ``catch up'' in places like Clinton, Mississippi, home to
WorldCom, and in Houston, where Enron had its headquarters.
``It took us a while to get peddling on Enron and
WorldCom,'' Burrus said.

Response Teams

Karen Spangenberg, chief of the FBI's financial crimes
section in Burrus's division, has created four, 10-person
regional response teams. They include lawyers, accountants,
financial analysts and asset forfeiture specialists. They can be
deployed at the first sign of trouble.
``In corporate fraud cases, especially ones that are
disintegrating in front of your eyes, there is a real need to
quickly get all the evidence,'' Burrus said.
He also said the 2002 Sarbanes-Oxley law, which increased
penalties for financial fraud and required executives to certify
that their books are in order, ``has been a big help.''
The law ``brings a seriousness to the company's financial
statements, where corporate executives are held accountable,''
Burrus said. ``It puts some real teeth into what they knew, when
they knew it. And I think it does a great service to the American
investor.''

--Editor: Rubin (jto). 

 

From: Robert L. Chapman, Jr.
Sent: Saturday, August 19, 2006 5:42 PM
To: 'Shawn C. A. Hassel (shassel@alvarezandmarsal.com)'
Cc: 'Edward Rogas Jr. (edrogas@aol.com)'
Subject: Chapman Capital Activism: Vitesse (VTSS): Compensation Committees Scrutinized in Barrons

August 19, 2006

Mr. Shawn C. A. Hassel
Chief Financial Officer
Vitesse Semiconductor Corporation
741 Calle Plano
Camarillo, CA  93012

Shawn,

Compensation Committees (and not just executives or boards of directors as a whole) are finding themselves getting more media attention.  Please forward to Vitesse's Compensation Committee (and Mr. Chris Gardner) the attached article in this weekend's Barron's regarding one such committee member.

As I have stated before, it is my belief that, as Managing Member of the firm that oversees the largest block of Vitesse Semiconductor, Mr. James Cole should resign from the Board immediately.  At the appropriate time, I intend to make my case to the public via a Schedule 13D amendment and communications with the financial press.

Robert L. Chapman, Jr.
Managing Member
Chapman Capital L.L.C.
Pacific Corporate Towers
222 N. Sepulveda Blvd.
El Segundo, CA  90245
Office: (310) 662-1900
Web:  http://www.takeovers.com

Meet Mr. Generosity
By JIM MCTAGUE

JAMES JOHNSON, A FORMER CHAIRMAN of Fannie Mae, just can't stay away from boardrooms. He sits on the boards of no fewer than six corporations, and is chairman of the compensation committees of five of them. That's a full plate for anyone in these times of increased scrutiny of boards' actions. Only 350 of the nation's 50,000 corporate directors sit on four boards, and most are content with one.

But that's not all that makes Johnson's board work stand out. When Johnson joins a board, executive compensation controversies often follow. The executive-pay practices of five of the companies where he serves have been criticized by two research groups on corporate governance, mostly for being insufficiently tied to performance. In other words, the presence of the legendary executive on a board may be shaping up as a warning sign for investors.

The companies, including such well-known ones as Gannett (ticker: GCI), Goldman Sachs (GS) and Temple Inland (TIN), defend their compensation practices -- and stand by Johnson. But it's hard to overlook the frequency of the criticisms. Even Johnson's tenure at Fannie Mae (FNM) in the 1990s has come under fire this year, with the mortgage giant's regulator contending he contributed to the colossal accounting debacle that came to a head under his successor, Franklin D. Raines.

Johnson, who declined to comment for this story, has mostly led a charmed career. Now 62, he rose to prominence in politics, becoming a top adviser to former Vice President Walter Mondale. That was followed by a princely - at Fannie, from 1991 through 1998. He greatly expanded the quasi-governmental company, became one of the most prominent executives in America and collected $21 million a year. He still draws $1 million annually in pension payments and consulting fees from the company, according to a regulatory report.

Next came a few years at the helm of the prestigious Kennedy Center in Washington, D.C., a glamorous gig that cinched his election to the American Academy of Arts and Sciences. Now, in addition to his six boards, he is active in at least four major civic enterprises and serves as a vice chairman of the merchant bank Perseus Capital, also based in the nation's capital.

Johnson's image took its first big hit earlier this year, as a result of disclosures of possible backdating of stock options awards at UnitedHealth Group (UNH), where he has been a board member since 1993 and chairman of the compensation committee since 2004.

The Wall Street Journal reported in April that a board committee at UnitedHealth including Johnson was looking into possible backdating of $1.8 billion in options awarded to Chairman William McGuire from 1994 through 2002. The implication was that the board had acted only after being nudged by the SEC.
The dating of the options awards in several cases coincided with lows for the stock during the period, meaning higher eventual gains for McGuire. The odds of randomly selecting the profitable grant dates in advance were thought to be about one in 200 million.

McGuire picked the dates for options awards himself, and the board later approved them. Shares of UnitedHealth Group plunged after the disclosures and now trade 24% below their 52-week high. Some big institutional investors have filed a class-action suit in federal court in Minnesota, alleging breech of fiduciary duty and other violations of law. The suit names Johnson and most other directors as defendants, since they voted to approve the options grants. Minnesota's attorney general is also investigating the case.

UnitedHealth Group has said it won't comment until Johnson's committee has finished its investigation.
In a less-publicized instance earlier this year, Institutional Shareholders Services, which researches corporate governance for big investors, recommended that its clients who own shares of KB Home (KBH) withhold their votes for Johnson, who is a compensation-committee member, because KB's bonus plans are too generous and lead to "runaway compensation."

Bruce Karatz, chairman and CEO of the home builder, received $45 million in 2005. ISS says Karatz's compensation isn't linked directly to the relative performance of the company, but rather to the performance of the overall housing market. Thus, Karatz, whose company was only the fifth-best performer in its industry, received $32 million more than did Donald Tomnitz, CEO of D.R. Horton, the top-performing home builder in 2005.

Table: Multitasking in the Boardroom

Karatz, for his part, maintains the pay scheme is "totally performance-based," and he credits Johnson with "exceptional judgment." He adds that Johnson could not have dictated higher CEO remuneration by himself. "It's a committee action," Karatz says. "It was implemented many years ago, and it's a very mathematical, performance-based system."

Rockville, Md.-based ISS, which covers some 3,500 companies worldwide, each year accuses only about 2% of them of paying compensation that's out of whack with performance. But Gannett and Temple Inland were among that group in 2005, and Johnson is the head of both companies' compensation committees. The two corporations' option and stock awards weren't tied closely enough to performance, ISS maintains. Shareholders ignored the warning and didn't support pay changes.

The Corporate Library, another top source of corporate-compensation data, has raised a similar objection about the pay at Goldman Sachs, where Johnson has been a board member since 1999 and chairs the compensation committee. Remuneration at Goldman rises and falls with the markets and doesn't track performance versus its peers, says Paul Hodgson, a senior research associate of the Corporate Library. Former CEO Henry Paulson was making about $42 million a year when he left to become U.S. Treasury Secretary. The median pay for his peer group is $11.5 million, says ISS.

A spokesman for the investment bank said only that Johnson is "a valued member of the Goldman Sachs board."

The sole Johnson company that hasn't come under fire from critics is Target (TGT). Johnson has been a director of the retailer since 1996 and, yes, chairs its compensation committee.

THE SHEER VOLUME of Johnson's board work is cause for concern in some quarters. "We start raising a red flag when we see a director on four boards," says Hodgson.

The ISS sees the limit as seven. But since the implementation of the Sarbanes-Oxley law, which increases director workloads substantially, it has become increasingly rare for anyone to serve on more than two corporate boards, says ISS Executive Vice President Patrick McGurn.

But if the high number of boards Johnson serves on is an anomaly, his apparent taste for generous pay packages might not be. Academic research suggests that when highly compensated CEOs and former chief executives become board members, they favor generous pay packages for other CEOs.

Amir Barnea and Ilan Guedj, finance professors at the University of Texas' McCombs School of Business, examined data on the companies in the Standard & Poor's 1500. They found that directors who are, or were, highly paid chief executives and who know lots of other powerful, high-paid people tend to approve pay packages 10% to 13% richer than those at companies that appoint non-CEOs as directors.
The researchers also found -- perhaps to no great surprise -- that directors who approve generous pay packages at one company are likely to be awarded more directorships in the future.

The past, however, sometimes catches up with overly generous directors.

The Bottom Line

Two top research groups have criticized the executive-pay practices at several of the firms at which Johnson serves.

Though Fannie Mae's stock price soared by more than 700% during Johnson's seven-year tenure, federal regulators in May criticized him for allegedly creating a culture that had contributed to the company's subsequent fall from grace. After regulators uncovered accounting manipulations in 2004, Fannie Mae admitted to overstating income by $11 billion in past years.

In a recent interview with Barron's, James Lockhart, executive director of the Office of Federal Housing Enterprise Oversight, Fannie Mae's regulator, said: "Cultures grow over time and, obviously, in my mind, Johnson was very much involved in starting a culture of arrogance at the organization, which eventually led to all of the problems they had and are still having."

That hardly sounds like a good candidate for a board. But don't be shocked if some needy CEO recommends the generous Mr. Johnson for a director's seat over the next few years.
 

From: Robert L. Chapman, Jr.
Sent: Saturday, August 12, 2006 12:28 PM
To: 'Shawn C. A. Hassel (shassel@alvarezandmarsal.com)'
Cc: 'Edward Rogas Jr. (edrogas@aol.com)'
Subject: Chapman Capital Activism: Vitesse (VTSS): Board Conflicts of Interest in Investigation


August 12, 2006

Mr. Shawn C. A. Hassel
Chief Financial Officer
Mr. Edward Rogas, Jr.
Chairman, Special Committee