SC 13D/A 1 formsc13d.htm CHAPMAN CAPITAL VTSS SC 13D/A9 08-21-2007 formsc13d.htm
 
 

 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
SCHEDULE 13D
(Amendment No. 9)
 
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)
 
August 21, 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
 
     12,137,664 Common Shares
  9  SOLE DISPOSITIVE POWER
 
     12,137,664 Common Shares
10  SHARED DISPOSITIVE POWER
 
                0
11
 
AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
 
 
 
 
            12,137,664 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)
 
 
 
 
 
 
 
            5.4%
 
 
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
 
     7,314,507 Common Shares
  9  SOLE DISPOSITIVE POWER
 
      7,314,507 Common Shares
10  SHARED DISPOSITIVE POWER
 
                0
11
 
AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
 
 
 
 
           7,314,507 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)
 
 
 
 
 
 
 
            3.3%
 
 
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
 
                19,452,171 Common Shares
  9  SOLE DISPOSITIVE POWER
 
                0
10  SHARED DISPOSITIVE POWER
 
                 19,452,171 Common Shares
11
 
AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
 
 
 
 
           19,452,171 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)
 
 
 
 
 
 
 
           8.7%
 
 
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
 
                19,452,171 Common Shares
  9  SOLE DISPOSITIVE POWER
 
                0
10  SHARED DISPOSITIVE POWER
 
                 19,452,171 Common Shares
11
 
AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
 
 
 
 
           19,452,171 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)
 
 
 
 
 
 
 
           8.7%
 
 
14
 
TYPE OF REPORTING PERSON (SEE INSTRUCTIONS)
 
 
 
 
 
 
 
            IN
 
 

 
INTRODUCTION
 
This Schedule 13D Amendment ("13D Amendment #9") 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 and all previous amendments thereto are 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 7,314,507 Common Shares reported hereunder was $8,098,514 (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 12,137,664 Common Shares reported hereunder was $13,279,933 (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. This letter, dated July 7, 2006, is attached hereto as Exhibit B.
 
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 C.
 
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 F.
 
    On June 15, 2007, Mr. Gardner and the Issuer's Chief Financial Officer, Mr. Richard C. Yonker, returned Mr. Chapman's telephone call from earlier that day. Mr. Chapman excoriated Mr. Gardner for his perpetual, serial offerings of pretexts for failing to take actions that would lead to a reconstitution of the Board. Mr. Chapman highlighted the worsening corporate governance imbalance created by the Issuer's "rescue financier," affiliates of Tennenbaum Capital Partners, LLC, being granted a monitoring representative on the Board while the Issuer's owners have been deprived of the right to elect even one member of their own. Mr. Chapman made it clear to Messrs. Gardner and Yonker that a proxy fight to replace the illegitimately entrenched Board is a near certainty unless the demands of the Issuer's owners are met.
 
         On June 27, 2007, Chapman Capital issued a press release supporting Mr. Cole's termination as a member of the Issuer's Board of Directors.
 
         On July 5, 2007, Chapman Capital informed the Issuer's management that Chapman Capital intended to submit to the Securities and Exchange Commission a Schedule 14A commencing a process of soliciting proxies to replace the Issuer's Board of Directors. Chapman Capital's intention to commence such proxy solicitation, which is subject to the Issuer's continued non-compliance with commonly accepted standards of corporate governance, has been motivated by overwhelming support for Issuer Board reconstitution by both the Issuer's institutional and individual investors, the latter represented by the Vitesse Investor Group (http://www.vitesseinvestor.com).
 
      On July 5, 2007, Mr. Chapman spoke with newly "elected" member of Issuer's Board of Director's, Ms. Willow B. Shire.  Mr. Chapman encouraged Ms. Shire to read the 13D Filings and related press releases.  Mr. Chapman reiterated Chapman Capital's demand that the Issuer announce by July 31, 2007, either a) the scheduling of an annual shareholder meeting; or b) the appointment of no less than two shareholder-selected directors to the Issuers Board.  Mr. Chapman also spoke with Mr. Gardner,  emphasizing that an owner led Board reconstitution was imperative and long overdue.  A correspondence to this effect was sent to the Issuer's management and Board on July 7, 2007 and is attached hereto as Exhibit I.
 
          On July 26, 2007, Mr. Chapman met with Mr. Gardner and Ms. Shire at Mr. Chapman's home to discuss management, corporate governance and the Board's response to Mr. Chapman's demands that the Issuer announce, by July 31, 2007, either a) the scheduling of a shareholder meeting; or b) the appointment of no less than two shareholder-selected directors to the Issuer's Board.
 
          On July 30, 2007, Mr. Chapman spoke with Mr. Gardner in advance of Mr. Chapman's stated July 31, 2007 deadline.  Mr. Gardner confirmed that the Issuer's Board of Directors had met and continued to insist that new directors endure a different process than that utilized by the Board for the recent admission of director Willow Shire.  Mr. Chapman expressed his dissatisfaction to which Mr. Gardner simply replied "This is what the Board decided."  Mr. Chapman informed Mr. Gardner that Chapman Capital would begin the process of soliciting proxies from shareholders immediately by filing a Schedule DEFN14A with the Securities and Exchange Commission.
 
      On July 30, 2007, Chapman Capital announced that following an exhaustive, one-year effort to encourage the Board to come into compliance with core, generally accepted corporate governance standards, it has determined to seek nominees to replace all or part of the Board currently consisting of directors Christopher Gardner, Edward Rogas, Vincent Chan, Alex Daly and Willow Shire.  The Issuer last allowed its owners to elect their representatives on the Board some 18 months ago on January 24, 2006, in clear non-compliance with Section 211 of the Delaware General Corporation Law that required the 2007 annual meeting to be held by February 24, 2007, a date that was within the Delaware-mandated 13 months from the date of the Issuer’s last annual meeting at which directors were elected. This press release is attached hereto as Exhibit J.
      
      On August 14, 2007, Mr. Chapman sent a correspondence to Mr. Yonker to obtain this executive's assessment of the potential impact of the recent $170 million, gross negligence jury ruling against BDO Seidman LLP, the Issuer's independent auditor, on the Issuer's financial restatement and audit. This correspondence is attached hereto as Exhibit K.
 
      On August 21, 2007, Chapman Capital issued a press release announcing that Chapman Capital has launched an investigation into the backgrounds and affiliation of non-shareholder elected directors Willow B. Shire and Steven P. Hanson. This press release is attached hereto as Exhibit L.
    
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 19,452,171 shares of Common Stock constituting 8.7% 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)
06/25/07
CS
6,100
 $  1.14
06/25/07
CS
121,600
 $  1.14
06/26/07
CS
17,500
 $  1.15
06/26/07
CS
15,000
 $  1.14
06/26/07
CS
27,600
 $  1.14
06/27/07
CS
3,600
 $  1.15
06/27/07
CS
3,000
 $  1.17
06/28/07
CS
10,000
 $  1.15
06/28/07
CS
650
 $  1.16
06/28/07
CS
6,947
 $  1.14
06/29/07
CS
15,600
 $  1.15
06/29/07
CS
45,000
 $  1.15
06/29/07
CS
8,700
 $  1.15
06/29/07
CS
126,000
 $  1.16
06/29/07
CS
360,000
 $  1.16
07/02/07
CS
4,500
 $  1.15
07/02/07
CS
45,000
 $  1.15
07/02/07
CS
6,300
 $  1.14
07/02/07
CS
17,600
 $  1.15
07/03/07
CS
14,200
 $  1.16
07/03/07
CS
24,400
 $  1.16
07/03/07
CS
4,900
 $  1.16
07/03/07
CS
2,900
 $  1.15
07/05/07
CS
17,600
 $  1.16
07/06/07
CS
4,900
 $  1.16
07/06/07
CS
8,700
 $  1.15
07/06/07
CS
12,500
 $  1.17
07/13/07
CS
24,300
 $  1.19
07/13/07
CS
24,300
 $  1.18
07/16/07
CS
59,800
 $  1.18
07/16/07
CS
9,700
 $  1.17
07/16/07
CS
23,000
 $  1.18
07/17/07
CS
17,900
 $  1.17
07/17/07
CS
39,100
 $  1.18
07/18/07
CS
2,300
 $  1.16
07/18/07
CS
34,500
 $  1.18
07/19/07
CS
13,900
 $  1.17
07/19/07
CS
9,400
 $  1.18
07/19/07
CS
18,500
 $  1.18
07/20/07
CS
34,600
 $  1.18
07/20/07
CS
9,200
 $  1.18
07/23/07
CS
27,800
 $  1.18
07/23/07
CS
23,200
 $  1.18
07/23/07
CS
35,300
 $  1.18
07/24/07
CS
16,300
 $  1.18
07/24/07
CS
46,500
 $  1.18
07/24/07
CS
24,600
 $  1.18
07/25/07
CS
4,700
 $  1.18
07/25/07
CS
1,800
 $  1.18
07/25/07
CS
9,000
 $  1.18
07/26/07
CS
60,000
 $  1.17
07/26/07
CS
30,600
 $  1.17
07/27/07
CS
10,900
 $  1.16
07/27/07
CS
15,148
 $  1.16
07/27/07
CS
27,000
 $  1.17
07/30/07
CS
68,600
 $  1.16
07/30/07
CS
19,000
 $  1.16
07/30/07
CS
20,000
 $  1.16
07/30/07
CS
13,500
 $  1.16
08/03/07
CS
5,000
 $  1.17
08/03/07
CS
6,200
 $  1.17
08/03/07
CS
10,000
 $  1.17
08/06/07
CS
10,600
 $  1.16
08/06/07
CS
8,800
 $  1.17
08/07/07
CS
10,000
 $  1.15
08/07/07
CS
16,500
 $  1.15
08/07/07
CS
11,200
 $  1.16
08/08/07
CS
21,400
 $  1.16
08/08/07
CS
12,500
 $  1.14
08/09/07
CS
400
 $  1.14
08/09/07
CS
100
 $  1.13
08/09/07
CS
100,300
 $  1.16
08/09/07
CS
11,000
 $  1.14
08/10/07
CS
22,200
 $  1.14
08/10/07
CS
8,746
 $  1.14
08/10/07
CS
21,800
 $  1.15
08/10/07
CS
13,500
 $  1.15
08/10/07
CS
6,800
 $  1.14
08/10/07
CS
10,000
 $  1.14
08/13/07
CS
10,700
 $  1.15
08/13/07
CS
5,000
 $  1.14
08/13/07
CS
3,400
 $  1.14
08/13/07
CS
5,000
 $  1.14
08/13/07
CS
12,200
 $  1.14
08/14/07
CS
15,500
 $  1.15
08/14/07
CS
3,400
 $  1.14
08/14/07
CS
10,000
 $  1.14
08/15/07
CS
34,800
 $  1.12
08/15/07
CS
4,800
 $  1.14
08/16/07
CS
40,000
 $  1.03
08/16/07
CS
1,306
 $  1.02
08/16/07
CS
77,520
 $  1.08
08/17/07
CS
10,000
 $  1.04
08/20/07
CS
5,600
 $  1.02
08/20/07
CS
13,770
 $  1.02
 
 

Chap-Cap Activist Partners Master Fund, Ltd.
 
Date
Security
Amount of Shares/Contracts
 Bought/(Sold)
Approximate Price per Shares/Contracts
 (inclusive of commissions)
06/22/07
CS
30,000
 $  1.18
06/22/07
CS
59,000
 $  1.18
06/25/07
CS
6,400
 $  1.14
06/25/07
CS
126,400
 $  1.14
06/26/07
CS
157,500
 $  1.15
06/26/07
CS
135,000
 $  1.14
06/26/07
CS
248,000
 $  1.14
06/27/07
CS
32,400
 $  1.15
06/27/07
CS
27,000
 $  1.17
06/28/07
CS
90,000
 $  1.15
06/28/07
CS
5,600
 $  1.17
06/28/07
CS
62,500
 $  1.14
06/29/07
CS
1,750
 $  1.15
06/29/07
CS
5,000
 $  1.15
06/29/07
CS
1,000
 $  1.15
06/29/07
CS
14,000
 $  1.16
06/29/07
CS
40,000
 $  1.16
07/02/07
CS
500
 $  1.15
07/02/07
CS
5,000
 $  1.15
07/02/07
CS
700
 $  1.14
07/02/07
CS
1,951
 $  1.15
07/03/07
CS
14,814
 $  1.15
07/03/07
CS
25,600
 $  1.16
07/03/07
CS
5,100
 $  1.16
07/03/07
CS
3,100
 $  1.15
07/05/07
CS
18,289
 $  1.16
07/06/07
CS
5,100
 $  1.16
07/06/07
CS
9,208
 $  1.15
07/06/07
CS
12,500
 $  1.17
07/13/07
CS
25,700
 $  1.19
07/13/07
CS
25,700
 $  1.18
07/16/07
CS
70,200
 $  1.18
07/16/07
CS
11,300
 $  1.17
07/16/07
CS
27,000
 $  1.18
07/17/07
CS
21,100
 $  1.17
07/17/07
CS
45,900
 $  1.18
07/18/07
CS
2,700
 $  1.16
07/18/07
CS
40,500
 $  1.18
07/19/07
CS
16,100
 $  1.17
07/19/07
CS
11,001
 $  1.17
07/19/07
CS
21,500
 $  1.18
07/20/07
CS
40,400
 $  1.18
07/20/07
CS
10,800
 $  1.18
07/23/07
CS
32,200
 $  1.18
07/23/07
CS
26,800
 $  1.18
07/23/07
CS
40,700
 $  1.18
07/24/07
CS
18,700
 $  1.18
07/24/07
CS
53,500
 $  1.18
07/24/07
CS
28,310
 $  1.17
07/25/07
CS
5,300
 $  1.18
07/25/07
CS
2,000
 $  1.18
07/25/07
CS
10,300
 $  1.18
07/26/07
CS
240,000
 $  1.17
07/26/07
CS
122,400
 $  1.17
07/27/07
CS
43,600
 $  1.17
07/27/07
CS
60,400
 $  1.17
07/27/07
CS
108,000
 $  1.17
07/30/07
CS
274,400
 $  1.16
07/30/07
CS
76,000
 $  1.16
07/30/07
CS
80,000
 $  1.16
07/30/07
CS
54,000
 $  1.16
08/03/07
CS
20,000
 $  1.17
08/03/07
CS
24,800
 $  1.17
08/03/07
CS
40,000
 $  1.17
08/06/07
CS
42,400
 $  1.16
08/06/07
CS
35,200
 $  1.17
08/07/07
CS
40,000
 $  1.15
08/07/07
CS
66,000
 $  1.15
08/07/07
CS
44,800
 $  1.16
08/08/07
CS
85,600
 $  1.16
08/08/07
CS
50,000
 $  1.14
08/09/07
CS
1,600
 $  1.14
08/09/07
CS
400
 $  1.14
08/09/07
CS
401,400
 $  1.16
08/09/07
CS
44,000
 $  1.14
08/10/07
CS
88,600
 $  1.14
08/10/07
CS
34,900
 $  1.14
08/10/07
CS
87,200
 $  1.15
08/10/07
CS
53,900
 $  1.15
08/10/07
CS
27,200
 $  1.14
08/10/07
CS
40,000
 $  1.14
08/13/07
CS
42,800
 $  1.15
08/13/07
CS
20,000
 $  1.14
08/13/07
CS
30,300
 $  1.13
08/13/07
CS
20,000
 $  1.14
08/13/07
CS
48,800
 $  1.14
08/14/07
CS
61,900
 $  1.15
08/14/07
CS
13,600
 $  1.14
08/14/07
CS
40,000
 $  1.14
08/15/07
CS
139,400
 $  1.12
08/15/07
CS
19,200
 $  1.14
08/16/07
CS
160,000
 $  1.03
08/16/07
CS
5,300
 $  1.01
08/16/07
CS
310,280
 $  1.08
08/17/07
CS
40,000
 $  1.04
08/20/07
CS
22,400
 $  1.02
08/20/07
CS
55,200
 $  1.02

* 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    Letter dated July 7, 2006, from Robert L. Chapman, Jr., as Managing Member of Chapman Capital L.L.C., demanding a full scale auction of the Company following a financial restatement and rescission of all improperly granted stock options.
Exhibit C   Press release dated December 6, 2006, from Chapman Capital demanding resignation of Issuer's Director, James A. Cole.
Exhibit D
 
Letter dated December 6, 2006, 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.
Exhibit E
 
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 F
 
Press release dated June 15, 2007, from Chapman Capital demanding that Vitesse Semiconductor hold an annual meeting.
Exhibit G
  Letter dated June 15, 2007, from Mr. Chapman to the Issuer's Board and addressed to Mr. Rogas, now Chairman of the Issuer. 
Exhibit H
 
Press release dated June 27, 2007, from Chapman Capital supporting the termination of James A. Cole's membership from Issuer's Board of Directors.
Exhibit I 
 
Correspondence dated July 7, 2007, from Mr. Chapman to Issuer's management and Board of Directors reiterating July 31, 2007 deadline for progress on Board reconstitution.
Exhibit J
 
Press release dated July 30, 2007, from Chapman Capital announcing its determination to initiate a process to replace all or part of the Issuer's Board.
Exhibit K
  Correspondence dated August 14, 2007, from Mr. Chapman to Issuer's CFO Richard Yonker.
Exhibit L
  Press release dated August 21, 2007, from Chapman Capital announcing launch of investigation into Willow B. Shire and Steven P. Hanson. 


 

 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: August 21, 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: August 21, 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: August 21, 2007
CHAPMAN CAPITAL L.L.C.
 
 
 
By:
/s/ Robert L. Chapman, Jr.
 
 
 
 
Name: Robert L. Chapman, Jr.
 
 
Title: Managing Member
 
 
Dated: August 21, 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
Robert L. Chapman, Jr.
Managing Member
 
July 7, 2006
 
Mr. John C. Lewis
Chairman (70; ~ 0.1% owner1)
Vitesse Semiconductor Corporation
741 Calle Plano
Camarillo, CA  93012
Director, Pinnacle Systems Inc.
Director, Cypress Semiconductor Corp.
Fmr. Director, Infinity Financial Tech., Inc.
Fmr. Ch./CEO/Pres., Amdahl Corp.
Office:  (805) 388-3700
Facsimile:  (805) 987-5896
 
Mr. Edward Rogas, Jr. (65; 2000)
Mr. Louis R. Tomasetta (57; 1987)
Mr. Moshe Gavrielov4 (51; 04/05)
Director, Vitesse (~ 0% owner2)
Director, Vitesse (~ 0.4% owner3)
Director, Vitesse (~ 0% owner5)
741 Calle Plano
3651 Via De Costa
EVP/Gen. Mgr., Cadence, Inc.
Camarillo, CA  93012
Thousand Oaks, CA  91360
2655 Seely Avenue
Fmr. SVP, Teradyne, Inc.
Co-Fdr.,Fmr. CEO/Pres., Vitesse Corp.
San Jose, CA  95134
Fmr. Dir. Unit Instruments, Inc.
Fmr. Pres., Vitesse Integ. Circuits Div.
Fmr. Dir., CEO, Verisity Ltd.
Fmr. Dir. Autoclave Engineers Inc.
Fmr. Dir. Maker Comm. Inc.
Office:  (408) 943-1234 Ext. 6802
Office:  (805) 388-3700
Office:  (805) 493-0160
Facsimile:  (408) 428-5001
Facsimile:  (805) 987-5896
Facsimile:  (805) 987-5896
mary.macdonald@teradyne.com
     


2 Messrs. Gavrielov and Daly have their names boldfaced due to their comprising the Special Committee of the Board of Directors. 
3 Edward Rogas, Jr. ownership stake: unmentioned in Vitesse 2006 Proxy Statement, in which Mr. Rogas is first nominated to the Board. 
4 Louis R. Tomasetta ownership stake: 924,459 shares per Vitesse 2006 Proxy Statement. 
5 Moshe Gavrielov ownership stake: approximately “—” shares per Vitesse 2006 Proxy Statement.
 

Dr. Vincent Chan, Phd. (57; 2000)
Mr. James A. Cole, (63; 1987)
Mr. Alex Daly (44; 1988)
Director, Vitesse (~ 0% owner6)
Director, Vitesse (~ 0.1% owner7)
Director, Vitesse (~ 0% owner8)
Director, MIT Lab for Info & Dcns.
M/G. Partner, Windward Vent., L.P.
Founder, Ch./CEO, Nutrophy, Inc. 9
77 Massachusetts Ave., Bldg. 32
P.O. Box 7688
7003 N Waterway Dr., Suite 222
Cambridge, MA  02139
Thousand Oaks, CA  91359
Miami, FL  33155
Fmr. Head, Comm. & I.T. Div., MIT
Director, Giga-Tronics, Inc.
Ch. Fmr. /Pres./CEO, ArcSight, Inc.
Office:  (617) 253-2142
G.P., Spectra/New Enter. Ass.
Office:  (305) 260-0883
Facsimile:  (805) 987-5896
Founder, Pres., Amplica, Inc
Facsimile:  (305) 260-9395
 
Fmr. Dir. Spectrian Corp.
 
 
Office:  (805) 497-3222
 
  Facsimile:  (805) 497-9331  
 
Via U.S. Postal Service & United Parcel Service
 
Dear Mr. Lewis (and the Vitesse Board of Directors):
 
Chap-Cap Partners II and Chap-Cap Activist Partners (the “Chap-Cap Funds”), advised by Chapman Capital L.L.C., own over 16 million common shares, or 7.3%, of Vitesse Semiconductor Corporation (“Vitesse”, the “Company”).  To put this ownership stake into perspective, our hedge funds’ financial interest in Vitesse’s common equity now exceeds Vitesse’s Board of Directors’ ownership by a factor of 13-to-110 and is over twice the ownership position of Vitesse’s second largest reported shareholder.11   Despite Chapman Capital’s foremost ownership in the Company, you would be well advised not to mistake it for a vote of confidence in you (as Vitesse’s “superintendent”) or the balance of the Board.  To the contrary, Chapman Capital believes that after treating backdated stock options tied to the success of Vitesse’s computer chips like past-expiration bags of stale potato chips, the Board’s stewardship shall be proven grossly negligent, if not fraudulent.
 
Chapman Capital demands that Vitesse, following financial restatement and rescission of all improperly granted stock options, conclude a full scale auction of the Company, which we estimate would value Vitesse in excess of $4.50 per share as part a strategic bidder’s post-merger business model. Vitesse’s market capitalization today stands at just over $300 million,12 which when combined with its approximately $97 million in convertible,13 subordinated debt and approximately $50 million drawn from the Tennenbaum facility (offset by the cash itself and other net working capital14) values the enterprise at approximately two times its estimated $200 million (~ $0.90/share) in estimated CY2006 revenues.15  Importantly, Vitesse itself has forecast gross margins to settle at 50%,16 led by 60% networking margins that ratchet up 50% SAS and 40% Ethernet product margins.  Strategic/horizontal mergers often are driven by procurement-related and redundant

13 Vitesse’s 1 ½% debt is convertible at $3.92/share, may be put or called in October 2009, and matures on October 1, 2024; Lehman Brothers served as lead manager; the conversion price may be subject to downward renegotiation as a result of recent corporate developments. 
14 Chapman Capital believes that Vitesse’s cash crunch that precipitated the ultra-high yielding Tennenbaum facility was caused primarily by Vitesse’s a) overreaction to lengthening lead times and resultant excessive wafer inventory build-up, and b) distributor channel stuffing as implied by the Company’s revenue recognition related commentary. 
15 Vitesse reportedly had been guiding toward $230-250 million in CY2006 revenues as of February 2006, with a ramp-up to just under $70 million in 1QFY2007 (ending December 31, 2006) revenues estimated by various sellside analysts. 
16 Gross margins in Vitesse’s 1QFY2006 (ending December 31, 2005), 4QFY2005, 3QFY2005 and 2QFY2005 were 57%, 55%, 54% and 56% respectively, making reasonable our acceptance of Vitesse’s 50% long-term gross margin estimate. 

SG&A savings that macerate otherwise fat gross margins such as those forecasted by Vitesse.  A strategic buyer with its own R&D/general/administrative capabilities and overlapping sales force should be able to focus on Vitesse’s revenues and gross income when valuing this uniquely positioned Company.  Until the most recently reported quarter, Vitesse’s R&D expense alone consumed nearly 100% of the Company’s gross income,17 with approximately $13 million of quarterly SG&A expense thereafter tanking operating income deep into the red as far back as a shareholders’ red eyes can see.  Estimating conservatively that Vitesse’s CY2007 revenues will equate to at least $1.00/share and thereafter generate $0.50/share in gross income, a mere ten multiple applied to the latter escalates Vitesse’s private market value to $4.50 per share,18 over three times today’s depressed market price.
 
Vitesse’s well-planned redesign into the sweet spot of the low-cost Gigabit Ethernet19 upgrade cycle,20 combined with pent up demand driving double digit growth for its Network products21 from merging and recovering U.S. and Asian22 telecommunications equipment customers, makes the Company an ideal acquisition candidate.  Octal PHY competitors such as Marvell Technology Group Ltd., also caught up in this option backdating fiasco, have reported as much as 40% revenue growth in recent quarters.23  In storage, Vitesse’s 2 Gigabit Fibre Channel-SAS transition currently should be ramping up, though the loss of EMC for the Company’s 4 Gigabit solution was disappointing.24  Even after discounting Vitesse’s own $750 million and $450 million acquisitions of Sitera Inc.25 and Orologic Inc.26 respectively due to their top-of-the-bubble timing, the Company’s micro-capitalization status begins to look absurd.  Layered on top of those acquisitions was Vitesse’s $275 million27 deal to buy Versatile Optical Networks in 2001, followed more recently by the announcement of Vitesse’s $66 million cash deal for Cicada Semiconductor Corporation.28  While the acquisitions mentioned above have contributed mightily to Vitesse’s intangible (and thus valuation-light) goodwill of nearly a quarter of a billion dollars, Chapman Capital is confident that Vitesse’s resultant line-up of leading products will lead to an auction met with high demand from U.S., European and Asian bidders.

17 R&D expense consumed gross income in Vitesse’s 1QFY2006 (ending December 31, 2005), 4QFY2005, 3QFY2005 and 2QFY2005 at the rate of 74%, 95%, 87%, and 98% respectively. 
18 $4.50 equity PMV estimate = (($0.50 gross income x 10) - $0.50 net debt) = (($1.00 revenue x 5)) - $0.50 net debt). 
19 Cisco/Linksys is estimated as a 7-10% customer in Vitesse’s Ethernet business; Vitesse’s E-StaX-34 Low Cost Stackable Layer-2 GbE Smart Switch is the industry’s first low cost stackable Layer-2 GbE smart switch, eliminating the need for Fast Ethernet stackable products. 
20 Chapman Capital itself upgraded its LAN from 10/100 Mb/sec to 1000 Mb/sec this past March 2006 using Linksys switches that utilize Vitesse technology. 
21 Vitesse has design wins with 8 of the top 10 Ethernet over SONET customers, a group that includes Lucent/Alcatel, Siemens, Tellabs, Nortel, Marconi, Huawei, ZTE, JDS Uniphase and Ciena; Vitesse’s 10GbE transceiver solutions, showcased at Interop on May 2-4, 2006, enhance and enable the latest high-speed signals and protocols in Metro, enterprise and storage equipment; Networking competitors include PMC-Sierra, Inc. and Agere Systems Inc. in Transport, and Maxim Integrated Products, Inc. (also under backdated option investigation) plus Mindspeed Technologies Inc. in PHY. 
22 Asian customers include Huawei Technologies, which had doubled its October 2005 forecasts as of January 2006. 
23 Marvell Technology reported April 2006 quarterly revenues of $521 million vs. $365 million the previous year. 
24 Chapman Capital believes it is reasonable to expect SAS products such as the VSC7250/VSC7251, assuming $17-45/port pricing, to grow into a $5 million/quarter revenue line by year end 2006.  Orders from other storage customers such as Hewlett-Packard, IBM, Hitachi and Brocade should lead to a stabilization in storage revenues. 
25 Sitera stock (vs. cash) acquisition was announced on April 20, 2000 and consummated on June 2, 2000; Vitesse advisors were Lehman Brothers and Davis Polk. 
26 Orologic stock (vs. cash) acquisition was announced on March 27, 2000 and consummated on March 31, 2000; Vitesse advisors were Lehman Brothers and Davis Polk. 
27 Versatile Optical Networks acquisition value was $275 million at the June 4, 2001, announcement date but had fallen to $125 million by its consummation on July 31, 2001; Vitesse advisors were Lehman Brothers and Davis Polk. 
28 Cicada cash acquisition announced December 29, 2003 and consummated February 4, 2004. 

 
The Special Committee of the Board of Directors29 must take any and all actions necessary to obtain the rescission of former management’s unexercised, backdated stock options,30 and disgorgement of all ill-gotten profits from those that have been converted to capital gains via option-related stock sales.  In an April 2006 press release and related SEC filing,31  Vitesse announced that its Board had appointed a “Special Committee of independent directors to conduct an internal investigation relating to past stock option grants, the timing of such grants and other related accounting and documentation issues.”  In the same company filing, Vitesse admitted that “in the course of its investigation, issues have arisen relating to the integrity of documents concerning the Company’s stock option grants.”  As the Special Committee surely must have learned by this time, in order for backdated stock options to be legal32 the following circumstances must be present: 1) Vitesse’s formal plan under which the stock options were issued33 permits stock option backdating; 2) Vitesse’s income statements and balance sheets are properly reported in the Company’s quarterly SEC filings, reflecting compensation and tax expenses or liabilities arising from the grant of “in-the-money” options; and 3) Vitesse’s annual proxy statements and periodic SEC insider filings34 disclose any backdated nature of granted stock options.  It is Chapman Capital’s belief that Vitesse’s Special Committee found cause to terminate Messrs. Tomasetta, Hovanec, and Mody (hereinafter, “The Three Stooges”) following an investigation into potential securities violations.  Given that the Three Stooges may face civil and criminal penalties including criminal liability for fraud or income tax evasion, they may be well advised to disgorge voluntarily any illegally obtained gains and allow for the rescission of any improperly granted, unexercised stock options as a starting point to any plea agreement with the United States Securities and Exchange Commission and Department of Justice.
 

29 The Special Committee of the Board of Directors is comprised of Messrs. Rogas and Gavrielov. 
30“Backdating” is the deliberate act of moving the grant and/or effective date of a stock option grant to a prior date during which the market price for the underlying shares was lower than the market price on the actual date that the stock options were awarded, typically via compensation committee meeting or approval by unanimous written consent in lieu of such meeting 
31 Source: Vitesse Form 8-K dated April 27, 06.
32 The specific laws that regulate the granting and disclosure of stock options are the Securities Exchange Act of 1934 (Section 10(B) regarding making a material misrepresentation of a known fact; Section 10b-5 regarding using material, non-public information for financial gain to the detriment of counterparties; and Section 20(a) regarding individuals using their positions of power/control over corporate directives to present false or misleading information), the Sarbanes-Oxley Act of 2002 (Section 906 regarding the requirement by CEOs and CFOs to certify periodic SEC filings that fairly represent the company’s financial condition; and Section 302 regarding certifications with respect to the disclosure in a company’s SEC filings), the Foreign Corrupt Practices Act (USC Section 78(m) regarding falsification of a corporate document used to permit access to corporate assets), the Internal Revenue Code (Section 162(m) regarding the $1,000,000 limitation on the tax deductibility of compensation paid to certain executive officers by a publicly-held corporation, unless that compensation is performance-based -- stock options are exempted from this section if their exercise price is equal to the fair market value of the stock on the date of the grant; and Section 409A regarding discounted options and the related need to modify an options plan by year-end to avoid punitive taxation on below-market grants of options); and state regulations regarding breach of fiduciary duty, waste of corporate assets and potentially an usurpation of a corporate opportunity, depending on jurisdiction. 
33 Vitesse has issued free stock/stock options under its 2001 Stock Incentive Plan, 1999 International Stock Option Plan, 1991 Stock Option Plan, 1991 Directors Stock Option Plan, 1989 Stock Option Plan, and 1991 Employee Stock Purchase Plan. 
34 SEC Form 4 references in its “**” footnote that “intentional misstatements or omissions of facts constitute Federal Criminal Violations. See 18 U.S.C. 1001 and 15 U.S.C. 78ff(a)”. 
 
 

The wealth scalped from the skulls of Vitesse’s owners by the “throttled threesome” should supply ample liquidity for these disgraced executives to begin restoring their lost honor.  Former CEO Tomasetta, EVP/Finance Hovenac35 and CFO Mody have sold Vitesse shares for estimated amounts exceeding $42 million,36 $15 million, and $2 million37 respectively from 1999-2005.  Due to these three executives’ potential breach of their fiduciary duties to Vitesse’s owners, the Company’s market value has fallen so precipitously that this aforementioned nearly $60 million total now approximates 20% of Vitesse’s entire market capitalization, which itself has lost an estimated $300 million on the backs of these individuals’ potential transgressions.  Unless those guilty of such potential infractions seek to take the "perp walk" down the path that expires where Kenneth Lay now lies scattered in ashes, I expect that option cancellation38 would be a welcomed part of any plea bargain agreement.  On March 18, 2006, Vitesse Compensation Committee member Daly told the Wall Street Journal that “a review of the grants found nothing extraordinary about their timing, and absolutely no grants have been made to anyone, least of all the CEO, that are out of sequence with our normal grant policy. Chapman Capital hopes that Mr. Daly is more diligent in pursuing any remuneration to Vitesse’s owners than he was when investigating the acts themselves.
 
35 Mr. Hovanec served as CFO from 1993-2005 before being promoted to EVP of Finance.
36 In a watershed event, the Wall Street Journal broke the story on Vitesse’s potentially backdated stock options on March 18, 2006; according to that article, Mr. Tomasetta “reaped tens of millions of dollars from stock options … [despite the fact that Vitesses shares] now rest at about the level of a decade ago.”  Specifically, the WSJ cited a March 1997 option grant that, “adjusted for later stock splits, gave [Tomasetta] the right to buy 600,000 shares at $5.625 each. The date they were priced coincided with a steep fall in Vitesse's stock, to what turned out to be its low for the year. He pocketed $23.1 million in profit when he exercised most of these options between 1998 and 2001.”  The WSJ further reported, “In eight of Mr. Tomasetta's nine option grants from 1994 to 2001, the grants were dated just before double-digit price surges in the next 20 trading days.  The odds of such a pattern occurring by chance are about one in 26 billion.”
38 Chapman Capital demands cancellation of, and disgorgement of improperly obtained capital gains from, all improperly granted stock options. 
 

Fortunately for Vitesse’s Board, extensive precedent now exists in the public markets for the canceling, rescission, renunciation and voiding of all improperly granted stock options, and disgorgement of any unlawfully obtained gains related thereto.  Specifically, the list below details how certain rehabilitated public company directors have dealt with this issue by obtaining the restitution for, or any rescission of, illegally or improperly backdated stock options, in some cases negating the need for any financial restatement whatsoever.
Mercury Interactive
(Nasdaq:  MERQ)
Perhaps making itself the gold standard for backdated stock option restitution, Mercury declared void and unenforceable an aggregate of 2,625,416 vested and unexercised options granted between 1997 and 2002 to former CEO Amnon Landan.39 Furthermore, Mercury determined that Mr. Landan had been terminated for cause and was therefore not entitled to receive severance benefits under his Employment Agreement.40   Additionally, Mercury re-priced the existing stock options of former CFO Doug Smith to the day the grants actually were granted, and, with regard to exercised options, forced Smith to pay the difference between the exercise price of the options and the closing price of the company’s stock on the day in which the grants were actually determined.41
Apple Computer
(Nasdaq:  AAPL)
Cancelled backdated stock option grant to CEO Steve Jobs.42
Brooks Automation
(Nasdaq:  BRKS)
Implicated Directors chose to resign from the Board, and to voluntarily renounce all their current stock options and restricted stock awards, whether or not vested.43
Comverse Technology
(Nasdaq:  CMVT)
Settled an agreement with implicated and subsequently resigned CEO and President Kobi Alexander stipulating that:Mr. Alexander will not be entitled to receive any stock options, restricted stock, stock appreciation rights or any equity or other incentive compensation under any plan or other arrangement of the Company, no previously granted stock options, restricted stock, stock appreciation rights or other equity compensation shall vest and the Alexander Employment Term shall not count towards vesting. In addition, Mr. Alexander agreed not to exercise or transfer any outstanding options during the Alexander Employment Term.”44  In April 2006, Comverse said some option-grant dates used in its accounting “differed” from the actual grant dates, and that it would restate more than five years of financial results.
Analog Devices
(NYSE:  ADI)
Acknowledged having granted options just ahead of good news (spring-loading) and agreed with the SEC to re-price options granted to Mr. Fishman (President and CEO) and other directors.  Mr. Fishman also agreed to make a disgorgement payment with respect to options granted in certain years.45


39 Source:  Mercury Interactive Corporation Form 8-K dated June 9, 2006. 
40 Source:  Mercury Interactive Corporation Form 8-K dated May 19, 2006. 
41 Source:  Mercury Interactive Corporation Form 8-K dated November 3, 2005. 
42 Source: Apple Computer Press Release dated June 29, 2006;  http://www.apple.com/pr/library/2006/jun/29stock.html 
43 Source: Brooks Automation Press Release dated May 18, 2006.  http://investor.brooks.com 
44 Source:  Comverse Technology, Inc. Form 8-K dated April 28, 2006. 
45 Source:  Analog Devices, Inc. Press Release, November 15, 2005; http://www.analog.com/en/press/0,2890,3%255F%255F88325,00.html 
 

Your apparent greed and lax oversight while serving as Chairman of the Board of Amdahl Corporation46 and stock option insouciance as a director of Cypress Semiconductor Corporation compound our concerns regarding your past and future stewardship of Vitesse in a similar capacity.  In a May 18, 1992, article entitled “Stock Giveaways Serve as ‘Golden Handcuffs,” the San Francisco Chronicle highlighted you personally as one of the beneficiaries of one of the largest free stock or stock option giveaways.47  Renowned compensation consultant Graef Crystal was quoted in that article saying, “You tell the shareholders you are aligning the guy's interest with that of the company, but it's purely a giveaway.  It's the closest thing in the executive suite to union featherbedding.”  Matching our concerns regarding free stock options or restricted stock, Jim Kuhns further remarked, “You get the stock no matter what you do.  All you have to do is make sure you don’t lose your job before the restrictions lapse.”  Local San Francisco Bay executives must have taken notice of your stock/option promiscuousness, for the very next year Cypress Semiconductor CEO and shameless stock option junkie T.J. Rodgers expressed ecstasy when he announced your addition to his Board of Directors on November 10, 1993.  In Cypress’ announcement of Mr. Lewis’ instatement as director, Rodgers exclaimed that he“look[ed] forward to having this industry legend on the Cypress team.”48 One wonders, given your disturbing participation in a company notorious among the investment community for “getting huge cash compensation to employees in somewhat of a cloaked fashion,”49 how you possibly can be trusted to wean Vitesse executives away from sucking on its own stock options areola.
 
As Chairman of the Board of Directors of Vitesse, you cannot escape blame for weak oversight of a partially-expelled executive management team that dwelled far too long in the abyss of confident incompetence. It may have seemed like an expeditious exercise in denunciation to fire the Three Stooges, but expulsion to their respective cages after they committed their allegedly improper acts is no substitute for fulfilling your duty of due care to prevent them from happening in the first place.  Vitesse’s Board may have become insensitive to the financial agony being felt by the Company’s owners due to the Board’s near failure to qualify as owners themselves.  As the advisor to Vitesse’s largest owner, Chapman Capital will not allow you to pretermit its demands for a sale of the Company.  Indeed, our firm intends to initiate a full scale investigation of you and the balance of the Board, utilizing an in-house private investigator (and former Marine who has returned from battle in the Balkans) who will be directed to shadow your past, present and prospective activities as they potentially affect our ownership interest in the Company.  We may seek to obtain intimate knowledge of all aspects of your life that may indicate an adverse effect or risk to our investment.  In essence, you should live and breathe under the cloud that your past failures to regulate the Three Stooges have subjugated the Board and executive management into a state of perpetual audit.
 
Vitesse CEO Chris Gardner appears to Chapman Capital to be emotionally estranged from and morally misaligned with the Company’s Owners.  In what may be the most untimely display of disregard for owner interests that I ever have witnessed, it has been reported to the SEC that in the midst of Vitesse’s recently facing NASDAQ delisting, delay and

46 Mr. Lewis served as Amdahl Corporation President from 1977-1983, CEO/President from 1983-1987, Chairman/CEO from 1987-1992, Chairman from 1992-1996, Chairman/CEO/President from 1996-1998, and Chairman from 1998-2001; prior to his lengthy tenure at Amdahl, Mr. Lewis was a salesman at IBM Service Bureau Corporation (1960-1970), held various positions at Computer Sciences Corporation (1970), and advanced to the position of Xerox Corporation President (1976-1977). 
47 In a table entitled “LARGEST CORPORATE GIFTS,” the San Francisco Chronicle cited the value of restricted stock given to Mr. Lewis, “generally at no cost or for a token sum,” at $621,075. 
48 Source:  Business Wire, November 10, 1993. 
49 Statements made by Ken Broad, fund manager at Transamerica Investment Management.  Source:  TheStreet.com, October 3, 2003. 

restatement of financial statements, and a rescue financing that had depressed the market value of its shares, Mr. Gardner was granted 400,000, ten-year50 stock options struck at the depressed price of $1.53/share.  However, the grant alone is not the primary source of Chapman Capital’s outrage.  As shocking as this will be for Vitesse owners to read, these 400,000 free stock options were not priced on or as of May 15, 2006, the date on which Vitesse appointed Mr. Gardner CEO51 and that Vitesse shares traded $1.72-1.84/share,52 but instead were priced on June 21, 2006, at a $1.53/share strike price and not the 12-20% higher market price that existed at the time of his May 15, 2006 appointment.  As we now know that Vitesse’s Compensation Committee seems to have possessed no compunction against backdating stock options (particularly when the back-market price was significantly lower), why didn’t the Compensation Committee backdate Mr. Gardner’s 400,000 stock options to the higher market price of the date he was appointed?  It should be noted further that Mr. Gardner received 625,000 free stock options in FY2003, FY2004 and FY2005 combined, on top of 600,000 free stock options from FY1998-FY200153, leaving Chapman Capital doubtful that Mr. Gardner’s hands are clean of the insidious ink potentially used to corruptly backdate his peers’ stock option grants during that same period.  After joining Vitesse in 1986, Mr. Gardner served as Vitesse’s Chief Operating Officer from 2000-2002, arguably as the second in command within the entire corporate structure.  We ask the Company’s Board of Directors to explain the circumstances that led to Mr. Gardner’s apparent demotion from Chief Operating Officer to General Manager of the Transport division54 in June 2002, and why it believes he is the best choice to lead a now more complicated Vitesse today.55
 
The Compensation Committee of Vitesse, comprised of co-directors Cole, Daly and Chan, surely understands its fiduciary responsibility to a) tie pay to performance, and b) ensure that management is rewarded primarily when (and not irrespective of) shareholder capital gains. However, despite evidence to the contrary, Vitesse's disgraced former CFO, Yatin Mody, reportedly told the Wall Street Journal,the grants were reviewed and approved by the compensation committee, and the exercise price set as of the date of the approval, as documented by the related minutes.” Mr. Tomasetta confirmed this story, telling the WSJ,the grants were approved by the board and the price set at the close of the day of approval.  I refuse to believe that Mr. Louis R. Tomasetta (Fmr. CEO; 924,459-share/$1,284,998 ownership vs. $388,076 compensation and grants in 2005 of 1,800,000 shares with a potential value of $7,401,34056), Eugene F. Hovanec (Fmr. EVP, Finance; 528,014-share/$733,939 ownership vs. $246,154 compensation and grants in 2005 of 450,000 shares with a potential value of $1,850,33557), Yatin D. Mody (Fmr. VP, Finance and CFO; 87,079-share/$121,039 ownership vs. $196,000 compensation and grants in 2005 of 400,000 shares with a potential value of $1,644,74258), Christopher R. Gardner (CEO; 186,234-share/$258,865 ownership vs. $216,923 compensation and grants in 2005 of 300,000 shares with a potential value of $1,233,55759), or Ira Deyhimy (VP; 434,774-share/$604,336 ownership in 2005 vs. $175,000 total compensation and grants in 2004 of 75,000 shares with a potential value of $833,12960), are in the least bit inept or indolent in performing their duties to the Company’s owners given the non-aligning ratio of their ownership stake in the Company to their annual compensation.61  I am sure they all have excellent explanations besides the fact that they receive free handouts of free stock options authorized by the Compensation Committee.

50 Source:  Vitesse Form 4 signed June 22, 2006, by Mr. Gardner; the options are “exercisable as to 25% of total number of underlying securities on each of June 21, 2007, June 21, 2008, June 21, 2009, and June 21, 2010.” 
51 Source: Vitesse Form 8-K dated May 18, 2006; such filing states, “On May 15, 2006, Christopher R. Gardner, the Acting Chief Executive Officer of the Company, was appointed Chief Executive Officer.” 
52 Source:  Bloomberg. 
53 Source:  Vitesse proxy statements. 
54 Transport markets long-haul and Metro products, and along with PHY, Framers/Mappers, switch fabrics, network processors, and datacom optical now are part of the Network Products Division. 
55 In addition to Mr. Gardner’s insensitivity to the stock option related carnage of Vitesse’s owners, despite having notified Mr. Gardner nearly two months ago of the Chap-Cap Funds’ having become the Company’s largest reported shareholder group, Mr. Gardner has not returned Chapman Capital’s calls or otherwise reached out to its largest owner. 
56 Source:  Vitesse 2006 Proxy Statement dated December 19 2005.  Proxy includes information on potential realizable value of options granted at an assumed annual rate of 10% stock price appreciation for option term. 
57 Ibid. 
58 Ibid. 
59 Ibid. 
60 Source:  Vitesse 2005 Proxy Statement dated December 17, 2004. 
61 Vitesse shares owned by executives valued at $1.39/share.

KPMG, LLP, Vitesse’s “independent registered public accounting firm” that issued the unreliable62 report relating to the effectiveness of the Company’s internal controls over financial reporting and management’s assessment thereof,63 also should be “persuaded” to help reimburse Vitesse’s owners for any services not rendered.  It was the responsibility of KPMG, before issuing such a report, to audit (that is why they are called “auditors”) Vitesse’s policies and controls over recognizing revenues from distributors that may have submitted conditional purchase orders for the Company’s products.  Section 404 of the Sarbanes-Oxley Act of 2002 requires the Company's auditor to attest to, and report on management's assessment of the effectiveness of, the Company's internal controls and procedures for financial reporting in accordance with standards established by the Public Company Accounting Oversight Board.  Essentially, KPMG’s duty was to discover if Vitesse corruptly engaged in “practices in connection with credits issued to or requested by customers (for returned products or otherwise) and the related accounting treatment, as well as the application of payments received to the proper accounts receivable,” as now appears to be the case by Vitesse’s own admission.64  Obviously such practices may have led to Vitesse’s “accounts receivable and revenues [being] misstated,”65 something that Vitesse’s owners never should have to fear due to proper auditing by KPMG.  If KPMG was aware of the stock option backdating, it may have been a participant in fraudulent and unlawful conduct.66  If KPMG was unaware of this practice, one must question whether they were grossly negligent in auditing and subsequently uncovering Vitesse’s potentially unlawful acts.
 
Vitesse’s extraordinarily expensive in-sourced Acting CFO67 gives the Company yet another reason to complete its restatements and conclude an auction expeditiously.  While we have been impressed with Mr. Hassel’s credentials68 and no-nonsense focus on putting Vitesse back on firm footing, paying over $1 million/year69 to a 35-year-old70 Acting CFO who is a) commuting to/from Arizona on weekends, and b) claims minor experience with integrated circuit companies71 is an extraordinary expenditure of corporate funds.  Should Vitesse’s Special Committee confirm that excommunicated former CEO Tomasetta, former EVP Hovanec and former CFO Mody are guilty of illegal or otherwise prohibited acts that in essence forced Vitesse to retain such high priced, emergency talent, Chapman Capital believes that the Three Stooges should be convinced of the prudence of including in their plea agreements the reimbursement to Vitesse of all extraordinary expenses.  This would include not only Mr. Hassel’s seven-figure annualized compensation, but also any other extraordinary option and restatement-related expenses to attorneys and consultants charging high-end prostitute levels of hourly compensation.  With FY2003-FY200572 total cash compensation for Messrs. Tomasetta, Hovanec and Mody of $1,294,326, $831,154 and $831,154 respectively, these three corporate rejects should have ample cash and other personal assets to cover the fumigation of Vitesse’s house of cards.


62 Source:  Vitesse Form 8-K dated April 27, 2006.
 

Any takeover defense by Vitesse’s management counterclaiming that Chapman Capital is “attacking” or otherwise adverse to the best interests of the Company (as compared to its management’s careers) is patently preposterous.  On behalf of our own partners and shareholders, Chapman Capital has expended over $24 million to purchase in excess of 7% of the Company, ample incentive to protect rather than penalize our investment.  Yet, despite a virtually unblemished activist track record and near doubling (on average) of our targets’ stock prices following fifteen completed activist campaigns of “Owner Liberation,” I have been confronted repeatedly with four management/director defenses.  Accordingly, in order to head off certain tutelary tactics on your part, I hereby articulate Chapman Capital’s rebuttals to the baseless accusations I anticipate:

Baseless Accusation #1:  Chapman Capital has made personal attacks against Vitesse and its management;

Cogent Rebuttal #1:  The fustigation contained herein targets exclusively Vitesse management and directors’ professional actions or inactions (i.e., backdating stock option grants).  We are entirely complimentary of the Company’s products, services and non executive employees, while we neither know nor care little about the personal lives, habits or attributes of Vitesse’s management or Board to the extent such deportment does not affect our investment in the Company.  Once again, expression of our negative opinion73 of your behavior in your capacity as a professional fiduciary does not constitute a personal attack.


Baseless Accusation #2: Chapman Capital is acting in concert with other Vitesse owners;

Cogent Rebuttal #2:  No member of Chapman Capital has engaged in any prohibited discussion or alternate form of communication regarding Vitesse with any other owner of Vitesse.Moreover, should Vitesse General Counsel Sharon Drew take a few minutes to review Securities Exchange Act of 1934, Section 13(d)(3) and related Rule 13d-3, she will realize that legal constitution of a “group” requires the exceptionally high hurdle that “two or more persons act as a partnership, limited partnership, syndicate, or other group for the purpose of acquiring, holding or disposing of securities of an issuer,” with the list of beneficial owners belonging to such group only including “any person who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise has or shares voting or investment power” in the Issuer.  Lastly, as I am sure Vitesse’s lawyers will inform you, since 1992,74 two shareholders of any size, amounting to any combined percentage of Vitesse, can debate or otherwise discuss amongst themselves the Company’s merits and pitfalls, intentions or expectations regarding matters of his/her own portfolio management, research, trading, or corporate governance involving the Company.  Thus, at the risk of being officious, please take this word of advice:  when the angry masses inevitably come huffing and puffing on the door of 741 Calle Plano, crying wolf pack will only enrich the Company’s attorneys and delay the unavoidable destiny of a public company whose majority ownership wants it sold to the highest bidder.


 

Baseless Accusation #3:  Chapman Capital seeks short term, “quick-buck” profits at the expense of long term Vitesse shareholders;
Cogent Rebuttal #3:  Vitesse’s long term shareholders seem to have paid dearly for believing in your long term plans for the Company.  One by one, whether it be onetime 4.2 million shareholder Goldman Sachs or any of a handful of others that punted their ownership stake in just the past several, bloody months (to Chapman Capital and others), those owners who imbibed Lou Tomasetta’s Long-Term Value Cool Aid now have “fool poisoning.”  Clearly, after decimating long term shareholders’ vestigial trust in the Board’s oversight and numerous dead-end paths to profitability, Vitesse’s distressed stock price speaks for itself.  Moreover, we look forward to transitioning our ownership into what the U.S. government defines as “long-term” status on Day 366 of our holding period.  Nothing would please our firm more than selling our entire position above $4.50/share, as legal “long-term shareholders,” at the conclusion of a successful auction in 2007.

Baseless Accusation #4:  Chapman Capital’s low cost basis deprives it of the right to excoriate Vitesse’s Board and management for the stock price destruction that preceded our share accumulation;
Cogent Rebuttal #4:  When Chapman Capital purchased greater than 16 million shares of Vitesse, attached to that 7% block of the Company’s shareholder equity was the blood, sweat and tears of all those previous owners who surrendered rather than fight.  Each of the shares owned by the investment funds that Chapman Capital manages is 100% identical to those purchased by Kopp Investment Advisors Inc. (3.4% owner),75 Barclays Global Investors UK Holdings Ltd. (2.9% owner),76 Frontier Capital Management Company Inc. (2.5% owner),77 Franklin Advisers Inc. (2.1% owner),78 and Vanguard Group Inc. (2.0% owner),79 among other investors unfortunate enough to have trusted the Board to fulfill its fiduciary duty of due care.  In summary, the price one pays for his ownership stake, whether it be $115/share in March 2000, or $1.51/share in June 2006, is totally irrelevant to his rights to protect and defend his capital from any future neglect of fiduciary duties by Vitesse’s Board of Directors.
 
If our ownership stake in Vitesse leaves you tossing and turning through sleepless nights, we recommend that you pick up a copy of insomnia-killer The Modern Corporation and Private Property by Adolph Berle and Gardiner Means.  Printed 3 years before you were born, this corporate governance suspense thriller spells out Berle and Means’ view of how modern capitalism is characterized by pervasive oligopoly and the separation of management from ownership.  For a decade now, I have lamented publicly via Schedule 13D filings how fragmented equity ownership converts capital-risking “Owners” into un-concentrated, faceless, DTC-coded “shareholders.”  In this conflicted world of “Agency Capitalism,” a board and its hired hands (together, the “Agents”) conveniently lose sight of the most important fact of their corporate lives:  the Agents work for the Owners, and should such Agents differ in opinion from the majority of Owners regarding strategic and operational direction, it is incumbent upon those Agents to convert dissident Owners to management’s disparate views rather than simply state, “We possess better information and/or judgment than the Owners who hired us.”  Importantly, for the Agents’ intransigent approach to have any legitimacy, this “better information” must be material in its relevance to a rational investor in his making a decision to buy or sell the company’s shares.  If such “information” is in fact “material” by the SEC’s definition thereof, then under Regulation FD the Company has a responsibility to make “fair disclosure” of any such information promptly via an 8-K filing (possibly accompanied by a press release), thus feeding the process of informing Owners of any non-disclosed material developments that the Agents feel, by such non-disclosure, have hindered Owner comprehension.  In essence, Agents must make their alternate case public and subsequently convince the Owners that their own views are either out-of-date or simply irrational.  We are watching this play out now in the battle for Board control of H.J. Heinz Company, as both incumbent and agitator have campaigned their cost cutting platforms to the entire Ownership base.  Yet, if Agents truly were beholden to public company Owners rather than the executives to whom they often owe their directorship in the first place, there would be no need for proxy contests whatsoever as directors exercising due care would mediate the conflict between management’s plans and those of the Owner majority.  While such mediation requires a director

remaining able and willing to communicate with Owners, any director unable or unwilling to commit such time to fulfill his fiduciary duties simply should resign his directorship.
 
I must reiterate that Chapman Capital has absolutely no interest in obtaining Board seats at Vitesse Corporation.  As noted in our recent Schedule 13D filings in two other shareholder-unfriendly public companies,80 we have no interest in being shackled by the membership rules of a Club Vitesse “insider”.  Chapman Capital is a “Berle and Gardiner Shareholder Activist,” yearning for the ephemerally salubrious separation of management from ownership.  To be honest, I swelter at the thought of driving north along the Pacific Coast Highway only to arrive as a minority director and have the fresh ocean breeze replaced by all the hot air bellowing from your crusty mouth.  I have nightmares of sitting across from Mr. Tomasetta as he explains to me how amazingly lucky he was to have his options priced near pinpointed lows in Vitesse’s trading history.81  I ponder why any Owner should become fearfully compelled to have its representative serve on the Company’s board of directors – you and the rest of the Vitesse gang are being paid annually cash of $30,000- $40,000 per year plus 40,000-60,000 free stock options82 to maximize (and certainly not destroy) the value of the Owners’ investments.  Essentially, the Owners gave Mr. Tomasetta a lease on Vitesse, but that lease ran out March 18, 2006, when the Wall Street Journal’s Charles Forelle and James Bandler broke the story on the backdated option scandal.  On that day, when your and Mr. Tomasetta’s ability to point to the “long term shareholders” for support lapsed as their ownership interests were puked into a market valuing Vitesse’s shares near all-time lows, the “two minute warning” on your career as a public company fiduciary began ticking away.  However, I pray you do not rest peacefully at night dreaming of a world free of proxy fights.  Should another shareholder determine to follow our lead, “shadow 13D” our filing, and propose an alternative slate of directors, consider your eviction notice served.
 
In conclusion, Chapman Capital, on behalf of what it believes is a majority of Vitesse’s owners, demands that the Company’s Agents consummate an auction of Vitesse Corporation immediately following its financial restatements.  As a microcap public company forced to wade through public beach waters infested with the dorsal fins of Messrs. Sarbanes, Oxley, and Chapman, Vitesse should be able to command a sizable premium (to public market) valuation from a strategic buyer capable of deriving management accountability and performance attainable only when management knows its bosses are neither faceless nor feckless.  While the sale of Vitesse at our estimated valuation may not be the lottery ticket to which Mr. Tomasetta has become accustomed, I am sure you realize that the Three Stooges have only themselves to blame for the rare expiration of any non-rescinded stock options in “out of the money” form.  As for you, Mr. Lewis, to quote you personally, “You live by the sword and you die by the sword.”83  We suggest that, figuratively speaking, you draw yours and fall upon it before Vitesse’s owners are forced to do so themselves.
 
Sincerely,
/s/ Robert L. Chapman, Jr.
Robert L. Chapman, Jr.



82 Source:  Vitesse 2006 Proxy Statement.  In accordance with the Company’s 2001 Stock Incentive Plan, in 2005 grants of 40,000 options shares, with Chairman receiving 60,000, were provided to John C. Lewis, Vincent Chan, James A. Cole, and Alex Daly at an exercise price of $3.53.  Similarly, Moshe Gavrielov was granted 40,000 at an exercise price of $2.15. 
83 Source:  Fortune article entitled “The Game Has Changed in Big Computers” dated January 25, 1982.
 

Exhibit C
 
[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 D
 
[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 E
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: