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Hedge Fund Vents on Vitesse

Craig Matsumoto
7/10/2006
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A hedge fund calling for the sale of troubled Vitesse Semiconductor Corp. (Nasdaq: VTSS) made its point Friday with an attention-getting letter loaded with insults and jibes.

California-based Chapman Capital LLC, which owns a 7.3 percent stake in Vitesse, is making its demands in the wake of a stock-options scandal that's led to the firing of three Vitesse executives. (See Vitesse Execs Get the Axe.)

The fun part is a letter, dated July 7, to Vitesse's board from Chapman Capital founder Robert Chapman. The letter was appended to an SEC form 13-D, filed Friday to report Chapman Capital's purchase of its Vitesse stake -- roughly 16 million shares amassed since May 18, the form says.

The letter is smug and brutal, combining detailed research (83 footnotes!), highfalutin language, and plain old cheap shots. For example, Chapman describes his firm as "yearning for the ephemerally salubrious separation of management from ownership" -- but he also refers to the three fired executives as "The Three Stooges" and "the throttled threesome."

When Chapman explains his firm is not attempting a hostile takeover of Vitesse, he makes his point with some descriptive personal details.

"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," Chapman writes to Vitesse chairman John C. Lewis. "I have nightmares of sitting across from Mr. Tomasetta [Lou Tomasetta, Vitesse's former CEO] as he explains to me how amazingly lucky he was to have his options priced near pinpointed lows in Vitesse’s trading history."

Ah, but these aren't personal attacks, Chapman points out elsewhere in the letter: "Expression of our negative opinion of your behavior in your capacity as a professional fiduciary does not constitute a personal attack."

Chapman's main point is to call for the "recission" of any ill-gotten stock-option payouts and, once any earnings restatements are done, the sale of Vitesse. Specifically, his firm demands "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 stock rose 24 cents (16.9 percent) to $1.66 Friday afternoon, once word of the 13-D spread.

Chapman praises Vitesse's products, directing his barbs only at management. "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," he writes.

Chapman Capital's call for a Vitesse sale isn't that unusual -- recall how a hedge fund pressured CoSine Communications in 2003, for instance. (See Mellon Hires Banker for CoSine.) It's just that the firm's style is to go for the jugular, and the media attention. (Apparently, it works.)

Vitesse isn't the only company getting roasted by Chapman. A Chapman 13-D filed in June regarding timeshare firm Sunterra Corp. reads, in part: "Sunterra Europe is a malignant cancer ulcerating at Sunterra’s healthy North American business." Chapman Capital has been at this for a while, having filed 17 13-Ds, "15 of them hostile campaigns," between 1996 and 2003, according to its Website.

Vitesse officials could not be reached for comment late Friday.

— Craig Matsumoto, Senior Editor, Light Reading

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Stevery
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Stevery,
User Rank: Light Beer
12/5/2012 | 3:49:19 AM
re: Hedge Fund Vents on Vitesse
Hmmmm. They buy a bunch of shares, they write an inflammatory letter, and then the stock price rises as the media pick up the story.

Any thoughts as to their next action with their shares?
startup_shutup
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startup_shutup,
User Rank: Light Beer
12/5/2012 | 3:49:19 AM
re: Hedge Fund Vents on Vitesse
Kill Vitesse -- this stock option pricing scandal is UNBEARABLE ...

I applaud the letter and redicule to fat pig (bastard excs) ...
Stevery
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Stevery,
User Rank: Light Beer
12/5/2012 | 3:49:17 AM
re: Hedge Fund Vents on Vitesse
Looks like they'll hold onto the shares, actually -- this isn't a quick flip. (That's one of four points that Chapman carefully rebuts in his letter.) To quote: (quote omitted)

Why would you believe a word from their letter? And how would you verify that they held onto their shares?





Pete Baldwin
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Pete Baldwin,
User Rank: Light Beer
12/5/2012 | 3:49:17 AM
re: Hedge Fund Vents on Vitesse
Any thoughts as to their next action with their shares?

Looks like they'll hold onto the shares, actually -- this isn't a quick flip. (That's one of four points that Chapman carefully rebuts in his letter.) To quote:

"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."
optiplayer
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optiplayer,
User Rank: Light Beer
12/5/2012 | 3:49:15 AM
re: Hedge Fund Vents on Vitesse
And how would you verify that they held onto their shares?

Because they have to file 13D forms every quarter as long as they are a 5% or greater holder of VTSS. That's how we know they took this position and that is how we will see them unwind it.

Seems you have a problem with VCs and Hedge Funds...
twill009
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twill009,
User Rank: Light Beer
12/5/2012 | 3:49:12 AM
re: Hedge Fund Vents on Vitesse
I think many investors probably feel like venting at Vitesse's board and management, but this story has a surreal feel to it.

Activist shareholders usually want to rally other shareholders to their cause. In order to do so, you need to be taken seriously. Nothing in Chapman's invective rings of credibility. Crackpot is more like it.

The whole thing would be comical if the decline in the stock wasn't already so tragic. I hope the company does get bought because the rank-and-file employees at Vitesse do not deserve to be ruined by the misdeeds of senior management.

The problem is that the company is so tainted now, and the stock market is so jumpy, that it is hard to imagine a public company making a bid for Vitesse. Maybe this is a great target for a buyout shop like Texas Pacific, KKR or Francisco Partners.

Pete Baldwin
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Pete Baldwin,
User Rank: Light Beer
12/5/2012 | 3:49:11 AM
re: Hedge Fund Vents on Vitesse
Why would you believe a word from their letter? And how would you verify that they held onto their shares?

Chapman Capital likes to make these kinds of plays, and it's not going to work any more if they get a reputation for being quick flippers. And as someone else mentioned, Chapman Capital would have to disclose it if they dumped their shares.

Now, if Vitesse stock suddenly tripled next week -- yeah, then they might sell right away. As would lots of folks. But I don't think that's what Chapman Capital is counting on.
firstmiler
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firstmiler,
User Rank: Light Beer
12/5/2012 | 3:49:10 AM
re: Hedge Fund Vents on Vitesse
Startup Shutup = Bobbymax???

fm
Stevery
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Stevery,
User Rank: Light Beer
12/5/2012 | 3:49:08 AM
re: Hedge Fund Vents on Vitesse
Because they have to file 13D forms every quarter as long as they are a 5% or greater holder of VTSS. That's how we know they took this position and that is how we will see them unwind it.

You are correct! I had not considered that they are > 5% owners.

From the filing, the sum of their buys and sells appears to be about 16M shares @ approx $1.50 per share. It looks like they sold at anything over $1.75.

It will be interesting to see if they took the opportunity of their media coverage to dump a chunk of their position. (They are required to report fairly soon if >1% (?) change occurs.)
rjmcmahon
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rjmcmahon,
User Rank: Light Beer
12/5/2012 | 3:49:08 AM
re: Hedge Fund Vents on Vitesse
Startup Shutup = Bobbymax???

I don't think so. My impression of Bobbymax is that he was affilliated with Lucent somehow (and may have had much of his retirement wiped out when that collapsed.) Startup_shutup gives me the impression his backgound is from a society that is, or was, cash based and not based on consumer credit. Both are engineers unable to make sense out of what seems to be chaotic (or as Dee Hocks would say - chaordic) financial systems.
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