In my last blog post about convicted felon turned fraud fighter Barry Minkow’s expose of corporate officers and directors misrepresenting their resumes, I closed with the following comment, “As a convicted felon, I have learned that where there is smoke there is usually fire.” In this blog post, I take a closer look at Trimble Navigation Limited (NASDAQ: TRMB).
According to a Fraud Discovery Institute (Minkow’s private investigation company) background check, Executive Vice President and Executive Committee member Dennis L. Workman claimed in various SEC filings (latest 10-K here) that he obtained a Master of Science Degree in Electrical Engineering from the Massachusetts Institute of Technology (MIT) in 1969. However, a background check by FDI shows that while Dennis Workman attended MIT from September 19, 1967 to May 31, 1968, no degree was conferred.
The Wall Street Journal contacted MIT and reported that:
M.I.T. says Mr. Workman attended the school, studying physics for two semesters, but never earned a degree.
The Wall Street Journal article goes on to say that:
A spokeswoman for Trimble, LeaAnn McNabb, says Mr. Workman thought he had received a master's degree when he left M.I.T.'s doctoral program in the late 1960s.
"The professor gave his assurance to Dennis that he would submit the necessary paperwork," Ms. McNabb says. "Dennis is working with M.I.T. to work out the situation." She declined to comment on whether Trimble had previously checked Mr. Workman's credentials or would update its annual report.
"I don't remember receiving the degree," Mr. Workman said in an interview. "It's my position that I earned it, that's for sure. I'm unequivocal about that." Mr. Workman says he had planned to earn a Ph.D., but had to leave school because of the Vietnam War.
"It was either leave the country, get drafted, or find a job with a critical-skills deferment, which is what I did," he says.
If Dennis Workman did not obtain a degree from MIT, he violated company policy in addition to causing a false report to be filed with the SEC.
According to Trimble's Business Ethics and Conduct Policy:
Every director, officer, employee, consultant, agent and representative of the company must observe the highest ethical standards and exercise proper judgment in all business dealings.
Trimble's Business Ethics and Conduct Policy goes on to state that:
When filing or submitting reports and documents to the SEC, Trimble is committed to providing full, fair, accurate and timely disclosure in compliance with all applicable laws and regulations. Senior Officers are required to promote compliance with this policy and to abide by Trimble’s standards, policies and procedures designed to promote compliance with this policy.
The company should terminate Dennis Workman's employment if he cannot provide evidence of a Master of Science Degree from MIT and refute Minkow's report, if it really espouses "the highest ethical standards and exercise proper judgment in all business dealings" and "is committed to providing full, fair, accurate, and timely disclosure" to the SEC.
Barry Minkow and I believe that if you lie about your educational background, you are capable of lying about anything else, too. Investors require honesty from the fiduciaries running their companies. If an outsider like Minkow can find false credentials in corporate America where company gatekeepers have failed, what other problems exist that investors are not aware of? Do the officers and directors running these companies put their fiduciary duties to their shareholders first, or are they more concerned about their own personal self-interest?
A starting point for answering the above questions can be found by examining Trimble’s $250 million share repurchase program announced by the company in January 2008.
Often, investors are pleased when companies buyback their stock, since they consider it a sign of company confidence in the value if its shares. However, legendary investor and Berkshire Hathaway (NYSE: BRK.A) CEO Warren Buffett, was once said:
Now, repurchases are all the rage, but are all too often made for an unstated and, in our view, ignoble reason: to pump or support the stock price... We will not repurchase shares unless we believe Berkshire stock is selling well below intrinsic value, conservatively calculated."
Therefore, if we follow Buffett’s advice, investors should be suspicious of management’s true intentions in buying back company stock. Is the intent of such stock repurchases to build “intrinsic value” or is it used to “pump or support the stock price?” One way to find out the true purpose behind stock repurchase programs is to look at insider selling, especially as the company is buying back its stock at the same time. Insider selling while a company buys back its shares may indicate that such a stock repurchase program is nothing but a ruse to allow insiders to sell at temporarily higher stock prices caused by company stock buybacks.
As I detailed above, early this year, Trimble Navigation announced a $250 million share repurchase program. During the first nine months of this year, the company repurchased 3.707 million shares on the open market at an average price of $31.23 per share. The total purchase price of such shares was $115.85 million.
During the same nine months ended September 26, 2008, Trimble reported net income of $127.73 million and had operating cash flow of $141.95 million. Therefore, stock buybacks were about 91% of net income and 82% of operating cash flow.
Meanwhile, insiders have been unloading stock at large profits. During the same period, insiders sold 93,349 shares at an average price per share of $35.68 and pocketed gross proceeds of $3.331 million.
Based on the above, we should ask: Did Trimble’s stock buybacks help to prop up the company’s short term stock price, so insiders could unload their shares at higher profits than if there were no stock repurchases at all?
Is this a company that puts its shareholders' interests first?
Sam E. Antar (former Crazy Eddie CFO and a convicted felon)
Update: The D & O Diary Blog written by Kevin LaCroix discusses legal issues relating to credential inflation.
Disclosure: I am not short or long any of the companies named in this blog post. However, Barry Minkow may have a short position in Trimble Navigation.
Over a year ago, I provided funds to Fraud Discovery Institute (FDI) to help pay costs of its investigations, though I had no control over any monies spent. I am not an owner, manager, employee, or consultant of Minkow or FDI and I do not receive any compensation from them.