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Judge silences two Telos board members
Ashburn-based defense contractor Telos Corporation was granted June 27 an injunctive relief order by a Baltimore judge, barring two officers from activist hedge fund Costa Brava Partnership -- who also serve on Telos' board of directors -- from any and all contact with past, present and future auditors for Telos.
The officers, Andrew Siegel and Seth Hamot, have been accused by Telos of making “repeated threats of baseless litigation against the company's last two independent auditors [Goodman & Company and Reznick Group].”
Telos claims that because of the actions of Siegel and Hamot, Reznick Group ceased working with Telos in April.
Attorneys for Siegel and Hamot said they will file an appeal.
John Peterson, spokesman for the Reznick Group, said the firm is not able to comment due to firm policy.
According to court documents the alleged acts of interference included “written communications to Reznick, seeking to influence its professional judgment and opinion on certain accounting issues, including the classification of Telos’ .... preferred stock. These communications included a March 28 ... letter sent to Telos’ former auditor, Goodman and Company, demanding that it withdraw its prior audit opinions for Telos and threatening further litigation if it did not comply. That letter was blind copied to Reznick allegedly at Hamot’s direction and with his knowledge, and with Siegel’s approval.”
In his June 27 ruling, Judge Albert J. Matricciani Jr. said, “The conduct by Hamot and Siegel indicates that they put their interests ahead of the corporation they were supposed to be serving, and sought to disrupt the company's essential relationship to serve their own ends.”
Matricciani also wrote, “Telos is likely to demonstrate that [Hamot and Siegel's] conduct was not just wrongful, but unlawful.”
He also said that Hamot and Siegel may have violated section 303 of the Sarbanes-Oxley Act of 2002 and SEC Rule 13b2-2, both of which deal with improper influence on the conduct of audits.
Matricciani wrote that these two violations could “provide another basis for liability for tortious interference with business or economic relations.”
Tortious interference occurs when a person intentionally damages a plaintiff's contractual or other business relationships.
Records with the court state the Reznick Group ceased working with Telos April 16, citing that the auditor's independence was impaired by the actions of Hamot and Siegel. Telos currently has no independent auditing firm.
Since Reznick no longer is Telos' independent auditor, the company does not have the ability to produce audited financial statements for 2007, causing it to “suffer irreparable harm absent injunctive relief due to its inability to retain an auditor and produce audited financial statements,” according to court documents.
This ruling is one of many related to Telos that Matricciani has handed down in the past few months.
Boston-based Costa Brava holds almost 16 percent of Telos Public Preferred Stock, and in 2007 Hamot and Siegel were elected to Telos' board of directors, with terms expiring in November.
In October 2005, Costa Brava filed a lawsuit in the Circuit Court of Baltimore City (where Telos is incorporated), claiming numerous discrepancies and asking for a $100 million payout from Telos stocks.
In that suit Costa Brava accused Telos of the following allegations: not paying the hedge fund mandatory dividends on stock it held with Telos; issuing stocks that had characteristics of debt instruments; doing nothing to improve the company's solvency or pay accrued dividends; and challenging bonus payments to Telos officers and directors. Matricciani dismissed all those claims in April.
In a separate but related case, Costa Brava also filed suit against Telos' previous independent auditor, Goodman & Company in Fairfax Circuit Court, in December 2005.
Costa Brava alleged Goodman produced an audit that would help it avoid redeeming millions of dollars of preferred Telos stock owned by Costa Brava and other investors. A jury found against Costa Brava on three of four counts. Goodman was charged on one count of explain count, but no damages were awarded.
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