Tuesday, December 09, 2008

Deep Capture? Deep Shmapture


When an email appears with the subject line, “American Soldiers punished by naked shorting,” our eyes, so to speak, perk up.

Turns out, this email is not merely some clever bit of spam, intended to get the receiver to send off their social security number or AMEX card information to some Russian hacker, but is actually sent out under the auspices of a public company CEO.

For that reason alone, the average reader might think it contains a grain or two of truth, and be inclined to take a look.

Unfortunately, while the email does indeed contain a few grains of truth—as we shall see—the email’s headline is essentially what Hitler called the “Big Lie,” a lie so “colossal” that nobody could imagine it would have been made up.

Well, this one is made up.

The email connects to a web site called Deep Capture, with a lead story that reads, and we are not making this up:

Hedge Funds to US Soldier: “I need a Maybach, so…You can die too.”

Take a Mercedes, stir in a couple hundred thousand dollars, and you get a car called a Maybach. Hedge fund guys in New York and Connecticut buy them.


What follows purports to tell the tale of a company called Force Protection, a real company that makes vehicles that protect soldiers from hidden explosive devices. Force does this by fitting the base of the vehicle with a heavy, V-shaped shield that deflects the blast outward, away from the soldiers inside the vehicle.

The tale told by this particular idiot, to paraphrase Shakespeare, is that Force Protection was driven out of business by “some people” that “began naked short selling them into oblivion” so that hedge fund managers could buy Maybachs.

According to this web site, the company was unable to issue stock following the purported naked shortselling attack, and consequently, “throttled back their expected output” of life-saving MRAPs.

The web site finishes with this whopper:

“Thus, more of these will be created in Iraq this month…” [above a photograph of soldiers saluting flag-draped coffins] “…so that soft hedge fund guys can have more of these:”—followed by a photo of a sleek new Maybach.

Having once owned shares in Force Protection—albeit briefly, owing to the management’s tendency, in our view, towards hyperbole, as well as the presence of many looming competitors in the business of protected vehicles—we can say we know of no such “naked shorting” conspiracy against Force Protection, although the shares did appear on the Reg SHO list, which is one of the grains of truth provided by this web site. (Another being that Force Protection makes MRAPs.)

Nor, would it appear, has Force Protection experienced a problem manufacturing more MRAPs this year than last, as the web site implies. The company itself, in fact, touted higher deliveries of the Cougar brand of MRAP in last month’s earnings press release:

The Company noted that the third quarter represented strong levels of MRAP production. Force Protection and its subcontractor, General Dynamics Land Systems (GDLS), delivered 422 Cougar vehicles during the third quarter….This compares with 353 Cougar vehicles delivered in the third quarter of the prior year, which generated $176.9 million.

Indeed, the company does not appear to have suffered from its inability to issue stock. Again, from Force Protection’s own press release:

The Company noted that at September 30, 2008, it continued to maintain a strong capital position, with no long-term debt and $79.4 million of cash. Additionally, the Company noted that, in order to create additional financial flexibility, in October 2008 it modified its credit agreement with Wachovia Bank to increase the principal amount to a maximum of $40 million and to extend the maturity date to April 30, 2010.


Mr. Moody concluded, "We are very pleased to continue to make progress in our operational and financial results. Our results in the third quarter reinforce our belief that we are a fundamentally strong company with an important, ongoing role to play in the survivability solutions market. We believe that there is an excellent opportunity to further develop our business, to continue to provide new technology and products to our customer and the war-fighter and, importantly, to create significant value for our shareholders."
—November 10, 2008

Hardly a company driven to the wall by naked short-selling.

Now, Force Protection has had its ups and downs, not the least of which is that there are three other manufacturers with government contracts to build MRAPs. Furthermore, there are plenty of MRAPS in Iraq already:

Although some current and former marines are critical of relying too much on the vehicles, fearing that they might change the fast-moving nature of the force, by mid-January about 2,500 MRAPs were in Iraq, up from about 100 in June. By this June, the military expected it would have more than 6,000, the bulk in Iraq.

Cheryl Irwin, a Defense Department spokeswoman, said nine manufacturers originally competed for contracts to build the vehicles and four were chosen: the Navistar International Corporation, manufacturer of International Harvester trucks; a partnership between Force Protection and General Dynamics; and BAE Systems of Rockville, Md.

—New York Times, February 24, 2008

Competition aside, Force Protection has had a few issues particular to itself.

Not being in compliance with Nasdaq Marketplace Rule 4310 (c)(14) for a period of time, as a result of not filing its June quarter 10Q, for one.

Announcing in August, 2008 that its 2007 financial statements “should no longer be relied upon,” for another.

Announcing it had identifyied “material weakness in its internal control over financial reporting,” in November 2007, for a third.



Deep Capture? Deep Shmapture, more like.


Jeff Matthews
I Am Not Making This Up


© 2008 NotMakingThisUp, LLC

The content contained in this blog represents the opinions of Mr. Matthews.
Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will not be responded to. This content is intended solely for the entertainment of the reader, and the author.


13 comments:

PhillipCharles said...

Jeff,

Another insightful post.

Out of curiosity, I gave these guys the 'once over' back in the Spring after they opened a testing facility in my hometown. Their shares were attractively priced, however the revenue stream was too concentrated for my tastes.

In taking a cursory glance at share performance, I don't understand the complaint? This guy is a clown. Sounds like he knows the war is over and is looking for something to prop up the price, and get the Fox News crowd to make a patriotic purchase of FRPT just to spite the state of Connecticut. Maybe Dobbs or O'Reilly will take the case...

Anonymous said...

are they hitting the merlot again?

if this were 40 years ago, i'd swear someone was on mushrooms when that was written.

Anonymous said...

Force Protection created the category of vehicles now known as MRAPs. They did this with little capital, entrepreneurial drive, and a whole lot of effort. The shorting did occur but did not limit the company's ability to raise money. The biggest issue had to do with the SECs valuation of shares issued prior. The company is well positioned for the future and as a shareholder I am hoping to see it realize its potential. Management can't stop crazies from making statements.

Anonymous said...

I don't think you adequately addressed their statement that they could not raise equity. The quote you mention, reproduced below, has nothing to do with raising equity.

The Company noted that at September 30, 2008, it continued to maintain a strong capital position, with no long-term debt and $79.4 million of cash. Additionally, the Company noted that, in order to create additional financial flexibility, in October 2008 it modified its credit agreement with Wachovia Bank to increase the principal amount to a maximum of $40 million and to extend the maturity date to April 30, 2010.

Lyon Jewett said...

Time to show these guys and the big 3 the door...

The US Government is bordering on retarded..or should I say "special needs?"

Jared said...

I'm familiar with the history of Byrne and his war against short-sellers. I think the imagery in this article from Deep Capture was a bit over the top.

One thing I will say in his defense is that stocks consistently showing on the Reg SHO list are being artificially pressured, and that could materially change their ability to get funding in this environment. Shares price does matter, that's what the ratings agencies have been reacting to.

Whether you agree that naked shorts can change share prices long term or not...it is illegal and should not be tolerated.

Anonymous said...

Where is the Kool-aid that you guys drink around here?...I'm thirsty.

It's time to take a little step out of your mini-box that you are trapped in Mr. Matthews and join some of us in what is called REALITY...Naked short-selling is REAL and the Deep Capture story, as a whole, is WAYYYYY bigger than one company, contract or person.

Thanks for the Kool-aid though, but I'll pass

Anonymous said...

May you live long enough to thank Dr. Byrne for his selfless and tireless work some day.

DeepCapture.com

Check it out, thoroughly, and decide for yourself.

Jeff Matthews said...

Ha! The one person who regularly refers to Patrick Byrne as "Dr. Byrne" is Patrick Byrne himself.

Hence, I strongly suspect Mr. Byrne is patting himself on the shoulder here, which would not be the first time.

Anybody seeking to read a delusional web site, go ahead.

Deep Capture, Deep Shmapture indeed!

JM

Anonymous said...

"Deep Capture? Deep Shmapture"

Oh Jeffy, DeepCapture was honored in a landslide victory as the winner of the 2008 Webblog Biz Award category. More truth in any single paragraph on DeepCapture than one could ever find in reams & reams of trash that you pen.

Jeff Matthews said...

"Anonymous": Being named best drunk by a bunch of drunks is not hard.

Do everyone a favor, to prove your point:

1. Name those "thousands of companies" that have been put out of business by naked shorting.

Name 'em.

2. If you can't do that, name just 100.

3. If you can't do that, name 10.

Why do ill-informed cowards always use "Anonymous" anyway?

JM

Anonymous said...

As to the issue of the mythical practice of naked short selling, the cat is out of the bag. And not because some conspiracy theorist is making it up, Gold Man Sacks' own law firm screwed up:

http://www.rollingstone.com/politics/blogs/taibblog/accidentally-released-and-incredibly-embarrassing-documents-show-how-goldman-et-al-engaged-in-naked-short-selling-20120515

Jeff Matthews said...

Bingo! Patrick Byrne finally figures it out! The shorts didn't short naked...Goldman did!

That was the point all along. No short seller we know ever shorted naked.

Therefore, the reason for the non-borrows was that unbeknownst to their clients, the prime brokers weren't actually borrowing the stock. So the clients (the shorts) were getting screwed too: they were paying rebates for shorts that weren't costing the PBs anything because the PBs weren't borrowing the stock.

It was not the shorts.

Case closed, point proved: no conspiracy by the shorts. Thank you.

JM