A Shocking Defense

October 31, 2005
Elizabeth MacDonald, Forbes

New court documents contain awkward disclosures for the president of stun gun maker Taser International.

Taser International, The Under-siege stun gun maker whose stock soared sixtyfold in three years only to plunge 80% amid short-seller raids, shareholder class actions and wrongful- death lawsuits, has had another shock to the system.

Newly unsealed court documents in a personal injury case against Taser have President Thomas Smith detailing which current and former cops got stock options in Taser in exchange for essentially endorsing its line of guns, which temporarily paralyze suspects with a blast of electrical currents.

The options controversy first erupted in 2004, when President George W. Bush picked Bernard Kerik, the former New York City police commissioner, to run the Homeland Security Department. It then emerged that Taser had paid Kerik 85,000 options to join its board. Kerik says he promoted the gun to law enforcement and made more than $6 million on the options. Taser had repeatedly refused to disclose which other cops got the stock incentives.

But in September an Arizona state court judge unsealed records in a lawsuit filed by SECInsight, a research firm in Plymouth, Minn., And the Arizona Republicnewspaper. The records show Taser handed out almost 30,000 stock options to 11 people from 2001 to 2003, when Taser shares ranged from a low of 31 cents to a high of $8. The options, valued at $210,000 when they were issued, would have risen in value as Taser shares climbed as high as $33 by December 2004.

Seven of the 11 recipients are current and former police officers: All were in cities that bought stun guns.In Seattle, Wash. and Chandler and Glendale, Ariz. police departments bought Tasers during the options handouts. In Sacramento, Calif., New York City and Austin, Tex. departments had bought the stun guns before the cops got involved. The officers could not be reached for comment. Victoria, B.C. also bought Tasers.

Five of the cops served on a Taser advisory board on training police departments nationwide to use the stun gun, resulting in some sales. One officer in Chandler was accused by his superiors of a conflict of interest; the complaint was dropped. Still, "How can it not be a conflict of interest for Taser to use options as payola to police officers or medical experts, who then plug the company's product?" says John Gavin, president of SEC Insight.

The disclosures are another annoyance for Taser, of Scottsdale, Ariz., which also contends with an accounting investigation by the Securities & Exchange Commission, two class actions and 32 personal-injury torts, 13 of which allege wrongful deaths.

The latest court filings also show Taser gave 775 stock options to Darren Laur, a Victoria law enforcement official, for designing a gun holster. Laur co-wrote two medical reports praising the safety of the stun gun. Taser touts both reports on its Web site without revealing that Laur held options. Laur, who exercised and sold his options in 2003, says he made his superiors aware of his holdings and made the disclosure in a separate study.

Smith defends the options payments, saying Taser "didn't have the cash flow needed to pay these officers to do free training work." He also admitted in court that he didn't know whether Taser has a code of ethics or what it says. For that he need only read the Taser Web site:It says all employees are expected to read, understand and uphold the ethics policy and "avoid situations where a conflict of interest might occur."