Original Article Feds look at Taser actions SEC reviews safety, distribution claims Robert Anglen and Dawn Gilbertson The Arizona Republic Jan. 7, 2005 12:00 AM Taser International, the Scottsdale company that has armed nearly a fifth of America's police departments with electric stun guns and made millions for investors, is being investigated by the Securities and Exchange Commission. Trading of Taser shares was extremely active today. The share price fell, rose for a short time and then started falling again. Shortly after 1:30 a.m. Arizona time the stock was down almost 20 percent, at about $22.20, with close to 33 million shares changing hands. Company officials disclosed late Thursday that federal authorities have launched an inquiry into claims the company has made about its safety studies. The SEC also is looking into an end-of-year sale to a Prescott firearms distributor that some stock analysts have called dubious because it appears to inflate sales to meet annual projections. "We're confident that this is going to come out in our favor," Taser President Tom Smith said Thursday night, adding that the company stands by its safety statements and the recent sale. Taser officials said they received a notice from the SEC earlier this week, but disclosed it only after being questioned about it by The Arizona Republic. The inquiry is a step below a formal investigation, where regulators have subpoena power. It is the latest and highest-profile scrutiny of the company, whose sales and stock price have zoomed the past two years. The disclosure comes after investigations by The Republic and the New York Times raised serious questions about the gun's safety record and about the company's reports to shareholders. Although the company has repeatedly said its stun guns have never caused a death or serious injury, The Republic has linked the stun gun to 11 deaths and to several injuries involving police officers. "We feel very confident that the statements that we've made surrounding the safety of our products are supported with the safety studies," Smith said. Questions about safety have already caused some police departments around the country to back off purchases of Tasers, and the SEC probe could raise additional doubts. Smith also defended the company's purchase agreement with a Prescott firearms distributor called Davidson's Inc., a sale that is part of the SEC investigation. An investment analyst in Scottsdale raised questions last week about a recent $1.5 million Taser order. At issue is the sale of 1,000 new consumer stun guns and other products that Taser announced on Dec. 20. The news came just 11 days before the end of Taser's, and most companies', quarter and year end. Public companies have Wall Street sales and earnings targets to meet so there's always a push to come in on target. Some companies have gotten too aggressive, though, and run afoul of accounting regulations that dictate when you can include a sale on the books. "It's a deal that could maybe make a quarter," said Rob Miceli, earnings quality analyst with the Scottsdale firm Gradient Analytics Inc. "Any time we see something like that it bears further investigation." In his Dec. 30 report, he expressed "grave concerns" about the quality of the revenues from the deal. In an interview with The Republic before the SEC investigation was announced Thursday, Davidson's CEO Bryan Tucker said it received the Tasers by Dec. 31. He suggested the scrutiny over the deal was much ado about nothing. Davidson's has done business with Taser since 1999. Tucker said that there was no pressure from Taser executives to rush the deal and that he was aware the announcement was going out on Dec. 20. He said Taser officials were eager to close the sale and ship the product but said that's typical for any company in business. "It wasn't like, if you don't take them before the end of the year, the deal's off," he said. "That's not it at all." Even if Taser is cleared, the mere mention of an SEC inquiry usually puts a cloud over a company in investors' minds and often leads to shareholder lawsuits and other fallout. But the most immediate impact is usually on the stock price. Shares of Krispy Kreme, for example, fell 16 percent in one day this summer after it announced that the SEC had launched an informal inquiry into its accounting practices. And like Krispy Kreme, Taser is a popular stock that went on a rocket ride. Taser's stock rose 361 percent last year and split three times. That was on top of a 1,900 percent run up in 2003. In dollar terms, it has gone from 34 cents to nearly $32. Those gains were based on sales of Taser stun guns to police departments, which bought the guns based on Taser's claim that it has never caused a death or serious injury. For years, Taser maintained that its stun guns never caused a death or serious injury. As proof, Taser officials said no medical examiner had ever cited the gun in an autopsy report. But The Republic found this summer that Taser never had those autopsy reports and didn't start collecting them until April. "It is not Taser International that says Taser is not to blame," Taser Chief Executive Officer Rick Smith said in an April news release. "It is the medical examiner's opinion in every single case across the country." Using computer searches, autopsy reports, police reports, media reports and Taser's own records, the newspaper has identified 88 deaths following police Taser strikes in the United States and Canada since 1999. Of those, 11 autopsy reports to date have linked deaths to the stun gun. Medical examiners cited Taser as a cause or contributing factor in eight deaths and could not rule it out as a cause in three others. Smith said the SEC's inquiry on its statements focuses on questions raised about Taser's announcements on product safety that seemed to bolster stock prices just before executives and directors sold $68 million in shares. In October, Taser issued a press release saying a Department of Defense study, whose full results have not yet been released, found that its guns were safe. But the New York Times reported that the Air Force researchers who conducted the study actually found that the guns could be dangerous and that more data was needed to evaluate their risks. The researchers said the stun guns "may cause several unintended effects, albeit with low probabilities of occurrence," the Times reported. Taser has also told shareholders that the stun gun has been used on more than 100,000 police officers who have volunteered to be shocked during Taser training sessions. Company officials said no officer has ever been injured during those sessions. But a doctor working for Taser wrote that a one-second burst from the stun gun was responsible for fracturing the back of a Maricopa County sheriff's deputy in 2002. That deputy, Samuel Powers, was the first to file a product liability lawsuit against Taser and he claims the shock forced him into medical retirement and has left him suffering permanent injuries. He has been joined by other police officers around the country who have come forward with lawsuits and complaints about injuries they attribute to being shocked with a Taser. Although the doctor hired by Taser to evaluate Powers confirmed the stun caused the fractured back, Taser has not reported that to shareholders. In repeated filings to the Securities and Exchange Commission, Taser said that Powers is alleging that he "injured his shoulder" and made no mention of the fracture.