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Sprint Can Weather Perfect Storm of Fraud Probe, Nextel, iPhone

NEW YORK ( TheStreet) -- Sprint Nextel (S), the Kansas wireless communication company, recently surprised the street with a healthy beat above estimates. Unfortunately for shareholders, almost as soon as corks from champagne bottles hit the ceiling, sharks started swimming in circles around the company's moat.

Members of Glancy Binkow & Goldberg have announced an "investigation of Sprint Nextel" -- "investigation" being code for "We don't have as much as we would like yet, but we really are hoping someone might come forward with a smoking gun." I don't blame lawyers for their inventiveness, but maybe jury members should have to demonstrate an ability to balance a checkbook to qualify.
Shares of Sprint were already trading near 52-week lows before news of a potential fraud investigation out of New York State.

Reuters' Karen Freifeld reported a potential $300 million liability from Sprint based on whistleblower allegations of tax fraud in New York State. In a nutshell, New York alleges Sprint failed to collect and remit cellphone service taxes as a means of gaining a competitive advantage over rivals including AT&T (T - Get Report) and Verizon (VZ - Get Report). The amount of taxes in dispute is $100 million; however, triple damages are possible in a worst-case scenario if allegations prove correct.

With the news of possible fraud, shares of Sprint already trading near 52-week lows fell an additional 5% to trade near $2.30. With such a low per-share price, shares in Sprint have become more or less a stock option without an expiration date.

Sprint investors are likely to have a ride like in A Perfect Storm, but without the sad ending. Investors should be prepared as news washes against the side, driving the shares higher or lower. Often highly volatile and emotionally charged stocks can provide the most opportunity for gains. There are ways to soothe the weak stomachs as the seas get wild, and I will describe how.

For now let's look at the seas Sprint is competing in and what to expect.

AT&T is finding life without an exclusive contract to sell iPhones easier said than done. AT&T's fast iPhone additions have virtually come to a halt, and Verizon is essentially in the same or worse situation. While Verizon didn't have an exclusive contract with iPhone, the reputation enjoyed by Verizon in comparison with AT&T virtually assured a mass migration from AT&T. It appears the migration has come to a halt and is waning as real competition for iPhone sales is a reality with three major carriers offering the "must have" phone.
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