Startling Allegations in a New CHS Lawsuit, and Concern That USG's Investors Will Feel Gypped

Also, more reader revolt.
Author:
Publish date:

Mondayne:

CHS Electronics:

The plot gets even thicker. Shareholder class action lawsuits are so routine that I don't know anybody who routinely reads each press release as it comes out. (Depending on the company and the severity of the situation, there can be upwards of a dozen per company at a time.) But

CHS

(HS)

has been a different story. One of the suits filed against CHS in recent weeks, by the law offices of Steven E. Cauley in Little Rock, Ark., alleged that financial statements "were based, in large measure, upon forged documents and false customer orders." Several days after that suit was filed, CHS said it had discovered forged documents.

Now comes an amended lawsuit, filed late on Friday, by Cauley. Its allegations include that the company "improperly kept certain assets (primarily accounts receivable) off its balance sheet" and that it "routinely shifted inventory from country to country in Europe to avoid the 18% value-added tax." The new suit also alleges that a CHS executive "who was involved in CHS's scheme to avoid the vaue-added taxes has fled the country under fear of indictment."

Where did they get that kind of detail? The attorney working on the case couldn't be reached for comment. A CHS spokesman declined comment.

Hitting a Dry Wall:

Maybe you saw the recent story in the

Wall Street Journal

: There's a huge shortage of gypsum board (known to most of us as drywall, wallboard or sheetrock). How huge is it? It's so big that housing projects are getting delayed. It's so big that contractors have had to lay off workers. Why, the drywall shortage is so big that some contractors are being forced to go to

Home Depot

(HD) - Get Report

!

Yet that's not necessarily any reason to buy the stocks of drywall makers. The biggest and purest play, among public companies, is

USG

(USG)

, which was better known as U.S. Gypsum before it emerged from bankruptcy a few years ago. This is a company that analysts love because it has new leadership, has pared itself down and is a leader in an oligopolistic industry.

So, what's not to like? Plenty, according to one money manager, who has been covering the housing and building industry for more than a dozen years (but who declined to be quoted by name.) His concern is that the company is on the brink of adding new capacity just as mortgage rates have started to rise -- up 100 basis points since their low last fall -- and housing starts and building permits are at or near records. "Whenever you get a backup in rates, you get a surge at the end (of demand) as fence sitters say, 'I better do this now if I want to buy my house.'

"Regardless of what happens to rates, unless they come back down at least 50 basis points from here you'll have a decline in housing starts from here. Things are so good they can't stay good forever."

A USG spokesman said that the extra capacity is being added over three to five years, while older lines are being shut. He adds that USG believes this will be another booming year for housing, with the shortage actually getting worse. Even if it doesn't, the spokesman says almost 40% of drywall demand comes from remodeling.

Besides, with USG currently trading at around 7.7 times trailing earnings, he figures the worst case has already been factored in. "And we're trading at discounts far below where we have historically through all of the industry's ups and downs."

Maybe, and maybe these concerns are too premature. But remember that housing booms can quickly turn to busts, which is just what happened to USG last time around.

Reader Revolt:

From someone identified as Brian Hall: "Have had access of your articles during my free trial and with each email I receive from you I am reminded of why I would never pay for your service. I am so tired of people like Hank Greenberg who have nothing but bad to say about any company that has anything to do with the Internet sector. He is just like all the analysts who keep talking about the high valuations of these companies and try their best to talk them down in case anyone is listening. Hank needs to get over it and realize that the old fashion stock market is just that, old fashion. Things have changed and they will not be the same again. The Internet sector is taking over and people like Hank can either jump on the boat or get run over by it. Here's hoping I'm on the boat as it goes over Hank.

"Cancel my newsletters that you send me and I'll find another company like Stockwinners or the bull market to listen to in the future."

Someone oughta tell Brian that Hank's hunch is that Hank was on the boat long before Brian ever knew there

was

a boat.

Herb Greenberg writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at

herb@thestreet.com. Greenberg writes a monthly column for Fortune and provides daily commentary for CNBC.