A new lawsuit lobs some explosive charges at Force Protection ( FRPT - Get Report). In a suit filed last week, Force Protection founder Garth Barrett and ex-finance chief Thomas Thebes accuse their former employer of "widespread corporate fraud, interested transactions by board members and securities violations." Barrett and Thebes say current and former top execs at Force Protection lined their pockets with millions of dollars through self-dealing. The claims mark the latest twist in an ugly spat between Force Protection and Protected Vehicles, a small armored car company started by Barrett and Thebes. Force Protection sued the Protected Vehicles execs in August, claiming they stole trade secrets to design competing military vehicles for the global war on terror. Force Protection denies Protected Vehicles' own allegations, which were outlined in a suit filed last Tuesday in federal court in South Carolina. The company says that "counterclaims made by Protected Vehicles are nothing more than stale accusations that have already been addressed thoroughly and satisfactorily by Force Protection and outside agencies." Once a mere penny stock, Force Protection has soared since the company started winning big government orders for so-called mine-resistant ambush-protected vehicles. Force Protection now competes in a field that includes titans such as General Dynamics ( GD - Get Report), Navistar and armor company Ceradyne . But the former execs' suit questions some of the transactions that paved the way for Force Protection's recent gains.
In mid-2002, just as the war on terror began to heat up, Force Protection sold itself in what the countersuit portrays as a dubious transaction that left former Chairman Frank Kavanaugh and former CEO Michael Watts with a huge chunk of the company. The suit filed by Barrett and Thebes says Watts managed to secure a full 10% of the company "for little or no consideration." An independent accounting firm hired by Thebes concluded that Watts had paid just $100,000 for a Force Protection stake worth $3.6 million instead. As the founder of the company that had just been sold, Barrett claims he immediately began raising concerns. Force Protection's own securities attorney later questioned the company's actions as well. Force Protection then adopted a new code of ethics. Just months later, in mid-2004, the company pointed to its new ethics policy when attempting to reassure investors worried about rampant insider stock sales. "We have always required that all of our officers, directors and employees comply with the law when selling securities," Force Protection stated in the first in a planned series of shareholder letters under its new so-called Transparency Project. Moreover, "in some cases, we believe it is appropriate for our officers and directors to sell some of their holdings."
Watts, the company's CEO, even promoted such activity. "I encourage the concept of celebration and positive reinforcement upon successful attainment of major milestones," Watts explained in that same letter to shareholders. "Once achieved, I believe that people need to receive a reward." Shortly afterward, Watts was indicted for evading taxes on income hidden in offshore accounts. Force Protection said the indictment covered events that took place before Watts joined the company-- but then went on to applaud Watts' high-mindedness. "It is typical of Mike that he would never want anything -- related or unrelated -- to hinder Force Protection's growth and progress," the company stated in an October 2004 press release announcing his departure. "We appreciate and fully support his decision to step aside for a time." Watts, who pleaded guilty this past May to one count of filing a false tax return, never returned.But Thebes, who was charged with enforcing Force Protection's new code of ethics, soon discovered more irregularities, including some tied to a stock grant to Kavanaugh. The suit claims his efforts to remedy the situation led only to more mischief. "Once Kavanaugh realized he would have to pay taxes on $1,123,011 of shares that he received, he telephoned Thebes and screamed at him for creating a 'paper trail,'" the counterclaim states. After that, "Thebes received a board resolution which changed the date when Kavanaugh's shares were granted and which subsequently changed the value of his shares from$1,123,011 to $120,000."
Barrett finally raised concerns with the board following this development. Meanwhile, Thebes continued to question the stock transaction and put his job at risk in the process. "Thebes was threatened by Gordon McGilton, current chief executive officer of Force Protection, to quit investigating the transaction or be fired,"the complaint states. Meanwhile, "McGilton began to belittle Thebes in company meetings. ... McGilton was attempting to intimidate Thebes because McGilton was angry that Thebes would not go along with widespread company fraud." By the summer of 2005, the outside firm hired by Thebes had completed its review and found evidence of rampant misconduct by leaders of the company. But Thebes continued to detect fresh signs of mischief. Specifically, he learned that Force Protection had awarded an expensive contract to a firm partially owned by the company's brand-new CEO, McGilton. Under the terms of that deal, signed by the CEO himself, Force Protection paid APT Leadership more than half a million dollars for consulting services and even arranged to cover all living expenses for APT employees on the job. In addition, the company shelled out $50,000 for early-stage APT software that was still being tested for bugs, the suit claims. "Drew Felty, formerly an accountant at Force Protection
and now the spokesman for Protected Vehicles, reported that the APT system did not work as well as the current Excel system being used by Force Protection," the complaint states. "When McGilton learned that Felty was questioning Force Protection's use of APT's system, McGilton sent Felty an email where he scorned Felty for not being able to use the APT system correctly."
But "the reason that Felty -- or anyone else at Force Protection -- could not use the APT system properly was because it did not work," the suit claims. Thebes felt that the arrangement violated Force Protection's code of ethics and noted his concerns in a written complaint. Barrett resigned shortly afterwards, and Thebes soon followed him out the door. Since then, Force Protection has continued to pay generously for APT's services. According to Force Protection's latest proxy statement, the bill for APT-- covering "business consulting services, training seminars and certain business software" -- topped $600,000 last year alone. Still, McGilton has gotten even richer by selling Force Protection stock. He began unloading his shares in late 2006 and, if he wasn't already, became a millionaire in the process. He then kicked off 2007 by selling 1 million Force Protection shares less than two weeks after they vested, leaving himself with just a tiny stake in the company that he still runs. Meanwhile, Kavanaugh has been dumping huge amounts of stock over the course of the past year. Already a multimillionaire, Kavanaugh executed his latest transaction on May 31 -- when the stock hit its second-highest price ever -- and then stepped down as chairman the very next month. Massachusetts-based investment strategist Peter Cohan says taxpayers should be outraged. "If this stuff is true," asks Cohan, who has no position in Force Protection stock, "why is the government even dealing with a company like this?"