Delcath Systems (DCTH) has been involved in a long battle with hedge fund Laddcap Value Fund for over a year. The fund is seeking to replace the company's board and possibly put the company up for sale. While this would result in a nice short-term spike for investors, the company argued that its long-term prospects would pay off. The company continued its battle against Laddcap Value Fund today by announcing a lawsuit alleging that the fund failed to disclose critical details about its proposed replacement board. Their PRE-14C filing with the SEC today shed some interesting details on the funds owners and motivations.

The company begins by pointing out that the current board has witnessed a 916% increase in the share price over the past three years - this kind of performance does not justify shareholder action to replace the board. The company then shed light on the funds management and proposed slate of directors:

"Ladd Defendants have failed to disclose is that one of their director nominees, Paul William Frederick Nicholls, filed Chapter 7 personal bankruptcy in 2002. Among other items, Mr. Nicholls amassed credit card debt of $105,349.75 on nine credit cards, including cards issues by such luxury retailers as Bloomingdale's, Bergdorf Goodman and Macy's. They failed to disclose that another nominee, Fred. S. Zeidman, served on the Audit Committee for Seitel Corporation, a company that restated its financials for seven quarters and subsequently filed for bankruptcy. The Ladd Defendants failed to disclose that Mr. Zeidman was named in seven lawsuits arising out of the restatements. They failed to disclose that Michael Karpf, M.D. sat as Vice Provost of the UCLA hospital system through its period of financial woes, necessitating the hiring of an outside firm to ascertain what went wrong. And certainly, the Ladd Defendants have failed to disclose the abysmal performance of the Laddcap hedge fund run by Mr. Ladd."

Now, Delcath shareholders are faced with a choice. If the proposed consent solicitation garners enough interest for a proxy battle and Ladcapp is able to take over the company, they are likely to attempt to put the company up for quick sale. This hunch is based on the fact that they demanded that the company contact an investment bank several months ago to explore strategic alternatives - an attempt which ended up failing after lawsuits were filed. If current managements remains in place after a proxy battle, the stock price is likely to appreciate also due to the added security that current management will remain for long-term growth. If, however, the lawsuit and solicitations are dropped (which has been what has happened in the past), the uncertainty and the threat of takeover remains which may be a drag on the stock price in the near term. Overall, this situation warrants a close watch, as a proxy vote of any kind could mean a catalyst to a quick increase in the stock price.

Verizon announced in 2005 that is was exploring strategic alternatives for its Yellow Pages business. Recently on July 7th of this year the said that they would be spinning off their Yellow Pages and Directories business in their Form 10 filing with the SEC. Under the terms outlined in this filing, current Verizon shareholders will receive one share of the new spin off, Directories Corp, for every twenty shares of Verizon that they own along with cash for any fractional shares. As the pending spin off comes closer to reality, let's take a look at how you can benefit from this spin off!

First, let's take a look at what we know. The new spin off would create the world's second largest yellow pages directories publisher in the United States along with the largest yellow pages directory on the Internet. The company's products would include print yellow pages, print white pages, an Internet yellow pages directory (SuperPages.com), and an information directory for wireless subscribers (SuperPages On the Go). These products had an estimated market share of about 72% in the top fifteen metro areas in the U.S. We also know that the company makes 90% of its revenues from sale of advertising in print yellow pages, 4% from sale of advertising in print white pages, and 6% from Internet Yellow Pages advertising. Finally, the Form 10 filing also noted a pro forma net income of over $1 billion and strong cash flows but also warned of "substancial debt". This debt includes a note receivable from Verizon of $507m and the issuance of up to $9.1b in debt comprised of senior term loans and other debt securities. More of the financial information can be found in the Form 10 filing.

Next, let's take a look at why the spin-off took place. In the Form 10, the company gave the following reasons:

• Enhance Directories Corp's ability to execute a potential acquisition strategy.
• Permit Directories Corp to enhance the efficiency and effectiveness of equity based compensation.
• To allow each company to determine its own capital structure.
• To allow each company to focus on its own core business.

The first two reasons listed here are of interest - we can see that the company is interested in pursuing a potential acquisition strategy and that the new owners have a big interest in making this happen (as much of their compensation is in equity based compensation, both from this event and from their holdings that came as a result of the VZ spin off itself). By carefully watching insider buying and selling after the sale, we will be able to tell how confident and vested owners are in making this happen. Following insiders, especially when they have a large stake in the success, is always a good idea.

Another advantage of this spin off situation is the fact that the stock is usually undervalued shortly after the spin off occurs. This comes as a result of the spin off process itself - shares of the new company are automatically distributed to all holders of VZ stock. More often than not, these VZ investors are not interested in the new spin off, and therefore immediately sell their shares. Also, some instituational holders are not allowed to hold the new stock. This results in a massive sell off that typically drives the price below its proper valuation.

All of this creates not only a short-term buying opportunity for swing traders, but also may be an opportunity for long-term investors to get in cheaply.

Apple Computers is the latest in a long series of headlines relating to the SEC's crackdown on backdated option grants - an issue potentially affecting a number of public companies, primarily in the tech sector. Apple recently launched its own internal investigation which uncovered several violations which may significantly impact the valuation of their stock. In an 8k filing with the SEC dated August 4th, Apple stated:

“Apple’s financial statements for the fiscal years ended 2003, 2004 and 2005, the interim periods contained therein, the fiscal quarters ended December 31, 2005 and April 1, 2006, and all earnings and press releases and similar communications issued by Apple relating to periods commencing on September 29, 2002 should no longer be relied upon.”

The company also notified investors that it would likely delay its 10Q filing with the SEC until further notice. Many other tech companies are also feeling the heat as the SEC cracks down. Among the potentially affected companies are Broadcom, Rambus, Sycamore Networks, and McAfee. Currently, Brocade is the only company facing criminal charges by the SEC. If found guilty, company officers involved in the crime can face up to 20 years in prison and $5 million in fines.

What Are Backdated Option Grants?

Option backdating occurs when a company grants a call option (a right but not obligation to buy at a certain price) with an exercise price below the price of the stock on the day of the grant. This means that the owner is entitled to an immediate gain on paper if he/she decided to immediately exercise their option. Now, as surprising as it sounds, this is not illegal. In fact, it is perfectly legal for a company to backdate options; however, the option grants must be classified as being backdated.

The SEC recently got involved when it discovered that several companies were classifying these backdated option grants as a type in which the exercise price is the same as the stock price on the day of the offer. This enabled companies to hide millions of dollars of expenses from the public, which in turn artificially boosted net income by reducing operating expenses. As a result many companies may be forced to restate many years worth of earnings due to the manipulation of net income. This will force investors to revalue (to the downside) the companies based on the new lower net income levels. Needless to say, these investigations will have a material effect on the offending companies.