STEC CEO Moshayedi Denies SEC's Insider Trading Allegations

   By Saabira Chaudhuri 
 

STEC Inc. (STEC) Chief Executive Manouchehr Moshayedi has denied all allegations made by the U.S. Securities and Exchange Commission that he sought to take advantage of an upward trend in STEC's stock price by selling a significant portion of his stock holdings as well as shares owned by his brother, a company co-founder.

He called the SEC's claims "unjustified" and said he will contest the commission's complaint vigorously.

"I pursued a sale of shares through a public offering at significant additional cost to me in order to establish a more transparent and orderly process, which also protected STEC and its shareholders from large and unexplained piecemeal sales that would have been triggered under my pre-existing 10b5-1 plan as the company's stock rose rapidly," Mr. Moshayedi said.

According to the SEC's complaint, STEC's stock price soared from January to August 2009 as the company reported higher revenue, sales and margins for its products, particularly its flagship flash-memory product called ZeusIOPS. In July 2009, the company disclosed an agreement with its largest customer, EMC Corp. (EMC), which agreed to buy $120 million worth of ZeusIOPS in the third and fourth quarters of 2009.

However, in the days leading up to the secondary stock offering on Aug. 3, 2009, the SEC said Mr. Moshayedi learned confidentially that EMC's demand for ZeusIOPS was turning out to be less than expected, which was likely to hurt the company's stock price. Instead of calling off the offering, Mr. Moshayedi entered into a secret side deal with EMC and proceeded with the sale of nine million shares, the SEC said. Mr. Moshayedi and his brother saw gross proceeds of about $134 million each from the offering.

According to the SEC's complaint, the offering was set to coincide with the release of STEC's financial results for the second quarter of 2009 and revenue guidance for the third quarter. The SEC alleges that, ahead of the offering, Mr. Moshayedi learned EMC's demand for ZeusIOPS was less than expected and wouldn't be enough to ensure that STEC's third-quarter revenue guidance would meet or exceed analyst expectations.

The SEC alleges Mr. Moshayedi, in the secret side deal, convinced EMC to take $55 million of ZeusIOPS products in the third quarter, more than it actually needed, in exchange for an additional $2 million price discount on the product in the fourth quarter.

On Thursday, Mr. Moshayedi said he and his brother, Mehrdad Mark Moshayedi, incurred an $11.2 million underwriting discount on the public offering and paid about $675,000 in transaction expenses, costs they wouldn't have incurred if they had maintained their established trading plans.

He denied the SEC's allegations that he was aware that a $120 million supply agreement between EMC and STEC for the second half of 2009 would be the last supply agreement ever reached between EMC and STEC, and that EMC's full-quarter demand for STEC's ZeusIOPS drives during the third quarter of 2009 would be no more than what EMC had already ordered from STEC during the first month of the quarter.

Lead Independent Director Kevin C. Daly said STEC's board of directors "unanimously supports Manouch's defense against the SEC complaint, whose allegations in our judgment are without merit."

Last month, the Santa Ana, Calif., computer-storage company said it received investigation closure letters from the SEC, which said it doesn't intend to recommend enforcement action against STEC or its chief operating officer, who is also Manouchehr Moshayedi's brother.

STEC's shares were down 1.6% to $7.50 in Thursday morning trade. The stock is down 22% in the past 12 months.

Write to Saabira Chaudhuri at [e-mail]

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