Each took promises for future payments and never saw the cash
An Austrian court has convicted American Superconductor’s rogue employee, Dejan Karabasevic, and already sentenced him to a year in jail and two years of probation. He sold trade secrets to Chinese wind turbine maker Sinovel. American Superconductor is now able to reveal some of what happened to so damage the company and its stock. The story is shocking in its simplicity.
The Croatian former employee was disgruntled after being demoted from the design team to marketing efforts. He was part of a small cadre of trusted employees who had access to the software code. He was identified rapidly because he was part of an even smaller group that was in China working with Sinovel.
Think about a software program you might buy that is time encrypted with an expiry code. If you don’t pay for the next year of service the program stops working. AMSC workers saw a rotating wind turbine with such an expired code during a visit to a Sinovel installation. That’s when AMSC knew that Sinovel had breached its secret sauce.
It appears Karabesevic folded his cards rapidly once confronted. As reported, his deal with Sinovel to transfer the trade secrets included a 5 year employment contract for $1 million, not the tiny payment of 15,000 Euros first reported (just $20,000). Perhaps for that larger amount, it was worth the risk of discovery. Just as Sinovel has refused to pay American Superconductor for services rendered, it also paid the “perp” only a tiny sum of what he was promised to get him to spill the beans and hand over the code. There surely is a pattern here.
Karabesivic is now cooperating with American Superconductor in its court case in China against Sinovel. His admission of guilt certainly undercuts Sinovel’s claims that it did nothing wrong and that its own extensive staff of designers had produced an electronic control system of its own. Sinovel claims that AMSC’s code was inadequate and unacceptable and wouldn’t pass muster with the new level of Chinese grid requirements. The identification of this individual and his swift path to justice is helpful to AMSC in trying to recover the damages for which it has sued Sinovel.
In addition to public statements by Senator John Kerry( D-MA) , other U.S. Governmental Agencies are also lobbying on behalf of American Superconductor including the U.S. State Dept., the U.S. Commerce Dept., and the Federal Trade Commission. Unfortunately, it appears that Sinovel has no appreciable assets in the United States so whatever legal remedies might eventually be forthcoming must emanate from the Chinese judicial system.
In addition to announcing the resolution of the court proceedings in Austria against the disgruntled employee, AMSC has now filed its revised financial statements for 2010 and the first quarter of fiscal 2012. That puts it back into compliance with the SEC. The numbers aren’t pretty because AMSC was so heavily dependent on its relationship with Sinovel. Revenues dropped 90% to only $9 million in the first quarter compared with a restated $97 million in Q1 2010. That matches the 90% drop in the stock price from 44 in January 2010 to under 5 right now. Sinovel went public on Jan. 13, 2011 just as its own growth was slowing. Its stock has traded in a range from 45 to a low of 22 this week in U.S. dollars. In other words, it too has dropped by half. Its business ethics ought to give one pause about investing in it, however.
Looking forward, management stated that it has received $100 million in new orders since the news of the theft was reported in early April. However, many of those orders will not be fulfilled until next year or the year after. Management guided Q2 revenues to $18 million or about twice those of the first quarter and said it will only give quarterly guidance going forward. For now, many investors want to eliminate the stock from their portfolios for quarter end window dressing. That’s why it remains under pressure even as this very volatile market is heading higher at the moment.
The new CEO has a tough road to travel to restore the company’s credibility and execute an effective business model. Founder and former Chairman Greg Yurek no longer has an office at AMSC but remains available as a “consultant.
It is worth observing that all alert American companies are becoming aware of the dangers of doing business in China and taking precautions when they can. GM is holding a three day Board Meeting in Shanghai this month. While auto sales in the United States have plummeted from more than 16 million annual sales before the financial collapse to only 11-12 million this year, Chinese car sales have surged from 1 million per year a decade ago to more than 16 million in 2011. That makes China a very alluring market as its populace moves from bicycles to automobiles. GM has the largest auto position in China of American manufacturers and would like to expand production of its electric cars there. However, the same problem exists as occurred with AMSC: concern about the technology transfer and the degree to which intellectual property and patents will be respected and honored.
On Sept. 2, 2011, GM’s Akerson was quoted in a recent interview with the Wall Street Journal: "There are technology risks, there are relationship risks, there are business risks. I am sure China will do what's best for China. But you ignore China at your own peril."
Joan E. Lappin CFA, Gramercy Capital Mgt. Corp
Gramercy Capital has no positions in any companies named in this article.
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