Koss fraud. Wow, not good.

[Wmcmanus]

If Koss goes Chapter 7, then the above does not apply, correct?

As a practical matter, yes. See my reply above for more details, but in a Chapter 7, chances are pretty good that product owners would get shafted completely.

If they go Chapter 11, the Bankruptcy Court could simply void (or modify) all existing warranties. I don't know how common that is. But for that reason, and the priority issue mentioned above, holders of warranties would almost certainly get the shaft if a BK is filed.

Yes, again, to all of the above. In a reorganization, the judge could void (or more likely modify) existing warranties. The reason I say more likely modify is that in reorgs, it's always a give and take process to get all of the various creditor classes to agree to the "plan".

The more classes there are, and the more stubborn the senior note holders (i.e., banks) and other secured creditors are, the more difficult it becomes to get a plan approved. It all comes down to how badly everyone wants to get the job done to ensure that 1) the company can somehow survive, and 2) that everyone comes away with something.

If the higher priority classes decide that warranty claimants (and other unsecured creditors) should get absolutely nothing, then they would be sabotaging any hopes that they might have had to get a plan approved. If just one class of creditors won't approve the plan (in this case because they are being offered nothing at all) then they can vote against the plan and kill the whole deal.

Thus, for a Chapter 11 to work, the warranty claims would have to be honored at least to a certain extent, if the judge even allows them to be represented in the creditor meetings/negotiations as a separate class to begin with. So there are a zillion "what ifs" involved.

You can be sure that if we were talking about GM (rather than Koss), and if they were in Chapter 11 (as regulated by a federal bankruptcy court and not "The Man" Obama) then the significance of warranty claims and the undue hardship imposed upon present car owners if their claims were not to be honored, would ensure that they are adequately represented. Why? Bigger dollar claims potentially involved and a much broader audience, as well as the political risk of not honoring those claims (to any extent).

But with a small company like Koss and (for the most part) very inexpensive products and thus insubstantial warranty claims that are likely to occur, and no political pressure to ensure that their rights are being represented, sure, a judge might throw them out as a potential creditor class altogether just to simplify the overall process.

[Currawong]

^Agree, and even if it isn't the case, there's certainly the perception. And I would bet that Koss's vendors are now clamoring for any outstanding invoices to be payed ASAFP.

Even if the adjusted financials turn out not to be that bad, I can imagine just this killing the company. Much the same thing happened to a small, but significant company owned by friends of mine. There was hint of financial instability or some-such and suddenly all the supplies changed their invoices from 90 days to 30 days and the company went under, and was bought up by a much bigger one. Said friends got a nice position in the corp though.

[TomB]

Man, you wonder what the strategy will be to deliver a come-back.

Thin out, for sure.

Discontinue the low money makers.

R&D is expensive.

Focus on the products with good sell through.

Focus on developing stronger partnerships with .. say ... Radio Shack.</snip>

Actually, did anyone notice in the past couple of months that Koss had transitioned away from Radio Shack and on to Best Buy? Best Buy now offers an updated version PortaPro - black band, cloth leads, etc. - not really the anniversary edition, but close. I haven't seen the KSC75 there yet, but they have the UR40 and at least one other model. One wonders if this relationship was going to grow.

Bad timing all the way around, I guess.

[ktm]

I am beginning to suspect that there was other mischief going on,

and all she did was exploit it. I find it hard to believe all the other

execs could miss this, unless others were in on the skim.

All she did was get too greedy and exposed the whole thing to the

light of day.

[The Monkey]

And so it begins: Koss Corporation under Shareholder Investigation

[Dusty Chalk]

I am beginning to suspect that there was other mischief going on,

and all she did was exploit it. I find it hard to believe all the other

execs could miss this, unless others were in on the skim.

All she did was get too greedy and exposed the whole thing to the

light of day.

I'm not of this mind at all. If you were aware of just how lofty bigwigs at companies can be, and how much they depend on the information of their subordinates, you'd have no problem believing (as I do) that this is isolated to at least as high up as her (obviously I would have no problem believing that her immediate subordinates at least knew about it).

[Chekhonte]

You know after the stock freeze is melted, and undoubtedly plummets it might be a good time to invest since Koss still makes descent and popular gear. This is assuming that the scandal doesn't cause the company's collapse.

[Wmcmanus]

You know after the stock freeze is melted, and undoubtedly plummets it might be a good time to invest since Koss still makes descent and popular gear. This is assuming that the scandal doesn't cause the company's collapse.

I agree(d).

At the moment, the company's stock is still halted. Trading is unlikely to resume until, as you say, the forensic audits are complete and amended financials are publicly available. At that point, nobody has any particular trading advantage. As others have said, it is a very thinly traded security, so there's no telling what could happen. There may be a lot of panic sellers which would create a very brief buying opportunity for those who think the company will be able to survive (i.e., not to bankrupt).

The trick in these situations is in trying to gather as much 'intelligence' as you possibly can about the mood and the environment in the workplace at Koss these days. Not insider information as such (you can't trade on that), but sort of the near-inside scoop in the 'talk of the town' sense. If you know people who know those who likely know more about what the future is likely to hold for Koss, you might want to make a calculated bet and make a substantial investment. But, even then, not more than you're willing to lose!

[Wmcmanus]

And so it begins: Koss Corporation under Shareholder Investigation

My first reaction was - meh, just the lawyers trying to get themselves (oops, I mean as many minority shareholders as they can put together as clients) a piece of the pie (if there is any left after settling the company's debts). So no big surprise there.

But in the disclosures below the story, it indicates that they're not a law firm and provide information as a public service. Hmmm... "Foundation" implies that they're not-for-profit, but they don't make that claim directly. Color me suspicious.

This does bring up an interesting point. I had mentioned earlier in this thread that chances are the outside directors and non-family officers of Koss will be "well" covered with D&O insurance. But for a company this size I'd imagine it would be for $10 million or so of coverage (perhaps less)* because they wouldn't have ever contemplated that there would be high transactional risks. In other words, sure Koss has to pay suppliers and such, but probably doesn't ordinarily enter into multi-million dollar single transactions. With D&O insurance being so expensive these days, and with Koss not typically doing high dollar transactions, I'd bet anything that they'll be underinsured. Plus, I can't imagine that they'll be able to convince their insurance company that all of this was a single occurrence! Ha! Fat chance.

So the outside directors are probably shopping for fresh undies about now. Of course, normal protocol is to have the company stand responsible (in way of indemnity clauses) for any judgments handed down against individual directors. Thus if, a) Koss does appear to have the financial ability to emerge from this mess in tact, and then there is a successful shareholder derivative suit against the company -- which essentially involves a judge agreeing with a well represented group of minority shareholders that the company should be forced to sue the directors for their negligence, and c) the company then, in turn, must stand behind the directors (thus sued) to indemnify them for any personal liability they might stand to suffer...

The end result might be that Koss would need to use it's own funds (whatever is left to begin with) to pay the minority shareholders for the damages that they've suffered. This would, in turn, bring on another round of litigation expenses to attempt to measure the minority shareholder losses. Not a straightforward process since Koss' stock price has slumped so much in recent years to begin with, part of which may well be attributable to the fraud that has been going on.

Without adequate D&O insurance, I doubt that Koss will come out alive in this mess. Perhaps the only saving grace will be that 73% of those losses won't need to be indemnified by the company (that representing the family's ownership of the company). So if $31 million is the total loss, and if only $10 million of that is insured (just a guess), then it's a $21 uninsured loss that they might be held accountable for, which translates to less than $6 million of losses to the minority shareholders (assuming the worst case that there is a successful lawsuit by minority shareholders). Of course, their money damages could be measured differently, such as the loss in the value of their stock directly or indirectly related to the fraud, but that would be much harder for them to prove.

All speculation as to what might happen, but suffice it to say, if Koss does appear to be emerging as an ongoing entity, it would for sure have some serious legal fees to deal with (not to mention all of the costs of this ongoing investigation), and there would also be a strong possibility of having to stand in the shoes of their directors as well to indemnify them against any shareholder actions.

Like any such situations, it becomes a case of bad news piled upon more bad news.

* Regarding the escalating costs of D&O insurance, I'm one of 4 outside directors for a company that has a market cap of about $150 million. The annual premium for D&O insurance to cover the 4 of us for $10 million per transaction this year was quoted at $82k ($119k for $15 million of coverage, $139k for $20 million of coverage). That was the best quote by far. One insurance company wanted more than double those figures. It's not cheap, to say the least.

Now, given that, and given the attitude that I can see with Koss (e.g., not wanting to pay Grant Thornton to do an internal controls audit), plus the fact that their normal transaction profile is undoubtedly regarded as low risk, I just can't imagine that they'll have $30 million of D&O insurance coverage.

[Dusty Chalk]

I disagree (that they won't come out of this alive). They basically were doing so well that someone could hide US$10M of thievery. If they can convince an investor of that, they can surely make back any investment and more.

And of course, with the promise of internal controls audits this time.

I mean, it would be just sad if the company went under as the result of one person's greed, when the rest of it was doing so well.

[The Monkey]

I don't know if we can really conclude that the Company was doing well, yet. We need to see the true underlying financials. Enron was doing well...until it wasn't. And to be sure, lots of folks made lots of money with Enron (and similar). To catch a falling knife and all that.

[matt fury]

I'm really hoping that the Kosseses are as proud and invovled with their company as I imagine to be. Hopefully enough that they rally through all the bullshit and do what it takes to come out of this.

[Dreadhead]

Holy Shit. They have captured 22,000 items! Woman was BSI as well as a thief.

http://www.sec.gov/Archives/edgar/data/56701/000110465910001110/a10-1661_1ex99d1.htm

[Hopstretch]

Her burn rate was increasing steadily, too.

[HyperDuel]

Wow, that is all I have to say.

[Aimless1]

FY 2005: $2,195,477

FY 2006: $2,227,669

FY 2007: $3,160,310

FY 2008: $5,040,968

FY 2009: $8,485,937

Q1 FY 2010: $5,326,305

Q2 FY 2010: $4,917,005

That's sick! Looks like she was intentionally trying to drive the company into melt down.

[Dusty Chalk]

"BSI"?

[Dreadhead]

"BSI"?

bat shit insane

[aerius]

Now that is some quality embezzlement.

[ktm]

Wow. How could the other people in charge NOT notice that.

Taking 60 million at Fry's could go unnoticed given how large they are,

but almost 30 million from Koss?

[The Monkey]

New CFO at Koss.

Profile of the perp.

Edited January 19, 2010 by The Monkey

[Wmcmanus]

"Her sense of style was impeccable," one friend said. "Her wardrobe was beautiful. I was in awe."

Uh, ya...

[dcpoor]

hope she enjoys the orange jumpsuit.

[episiarch]

All that money embezzled, all those expensive clothes and charity balls, and the paper doesn't even have a flattering and properly lit file photo of her. That should make the orange jumpsuit extra poignant.

[boomana]

Wow, that is all I have to say.

Since you managed to spam this forum with seven posts on your first day here, you need to re-read your welcome pm now.