Gannett Papers Shocked by Stun-Gun Maker’s Claims

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Taser International Inc., the world’s largest stun-gun manufacturer, allegedly made false statements to the Securities and Exchange Commission concerning an agreement with two of the nation’s largest newspapers, according to the newspapers’ representatives and documents obtained by the Center for Investigative Reporting.

The statements stem from the 2006 settlement of Taser’s libel suit against Gannett Co., Inc, the parent corporation of the two newspapers—USA Today and the Arizona Republic. In two SEC filings, Taser claimed that the newspapers “would review articles regarding the Taser device with us prior to publication”—an extraordinary breach of journalistic standards. Taser’s general counsel initially stated the claim to Wall Street analysts in an earnings conference call, adding that it was “in order to ensure accuracy.”

The newspapers, which were unaware of Taser’s claim until their lawyer was contacted recently by CIR, deny ever making such an agreement, and have demanded that Taser formally correct the record. Initially, Taser was reluctant to amend its statements and the newspapers were considering further action, according to interviews with parties on both sides. Representatives of Taser and Gannett are currently in discussions to settle the dispute. The SEC declined to comment on the allegations.

The Scottsdale, Ariz.-based stun-gun maker and its hometown paper have had a contentious history, resulting from the Republic’s detailed reporting, from 2004-2006, about the company and the safety concerns of its flagship product, which is used by more than 13,000 law enforcement, correctional, and military agencies around the world.

Its sister Gannett paper, USA Today, has also angered Taser, particularly after publishing a June 2005 story and graphic that significantly overstated the electrical output of Taser’s X26-model stun gun. Taser contacted the newspaper and the story was corrected the next day of publication.

But a few weeks later Taser sued, claiming that the Republic and USA Today “engaged in the ongoing publication of misleading articles related to the safety of Taser products, resulting in substantial economic damages to us, our customers and our shareholders.” Taser claimed the newspapers’ stories cost company shareholders more than one billion dollars in lost value.

Maricopa County (Ariz.) Superior Court Judge Paul J. McMurdie rejected Taser’s claims in granting Gannett’s motion for summary judgment. In his Jan. 25, 2006 ruling, he awarded McLean, Va.-based Gannett attorneys’ fees after finding one of the claims “clearly unjustified.” About three weeks later, the two sides asked the court to formally dismiss Taser’s claims—and with it Taser’s right to an appeal—while Gannett withdrew its claim to attorneys’ fees, court records show.

“It was a total victory,” said David Bodney, Gannett’s attorney in the case. But that’s not how Taser reported it to the SEC, or to Wall Street analysts who covered the company.

In a Feb. 22, 2006 conference call with financial analysts, Douglas Klint, Taser’s general counsel and executive vice president, said: “Our lawsuit against Gannett Company Incorporated was dismissed with the understanding that, in the future, the USA Today and the Arizona Republic newspapers would review their Taser stories with the company prior to publishing in order to ensure accuracy,” according to a transcript of the call.

The next month, in its Form 10-K filing, Taser wrote: “[T]he parties entered into a stipulation for dismissal with the understanding that the USA Today and the Arizona Republic would review articles regarding the Taser device with us prior to publication.” That statement was repeated in the company’s May 18, 2006 quarterly report to the SEC.

Only one Wall Street analyst who was a participant in the February conference call, Matthew McKay, formerly of Jefferies & Co., responded to an interview request. McKay said the statement in question influenced his coverage. He concluded that the settlement terms appeared to benefit Taser and represented “a big-time opportunity” for investors.

Current San Francisco Chronicle editor Ward Bushee, the Republic’s editor at the time of the settlement, and Randy Lovely, the Republic’s current editor, said they were unaware of Taser’s statements until asked about them recently by CIR, and denied that any such agreement ever existed.

“Taser’s assertion in the SEC filing is completely false,” Lovely said. “The Arizona Republic would never allow a source to review a story prior to publication. To do so would completely violate our journalist principles and standards of independence. The Republic has aggressively reported on Taser during the past few years, and we stand behind the full scope and accuracy of our stories.”

Taser counsel Klint initially defended the statements in an interview with CIR, pointing to a letter about the settlement from Bodney which states that the newspapers and Taser agreed to “endeavor to communicate and interact with one another in a professional manner…In turn, Taser will make its executives or public relations personnel available for comment.”

Klint said the word “comment” implies that the company would review stories prior to publication. “How in the world can we comment on a story without them reviewing the story with us?” he reasons. “We can’t comment on something we can’t review.”

“That’s preposterous,” countered Bodney:

His interpretation of that statement is inaccurate. There’s a vast difference between a reporter calling the subject of an allegation for comment … and giving the subject of the allegation a right to review the story prior to publication. Unfortunately, Taser’s statement to the SEC gives the impression that USA Today and the Arizona Republic gave Taser the right to review stories about them prior to publication. It’s inaccurate and misleading….

What [Taser] promised to investors and the SEC—that’s the last thing we would have promised them, especially since we settled the lawsuit with the expectation that we’d hear nothing further from them about it.

Bodney said he pushed for a quick dismissal of the case in part to stop Taser’s attempt to get access to “all documents referring or relating to Taser” used by Republic reporters during the newspaper’s investigation of the company.

Klint said Taser has not been reviewing the newspapers’ articles prior to publication. But he defended Taser’s interpretation of the settlement, saying the company accurately paraphrased the language spelling out the settlement terms:

[For the newspapers] to characterize it as a total fabrication is really a misstatement… We probably should have said we were going to have the opportunity to review [the stories] and provide comment … Could we have gone into more detail? Absolutely. Did we have to? No, we didn’t.

Taser’s statements to the SEC have been called into question in the past. In January 2005, the SEC began an informal inquiry into Taser’s safety claims; that same week, the Arizona Attorney General’s office said it, too, was looking into those claims. The SEC inquiry expanded into an official investigation, but no action was taken. The attorney general’s inquiry ended after Taser agreed to modify its marketing language.

In January 2005, Taser shareholders, citing numerous news reports from around the country, launched a class-action suit against the company, alleging they had been misled about the safety of Taser’s products. The suit eventually was settled for nearly $22 million, of which Taser’s portion was about $18 million, with the company’s insurance carrier covering the rest.

In August 2007, Bloomberg News reported that the company had settled at least ten product-liability lawsuits alleging personal injury—lawsuits that Taser had claimed, in news releases and in its SEC filings, to have won through a court dismissal or judgment in its favor. The company now acknowledges these settlements clearly in its filings.

False statements to the SEC about material facts which are likely to influence investors could result in sanctions, civil lawsuits by shareholders who suffered losses due to the alleged misrepresentation, or criminal action if regulators determine that the misstatements were intended to mislead investors, according to Jesse M. Fried, a law professor at the University of California, Berkeley, and co-director of the Berkeley Center for Law, Business and the Economy.

“When you’re dealing with SEC issues, the standard is material misstatement,” Klint notes. “There’s absolutely no way this is a material misstatement.”

Fried says it’s unlikely any formal action by regulators would result in this instance. He said a reasonable investor wouldn’t base his decision to buy or sell Taser stock on the company’s right to review newspaper articles prior to publication, and, in any case, reviewing articles doesn’t necessarily guarantee the right to veto publication.

But former Jeffries & Co. analyst McKay, whose coverage of Taser from 2005 until earlier this year helped investors decide whether to buy or sell Taser International stock, said news of the purported settlement presented an “opportunity” for investors.

McKay, who participated in the 2006 conference call with Klint, acknowledged that the critical news media coverage of Taser and its products had hurt company sales and its stock price, and that with news of the settlement, the critical coverage “…was an issue that was going to come off the table. One less negative thing you’d have to deal with regarding the company.”

“I thought, all right, you’ve got some bad news out there that has impacted the share price in a negative way,” McKay said in a recent interview. “As a stock analyst, here was an opportunity to jump in and make my clients money. [USA Today and the Republic] didn’t have the facts right, and as a result the valuation of the company was off,” he said. “To me, it was a big-time opportunity.”

McKay, who believed “there was good being done by Taser” in saving lives, said Taser felt “that USA Today and the Arizona Republic just wanted to write negative stories about Taser, that they wanted to make it as sensational as they possibly could. It’s why they were so defensive with the media,” he said.

Bob Steele, a journalism values scholar at the Poynter Institute and journalism ethics professor at DePauw University, explained why pre-publication review of stories could violate readers’ trust:

If a news organization were to have such a formal legal agreement with a company it’s covering, then that news organization’s past, present and future coverage of that company would be suspect. The readers would have every right to wonder if the newspaper had pulled punches when it came to reporting truthful, meaningful information. There would be questions of whether the newspaper bowed to the wishes or pressures of the subject of the story to back off a certain element or change the tone. One could easily wonder if the story could be tainted.

McKay applied the concept to his work as an analyst covering Taser, noting, “For me, I knew there was no way in hell they’d review anything I wrote prior to it being published. I really don’t want [USA Today and the Republic] reviewing articles with the company because the news gets tainted. It becomes biased. I don’t want that either. I just want the media reviewing with Taser how the device works and making sure they get those facts correct.”

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Shahien Nasiripour is a reporting fellow at the Center for Investigative Reporting. For more on Taser, visit the Web site for the Center’s special project, Zapping Taser.