Editor’s Note: This is Part One of a three-part series.
Part One: Origins and Endings
Of all the puzzling incidents that threatened the survival of Law Enforcement Associates, a Raleigh-based surveillance technology firm boasting some of the most bizarre episodes in North Carolina corporate history, it’s almost anticlimactic that the deathblow came from a simple breach of contract.
This is, after all, an organization that started as a bogus mining firm in Nevada originally promoted by a Florida sex offender. This is the company whose brief public history has included accusations of artificial stock inflation and insider trading, a majority shareholder convicted of felony exporting charges, countless accounting mishaps, extreme infighting among directors, accusations of political exploitation, an ignominious de-listing from the American Stock Exchange, an acquisition, a plummeting stock price, slashed governmental budgets eating into revenues, investigations by the State Board of Investigations, lawsuits from former executives, and a raid by federal agents from the Department of Commerce.
But for all that, the company’s coup de grace came from a Florida businesswoman named Barbara Wortley.
*
To understand the meandering story of Law Enforcement Associates, you have to start at the end. In October 2007, Law Enforcement purchased assets from a limited liability company called Advanced Vehicle Systems in which Wortley had a controlling interest. As part of the asset purchase agreement, they gave Wortley a “demand option” that allowed her to sell 1.2 million shares of Law Enforcement stock at $1.25 per share in August 2009.
By including this measure, former President and CEO Paul Feldman was gambling on Law Enforcement’s future stock price. In order to make the deal worthwhile, shares would have to equal or eclipse the $1.25 mark, about 30 cents higher than the price at the time of the agreement.
The next two years weren’t kind to the company. On June 26, 2009, Law Enforcement’s stock opened at 40 cents per share. That same day, Wortley gave advance notice that she would be exercising her demand option. Feldman met with Wortley and tried to bridge a settlement, but his offer was rejected. A little more than a month later, the $1.5 million came due.
The company decided not to pay.
Zoom in and scroll through the timeline to see the progress of LEA through the years.
Wortley sued, and the legal process that followed came to a head last summer, when the case was finally heard in Wake County. The stakes were high. If Law Enforcement lost, company Controller Tony Perry admitted it might be difficult to stay afloat. With 27 employees on salary, cash assets below $80,000 and total assets valued at just $2.5 million as of Dec. 31, 2010, Wortley’s $1.5 million with interest and legal fees would prove too large a hit. Auditors even classified the problem as a “going concern.”
“When any company gets a going concern opinion,” Perry said, “it’s not good for the stock, because it’s basically saying there’s substantial doubt the company can continue its existence.”
Perry was the only Law Enforcement employee who would speak on the record for this story.
And while the demand option could be seen as an isolated business decision gone wrong, the facts paint a story of a company that made one bad decision after another for more than a decade. Mike Wagner, who served as the company’s chief financial officer in 2005 and 2006, could still recall the incredible situation when we spoke with him last March.
“It seems like in about every direction I turned, there was something that required some kind of investigation,” he said.
*
In some ways, the story of Law Enforcement begins in 1974 when a man named John Carrington moved a private company called Sirchie Finger Print Laboratories from Philadelphia to Raleigh (he would move it to Youngsville, N.C. in 1992). Carrington, who later became a North Carolina state senator, had married into the Sirchie family and eventually taken over their business. One of the company’s subsidiaries was Law Enforcement Inc.
John Carrington
As a founder of Advanced Covert Technology Inc., Ryan Mitchell represented Law Enforcement’s products as an independent sales representative until he left the company in 2008 due to decreased commissions and weaker development and marketing.
“That mistake they made was when they became a publicly traded company,” he said last year. “It was all about the money versus all about the product.”
But the story of how Law Enforcement went public is less straightforward. In May 1998, a public mining concern called Academy Resources was founded in Nevada by Nolan Moss—who had previously run into trouble in Canada for stock market infractions—and promoted by Orville Baldridge, who had been convicted of lewd and lascivious conduct with a child under 16 in 1991.
Academy Resources earned no mining profits, but in June 2000 it acquired an Internet firm in New Jersey called Myofils Inc. for $21,000. Myofils never did any business, Internet or otherwise, and between August and October 2001, John Carrington became a majority shareholder of Academy Resources for a combined $165,000.
In early December, Academy Resources purchased Law Enforcement Associates Inc. with 25 million shares of stock, and changed the overarching name to Law Enforcement Associates Corp.
Just like that, Carrington’s subsidiary company was public. And it didn’t require the traditional initial public offering or much of an SEC trace at all. In fact, the transaction wasn’t reported through Law Enforcement until SEC filings in 2002, and by then the company had engineered a reverse stock split to reduce total shares and further confuse the situation. Before Christopher Byron of the New York Post uncovered many of the details in January 2005, the company’s origins were almost entirely opaque.
*
Between 2001 and 2004, Law Enforcement’s core came together. In those years, the company’s revenues reached as high as $6.2 million, but net income never exceeded $723,000. The majority of sales came from audio and video surveillance equipment, and a significant chunk also came from under vehicle inspection systems—a ramp and camera system for inspecting undercarriages that Law Enforcement marketed to police and government agencies across the country.
“That was a really a big product at a time when the Gulf War was really booming and there were a lot of terrorist attacks,” said Mitchell, the independent sales representative. “Sept. 11 really helped a lot as far as developing the ramps because people wanted security in military installations and prisons and things like that.”
Paul Feldman, the company president since 1993, soon found himself with an entirely new board of directors. State Senate majority leader Tony Rand joined the board in May 2003 along with a former Brigham Young University basketball player and independent sales representative named Martin Perry (a close friend of Feldman’s who Mitchell and Wagner believe benefited financially from the friendship).
Tony Rand
Together with Feldman, the board approved two large purchases in 2004. The first came in June, when Law Enforcement acquired assets including surveillance equipment and inventory from Audio Intelligent Devices Inc. The company paid $540,000 and 2.4 million shares of common stock for the assets, as well as a demand option for $903,000. The company failed to register the demand as a liability until 2006, forcing them to release a notice of non-reliance on previous financial statements.
A far more damaging acquisition came in September 2004, when a patent for a stun gun was purchased from James McNulty and Yong Park for 1.5 million shares. Law Enforcement immediately began to publicize the stun gun, calling it an “electric discharge weapon.”
But that decision puzzled many in the company. Another company, Taser International Inc., already had a strong stun gun product, and Law Enforcement’s version had prompted litigation due to severe injuries sustained by victims.
“I felt like that was a pump-and-dump scheme,” said Wagner, the CFO who would take over and review company finances a year later. “They pumped that thing up and claimed that there were a lot of orders for it.”
He wasn’t alone in his estimation. Mitchell agreed, calling it a “greed thing.”
“The stun gun, in my opinion, was a publicity stunt to run the stock price up,” he said. “That I don’t think they were ever going to bring it to market. I think it was all a ploy by Paul Feldman to get the stock price up so he could make more money.”
And Mike Witt, a former independent sales representative who became a full-time Law Enforcement employee after 2005 and stayed until 2009, remembers the strange way the product was handled.
“The only thing I can really do is laugh at that,” he said last spring. “It was kept secret from the outside reps. We didn’t really know anything at all.”
When asked whether that was a unique situation, he replied, “Well, obviously.”
But for Mitchell, Witt, and Wagner, the confusion didn’t last long.
On the day of the purchase, Law Enforcement stock closed at 95 cents per share. On January 10, 2005, just four months later, the price reached an all-time high of $12.74 per share, an incredible increase of more than 1,300 percent. Fifteen days later, the price closed at $4.80 per share, a 73 percent loss in value from the peak.
In the interval, John Carrington cashed out $740,875 in company stock. Paul Feldman did even better, netting almost $1.3 million between September and January.
The stun gun was never released.
