Feds making a return visit to MTS Systems

  • Article by: ERIC WIEFFERING , Star Tribune
  • Updated: August 16, 2011 - 9:40 PM

Lessons apparently don't stay learned at MTS Systems.

Three years after the company pleaded guilty to two criminal violations of export regulations, the Eden Prairie maker of sophisticated test systems and sensors finds itself back in the government's cross hairs.

The U.S. attorney's office in Minneapolis is again issuing grand jury subpoenas. The company again finds itself scrambling to explain an apparent inability or unwillingness to dot the i's, cross the t's and check the appropriate boxes.

And as is often the case, investors are paying the price. MTS shares have lost 25 percent of their value from their peak in March, just before the company disclosed that it was A) under investigation and B) barred from bidding on new government contracts.

Since then, MTS has racked up $3.4 million in legal costs, and the meter is still running. The company, which did not respond to an interview request, says it is conducting its own investigation while cooperating fully with the government's.

On a call with Wall Street analysts earlier this month, CEO Laura Hamilton warned that "we're unable to determine the likely outcome or the range of loss or the resolution timing."

Beyond that, MTS isn't saying much. In this regard, anyway, the company appears to have learned something from its last torturous go-round with the feds. In 2003, then-CEO Sidney Emery Jr. memorably described the investigation as "bizarre" and the allegations as "absurd."

Five years later, he stood before a federal magistrate and, on behalf of MTS, pleaded guilty to two misdemeanor criminal offenses relating to the planned sale of equipment that could have been used to test nuclear weapons in India.

The equipment was never shipped, but in making its export applications company employees failed to disclose their knowledge about how the equipment might be used.

MTS paid $836,000 in fines and penalties and was placed on probation for two years. The company agreed to beef up its compliance systems after it was revealed that MTS had no attorneys on staff well versed in export restrictions when the violations occurred.

MTS also agreed to sponsor a public symposium on export compliance. One of the guest speakers was Hank Shea, the former federal prosecutor who negotiated the plea deal with the company. The title of his speech: How good companies can get in trouble.

Shea, who teaches at the University of St. Thomas School of Law, acknowledged that he has been contacted by federal authorities and asked to provide "information and recollections" about the previous case.

MTS, which had $375 million in revenue in the fiscal year that ended last October, gets between 5 and 7 percent of its business through contracts with the federal government. To be eligible for these contracts, companies must file a lengthy certifications document that includes, among things, acknowledging the existence of past convictions or civil judgments for making false statements.

MTS filed five such disclosure forms after it pleaded guilty in 2008 and before the current investigation began. Four different MTS employees signed the documents (none were members of the senior executive team). In each case, they checked the "Have Not" box when asked about previous convictions or plea agreements within the preceding three years.

The company said federal investigators alerted it in January that they were investigating why MTS had checked the wrong box.

Was it an honest mistake? Willful disregard? Bad legal advice? Ultimately, the answer may not matter much because the investigation has become more sweeping.

MTS said that federal investigators recently expanded the scope of their inquiry to include its general compliance record and practices in areas including export controls and government contracts, and that grand jury subpoenas have been issued to "third-party" individuals.

The U.S. attorney's office, as per usual, declined to discuss the MTS investigation.

ericw@startribune.com • 612-673-1736

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