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STEC boss Manouche Moshayedi has issued a detailed rebuttal of the SEC's indictment that charged him with insider trading, saying that the SEC is plain wrong.

The SEC charges relate to a STEC public offering of shares held by Moshayedi and his brother Mark on 9 August, 2009, with the SEC alleging Moshayedi knew that EMC was going to reduce its purchase commitments for STEC's ZeusIOPS flash drives. This ended up causing STEC's share price to fall, yet the CEO went ahead (whether or not he had knowledge of this at this point is in dispute) with the public offering at the set price, from which he personally benefited to the tune of $88.46m.

Moshayedi and his lawyers have crafted a detailed rebuttal (PDF) of the SEC's charges. The statement asserts that neither he nor anyone else knew EMC was going to lower its purchase commitments in the future. The CEO and his lawyers said that EMC itself only found out about issues with its STEC flash drive sales in October, two months after the STEC share sale, so how could Moshayedi have known?

At the time STEC was the sole supplier of solid state drives (SSDs) to EMC, which was selling them as disk drive alternatives in its storage arrays to accelerate data access speed. EMC was selling them as fast as it could get hold of them and had told STEC to expect a quarter on quarter doubling of its orders.

EMC represented 15.2 per cent of STEC's business in 2008. In the first 2009 quarter, EMC bought $7.6m worth of STEC SSDs. This jumped to almost $33.3m in the second quarter. In July, STEC announced EMC had committed to buy $120m worth of the ZeusIOPS drives in the second half of 2009 in a volume purchase agreement.

By the end of the month EMC had placed $43.6m worth of orders.

The share offering took place in August, by which time an EMC procurement exec had mailed STEC saying, among many other things, that EMC would not enter a volume purchase agreement with STEC again. Moshayedi's SEC answer document says that STEC understood this to be a negotiating tactic, rather than a forthright and true declaration, as the SEC avers.

Moshayedi's answer document asserts that there were continuing volume purchase agreement negotiations between EMC and STEC in August after the share offering, and it was only in September that EMC rejected a STEC proposal. At the end of the 2009 third quarter, EMC had bought $55m worth of STEC SSDS and this rose to $65m by the end of the year, with EMC being STEC's largest customer, and fulfilling EMC's $120m volume purchase agreement at the half year point.

Internal EMC emails show that execs were shocked to find lots of STEC SSDs in their inventory in October 2009 and the EMC boom for STEC began its end-game as EMC looked to a second source. However, the tap was not turned off, with EMC buying $100m worth of STEC drives in April 2010. It was STEC's largest customer that year, accounting for 37.8 per cent of its business, and STEC's largest customer in 2011 and again in 2012.

But this was enough though to kill STEC's share price, and investors who had ridden the STEC stock boom were given a nasty shock as the bubble burst.

STEC share prices in 2009

STEC share price moves in 2009 (Image via: Yahoo! Finance)

The 11 September share price peak of $41.30 fell precipitously and dropped to an 11 December low point of $11.44, a 72 per cent fall. The SEC alleges that Moshayedi knew this could happen and sold his shares without telling anyone else. Michele Wein Layne, director of the SEC’s LA office, said at the time: “Company insiders are strictly prohibited under the securities laws from exploiting corporate dealings for private gain, particularly in the secretive and manipulative manner that Moshayedi did.”

But Moshayedi insists he didn't know, couldn't have known, and acted in good faith. It's tough but that's life in the NASDAQ market.

STEC shares are currently trading at $7.41 as the company is trying hard to get over a late entry into SAS and PCIE flash drives.

Read Moshayedi's answer document to find out the details, and there are lots of them. They seem to add up to a believable story. The SEC has to decide for itself if the CEO's responses are really credible and pull off its legal attack dogs, or if they are rubbish and have them bite harder. ®

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