Costa Brava's revenge against Telos

Activist investor Costa Brava Partnership III LP may be getting close to a big payout, as it pursues a two-pronged litigation approach to extracting share value.
The Boston-based hedge fund launched a civil lawsuit in December 2005 against Goodman & Co. LLP, the independent auditor for Telos Corp., a networking and information technology company that provides services and equipment to the U.S. Department of Defense. That suit may soon come to a conclusion — the trial began last week on Nov. 26.
The activist hedge fund alleges in the suit that Telos hired Goodman to produce an audit that would help it avoid redeeming millions of dollars of preferred stock of the IT firm owned by Costa Brava and other investors. The dispute centers on Telos’ 2004 annual filing audited by Goodman. The accounting firm, Goodman, has denied any wrongdoing. It resigned as Telos’ outside auditor in July, according to an Oct. 26 SEC filing made by Telos. Costa Brava is seeking damages in excess of $17 million, an amount that an investor spokesman said should be tripled to $60 million.
According to an Oct. 25 filing with the SEC, Costa Brava owns a 15.9% Telos stake. The activist fund also has a separate complaint pending against Telos in the Circuit Court for Baltimore City in the State of Maryland.
A source familiar with the company pointed out that Telos’ previous accountant, PricewaterhouseCoopers, refused to go along with the accounting alterations that would hurt Costa Brava and other investors. — Ron Orol

Ron Orol is a Washington-based reporter for The Deal and author of Extreme Value Hedging: How Activist Hedge Fund Managers Are Taking on the World.