Key Takeaways

  • TASER stock collapsed from a $2 billion market cap to $100 million in late 2004 after an SEC investigation froze municipal sales.
  • An executive assistant inside the company acted as a mole, leaking confidential internal files to short sellers who passed them to The New York Times.
  • Police departments halted purchase orders immediately, telling management they could not face city councils while federal probes remained open.
  • When insurers urged a $2 million settlement on an early product liability suit, Rick Smith threatened to sue the insurer to block any payout.
  • That zero-settlement stance eliminated nuisance lawsuits over the long run, bringing Axon's active product liability caseload down to zero.

The Short Attack and the Mole in the Office

In 2004, TASER was the top-performing stock on public markets. Then the roof fell in. Short sellers targeted the company, and the Securities and Exchange Commission opened a formal inquiry into whether TASER misled the public about weapon safety to inflate share prices.

“My personal assistant was actually a mole for short sellers,” (play from 14:03) Smith recalled. She sent non-public company files directly to short sellers, who fed them to national reporters. As Smith put it, “The New York Times was then disclosing they were getting internal confidential material non-public information from short sellers who were somehow getting it out of our company.” (play from 14:13)

For a business selling directly to public safety agencies, a federal investigation is lethal. Municipal procurement runs on public approval. Chiefs of police could not risk spending taxpayer money on a vendor accused of fraud. “Our customers are police so they stop buying from us,” (play from 14:32) Smith said. “They're like, 'Look dude, you're under federal investigation. I can't go to my city council until this is over.'” (play from 14:36)

The business lost 95 percent of its market value, plummeting from $2 billion to $100 million.

Why Settling Product Lawsuits Destroys You

When customer lawsuits started landing, the standard corporate playbook dictated paying off plaintiffs quietly through insurance. Insurance carriers treat early settlements as cheap risk management. Smith saw it as an existential trap.

“Our insurance company wanted to settle this first case for like around $2 million and we said, 'Hell no, you can't. If you settle this case, we will get swamped in litigation.'” (play from 16:02)

Smith understood incentive design better than his carriers did. If personal injury lawyers see a hardware manufacturer write a $2 million check, every arrest involving a stun gun becomes an automatic lawsuit. TASER fought the insurer directly, threatening litigation against its own carrier to stop any deal. They took the cases to court, spent the capital to defend the engineering data, and proved the product was safe.

The long-term payoff took decades, but it worked. “For the first time in decades, we now have zero litigation cases,” (play from 16:44) Smith said. “Cuz if you sue us, you better bring your A-game. If we did something wrong, we're going to be rational and we will settle it.” (play from 16:47) Because the company proved it will spend $5 million defending a case rather than hand over $500,000 in extortion money, plaintiff attorneys stopped filing.

What to Do With This

Audit your insurance policies and commercial contracts this week to see who controls settlement consent. If your carrier holds unilateral authority to settle third-party claims on your behalf, demand an endorsement requiring your written consent. Giving up that control invites copycat claims that can ruin your pricing and reputation.