ADGI is a liquidation play with litigation-related hair, but the risk/reward here seems very favorable given that it is trading at about 45% of its liquidation value ex-litigation liability, and as discussed below, the litigation liability seems like it will be minor.

In short, ADGI sold substantially all of their assets and is operating under a plan of liquidation.  ADGI estimates that they could pay out approximately $5.70/sh, or $46.9mm, in liquidating dividends before giving effect to any potential liability from a DOJ investigation into a former employee.  [The liquidation estimates are contained in the proxy dated 7/28/10.]  They have already converted their assets to cash, so there isn't any risk on the asset side.  The catch is the DOJ investigation: earlier this year a former employee was arrested as part of a DOJ sting operation into violations of the Foreign Corrupt Practices Act("FCPA").  This will delay any payouts(they will not make any distributions until the legal matter is behind them) and can subject them to potential liability.  The stock price, however, is essentially pricing in one of the largest FCPA-related liabilities in history, despite the fact that the former employee was engaged in a minor sting operation and his alleged illegal activity occurred while he was working for a different employer.  In sum, the FCPA issue seems very overblown, any potential liability should be minor, and is more than compensated for by the stock price.

The FCPA Investigation

The Foreign Corrupt Practices Act is designed to go after companies that bribe/give kickbacks/etc to foreign government officials.  The potential penalties under the Act aren't necessarily back-breaking(they max out at $2.5mm per incident), but the recent trend(and the real source of liability) has been to force companies to disgorge their illicit profits.  For example, GE recently settled an FCPA claim related to giving bribes/kickbacks in the corrupt Iraqi oil-for-food program.  The settlement amount was $23.4mm, which is one of the largest amounts in history, but only $1mm was actually PENALTIES, the remaining amount was disgorgement of past profits and interest on those profits.  You'll see a similar breakdown in other cases, i.e., the criminal penalties are usually overshadowed by the disgorgement of past profits.

So what is ADGI's potential liability here?  IMO, it won't be significant, especially in light of the discount offered by the current stock price.  The former employee got caught up in a DOJ sting operation, where federal agents posed as African government officials and approached U.S. arms manufacturers about giving them contracts in exchange for kickbacks.  Significantly, ADGI's former employee WAS NOT WORKING FOR ADGI when the alleged violations took place, he was moonlighting at another company.  It seems unlikely that ADGI will face ANY liability here.  The only real risk is that the subpoena may turn up additional wrong-doing on the part of ADGI, but it only becomes a real problem if they were engaging in long-term wrongdoing and have substantial profits to show from it.

Timing of Distributions

ADGI will not make any distributions until this matter is behind them and they have reached some sort of agreement with the DOJ.  It's my understanding that ADGI is being proactive to try and get this done, but it's unclear when they will be able to make distributions.  The trials against the 22 defendants are expected to be held in 2011.  I'd hope that the conclusion of the trials would allow ADGI to settle with the DOJ, which could allow them to start making distributions by the end of next year.  So you will have to wait awhile to get paid, the discount in the stock seems to amply compensate you for the time value. 

Conclusion

ADGI is in liquidation and expects to be able to pay out $5.70 less any amounts incurred as a result of the DOJ subpoena.  ADGI will not, however, make any distributions until this matter is resolved, which I am hoping means by the end of next year.  The stock is currently at $2.70, giving you about $24.5mm in wiggle room to account for any potential liability and legal fees.  I expect that any liability and increased expenses will be minor.  The risk/reward here seems extremely favorable to me; it seems like a situation where investors see "FCPA investigation" and simply move on to the next idea without really thinking about what the liability is likely to be.