A Runup Raises Some EyebrowsAmy Barrett
The people behind Hariston Corp. are delighted to tell you the company is a winner. They contend that through an ambitious and risky
project in Butte, Mont., to clean up mine water while at the same time producing valuable metals, this little-known NASDAQ company will revolutionize environmental cleanups. Hariston has "the only technology that can do that effectively," says Hariston director and investor Stephen J. Roth. "It's the answer to everyone's problems." Hariston's stock is sizzling, having tripled to $10.75 since late 1992.
But the rise of Burlington (Ont.)-based Hariston is far ahead of experts' projections for the company's metal-extraction technology. Hariston press releases describe upcoming deals and a pending revenue explosion--they predict the Butte project will generate $60 million in revenues this year and $145 million next year--but mining-industry experts warn that the bold assertions may be overly optimistic. The company, which had revenues of just over $5 million in the first nine months of 1993 and operating income of $165,000, is banking on netting hefty prices for the specialty chemicals it will produce with the metals it extracts. But the extraction work itself is often prohibitively expensive. "It sounds suspicious to me," says Stephen D. Hill, a research director with the U.S. Bureau of Mines.
PRESS RELEASES. So why has the stock risen so fast? A Beverly Hills brokerage firm by the name of Reynolds Kendrick Stratton Inc. has certainly helped. And according to an investigation by BUSINESS WEEK, the firm's actions raise troubling questions about potential conflicts of interest for some of the directors of Hariston and RKS, a market maker in Hariston stock. RKS has its brokers aggressively hawking shares in Hariston, according to several former RKS executives. One former employee says it is the only stock he recalled the firm's brokers promoting. A broker in RKS's Dallas office says prospects are often sent copies of Hariston's glowing press releases.
The phone pitches are intense. According to internal RKS documents obtained by BUSINESS WEEK, a script for use in pitching Hariston has been circulated among some RKS brokers. It describes Hariston as a diversified company with "the strength of a blue chip" and promises potential investors that the metals extracted in Butte "can be resold on the market at a phenomenal profit." The pitch asks a potential investor four times to buy an initial stake of 10,000 shares in Hariston. Aggressive sales pitches are not illegal. But Jonathan Layne, a partner and a securities law specialist at Gibson, Dunn & Crutcher, says it is "cleaner" if interrelationships between a brokerage firm and a company it is promoting are fully disclosed to investors. While RKS says it would notify investors of the dual role before they made final purchase decisions, brokers were not required to make disclosures in initial pitches and the script that circulated among RKS brokers contained no such disclosures.
William R. Stratton, president of RKS'S parent company, RKS Financial Group Inc., declined repeated written requests for an interview, but the firm's general counsel, Mark M. Rossow, plays down RKS's involvement with Hariston. He says the firm's brokers are strictly ordered not to use scripts. Rossow also says Hariston is just one of many stocks that RKS brokers like and that RKS's trading in Hariston stock has been, on average, less than 10% of the total in the past six months.
Regardless of the total trading, though, RKS's enthusiasm for Hariston becomes even more troubling when the web of interrelationships between Hariston investors and RKS directors and consultants is uncovered. Several major investors in Hariston, including Walter E. Senior, a former 20th Century Fox executive, and Irving Kott, a Canadian investor who has previously admitted to stock fraud in an unrelated matter, have served as directors of RKS--Senior is chairman--or as consultants and advisers to the firm. And Hariston investors benefit handsomely when RKS drums up buyers for Hariston stock.
FRESH MONEY. The ties between Hariston and RKS became close last spring. It was then that Hariston investor Roth, about to join Hariston's board, helped arrange for a new group of investors to inject $2 million into RKS, which he knew as a market maker in the stock. He received warrants to buy 500,000 RKS shares at $1.25 a share after the newcomers came on board. He still holds those, along with roughly 35,000 Hariston shares. Last year, he sold some Hariston shares and says he "did make money" on the investment. Today, in addition to Roth's dual ties, RKS Director Senior estimates he still holds about 40,000 Hariston shares and options on shares while RKS Director Christopher J. Sues owns 20,000 shares.
Kott is a key player behind the scenes at both companies, and he has tangled with regulators for years. The tall, smooth-talking financier, an investor, adviser, and capital raiser for Hariston and a onetime adviser to RKS, paid a fine as early as 1961 for selling securities without a license, according to the Ontario Securities Commission. In 1976, the records show, he pled guilty to stmck fraud in relation to a stock called Somed Mines Ltd. and paid a $500,000 fine. And in the early 1980s, he raised money for a Dutch metal-extraction company, DeVoe Holbein International, while acting as a consultant for a brokerage firm called First Commerce Securities, located in Amsterdam. First Commerce was raided in 1986 by Dutch authorities investigating its sales practices, and according to Dutch authorities, Kott, as a consultant, was also investigated. DeVoe Holbein, which had been aggressively promoted by First Commerce brokers, subsequently folded. The First Commerce investigation was dropped after a group including Kott voluntarily paid $3.5 million into its bankruptcy account.
Kott's association with Hariston has caused some problems for the company in the past. During 1992, Hariston wrote off over $1 million in loans to businesses wholly or partly owned by Kott's sons Michael and Ian. In a written response to questions, Michael Kott says he was a passive shareholder in the companies. Ian Kott could not be reached for comment.
Hariston Director Roth estimates Irving Kott is responsible for between one third and one half of the $10 million in new capital Hariston has raised in the past year through a series of private placements. Kott says he does not have an ongoing role at Hariston, but Roth says he expects the Canadian financier will continue to play a role in raising capital for Hariston. As for his personal holdings in Hariston, Kott will say only that he owns less than 5% of the company's stock.
Kott even played matchmaker of sorts between Hariston and Metanetix, the unit involved in the metal-extraction work in Butte. He met the man who is now leading the technical work at Metanetix, Irving W. DeVoe, in 1982, when the scientist was forming DeVoe Holbein International. Despite the eventual collapse of DeVoe Holbein, Kott says he endorsed DeVoe when Hariston officials asked him what he thought of their potential investment in DeVoe's technology.
Kott's role at RKS has been similarly complex. He says he advised Roth about the investment in RKS and acted as a consultant for the firm last summer in a restructuring. In addition, Kott says he provided advice on market conditions after RKS was slapped with lawsuits by short sellers involved in the stock of Future Communications Inc. Those suits were recently settled. Rossow says that Kott's relationship with RKS ended in December and that he no longer has anything to do with the firm.
FEW SALES. RKS Chairman Senior has other ties to Hariston. The former movie-industry executive and Hariston chairman owned 125,000 Hariston shares, including some unexercised options, as of last spring, when he was preparing to join RKS's board. He says he sold roughly 80,000 of those shares at a significant profit to fund his investment in RKS. When he joined the board of RKS last spring, he invested $600,000 in the firm. He remained on Hariston's board until December. Senior says he did not see a conflict of interest in being on both boards, but resigned from the Hariston board after reading criticism in the San Francisco Chronicle of his dual role.
Another RKS Director, Sues, also a Hariston board member, joined RKS's board last May after investing $85,000 in the company. He resigned from Hariston's board in July. Sues said he left to "avoid the appearance of a conflict of interest." But when he left, he had already sold 10,000 shares of Hariston stock for a profit of nearly $50,000.
It's quite possible that Hariston's operation will ultimately prove profitable. Hariston is banking on a new process--about which it divulges little--to extract metals such as zinc, iron, and manganese from mine water at a site in Butte. DeVoe says Metanetix will use those metal compounds to produce high-priced specialty chemicals for sale to agricultural, paint, and water-purification companies.
While it is clear the company has pumped considerable resources into the Butte project, sales to date have been minimal. And although company officials say they are still on track to meet revenue projections and have already shipped metals, they decline to provide any supporting details.
Industry experts--who admittedly do not know the specifics of the Metanetix technology--question the profitability of extracting metals from mine water. Terry McNulty, a consultant working with Atlantic Richfield Co., which is potentially responsible for some of the Superfund cleanup at the Butte site, estimates that even if Hariston were pumping at its 1995 target rate, it could only produce chemicals worth $20 million a year based on what he knows of the metal content of the pit from which the operation will draw water. While Hariston says such estimates ignore the high prices it will garner on some products, McNulty warns it will be tough to come near the $145 million in revenues Hariston projects for the project that year.
Kott remains optimistic, however. "The biggest story in the world today is the environment," Kott says. And DeVoe "will revolutionize the industry." Whatever the merits of DeVoe's technology, though, the ties between Hariston and RKS should give investors pause.