We'll Have You Back on Nasdaq in No Time!
It could have been a scene from a B version of the movie Wall Street. In a conference room at j2 Global Communications Inc. (JCOM )--fittingly in the heart of Hollywood--a man who described himself both as an "investor-relations professional" and a "turnaround specialist" made a well-choreographed presentation. Dressed in a black turtleneck and a maroon suede jacket, with slicked-back, Grecian-Formula hair and multiple facial tucks, he resembled "a male Joan Rivers," recalls Laura Hinson, j2's head of public relations. Fervently, he preached to the assembled team from j2, a provider of Internet messaging and communications services, that its stock was "hugely undervalued." He played on the sheer terror companies like j2 have of being delisted from Nasdaq, dwelling on the warning it received late last year after its share price fell below $1 for 30 consecutive days.
How far and fast the tech darlings have fallen. Their sudden reversal of fortune makes them easy prey for small-cap stock wheeler-dealers who see dollar signs in their desperation. Conversely, the blue-chip bankers who once wined and dined them now won't even return their phone calls. j2 was brought public in 1999 by CIBC World Markets, Donaldson, Lufkin & Jenrette, and Robertson Stephens. None of them now covers it.
Especially vulnerable to shady operators are those in danger of being delisted from Nasdaq--companies frightened they'll be tossed into over-the-counter, bulletin-board oblivion. BusinessWeek contacted some 30 of them, and all said they were being heavily solicited by stock promoters. So far this year, 291 Nasdaq stocks have traded below $1 for at least 30 days, according to FactSet Research Systems Inc., a financial researcher. Nasdaq gives companies 90 days to get their shares above $1 for 10 consecutive days to stay listed. "Many of these companies are vulnerable and often are unaware they're being used," says Bradley W. Skolnik, former president of the North American Securities Administrators Assn.
Promoters promise to boost a company's stock price enough to keep it listed, as well as help find new avenues of financing. But they want big bucks. Instead of demanding payment in stock as they did during the bull market, relying on overzealous investors and pump schemes to make their money, many are asking for hefty up-front or monthly cash payments in addition to stock warrants. Problem is, "these kinds of promotions never work. No one buys the stories coming from these so-called investor-relations firms," says Louis M. Thompson Jr., president of the National Investor Relations Institute.
"OUTRAGEOUS." In j2's case, the stock promoter, whom j2 refused to name, offered to set up road shows for the company in Europe, where securities regulations are notoriously more lax. He also offered to prominently place j2's company profile on his firm's Web site--essentially a stock-promotion vehicle. All this for a tidy fee of $10,000 a month and $100,000 in j2's stock and warrants--a sum that NIRI's Thompson calls "outrageous." "I couldn't get out of that meeting fast enough," says R. Scott Turicchi, j2's head of corporate development and a former Donaldson, Lufkin & Jenrette Inc. managing director.
Turicchi says j2 has been solicited by numerous stock-promotion Web sites, including Investor-Trading.com and AfterHourTrades.com. Both Web sites deny that they are stock promoters.
Threatened with delisting, companies are often panicked into promoters' arms. "We're getting contacted aggressively by a lot of Nasdaq companies that have fallen below the listing requirements--it's a great area for us," says Dodi B. Handy, president of Madison & Wall Worldwide Inc., a Longwood (Fla.) firm that bills itself as a "leader in global investor relations." Madison & Wall currently represents six Nasdaq clients, including IFS International, NetCurrents, and eSafetyworld--five of which are trading under $1 a share. "We try not to be daunted by delisting issues. We try not to focus just on the price," says Handy. She says her firm helped IFS, a banking software manufacturer that received a warning from Nasdaq earlier this year, to ward off a delisting. "IFS got very aggressive in terms of letting us communicate with their shareholders," she says. Firms like Madison & Wall "blast," or send numerous e-mails, to potential investors, phone brokers, and existing shareholders "to make sure they are aware of the positive and forward-moving progression our clients are making," says Handy. IFS's stock traded above $1 for over 10 consecutive days in February and March, but is once again under water. IFS pays Madison & Wall $9,000 monthly for its services, plus warrants to purchase a total of 200,000 shares of the company's stock at various prices.
Madison & Wall also runs a Web site called www.insidewallstreet.com, where it features client profiles and claims to feature its clients' latest press releases. But by April 11, the Web site had nothing on the bankruptcy that its Nasdaq-listed client, Ursus Telecom, filed on Apr. 6, nor any indication that Nasdaq had ordered a trading halt in the stock. A tucked-away disclosure on the site, in order to stay on the right side of the law, says "its publication is an advertisement" on behalf of its clients and "may not be construed as investment advice." But the firm, called Continental Capital & Equity Corp. before an employee buyout culminating on Jan. 1, has been in hot water. John Manion, its founder and past owner, is now in prison, convicted in 1998 of defrauding investors. "The firm has had no association with Manion's personal regulatory issues," says Handy.
According to Kevin Lichtman, a former stock promoter turned investor advocate and author of Stock Detective Investor, sometimes a stock promoter will knowingly work for a third party, such as a major shareholder, even without the consent of the target company. "They claim they're hiring them to maintain a Nasdaq listing, but really they just want the price to spike up and bail out," he says.
Other firms go directly after delisted companies. Capital Funds Group, based in Berkeley, Calif., features a heading on its Web site that reads, "You Have Been Delisted by Nasdaq," and claims: "CFG will help your company relist on Nasdaq or apply to the NYSE. We know the people who can make it happen." CFG promises it "can arrange to list your company on a new U.S. stock exchange within 60 days." But when contacted by BusinessWeek, Eric Barnes, president of CFG, could not remember the name of the new exchange. "I just went blank on it, but it's the only electronic exchange so far approved by the SEC," he says. In a later e-mail he said the new exchange is called Niphix. But Niphix is hardly a stock exchange--it bills itself as a "full-service brokerage and proprietary trading system," based in Peoria. Barnes, who claims he will "keep your stock trading at a high share price," calls his offerings for fledgling Nasdaq companies a "Stock Support Package." Price tag: $20,000 in cash.
"NO ONE CARES." David I. Vickers, chief financial officer of Quotesmith.com Inc. (QUOTD ), an online insurance service provider that received a warning from Nasdaq in January, has seen it all. "These guys want to rep us, but they've done no due diligence on us. Their compensation is purely based on how much they can get the stock price up." Brought public in 1999 by Hambrecht & Quist, ABN Amro, and Charles Schwab, the stock has sunk to just over $1, even after a one-for-three reverse stock split in March. "Now no one is covering us or cares about us except for the dregs," says Vickers.
Some say that many beaten-down companies are just getting their due. "There was irrational exuberance surrounding these companies--too many went public with negative cash flows and unproven business models," says William L. Walton, chairman and CEO of Allied Capital Corp., a Washington private equity firm. Even so, especially for former tech darlings, shady solicitations are a rude awakening as well as a potential horror show.
By Marcia Vickers in New York