FORWARNED IS FORARMED
The following is copied from Barron's, November 13, 2006 issue. It should be of interest to penny-stock investors. I added the bolding in the second paragraph.
Fred
TECHNOLOGY TRADER
By BILL ALPERT
A Dubious Inheritance
AS THE INTERNET EATS THE LUNCH of the print media, I fret for investors who might someday find themselves with only online sources to inform them. I have an obvious self-interest in print journalism, but so do investors. With rare exception, television, Websites and blogs still don't do the deep reporting needed to prove a stock under- or overvalued. And the Internet is still populated by bogus news sites like CEOcast.
Before YouTube was a twinkle in its founders' eyes, the CEOcast Website (www.ceocast.com) was hosting video investment clips and e-mailing newsletters about small-cap stocks. Like a boiler room broker, CEOcast's newsletters start out talking about the market and large-cap stocks like Disney or Cisco Systems, then switch suddenly to penny stocks. You've got to read the newsletter's fine print -- or filings at the Securities and Exchange Commission -- to learn that CEOcast is shilling penny stocks in exchange for hundreds of thousands of dollars in cash and shares. But those disclosures still don't tell you what you need to know about an ersatz news site like CEOcast.
Three years back, I reported evidence that CEOcast was run by a big-time financial felon named Michael S. Wachs ("On the Internet, a Second Act," July 28, 2003). In 1997, Wachs had pleaded guilty to diverting $20.8 million in assets as an executive at Chase Manhattan Bank. He made restitution, served 11 months in federal prison in Allenwood, Pa., and agreed to be barred from the banking and brokerage industries. As I reported, CEOcast and Wachs told me that Wachs didn't own or control the firm. Instead, ownership and control rested with a fellow named Kenneth Sgro.
Well, this past April, Sgro died. In a lawsuit recently filed in a New York state court, Sgro's widow, Olga N. Starisky, presents documents suggesting that CEOcast was and is controlled by the felonious Wachs -- contrary to CEOcast's documentation filed with the SEC and the IRS.
Indeed, her pleadings in the suit include documents from Michael Wachs himself, indicating that he has enjoyed millions of dollars in annual income as a stock promoter, even as his 1997 agreement barred him from working on Wall Street. If the allegations prove out, then investors may want to do their own due diligence on longtime CEOcast clients like the drug-addiction treatment company Hythiam (ticker: HYTM) and Internet telephony firm Voip. (VOII). Neither Wachs nor his lawyers responded to inquiries I made over several days.
In an affidavit filed with her suit, Starisky says that Wachs has been the "de facto majority owner" of CEOcast and "has dominated all aspects of the company's management since its incorporation." Wachs' criminal history made him try to disguise his role, Starisky states. After the Barron's exposi, the company's federal tax returns increased Ken Sgro's CEOcast ownership from 30% to 99%, with the remainder purportedly held by Wachs' wife, Rachel Glicksman. But the bulk of compensation went to Wachs' wife -- who, the widow attests, was a no-show employee fronting for Wachs.
The little stock promotion firm was a great moneymaker. CEOcast tax returns show revenue growing from $3 million in 2002 to $5 million in 2004. So the majority ownership attributed to Ken Sgro would seem to be worth quite a bit. But after receiving letters from Starisky's lawyers, Wachs said he would buy out Sgro's interest in CEOcast for one dollar. In September, Starisky filed suit for an accounting, appraisal and buyout of her late husband's interest in the company.
As of last week, Wachs hadn't filed a response to Starisky's allegation that he is trying to "steal" CEOcast. But in an Aug. 18 letter to her lawyer, Wachs made some interesting statements. Wachs said that CEOcast had paid him and his wife $2.1 million in 2003, $3.4 million in 2004 and $3 million in 2005 -- while Ken Sgro's take declined over the same period from $205,000 to $131,000. The business had paid virtually no dividends. Ken Sgro's ownership was upped from 30% to 99% "at the company accountant's suggestion for tax purposes," with no money paid for the ownership change.
Attached to Wachs' letter -- according to the widow's pleadings -- were two CEOcast documents that seemed to support Wachs' claims. A memo dated January 2002 assigned 87% of CEOcast's profits to Wachs and his wife. All voting and management control resided with the couple. A second document, dated December 2004, said that if Sgro died, Wachs could buy out Sgro's survivors for $1, without giving them any bank deposits or shares held by CEOcast because Sgro "contributed an insignificant amount of revenue and played a nominal role in the development of the company."
In his own affidavit, the widow's lawyer, Kenneth L. Moskowitz, said that the December document was neither valid nor genuine. It had an unnotarized signature of Ken Sgro that was a forgery -- according to a handwriting expert retained by Moskowitz.
Regardless of whether the court leaves CEOcast in the hands of Michael Wachs, it's clear that investors shouldn't rely on information from him or his company. If the court filings of his partner's widow are to be believed, Wachs is a liar and a fraud.
And if Wachs' own claims in the current dispute are to be believed, then CEOcast lied to the public (and to me) in denying that it's been the instrument of a financial felon.
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