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More history on Isser Elishis, Silicon Investor board 2001

Cash-Strapped Companies Turning More to `Toxic' Loans (Update1)
New York, Oct. 10 (Bloomberg) -- Atlantic Technology Ventures
Inc. had less than a year of cash left. Rejected by banks, the
medical technology investment company turned to Chicago-based
hedge fund Fusion Capital LLC for a $6 million credit line in
exchange for discounted stock.

Atlantic Technology paid $664,000 in stock and a finder's fee
to Fusion Capital in March. It never got any money because its
shares fell 65 percent to below a minimum specified in the loan
agreement. They were removed from trading on the Nasdaq Stock
Market in August.

The loan, known as an equity credit line, is an increasingly
prevalent form of financing for desperate businesses as stock sales slump and banks curb lending. Critics say they drive
borrowers deeper into the hole and securities regulators say the
risks are sometimes not fully disclosed. Investors say the
transactions attract short sellers who push down the shares.

``This was a real trial by fire in the harsh aspects of
corporate finance,'' Atlantic Technology Chief Executive Frederic
Zotos said. ``I wouldn't recommend them unless you really know
what you're doing.''

Sharks

The loans, pioneered in the last two years by hedge funds and
used by some investment banks including Societe Generale and CIBC
World Markets, give the lenders quick up-front fees. Lenders can
also profit by selling short, or betting against, the stock of a
company that wants to tap its equity line, then using the shares
it receives at a discount to profit from the shares' drop.

The loans are the latest manifestation of so-called ``death
spiral loans'' that are structured by investors to profit by
driving down a company's stock through short sales.

``It's like jumping in a pool of sharks,'' said John Nelson, a portfolio manager for the Wisconsin Investment Board, the 10th-
largest U.S. public pension fund with $67 billion in assets.
Nelson warns companies it invests in against equity lines.

The loans continue to gain in popularity as typical sources
of capital for risky businesses -- stock and junk-bond sales and
bank loans -- dry up, especially after the Sept. 11 terrorist
attacks.

With just 64 initial public stock offerings have been
completed this year, the U.S. is on track for its worst year in at
least a decade. There have been three junk-bond sales since Sept.
11 as the default rate reached a 10-year high.

Conversely, in 2000, there were 136 equity line loans
totaling about $538 million, from 11 equity lines for $35 million
in 1999, according to PlacementTracker.com. Through Sept. 24 of
this year, 115 equity lines were issued and companies received
$386 million.

Lenders

New York-based Acqua Wellington Asset Management and its
affiliates are the largest issuers of equity lines. Acqua funds
arranged $198 million in loans for at least 24 companies the past
two years, according to PlacementTracker.com, a database compiled by DirectPlacement Inc., a San Diego investment bank.

Some investors oppose the loans, and in at least one case,
blocked loans by CIBC World Markets to DMC Stratex Inc., a maker
of wireless-networking products. USInternetworking Inc. and Leap
Wireless International Inc. were forced by regulators to
restructure loans from Acqua Wellington.

``We warn (companies) against doing equity lines or other
financings which we consider to be toxic,'' said the Wisconsin
Investment Board's Nelson. ``They attract shorts, and they also repel savvy buyers who know what this type of instrument can do to
these stocks.''

On average, companies have received only 15 percent of
announced lines, after paying hundreds of thousands of dollars in
fees, PlacementTracker.com data shows. Some loan agreements
contain provisions that prohibit companies from accessing the line
if their stock drops. Other companies find that not enough of
their shares trade daily to enable them to tap much of the line.

Lenders deny that they are investing for short-term profits.
They say they are investing in companies whose prospects they say
are bright.

``I'm not telling you every share is held forever, but when
we take an investment our intent isn't flipping it,'' said Acqua
Chief Investment Officer Isser Elishis, who formed the fund in
January 2000 after leaving Hong Kong Shanghai Banking Corp.

Increasingly Popular

While the Sept. 11 terrorist attacks curbed junk-bond sales
and bank lending amid concern the economy is tipping into
recession, they have had little effect on the market for equity
credit lines. At least four companies announced agreements since
the attacks.

Cornell Capital Management, which was based in the World
Trade Center, provided a $20 million equity line to Continental
Energy Corp. even after Cornell's offices were destroyed,
Continental Chief Executive Gary Schell said. Schell said he
finalized the loan in cell phone calls with Cornell banker Robert
Farrell. Cornell did not respond to messages seeking comment.

In a typical equity line, the company and the issuer
negotiate a maximum amount the company can borrow. The companies
tap the lines at their discretion. In return, the lender buys the
shares at a discount of between 5 and 10 percent to the stock's
current price.

Critics say that the investors begin shorting the company's
stock when notified that the company wants to tap the line. In a short sale, an investor borrows shares and sells them in a bet thestock will drop and can be repurchased for a profit. In equity lines, the investors use the discounted shares they receive from the company to repay the shorted stock.

SEC
``We are concerned that these hedge funds may be acting as an
underwriter, getting securities at a discount with the intention
of flipping them, generally pretty quickly and in large blocks,''
said Michael McAlevey, the deputy director of corporation finance
at the SEC.

The SEC in March tightened rules governing how the loans are
issued, and the agency has forced at least three transactions to
be restructured. Regulators questioned whether the companies were adequately capitalized to complete the borrowings, and they forced the loan sizes to be reduced. They also compelled the lenders to assume liability if they misrepresented the investment when they resold the stock.
``As a shareholder or a bondholder, this is not the financing
you'd like to see,'' said Dmitry Khaykin, a telecommunications
analyst with Gabelli Asset Management Co., a mutual fund family
with $25.6 billion under management.

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