Wednesday, December 14, 2005 8:47:23 PM
SCANS AND SCAMS
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SEC FILES FRAUD CHARGES AGAINST RETAIL SKIN CARE CHAIN EXECUTIVES
The Securities and Exchange Commission today filed securities fraud charges against three men who fraudulently raised over $11 million from investors in stores of Skin Nuvo International, LLC, a skin care and laser hair removal company that operated in California, Nevada, and the Pacific Northwest.
The Commission’s complaint, filed in the United States District Court for the Northern District of California, alleges that, between 2002 and 2004, Nuvo co-founder Jeffrey Schmidt, 45, of Henderson, Nevada, falsely promised dozens of investors profits of 30% to 40% when he knew Nuvo’s business was in precarious financial shape. Nuvo has since filed for bankruptcy.
According to the complaint, Schmidt told investors their investments would finance particular new Nuvo locations, when in reality Schmidt spent the money to prop up the failing business, pay executives (including $680,000 to himself), and pay preexisting investors to maintain an illusion of profitability. Schmidt also provided investors with false income statements showing the retail locations to be substantially more profitable than they actually were.
The complaint further alleges that Nuvo’s former Chief Operating Officer Norman Valine, 39, of Las Vegas, Nevada, and a Nuvo co-owner Gary Gelnette, 51, of Concord, California, raised money from new investors even after suspecting that Schmidt may have embezzled funds and falsified financial records. Specifically, the complaint alleges that in late 2004, Gelnette, a former pastor, helped raise $1.35 million from a former parishioner, while Valine reaped $138,000 in commissions by selling Nuvo interests to four additional investors.
The Commission’s complaint alleges that Schmidt, Gelnette and Valine violated Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 (“Securities Act”), Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 thereunder. The complaint also charges Schmidt and Valine with violating Section 15(a) of the Exchange Act. The Commission seeks disgorgement, civil money penalties, and injunctive relief.
SEC Complaint in this matter
http://www.sec.gov/litigation/litreleases/lr19493.htm
Stocklemon Updates Housevalues.com (NASDAQ: SOLD)
Who naught suspects is easily deceived." Petrarca Petrarch
Lack of transparency is extremely frustrating when attempting to analyze the sustainability of a business model like that of Housevalues.com (NASDAQ:SOLD). SOLD’s management has consistently withheld the numbers which would support a transparent answer to this critical question. This forces both analysts and Stocklemon to use “voodoo math” to try to determine if Housevalues has actually attracted a customer base.
Stocklemon believes that transparency is a major problem facing Housevalues. They are not being forthright with either: the initial lead, the customer for the lead, or the investment community.
Anecdotal Evidence
The preponderance of agents we’ve spoken to freely express their dislike of Housevalues and its aggressive sales tactics. (Just ask any real estate agent you know.)
Complaints on internet sites reflect a litany of disgust and resentment over manipulative sales tactics, bogus leads, onerous cancellation fees, and ruined credit.
Just read the latest threads on Ripoffreport.com and Real Estate Agent Networking Sites.
http://www.ripoffreport.com/reports/ripoff146227.htm
http://www.realtychat.com/forum/search.php?0,search=housevalues,page=1,match_type=ALL,match_dates=30....
The sales tactics of Housevalues have angered agents so much that on December 13, we saw the launch of the website
http://www.housevalueslawsuit.com/
*Let is be known that neither Stocklemon or anyone affiliated with Stocklemon had anything to do with the above site and has no knowledge of who actually registered and is operating the above site. We learned about the website by checking the recent complaints against Housevalues on realtychat.com. Furthermore, Stocklemon has never published or solicited the publication of any postings on any consumer action site against Housevalues or any other company.
Analytical Evidence
The analytical approach is rendered difficult, because the company has notably never released the numbers on:
1. The distribution of “core customers” by length of subscription
2. The distribution of cancelled customers by length of retention
3. The actual amount of revenue received from cancellation fees
4. The number of customers who are released from their contracts without cancellation fees.
Instead of using the CSFB investor conference on December 1st to bring transparency to this critical issue, SOLD’s CFO muddied the water further by abusing one of those infamous “hypothetical statistics”. Stocklemon is aware of SOLD’s version of math that a 6.5% churn rate, applied to a static number over a 12 month timespan, yields a retention rate of 45% -- drop that right in the “interesting but meaningless” bin.
But then by sleight of hand, CFO Zdanowski states it as an actual number – stepping well over the line into what Stocklemon considers as “intentionally misleading”. There is absolutely nothing in SOLD’s entire reporting history that EVER supports a retention rate even remotely approaching 45%.
Here’s what we do know and find quite disturbing.
The total number of new customers added during the last 4 quarters exceeds or equals the entire core customer base. (This eye-popping comparison has in fact been true for all 7 historical quarters the comparison can be computed.)
The number of churned off customers, calculated using the company’s method equals or exceeds the number of customers added 4 quarters prior – for every period over the last 2 years. This supports the conclusion that there is a huge drop-off when the 12-month cancellation fee period expires.
The Thom Weisel analyst admits that SOLD’s method for calculating its churn rate understates the churn. By the Weisel analyst’s method, the churn rate is nearly 7% per month. As Weasel’s last research states
”The company’s calculation may understate churn because it uses the average count for the quarter as its base. It may be more appropriate to use the beginning subscriber count as the base because few of the lost subscribers in a given quarter are likely to have been from among those added in the quarter. If we recalculate churn on that basis, the monthly rate for 3Q05 would be 40bp higher.”
The CFO says you can’t multiply the monthly churn rate by 12 to get an annual rate. The Thomas Weisel analyst agrees with us that you certainly can:
“Monthly churn ranges from 6-7% (70-80% annualized)”.
In order to clear the confusion Stocklemon offers the attached model on Housevalues.com. The attached spreadsheet tracks all SOLD’s key core customer subscription and marketing expense statistics since the company began publishing them.
http://sl.stocklemon.com/ProdImages/SOLD_table.html
It is clear SOLD is adding new customers at an escalating rate. But is this due to building a subscriber base, or hidden by escalating marketing expenses?
Two important data points stand out:
1) Customers lost to churn , compared to new customers.
Row 9 calculates the number of customers churned off each qtr.
Row 11 is an average churn loss for the prior 4 quarters.
Row 15 shows new customers during each quarter.
Row 11 shows the average new customers for 4 quarters, one year prior.
Clearly, from comparing rows 11 and 12, for the last 9 months the company is churning off customers at the rate they were adding them one year prior. This is consistent with the expiration of the cancellation fee period which new customers are contractually obligated to pay if they terminate their service.)
2) Marketing expenses are increasing in absolute and proportional terms – a trend that suggests no efficiency of scale. SOLD has been spending in excess of 50% of gross revenues on marketing expense as its new customer counts grow. But, of more concern, (see Row 24) the average cost per new customer has been rising for the last 4 quarters, indicating that escalating spending on its telesales marketing crew, rather than its retention rate, is responsible for the growth in gross revenues and customer counts.
Both these numbers are consistent with Stocklemon’s conclusion, that SOLD’s business model is not sustainable as the residential real estate bubble loses momentum.
Same Business, presented honestly
Just to show that Stocklemon is not totally Bah Humbug, we will show a real estate lead site that creates no ill-will through deception of its customers. Just look at the business model of Reply.com’s www.realtynow.com and www.agentconnect.com
websites.
In sharp contrast to Housevalues, the above sites demonstrate 3 business practices that in the opinion of Stocklemon make their business more reputable and sustainable than Housevalues.
1. They pre-screen leads before they sell them to agents to make sure they are real people.
2. They do not make agents sign long term contracts.
3. They inform the buyer right up front in bold letters that they are connecting them to a real estate agent, and not leading them to the false belief that they are providing an online property valuation report.
Of course much like every lead generation company Reply.com will have their share of customer complaints, but not locking agents into a 12 month contract and telling the consumer up front that they are being referred to a real estate agent is a good start.
For this, we commend the way Reply.com does business.
Conclusion
Stocklemon continues to believe that the business model of Housevalues.com is truly unsustainable. Through the lack of transparency, SOLD is creating ill will within its customer base, lead system, and now the investment community. Rapid growth in new RE agents during the real estate boom fueled some sales, but those days are gone. And word has gotten around among Real Estate agents, which will require increasing marketing costs per customer to overcome.
Cautious Investing To All.
Disclaimer:
Stocklemon.com does not guarantee in any way that it is providing all of the information that may be available. We recommend that you do your own due diligence before buying or selling any security. At any times the principals of Stocklemon.com might hold a position in any of the securities profiled on the site. Stocklemon.com will not report when a position is initiated or covered. Each investor must make that decision based on his/her judgment of the market.
THE SECURITIES LAW LETTER
The Web's Best Source of Securities Law News
December 2005
Commentary
Appeals Judges Question SEC's Hedge Fund Rule
A divided SEC passed the rule in a 3 to 2 vote last year, citing evidence that the loosely regulated investment pools had become a breeding ground for fraud and trading abuses. But New York fund adviser Phillip Goldstein sued to stop the rule, arguing that the SEC had overstepped its authority and did not provide adequate foundation for the move. During the hearing, the appellate judges asked very critical questions of the SEC. Although questions during oral argument do not necessarily indicate which way a judge is leaning, my personal favorite question, which is actually a statement was "You don't have authority to act simply because you exist.," from Judge Harry T. Edwards. Many commentators had serious questions regarding the rationale for the new rule. Our analysis is in Bureaucracy Without Benefit
Economists Caution Investors on Hidden Risks of Hedge Fund
High fees, inconsistent data, and difficult-to-understand risks are reasons for individual investors to avoid or minimize their investments in hedge funds, caution a group of 32 senior financial economists, including three from Stanford, in a new report.
Mutual Fund Leaders Aim to Restore Trust
Mutual fund leaders came together for an annual conference aimed at restoring investor confidence after a year of scandals in what before had been considered a pristine-clean industry.
Amber Alert: Hedge Fund Seal Of Approval
Hedge funds can now show off their good housekeeping by stamping their efforts with what amounts to a seal of approval from Amber Partners. The Bermuda-based HF operational risk specialist has introduced a new service that will award "Amber-certified status" to any hedge fund that meets its "benchmark of operational quality," according to the firm.
NASD can help analyze fees in your funds
you own a mutual fund or if you're thinking about investing in one, perhaps for the first time, the one thing you absolutely need to do is pay attention to fees and expenses. That's what the experts keep telling us. However, for the novice investor -- and that's what most of us are -- figuring out how to compare the cost of one mutual fund with another can be as difficult as reading Latin. But NASD, the private-sector regulator for the securities industry, has introduced a new and improved mutual fund expense analyzer.
Smith Barney Cuts Pay for Smaller Brokers
According to Registered Rep magazine, Smith Barney plans to trim payouts for lower-end brokers next year, in an effort to counter rising costs and cull underperformers from its ranks. The new pay scale was announced to brokers internally in October and will take effect in January.
Pru Broker Wins $2 Million Wrongful Termination Suit
Bob Ostrowski was awarded $2 million from Prudential for wrongful termination in a New York Stock Exchange arbitration proceeding. The highly respected broker was terminated abruptly by the firm, in what appears to be an overreaction to a customer complaint. The Arbitration Panel awarded him $2 million, and amended his Form U-5.
Churning or Trading?
Trading accounts sometimes look like churned accounts. Here's how to tell the difference.
Enforcement Actions
Boston Money Manager Bradford C. Bleidt Sentenced to Over 11 Years
The Securities and Exchange Commission announced that, on December 5, 2005, Bradford C. Bleidt was sentenced to 11 years and three months in prison and ordered to pay restitution of $31,734,192.75 based upon his guilty plea to criminal charges brought by the United States Attorney's Office for the District of Massachusetts. On July 26, 2005, Bleidt pleaded guilty to 115 counts of mail fraud and one count of money laundering in connection with a scheme in which he defrauded approximately 125 investors of more than $27 million.
Court Orders Disgorgement, Penalty and Permanent Injunctions Against Ohio Businessman Bradley Smith and His Companies for Securities Fraud
Court Orders Disgorgement, Penalty and Permanent Injunctions Against Ohio Businessman Bradley Smith and His Companies for Securities Fraud. The SEC alleged that Smith and the companies told investors, both orally and in offering and marketing materials provided to investors, that most of the money raised would be used to buy stock in small community banks. Instead, most of the money was spent for other purposes, including to pay expenses for Smith's other businesses, as well as Smith's own personal expenses, including his personal credit card charges, house payments and a car purchase.
INVESTMENT ADVISER SENTENCED TO 24 MONTHS INCARCERATION
The Securities and Exchange Commission ("Commission"), announced today that on December 5, 2005, the U.S. District Court for the District of Massachusetts imposed a sentence of twenty-four months incarceration on Barry J. Goodman for orchestrating an offering fraud that resulted in two investors losing $700,000.
NASDR Notices to Members
05-79 Amendments to Section 4 of Schedule A to the NASD By-Laws Governing Continuing Education Regulatory Element and Qualification Examination Fees
NASD has filed for immediate effectiveness amendments to Section 4 of Schedule A to the NASD By-Laws to increase the Continuing Education Regulatory Element session fee and certain qualification examination fees. These rule changes will become operative on January 1, 2006
05-71 SEC Approves NASD Interpretive Material to Rule 9216 regarding NASD's MRVP
On August 18, 2005, the Securities and Exchange Commission (SEC) approved amendments to NASD Interpretive Material 9216-2 (IM- 9216-2), regarding NASD's MRVP.1 The new rule text is contained in Attachment A and is effective on November 14, 2005.
05-75 Amendments Regarding Deadlines for Submission of Initial Annual Report under Rule 3012 and Execution of the Initial Annual Certification under Rule 3013 and IM-3013
NASD has filed for immediate effectiveness amendments to NASD Rule 3012 (Supervisory Control System) and Rule 3013 (Annual Certification of Compliance and Supervisory Processes) to extend until April 1, 2006, the date by which members must submit their initial annual report required by Rule 3012 and execute their first annual certification pursuant to Rule 3013 and IM-3013. The rule change became immediately effective on its October 14, 2005 filing date.
05-73 Broker-Dealer, Investment Adviser Firm, Agent and Investment Adviser Representative Renewals for 2006
The 2006 NASD Broker-Dealer and Investment Adviser Registration Renewal Program will begin on November 21, 2005, when online Preliminary Renewal Statements are made available to all firms on Web CRD/IARD. This annual program simplifies the registration renewal process for more than 27,000 broker-dealer (BD) and investment adviser (IA) firms, and over 700,000 registered representatives and investment adviser representatives with the payment of one amount to NASD by the published deadline. Beginning this year, other regulators may also choose to renew branch registrations via Web CRD/IARD. On November 1, 2005, firms may start submitting post-dated Forms ADV-W via IARD. Beginning November 7, 2005, firms may start submitting post-dated Forms U5, BDW and BR Closing/Withdrawal via Web CRD/IARD.
05-72 SEC Approves Amendments to NASD Rule 3150, Regarding Reporting Requirements for Clearing Firms, and NASD Rule 3230, Regarding Requirements for Clearing Agreements
approved amendments to NASD Rule 3150, regarding reporting requirements for clearing firms, and NASD Rule 3230, regarding requirements for clearing agreements. The amendment is designed to deal with the reporting of "piggyback" firms and to distinguish them from the intermediary firm in the reports.
05-70 Revisions to the Series 4, 6 and 9/10 Examination Programs
NASD has revised the examination programs for the Limited Principal - Registered Options (Series 4), Limited Representative -Investment Company and Variable Contracts Products (Series 6), and Limited Principal - General Securities Sales Supervisor (Series 9/10).1 The changes are reflected in study outlines that are available on the NASD Web site (www.nasd.com). The changes will appear in examinations administered starting on November 30, 2005.
05-69 SEC Approves New Rule 2111 Prohibiting Members from Trading Ahead of Customer Market Orders Under Certain Circumstances
The SEC has approved new Rule 2111, Trading Ahead of Customer Market Orders, which prohibits a firm that accepts and holds a customer market order from trading for its own account at prices that would satisfy the customer market order, unless the firm immediately thereafter executes the customer market order.
News Items
Hedge funds snap back after tough month
After a losing October, better returns for many funds, thanks to the November stock rally
Hedge fund fight bound for appeal
Fund manager contends the SEC doesn't have the power to require fund advisers to register.
American Express Financial Corporation Settles Market Timing Charges
American Express Financial Corporation, now known as Ameriprise Financial, Inc. (AEFC) settled allegations that AEFC acted contrary to prospectus disclosures when it allowed certain shareholders to market time the mutual funds it advised, the American Express Funds (AXP Funds) when the AXP Funds' prospectus disclosures expressly prohibited market timing. As part of its settlement with the Commission, AEFC will pay $15 million in disgorgement and civil penalties, all of which will be placed in a Fair Fund for distribution to certain shareholders of the AXP Funds. AEFC also agreed to certain undertakings, including making annual presentations to its Board of Directors and the AXP Funds' Boards of Directors about the adequacy of its policies and procedures on market timing.
American Express Financial Advisors Settles Revenue Sharing Charges
American Express Financial Advisors Inc., now known as Ameriprise Financial Services, Inc. settled SEC charges related to allegations that AEFA failed to adequately disclose millions of dollars in revenue sharing payments that it received from a select group of mutual fund companies. As part of its settlement AEFA will pay $30 million in disgorgement and civil penalties. AEFA also agreed to make certain disclosures to its customers about its revenue sharing program. The Order finds that AEFA began receiving substantial revenue sharing payments and directed brokerage commissions from certain mutual fund families for distribution of fund shares starting in 2001. Since that time, affiliates of these mutual fund families have paid AEFA tens of millions of dollars each year in cash and non-cash revenue sharing payments.
NASD Fines Ameriprise Financial Services $12.3 Million for Directed Brokerage Violations
NASD announced today that it has fined Ameriprise Financial Services, Inc. of Minneapolis, MN, $12.3 million in connection with its receipt of directed brokerage in return for providing preferential treatment to certain mutual fund companies. The conduct at issue occurred when the firm was known as American Express Financial Advisors. The Securities and Exchange Commission (SEC) has also sanctioned the firm for related conduct.
SEC Charges Millennium Partners, L.P., Israel Englander, and Others for Engaging in Fraudulent Market Timing Scheme
Respondents to Pay over $180 Million in Disgorgement and Penalties
SEC Votes to Propose Rule to Provide Investors with Internet Availability of Proxy Materials
The Securities and Exchange Commission today voted to propose for public comment rules that would allow companies and other persons to use the Internet to satisfy proxy material delivery requirements.
NASD Charges Kirlin Securities, Two Individuals in Fraudulent Scheme To Avoid NASDAQ Delisting of Parent Company by Manipulating Stock Price
Co-CEO Also Charged with Forgery to Facilitate Manipulation; Firm, Other Officers Charged with Best Execution Violations
NASD Charges Kirlin With Stock Manipulation
Securities regulator NASD said on Tuesday that it has charged Kirlin Securities Inc., a subsidiary of Kirlin Holding Corp. , and two Kirlin officials with attempting to inflate Kirlin's stock price to avoid having the company be delisted from the Nasdaq.
NASD Fines Ameriprise $500K Over 529s
NASD has fined Ameriprise Financial $500,000 for failure to properly supervise the sale of 529 college savings plans, The Washington Post reports. NASD found that Ameriprise advisers failed to tell clients about the tax deductions they could have claimed by investing in 529s in their home state, and so, it has also ordered it to pay another $750,000 to compensate investors for the savings they would have realized.
NASD Fines State Street Global Markets Record $1.4 Million For Corporate and Municipal Bond Trade Reporting Violations
NASD Fines State Street Global Markets Record $1.4 Million For Corporate and Municipal Bond Trade Reporting Violations. Fine is Largest to Date for Fixed Income Trade Reporting Violations
Bonuses For Equity Derivatives Traders Up Over 10%
Bonuses for equity derivatives traders will be up more than 10% this year, bolstered by an explosion in options and futures trading volume, according to trading executives and recruiters. The surge will push total compensation for derivatives traders well into the seven figure range and well above what most equities traders make. Last year derivative traders' comp was flat. These bonuses could translate into even bigger numbers next year, as investment banks and trading houses are offering guarantees to the best traders to take advantage of the hot market, recruiters and trading executives said. "There are a lot of mandates
Online Publications
NASD November 2005 Disciplinary Actions
AML violations and more…
Recent Court Decisions
Appellate Court Unable to Vacate Arbitration Award With an Insufficient Record
Once again a court has confirmed that if an arbitration proceeding is not transcribed, a reviewing court may not be able to determine from the record whether the arbitral award should be vacated. Brockman v. Tyson, No. 01-03-01335-CV, 2005 WL 2850128 (Tex. App. 2005),
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If you have any questions or comments regarding any of the matters addressed in this issue of The Securities Law Letter, or regarding issues relating to securities arbitration, regulation or litigation, please contact:
Mark J. Astarita, Esq.
Beam & Astarita, LLC
300 Broadacres Drive
Bloomfield, NJ 07003
973-893-0900
astarita@seclaw.com
Discussions regarding these topics, and other securities law related issues are ongoing at The Securities Law Forums, the discussion center at The Securities Law Home Page. Visit the Securities Law Forums at www.seclaw.com
The Securities Law Letter is a monthly publication of The Securities Law Home Page, http://www.seclaw.com, and is available by email. It is for informational purposes only, it does not constitute legal advice, and should not be used as such.
To subscribe, send an email to seclaw2000@yahoo.com with the word subscribe in the subject line. For the HTML version, add "html" in the subject line. The next issue will be in your mailbox.
Copyright 2004, VGIS Communications and Mark J. Astarita.
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SEC FILES FRAUD CHARGES AGAINST RETAIL SKIN CARE CHAIN EXECUTIVES
The Securities and Exchange Commission today filed securities fraud charges against three men who fraudulently raised over $11 million from investors in stores of Skin Nuvo International, LLC, a skin care and laser hair removal company that operated in California, Nevada, and the Pacific Northwest.
The Commission’s complaint, filed in the United States District Court for the Northern District of California, alleges that, between 2002 and 2004, Nuvo co-founder Jeffrey Schmidt, 45, of Henderson, Nevada, falsely promised dozens of investors profits of 30% to 40% when he knew Nuvo’s business was in precarious financial shape. Nuvo has since filed for bankruptcy.
According to the complaint, Schmidt told investors their investments would finance particular new Nuvo locations, when in reality Schmidt spent the money to prop up the failing business, pay executives (including $680,000 to himself), and pay preexisting investors to maintain an illusion of profitability. Schmidt also provided investors with false income statements showing the retail locations to be substantially more profitable than they actually were.
The complaint further alleges that Nuvo’s former Chief Operating Officer Norman Valine, 39, of Las Vegas, Nevada, and a Nuvo co-owner Gary Gelnette, 51, of Concord, California, raised money from new investors even after suspecting that Schmidt may have embezzled funds and falsified financial records. Specifically, the complaint alleges that in late 2004, Gelnette, a former pastor, helped raise $1.35 million from a former parishioner, while Valine reaped $138,000 in commissions by selling Nuvo interests to four additional investors.
The Commission’s complaint alleges that Schmidt, Gelnette and Valine violated Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 (“Securities Act”), Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 thereunder. The complaint also charges Schmidt and Valine with violating Section 15(a) of the Exchange Act. The Commission seeks disgorgement, civil money penalties, and injunctive relief.
SEC Complaint in this matter
http://www.sec.gov/litigation/litreleases/lr19493.htm
Stocklemon Updates Housevalues.com (NASDAQ: SOLD)
Who naught suspects is easily deceived." Petrarca Petrarch
Lack of transparency is extremely frustrating when attempting to analyze the sustainability of a business model like that of Housevalues.com (NASDAQ:SOLD). SOLD’s management has consistently withheld the numbers which would support a transparent answer to this critical question. This forces both analysts and Stocklemon to use “voodoo math” to try to determine if Housevalues has actually attracted a customer base.
Stocklemon believes that transparency is a major problem facing Housevalues. They are not being forthright with either: the initial lead, the customer for the lead, or the investment community.
Anecdotal Evidence
The preponderance of agents we’ve spoken to freely express their dislike of Housevalues and its aggressive sales tactics. (Just ask any real estate agent you know.)
Complaints on internet sites reflect a litany of disgust and resentment over manipulative sales tactics, bogus leads, onerous cancellation fees, and ruined credit.
Just read the latest threads on Ripoffreport.com and Real Estate Agent Networking Sites.
http://www.ripoffreport.com/reports/ripoff146227.htm
http://www.realtychat.com/forum/search.php?0,search=housevalues,page=1,match_type=ALL,match_dates=30....
The sales tactics of Housevalues have angered agents so much that on December 13, we saw the launch of the website
http://www.housevalueslawsuit.com/
*Let is be known that neither Stocklemon or anyone affiliated with Stocklemon had anything to do with the above site and has no knowledge of who actually registered and is operating the above site. We learned about the website by checking the recent complaints against Housevalues on realtychat.com. Furthermore, Stocklemon has never published or solicited the publication of any postings on any consumer action site against Housevalues or any other company.
Analytical Evidence
The analytical approach is rendered difficult, because the company has notably never released the numbers on:
1. The distribution of “core customers” by length of subscription
2. The distribution of cancelled customers by length of retention
3. The actual amount of revenue received from cancellation fees
4. The number of customers who are released from their contracts without cancellation fees.
Instead of using the CSFB investor conference on December 1st to bring transparency to this critical issue, SOLD’s CFO muddied the water further by abusing one of those infamous “hypothetical statistics”. Stocklemon is aware of SOLD’s version of math that a 6.5% churn rate, applied to a static number over a 12 month timespan, yields a retention rate of 45% -- drop that right in the “interesting but meaningless” bin.
But then by sleight of hand, CFO Zdanowski states it as an actual number – stepping well over the line into what Stocklemon considers as “intentionally misleading”. There is absolutely nothing in SOLD’s entire reporting history that EVER supports a retention rate even remotely approaching 45%.
Here’s what we do know and find quite disturbing.
The total number of new customers added during the last 4 quarters exceeds or equals the entire core customer base. (This eye-popping comparison has in fact been true for all 7 historical quarters the comparison can be computed.)
The number of churned off customers, calculated using the company’s method equals or exceeds the number of customers added 4 quarters prior – for every period over the last 2 years. This supports the conclusion that there is a huge drop-off when the 12-month cancellation fee period expires.
The Thom Weisel analyst admits that SOLD’s method for calculating its churn rate understates the churn. By the Weisel analyst’s method, the churn rate is nearly 7% per month. As Weasel’s last research states
”The company’s calculation may understate churn because it uses the average count for the quarter as its base. It may be more appropriate to use the beginning subscriber count as the base because few of the lost subscribers in a given quarter are likely to have been from among those added in the quarter. If we recalculate churn on that basis, the monthly rate for 3Q05 would be 40bp higher.”
The CFO says you can’t multiply the monthly churn rate by 12 to get an annual rate. The Thomas Weisel analyst agrees with us that you certainly can:
“Monthly churn ranges from 6-7% (70-80% annualized)”.
In order to clear the confusion Stocklemon offers the attached model on Housevalues.com. The attached spreadsheet tracks all SOLD’s key core customer subscription and marketing expense statistics since the company began publishing them.
http://sl.stocklemon.com/ProdImages/SOLD_table.html
It is clear SOLD is adding new customers at an escalating rate. But is this due to building a subscriber base, or hidden by escalating marketing expenses?
Two important data points stand out:
1) Customers lost to churn , compared to new customers.
Row 9 calculates the number of customers churned off each qtr.
Row 11 is an average churn loss for the prior 4 quarters.
Row 15 shows new customers during each quarter.
Row 11 shows the average new customers for 4 quarters, one year prior.
Clearly, from comparing rows 11 and 12, for the last 9 months the company is churning off customers at the rate they were adding them one year prior. This is consistent with the expiration of the cancellation fee period which new customers are contractually obligated to pay if they terminate their service.)
2) Marketing expenses are increasing in absolute and proportional terms – a trend that suggests no efficiency of scale. SOLD has been spending in excess of 50% of gross revenues on marketing expense as its new customer counts grow. But, of more concern, (see Row 24) the average cost per new customer has been rising for the last 4 quarters, indicating that escalating spending on its telesales marketing crew, rather than its retention rate, is responsible for the growth in gross revenues and customer counts.
Both these numbers are consistent with Stocklemon’s conclusion, that SOLD’s business model is not sustainable as the residential real estate bubble loses momentum.
Same Business, presented honestly
Just to show that Stocklemon is not totally Bah Humbug, we will show a real estate lead site that creates no ill-will through deception of its customers. Just look at the business model of Reply.com’s www.realtynow.com and www.agentconnect.com
websites.
In sharp contrast to Housevalues, the above sites demonstrate 3 business practices that in the opinion of Stocklemon make their business more reputable and sustainable than Housevalues.
1. They pre-screen leads before they sell them to agents to make sure they are real people.
2. They do not make agents sign long term contracts.
3. They inform the buyer right up front in bold letters that they are connecting them to a real estate agent, and not leading them to the false belief that they are providing an online property valuation report.
Of course much like every lead generation company Reply.com will have their share of customer complaints, but not locking agents into a 12 month contract and telling the consumer up front that they are being referred to a real estate agent is a good start.
For this, we commend the way Reply.com does business.
Conclusion
Stocklemon continues to believe that the business model of Housevalues.com is truly unsustainable. Through the lack of transparency, SOLD is creating ill will within its customer base, lead system, and now the investment community. Rapid growth in new RE agents during the real estate boom fueled some sales, but those days are gone. And word has gotten around among Real Estate agents, which will require increasing marketing costs per customer to overcome.
Cautious Investing To All.
Disclaimer:
Stocklemon.com does not guarantee in any way that it is providing all of the information that may be available. We recommend that you do your own due diligence before buying or selling any security. At any times the principals of Stocklemon.com might hold a position in any of the securities profiled on the site. Stocklemon.com will not report when a position is initiated or covered. Each investor must make that decision based on his/her judgment of the market.
THE SECURITIES LAW LETTER
The Web's Best Source of Securities Law News
December 2005
Commentary
Appeals Judges Question SEC's Hedge Fund Rule
A divided SEC passed the rule in a 3 to 2 vote last year, citing evidence that the loosely regulated investment pools had become a breeding ground for fraud and trading abuses. But New York fund adviser Phillip Goldstein sued to stop the rule, arguing that the SEC had overstepped its authority and did not provide adequate foundation for the move. During the hearing, the appellate judges asked very critical questions of the SEC. Although questions during oral argument do not necessarily indicate which way a judge is leaning, my personal favorite question, which is actually a statement was "You don't have authority to act simply because you exist.," from Judge Harry T. Edwards. Many commentators had serious questions regarding the rationale for the new rule. Our analysis is in Bureaucracy Without Benefit
Economists Caution Investors on Hidden Risks of Hedge Fund
High fees, inconsistent data, and difficult-to-understand risks are reasons for individual investors to avoid or minimize their investments in hedge funds, caution a group of 32 senior financial economists, including three from Stanford, in a new report.
Mutual Fund Leaders Aim to Restore Trust
Mutual fund leaders came together for an annual conference aimed at restoring investor confidence after a year of scandals in what before had been considered a pristine-clean industry.
Amber Alert: Hedge Fund Seal Of Approval
Hedge funds can now show off their good housekeeping by stamping their efforts with what amounts to a seal of approval from Amber Partners. The Bermuda-based HF operational risk specialist has introduced a new service that will award "Amber-certified status" to any hedge fund that meets its "benchmark of operational quality," according to the firm.
NASD can help analyze fees in your funds
you own a mutual fund or if you're thinking about investing in one, perhaps for the first time, the one thing you absolutely need to do is pay attention to fees and expenses. That's what the experts keep telling us. However, for the novice investor -- and that's what most of us are -- figuring out how to compare the cost of one mutual fund with another can be as difficult as reading Latin. But NASD, the private-sector regulator for the securities industry, has introduced a new and improved mutual fund expense analyzer.
Smith Barney Cuts Pay for Smaller Brokers
According to Registered Rep magazine, Smith Barney plans to trim payouts for lower-end brokers next year, in an effort to counter rising costs and cull underperformers from its ranks. The new pay scale was announced to brokers internally in October and will take effect in January.
Pru Broker Wins $2 Million Wrongful Termination Suit
Bob Ostrowski was awarded $2 million from Prudential for wrongful termination in a New York Stock Exchange arbitration proceeding. The highly respected broker was terminated abruptly by the firm, in what appears to be an overreaction to a customer complaint. The Arbitration Panel awarded him $2 million, and amended his Form U-5.
Churning or Trading?
Trading accounts sometimes look like churned accounts. Here's how to tell the difference.
Enforcement Actions
Boston Money Manager Bradford C. Bleidt Sentenced to Over 11 Years
The Securities and Exchange Commission announced that, on December 5, 2005, Bradford C. Bleidt was sentenced to 11 years and three months in prison and ordered to pay restitution of $31,734,192.75 based upon his guilty plea to criminal charges brought by the United States Attorney's Office for the District of Massachusetts. On July 26, 2005, Bleidt pleaded guilty to 115 counts of mail fraud and one count of money laundering in connection with a scheme in which he defrauded approximately 125 investors of more than $27 million.
Court Orders Disgorgement, Penalty and Permanent Injunctions Against Ohio Businessman Bradley Smith and His Companies for Securities Fraud
Court Orders Disgorgement, Penalty and Permanent Injunctions Against Ohio Businessman Bradley Smith and His Companies for Securities Fraud. The SEC alleged that Smith and the companies told investors, both orally and in offering and marketing materials provided to investors, that most of the money raised would be used to buy stock in small community banks. Instead, most of the money was spent for other purposes, including to pay expenses for Smith's other businesses, as well as Smith's own personal expenses, including his personal credit card charges, house payments and a car purchase.
INVESTMENT ADVISER SENTENCED TO 24 MONTHS INCARCERATION
The Securities and Exchange Commission ("Commission"), announced today that on December 5, 2005, the U.S. District Court for the District of Massachusetts imposed a sentence of twenty-four months incarceration on Barry J. Goodman for orchestrating an offering fraud that resulted in two investors losing $700,000.
NASDR Notices to Members
05-79 Amendments to Section 4 of Schedule A to the NASD By-Laws Governing Continuing Education Regulatory Element and Qualification Examination Fees
NASD has filed for immediate effectiveness amendments to Section 4 of Schedule A to the NASD By-Laws to increase the Continuing Education Regulatory Element session fee and certain qualification examination fees. These rule changes will become operative on January 1, 2006
05-71 SEC Approves NASD Interpretive Material to Rule 9216 regarding NASD's MRVP
On August 18, 2005, the Securities and Exchange Commission (SEC) approved amendments to NASD Interpretive Material 9216-2 (IM- 9216-2), regarding NASD's MRVP.1 The new rule text is contained in Attachment A and is effective on November 14, 2005.
05-75 Amendments Regarding Deadlines for Submission of Initial Annual Report under Rule 3012 and Execution of the Initial Annual Certification under Rule 3013 and IM-3013
NASD has filed for immediate effectiveness amendments to NASD Rule 3012 (Supervisory Control System) and Rule 3013 (Annual Certification of Compliance and Supervisory Processes) to extend until April 1, 2006, the date by which members must submit their initial annual report required by Rule 3012 and execute their first annual certification pursuant to Rule 3013 and IM-3013. The rule change became immediately effective on its October 14, 2005 filing date.
05-73 Broker-Dealer, Investment Adviser Firm, Agent and Investment Adviser Representative Renewals for 2006
The 2006 NASD Broker-Dealer and Investment Adviser Registration Renewal Program will begin on November 21, 2005, when online Preliminary Renewal Statements are made available to all firms on Web CRD/IARD. This annual program simplifies the registration renewal process for more than 27,000 broker-dealer (BD) and investment adviser (IA) firms, and over 700,000 registered representatives and investment adviser representatives with the payment of one amount to NASD by the published deadline. Beginning this year, other regulators may also choose to renew branch registrations via Web CRD/IARD. On November 1, 2005, firms may start submitting post-dated Forms ADV-W via IARD. Beginning November 7, 2005, firms may start submitting post-dated Forms U5, BDW and BR Closing/Withdrawal via Web CRD/IARD.
05-72 SEC Approves Amendments to NASD Rule 3150, Regarding Reporting Requirements for Clearing Firms, and NASD Rule 3230, Regarding Requirements for Clearing Agreements
approved amendments to NASD Rule 3150, regarding reporting requirements for clearing firms, and NASD Rule 3230, regarding requirements for clearing agreements. The amendment is designed to deal with the reporting of "piggyback" firms and to distinguish them from the intermediary firm in the reports.
05-70 Revisions to the Series 4, 6 and 9/10 Examination Programs
NASD has revised the examination programs for the Limited Principal - Registered Options (Series 4), Limited Representative -Investment Company and Variable Contracts Products (Series 6), and Limited Principal - General Securities Sales Supervisor (Series 9/10).1 The changes are reflected in study outlines that are available on the NASD Web site (www.nasd.com). The changes will appear in examinations administered starting on November 30, 2005.
05-69 SEC Approves New Rule 2111 Prohibiting Members from Trading Ahead of Customer Market Orders Under Certain Circumstances
The SEC has approved new Rule 2111, Trading Ahead of Customer Market Orders, which prohibits a firm that accepts and holds a customer market order from trading for its own account at prices that would satisfy the customer market order, unless the firm immediately thereafter executes the customer market order.
News Items
Hedge funds snap back after tough month
After a losing October, better returns for many funds, thanks to the November stock rally
Hedge fund fight bound for appeal
Fund manager contends the SEC doesn't have the power to require fund advisers to register.
American Express Financial Corporation Settles Market Timing Charges
American Express Financial Corporation, now known as Ameriprise Financial, Inc. (AEFC) settled allegations that AEFC acted contrary to prospectus disclosures when it allowed certain shareholders to market time the mutual funds it advised, the American Express Funds (AXP Funds) when the AXP Funds' prospectus disclosures expressly prohibited market timing. As part of its settlement with the Commission, AEFC will pay $15 million in disgorgement and civil penalties, all of which will be placed in a Fair Fund for distribution to certain shareholders of the AXP Funds. AEFC also agreed to certain undertakings, including making annual presentations to its Board of Directors and the AXP Funds' Boards of Directors about the adequacy of its policies and procedures on market timing.
American Express Financial Advisors Settles Revenue Sharing Charges
American Express Financial Advisors Inc., now known as Ameriprise Financial Services, Inc. settled SEC charges related to allegations that AEFA failed to adequately disclose millions of dollars in revenue sharing payments that it received from a select group of mutual fund companies. As part of its settlement AEFA will pay $30 million in disgorgement and civil penalties. AEFA also agreed to make certain disclosures to its customers about its revenue sharing program. The Order finds that AEFA began receiving substantial revenue sharing payments and directed brokerage commissions from certain mutual fund families for distribution of fund shares starting in 2001. Since that time, affiliates of these mutual fund families have paid AEFA tens of millions of dollars each year in cash and non-cash revenue sharing payments.
NASD Fines Ameriprise Financial Services $12.3 Million for Directed Brokerage Violations
NASD announced today that it has fined Ameriprise Financial Services, Inc. of Minneapolis, MN, $12.3 million in connection with its receipt of directed brokerage in return for providing preferential treatment to certain mutual fund companies. The conduct at issue occurred when the firm was known as American Express Financial Advisors. The Securities and Exchange Commission (SEC) has also sanctioned the firm for related conduct.
SEC Charges Millennium Partners, L.P., Israel Englander, and Others for Engaging in Fraudulent Market Timing Scheme
Respondents to Pay over $180 Million in Disgorgement and Penalties
SEC Votes to Propose Rule to Provide Investors with Internet Availability of Proxy Materials
The Securities and Exchange Commission today voted to propose for public comment rules that would allow companies and other persons to use the Internet to satisfy proxy material delivery requirements.
NASD Charges Kirlin Securities, Two Individuals in Fraudulent Scheme To Avoid NASDAQ Delisting of Parent Company by Manipulating Stock Price
Co-CEO Also Charged with Forgery to Facilitate Manipulation; Firm, Other Officers Charged with Best Execution Violations
NASD Charges Kirlin With Stock Manipulation
Securities regulator NASD said on Tuesday that it has charged Kirlin Securities Inc., a subsidiary of Kirlin Holding Corp. , and two Kirlin officials with attempting to inflate Kirlin's stock price to avoid having the company be delisted from the Nasdaq.
NASD Fines Ameriprise $500K Over 529s
NASD has fined Ameriprise Financial $500,000 for failure to properly supervise the sale of 529 college savings plans, The Washington Post reports. NASD found that Ameriprise advisers failed to tell clients about the tax deductions they could have claimed by investing in 529s in their home state, and so, it has also ordered it to pay another $750,000 to compensate investors for the savings they would have realized.
NASD Fines State Street Global Markets Record $1.4 Million For Corporate and Municipal Bond Trade Reporting Violations
NASD Fines State Street Global Markets Record $1.4 Million For Corporate and Municipal Bond Trade Reporting Violations. Fine is Largest to Date for Fixed Income Trade Reporting Violations
Bonuses For Equity Derivatives Traders Up Over 10%
Bonuses for equity derivatives traders will be up more than 10% this year, bolstered by an explosion in options and futures trading volume, according to trading executives and recruiters. The surge will push total compensation for derivatives traders well into the seven figure range and well above what most equities traders make. Last year derivative traders' comp was flat. These bonuses could translate into even bigger numbers next year, as investment banks and trading houses are offering guarantees to the best traders to take advantage of the hot market, recruiters and trading executives said. "There are a lot of mandates
Online Publications
NASD November 2005 Disciplinary Actions
AML violations and more…
Recent Court Decisions
Appellate Court Unable to Vacate Arbitration Award With an Insufficient Record
Once again a court has confirmed that if an arbitration proceeding is not transcribed, a reviewing court may not be able to determine from the record whether the arbitral award should be vacated. Brockman v. Tyson, No. 01-03-01335-CV, 2005 WL 2850128 (Tex. App. 2005),
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If you have any questions or comments regarding any of the matters addressed in this issue of The Securities Law Letter, or regarding issues relating to securities arbitration, regulation or litigation, please contact:
Mark J. Astarita, Esq.
Beam & Astarita, LLC
300 Broadacres Drive
Bloomfield, NJ 07003
973-893-0900
astarita@seclaw.com
Discussions regarding these topics, and other securities law related issues are ongoing at The Securities Law Forums, the discussion center at The Securities Law Home Page. Visit the Securities Law Forums at www.seclaw.com
The Securities Law Letter is a monthly publication of The Securities Law Home Page, http://www.seclaw.com, and is available by email. It is for informational purposes only, it does not constitute legal advice, and should not be used as such.
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