My Investigation of Scams by Robert J McNulty
Tuesday, September 14, 2010
Investors worry about Robert J Mcnulty - scam artist extraordinaire
http://siliconinvestor.com/readmsg.aspx?msgid=14319669
he Big Man's Back (1999)
"In June, Biomerica filed documents with the SEC that told the world McNulty is back at work. In an 8-K, Biomerica said it sold 350,000 shares of restricted common stock to RidgeRose Capital Partners for $5 a share, or $1.75 million. (In another filing, Biomerica said that McNulty should be regarded as the beneficial owner of the shares, by virtue of his status as RidgeRose's sole manager.) Biomerica also said it would help elect three RidgeRose nominees to Biomerica's board of directors at each annual meeting.
Biomerica also granted RJM Consulting (RJM? Robert J. McNulty, of course) a warrant to purchase 1 million shares of restricted common stock in consideration of RJM's services in raising cash and introducing TheBigStore to Biomerica."
http://www.thestandard.com/article/display/0,1151,5763,00.html[url=]
August 9, 1999
The Big Man's Back
After reaping a windfall on the $220 million sale of Shopping.com – and leaving
behind an SEC controversy – Robert McNulty has returned to e-commerce.
By Jim Evans
A former navy seal and one-time
weightlifter notorious for his 80-hour
workweeks, Robert J. McNulty doesn't do
anything small. When he recently bought a
house in Southern California, he paid $14
million for eight bedrooms and 13
bathrooms. When he started a company,
he didn't just open a store, he opened a
warehouse: His HomeClub pioneered 1980s
warehouse chic.
And now, after the big sale of his first
Internet company, Shopping.com, McNulty
is back on the Net with a bunch of bigs, all
folded into TheBigHub.com, a metasearch-
and shopping-engine company.
But McNulty's trouble has been big, too, and so this time, there are
no long-winded press releases trumpeting his return. He's coming in
through the backdoor, because it might be his only way back in at all.
Between the sale of HomeClub and the founding of Shopping.com,
McNulty went through a decade of failed businesses and lawsuits
that cumulated in 1995 in corporate bankruptcy and trouble with the
Securities and Exchange Commission. Then, while he was at
Shopping.com, the SEC investigated the manipulation of the
company's stock. During the investigation, McNulty left the company
denying guilt, but Shopping.com's problems were well publicized, and
he became something of a persona non grata in Internet circles.
Since dropping out of L.A.'s Narbonne High School in the early '60s,
McNulty's shown that he possesses many traits of the great American
retailers – drive, ambition, creativity and resourcefulness. Now, at
age 53 and in the midst of another retail boom, this one spawned by
the Web, the big man is showing no signs that he's through. He's just
keeping quiet about it this time.
When Sol Price, the legendary retailer who founded Fedmart in 1954,
started Price Club in 1976, he inadvertently spawned a generation of
imitators. The concept was simple: Stack merchandise high on
industrial-style shelves, charge a membership fee, avoid high rents by
putting the stores in out-of-the-way locations, and build the outlets
big enough so trucks could deliver directly to the stores instead of to
distribution centers. It was retail on the cheap, and consumers loved
it.
Warehouse shopping was one of the first new ideas to come out of
retail in years. While warehouses were not the most consumer
friendly places to shop – Price's stores had no heat, no
air-conditioning, no paper bags and no restrooms – the prices were
right. No matter what the product, Price kept the margins low and
the suburbanites happy.
Warehouse sales really caught fire in the early '80s. In the spring of
1983, Sam Walton opened his answer to Price Club in the form of
Sam's Wholesale Club in Midwest City, Okla., a suburb of Oklahoma
City. By the end of 1983, there were about 20 warehouse stores in
the country; all but the original, San Diego-based Price Club, had
opened that year. Four years later, there were more than 200. And
Southern California was ground zero in the phenomenon.
One retailer paying close attention to what Sol Price was doing was
Robert McNulty, who had spent about eight years bouncing around
the home-center retail industry. In 1976, McNulty founded his first
company, Western Home Improvement Centers, in Southern
California. Four years later, finding himself underfunded, he sold the
company to W.R. Grace, an international chemical company with
interests in consumer services. At Grace, McNulty vaulted to VP in
charge of merchandising and operations in the home-centers unit
under Frank Denny, a future business partner.
But after two years with Grace, McNulty was restless. A born
independent, McNulty simply couldn't remain a VP in a big
bureaucracy. Later, when assessing his ability as an entrepreneur, he
told a trade magazine: "I look at Sam Walton at Wal-Mart; he's been
able to do it. Price Club founder Sol Price has been able to do it. You
have to have that overwhelming drive to succeed and pass it along
to every individual who comes to your company."
McNulty left Grace in 1982 to start his own megastore. But instead of
selling groceries or department-store goodies like Price and Walton,
McNulty went vertical and stuck to his strengths – hardware and
building supplies. Armed with $5 million in venture capital, he started
HomeClub with two stores in Southern California. It was the fall of
1983.
McNulty developed his managerial style at HomeClub. He was brash
and absolutely fanatical about the idea of leadership. McNulty even
taught three-week intensive management-training classes to
HomeClub's best and brightest. Among the assigned readings was the
autobiography of Lee Iacocca, the pop-business personality of the
moment.
HomeClub pulled in about $70 million in 1984. By early 1985, four more
stores had opened, and there was speculation that 15 more – and a
projected $500 million in sales – were only a year away. But already,
there were ominous rumblings about a new superstore called Home
Depot, which in 1985 opened an office to buy real estate in Southern
California.
On the outside, HomeClub was booming, but insiders knew the
company needed a cash infusion to stay afloat. The problem was
endemic to the concept: Instead of the 30 percent gross margins
that traditional discounters like Kmart (KM) enjoyed, warehouses
operated at 9 percent. With initial financing of only $5 million, infused
with $30 million more in 1984, McNulty decided it was time to go
public in the fall of 1985, just two years after he started the
business.
In October, HomeClub hit the public market. But instead of the $14 to
$16 a share that he had hoped to get, McNulty was forced to cut the
price to $9 a share. A little over 2 million shares were sold, netting
about $20.7 million, far below the company's expectations.
Disappointed, McNulty sold the company to Zayre for $151 million just
weeks later. The reason? "It takes deep pockets to play this game,"
McNulty told the Los Angeles Times. While the deal deepened
McNulty's pockets – he said he made about $6.5 million on the deal –
his credibility would never be the same.
For the next decade, McNulty tried in vain to regain the buzz that he
generated with HomeClub and opened several different warehouse
stores dedicated to different vertical markets. Seven months after he
sold HomeClub in July 1986, he founded All-American SportsClub, a
warehouse sporting-goods store. Just a few months later, the
company was hit with a series of lawsuits from sporting-goods
manufacturers and retailers. Reebok, for instance, sued SportsClub
for what it called the "bootlegging" of its shoes. It wouldn't supply
SportsClub, so McNulty got the shoes anyway through brokers and
diverters. In court filings, Reebok claimed that SportsClub provided
"negligible customer service in warehouselike surroundings and is
unqualified to be an authorized Reebok dealer."
A little over two years later, SportsClub went bankrupt and was
liquidated. But by then, McNulty had founded two office-supply
warehouses, HQ Office Supplies Warehouse and a chain of similar
stores in Canada called HQ Office International. Around the same
time, in July 1989, he started Auto Giant, yet another warehouse,
this time selling auto supplies (the corporate name was A.G.
Automotive Warehouses).
To get these ventures financed, McNulty turned creative. In the case
of HQ Office Supplies Warehouse, the company raised about $6 million
by selling units of its equity to the public through a broker. Those
who bought the units (warrants to buy stock) then redeemed the
warrants, raising another $19 million. In effect, McNulty raised the
cash needed to start his chain on the public market. And all before
opening a single store.
McNulty kept going. In 1990, he started another auto warehouse,
Auto Depot, a similar operation to Auto Giant, but with stores on the
East Coast instead of in Southern California. He used the same
financing model for Auto Depot that he used for his office-supply
chain.
Then the roof caved in. In December 1990, an unprofitable HQ Office
Supplies Warehouse announced it would leave Southern California for
Canada, where it would merge with McNulty's office-supply company
there. Staples (SPLS) , which had taken over the Los Angeles
office-supply market, bought nine HQ stores. Four months later, in
the span of two days, McNulty resigned from both HQ boards and the
board of his two auto warehouse companies, after he had authorized
the purchase of stocks that the boards hadn't approved.
That same month, McNulty's friend Arthur Laffer, the noted
economist who advised then-president Ronald Reagan, resigned from
the board of directors at Auto Giant because he disagreed with those
very transactions. McNulty, it seems, was using the cash that Auto
Giant raised in its public offering to fund a completely separate
company that just happened to be controlled by him – a no-no unless
you let the world know about it. He hadn't. An HQ lawyer said at the
time that the SEC wasn't investigating the issue, but it was clear
that something was up.
Even McNulty's marriage to his wife, Elaine, was crashing down
around him; they divorced in 1991. McNulty, however, did find some
success. In July of that year, he skippered his $1 million boat,
Chance, in the Transpacific Yacht Race from California to Hawaii. He
finished first.
When the SEC finally did get around to the complex relationship
among McNulty's various companies, it didn't like what it found. In
fact, the commission sued McNulty in September 1994. The SEC
alleged that McNulty "orchestrated a complex scheme to defraud
investors by using the proceeds of securities offerings by HQ Office
Supplies, HQ Office International, Auto Giant and Auto Depot to
finance the operations of affiliated companies rather than for the
stated purpose of funding the issuers' operations."
Among the more serious allegations was that McNulty's Auto Giant
falsely stated in a quarterly report that its $300,000 transfer to Auto
Holdings was used to acquire sites for Auto Giant's stores. According
to the SEC, those funds were actually transferred to Global America,
the firm that served as an underwriter for McNulty's other companies.
It also alleged that McNulty had two of his companies, HQ Office
Supplies and Auto Giant, transfer $1.8 million into accounts he
controlled at Global through a shell company. The problem? He didn't
disclose his interest in the shell company.
McNulty settled the case with the SEC in 1995 without admitting or
denying guilt. The court ordered him to "disgorge ill-gotten gains" of
$70,000 along with prejudgment interest, but waived payment based
on his demonstrated inability to pay.
Years later, his Palos Verdes, Calif., neighbor, friend and fellow board
member Laffer told the Orange County Register that he helped the
SEC in its investigation of McNulty. "I waited for him to do the right
thing, but I took the information, as soon as I was sure about it, to
the SEC," Laffer said. "I didn't like doing it. He's a loyal guy."
In 1996, McNulty realized something: selling goods out of a
warehouse is just like selling goods over the Web. For both, the
objective is volume. The seller takes out as much of the overhead as
it possibly can in hopes that convenience and price will lure so many
people that the slim margins will be worthwhile. So he started
Shopping.com. He aimed to build the Wal-Mart of the Internet, before
Wal-Mart got around to doing it.
The company operated on a shoestring at first. McNulty convinced
key employees to work for free, and promised them they would get a
salary and stock later. Then, according to SEC filings, Bill Gross of
Idealab invested seed money of $250,000 in Shopping.com. He joined
McNulty on the board as chairman in February 1997. According to
court documents in a lawsuit filed by then-CFO Brian Leneck against
McNulty regarding Leneck's stock allocation, the enlistment of Gross
as chairman was considered quite a coup; it certainly helped balance
the negative publicity surrounding McNulty. Soon, the company
featured Gross' name in any information package it sent to potential
investors.
But when it came time for Shopping.com to go public, McNulty's past
caught up with him. Originally, the company wanted a listing on the
Nasdaq SmallCap market, but because of McNulty's problems with the
SEC in 1995, the National Association of Securities Dealers was
prepared to reject the application, and the company withdrew it.
Shopping.com was relegated to the over-the-counter market, a
hodgepodge of stocks from marginal companies. In November, the
company went public on the OTC at $9 a share.
Then something strange happened: Shopping.com's stock price
started to rise, eventually jumping all the way to $32.35 a share. It
wasn't unprecedented for Web stocks to balloon, even in early 1998,
but it was odd enough for some traders to take note.
Shopping.com's underwriter for its IPO was Waldron & Co., an Irvine,
Calif., brokerage run by its chairman Cery Perle. Even in its
prospectus leading up to the offering, Shopping.com acknowledged in
the "risks" section that Waldron was an inexperienced underwriter and
had "only recently participated as a managing underwriter in its first
public offering of securities."
On March 24, the SEC halted trading of Shopping.com shares, amid
concerns from some traders that the investment bank was
manipulating the stock. That same day, Bill Gross, Shopping.com's
one-time instant credibility boost, quit as chairman of the board. In a
letter to McNulty, Gross wrote, "As Chairman of [Idealab], I have
made a commitment to my shareholder [sic] to devote my time to
early-stage, incubating companies and not serve on the Board of
public companies." Of course, after the SEC halted trading, McNulty's
history of trouble made the rounds in the press. McNulty denied any
wrongdoing in connection with the controversy.
Now, McNulty had to fill Gross' spot on the board. To do this, he
went to an old friend from the warehouse days: Frank Denny.
Denny had been McNulty's boss at W.R. Grace. Denny quit Grace a
year after McNulty did to form his own home-improvement chain,
Home Centers of America. In 1984, Denny sold the outfit to Kmart,
which renamed the stores Builders' Square, but stayed to manage the
division. Denny left Kmart in May 1989 to start Office Products of
America (which filed for Chapter 7 bankruptcy in 1991). Denny and
McNulty stayed in touch over the years and even invested in each
other's companies, but when Denny joined Shopping.com, it was the
first time they'd worked together since Grace.
Shopping.com was a mess. Around the same time Denny joined the
board in late March 1998, MSNBC reported that as much as 23
percent of Shopping.com's revenue up to that time had come from
purchases made by Waldron & Co., Shopping.com's underwriter.
These sales weren't disclosed in the company's filings with the SEC.
When the company finally did report Waldron's purchases in a May
1998 filing, it was even worse than MSNBC had reported: For the 12
months that ended Jan. 31, 1998, sales to Waldron accounted for 40
percent of Shopping.com's revenue. The total purchases? Waldron
had bought a Cisco communications system and a Compaq computer
system from its client.
With the SEC investigating the manipulation of Shopping.com stock
and reports that its banker was helping boost the company's
numbers, McNulty resigned from Shopping.com on June 1, 1998. Frank
Denny took over as chairman; John H. Markley was the new CEO.
McNulty left the new management with a damaged company. In a
June SEC filing, Shopping.com told its investors that the halt in
trading and the investigation by the SEC could make it difficult to
raise additional capital, reduce the liquidity of the company's stock
and make vendors reluctant to extend credit to the company.
Into this mess walked Compaq.
There's an old saying in the business world: Dumb money erases
many mistakes.
Compaq shocked investors everywhere when it bought Shopping.com
for $220 million in January, even though the company said that it
knew about Shopping.com's past. Instantly, there were conspiracy
theories, among them, that since Ben Rosen, Compaq's chairman, is a
friend of Bill Gross and an investor in Idealab, and Gross still had a
significant stake in Shopping.com, Rosen helped him out by buying
the company. The theory was never proved.
Gross seems to have wanted to wash his hands of McNulty and
Shopping.com for good. Four months after the sale, McNulty sued
him, claiming that Gross reneged on a promise to give McNulty 50,000
shares of Idealab. Gross wouldn't comment for this story.
When the SEC initially ruled on the March 1998 manipulation of
Shopping.com's stock, it didn't mention McNulty. It ruled that
Waldron's Perle "planned, directed and executed a scheme to
fraudulently increase the price of Shopping.com's stock by 255
percent." Waldron, the federal judge said, profited by more than $4.1
million from the manipulation. The court ruled that Perle orchestrated
what federal regulators call a "box job" on the shares: He controlled
the supply of the company's stock by selling 220,000 shares of
Shopping.com's stock to Waldron customers without their
authorization, and then prevented them from selling the shares. He
also threatened to fire any Waldron broker who allowed customers to
sell Shopping.com's stock to anyone outside of Waldron. Perle, in
effect, artificially inflated the market. The court fined Perle $110,000
and barred him from working as a broker. McNulty, on the other hand,
made north of $20 million on the sale to Compaq.
After Compaq bought Shopping.com and after the SEC ruling, Perle
told the Orange County Register: "McNulty ended up getting
vindicated, and I ended up getting my [rear] handed to me."
However, a source at the SEC says that the investigation into the
manipulation of Shopping.com's stock is ongoing. "I have concerns
that Perle was helped," says the source, who does not rule out
McNulty as a possible target. "It could have been anybody."
Shopping.com provided McNulty with a big score. In February,
according to the Los Angeles Times, he bought an
18,000-square-foot house with eight bedrooms and 13 bathrooms on
Harbor Island in Orange County, Calif., for about $14 million. But
McNulty just can't seem to stand still.
In May, Bloomberg reported that he was an investor in
TheBigHub.com, a metasearch and shopping engine that's descended
from a Florida company called iSleuth. Officials from TheBigHub denied
McNulty's involvement in the enterprise.
The Internet Sleuth was founded by SJI Group in 1995 as a
metasearch engine. In August 1998, it was bought by Coordinated
Healthcare, a medical company that traded at that time in the
over-the-counter market under the symbol "CHCK." After the deal,
and after Coordinated Healthcare sold off the last of its clinics, the
company quickly changed its name to iSleuth and its symbol to
"SLEU."
In mid-May 1999, the company announced it was changing its name
to TheBigHub.com (the domain name was registered to Robert
McNulty) and revealed that there would be significant management
and board changes. Once again, it changed its symbol on the
over-the-counter market, this time to "BHUB." It also changed its
business, and became a network of sites under the "Big" descriptor:
TheBigStore, TheBigRx, TheBigAuction, TheBigToys, TheBigPets and
so on. A flurry of press releases ensued. McNulty's old friend Frank
Denny signed on as chairman. Rounding out the board were Pat
DeMicco, formerly of Shopping.com, Roger Riddell, president of RNF
Holdings, and Rod Perth, president of the Jim Henson Television Group
and formerly of USA Networks and CBS. Al DiGuido, former executive
VP of e-commerce at Ziff-Davis, was named CEO. There was no
mention from the company that McNulty was involved.
But there were still plenty of questions about McNulty's investor
status in TheBigHub. The same week that iSleuth became TheBigHub,
MSNBC's Christopher Byron reported that the company was
circulating a private-placement memorandum on Wall Street to raise
$20 million. It was offering to sell preferred shares to investors for $4
a share, although the stock was trading at around $12 at the time of
the memo. The investors who bought in could hold the shares and
then exchange them for whatever price the stock was trading for at
the time of the exchange. It was all perfectly legal.
The private-placement memo also disclosed that Robert McNulty
owned more than 5 percent of TheBigHub, according to Bloomberg.
Meanwhile, however, the company still publicly denied any McNulty
connection. CEO DiGuido told Bloomberg on May 20 that McNulty
wasn't involved with TheBigHub's management.
Why all the slinking around? Was it just that the company was afraid
that any mention of McNulty in association with TheBigHub would
hurt the company's already marginal stock price? Company officials
didn't return The Standard's phone calls requesting an interview.
There are other reasons to be secretive. When Compaq bought
Shopping.com, McNulty signed a noncompete contract with Compaq
that said he couldn't work for, consult for or be more than a 5
percent investor in any company that does retail business on or
through the Internet without Compaq's approval. These stipulations[/url]
Posted by Joe Blink - 007 at 4:49 PM 
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