TSCM weighs in: COMMENTARY >> EYE TO THE KEYHOLE Playing CyberFast and Loose With the Facts By Christopher Byron Special to TheStreet.com
A most extraordinary series of press releases crossed my desk recently. They revealed that a Highland Beach, Fla., telecommunications start-up company bearing the name Cyberfast Systems (CYSI:OTC BB) expects to be drowning in riches any minute now.
The company's product? So-called voice-over-the-Internet
telecommunications services. This is the technology that's
supposed to enable people to place long-distance
telephone calls over the Internet, thereby cutting out the
phone company and saving greatly on costs.
Those press releases, plus some aggressive promotional
efforts on the part of the company's paid stock promoter,
have lifted Cyberfast -- which trades on the National
Association of Securities Dealers' over-the-counter
bulletin board market -- from 5 cents last October to nearly
$18 by June 9. (That didn't last long, however: The shares
are currently changing hands around 8 5/8.)
And that in turn has made a rich man indeed of one
Edward Stackpole, who turns out to own about 85% of
Cyberfast's 5.82 million shares outstanding. At the stock's
recent peak of 18, Cyberfast itself was being valued at
$104 million, with Mr. Stackpole's stake at just under $90
million.
Now, one may observe many things about all this,
beginning with the fact that $104 million just ain't what it
once was -- on Wall Street or anywhere else. But this
simply leads to the more basic question of whether,
financial inflation notwithstanding, Cyberfast Systems is in
fact worth much of anything at all.
We'll get to the particulars in a minute, but first some
observations on the enormous risks that any investor
takes when he or she puts a dollar into almost any
company traded on the NASD's rob-you-blind
over-the-counter bulletin board.
More than 6,500 stocks are traded on the bulletin board,
which makes it by far the largest equities market on Wall
Street, at least in terms of the number of companies
traded. Though the value of those companies is dwarfed by
the companies on the larger exchanges like the Nasdaq
National Market and the New York Stock Exchange,
the over-the-counter bulletin board is by far the most
rapidly growing equities market on Wall Street, with
trading volume that has more than doubled in the past year
to 432 million shares per day.
That would be great except for one thing: Almost none of
those companies is required to file audited financial reports
to their shareholders or to the Securities and Exchange
Commission, so few do. As a result, the only way for
most investors to learn about the health and business
prospects of a bulletin board stock is to read the
company's own self-serving press release -- the production
of which has become a growth industry of its own on Wall
Street.
Every day, hundreds of press releases pour forth via two
distribution services -- the New York-based PR Newswire
and the San Francisco-based Business Wire -- all of them
geared to catch the attention of naive investors looking for
the next hot new stock that's likely to triple by noon.
The whole game of hyping such stocks begins with what's
known on Wall Street as a "reverse merger into a
penny-stock shell" -- the facilitating of which also has
become a booming business in the darker alleyways of
downtown Manhattan.
To merge a company into a penny-stock shell, all you
need to do is find one -- which isn't hard, because
currently more than 3,000 actively traded bulletin board
stocks are selling for between 1 cent and 50 cents per
share. These might be companies created from scratch as
penny stocks under Section 504 of Regulation D of the
1933 Securities Act (we won't get into any of that) or
companies that started out as real businesses, then
basically went bust.
In any case, a company with, say, 5 million shares at 5
cents per share can be bought lock, stock and barrel for
$250,000. Then all you do is merge your own private
company into the penny-stock shell you've just bought and
you've in effect gone public via a cheapo initial public
offering, without having to file a single audited financial
statement with anyone.
What you do next is hire a stock promoter -- they go these
days by the hoity-toity name of "investor relations
consultants" -- to start cranking out press releases to get
your stock price rising. In this way, a pump-priming
investment of only a few hundred thousand dollars, spread
out among a half-dozen or so investors, can easily be
transformed into millions via bulletin board stock hype,
which is why the game has become so popular.
And it's also why those who get suckered into playing it in
the aftermarket are playing with fire: There is simply no
way to know whether a promoter's breathless claims about
a bulletin board stock are accurate -- and thus whether the
shares themselves will blow up in investors' faces the
minute they buy them.
Thus, on May 5, questions began to circulate in the press
regarding the accuracy of certain claims made via press
releases for an over-the-counter company called Net
Command Tech. Its stock price had recently climbed
from pennies to more than $30, even though the company
was nearly three years behind in its SEC filings. Too bad
more investors didn't heed those warnings, for on June 11
the SEC abruptly suspended trading of Net Command's
shares, leaving thousands of gullible "stuckholders"
holding the bag at $15.
Whether that fate now awaits holders in Cyberfast is hard
to say. For all the world knows, every claim in every press
release the company has issued since it reverse-merged
itself into a defunct penny-stock shell back in November
1998 may be the very quintessence of truth. But they also
may be nothing more than a skein of lies, distortions and
half-truths. Evidence on the matter isn't encouraging.
For starters, there are the company's press release
projections concerning revenue. On Nov. 12, 1998, with the
stock trading at 3 1/2, Cyberfast issued a press release
claiming to be in possession of audited financials showing
that it had collected $6 million in revenue for the first six
months of 1998, with earnings of $1.4 million. Sound
trivial? Then read on, for within weeks the company
claimed looming revenue 20 times as large.
Cyberfast's hired-gun promoter, Doug Blackwell of
somewhere in Florida, now says he personally had nothing
to do with that first release and that it had been a mistake
to call the financials "audited" because, well, they weren't.
In any case, a few weeks later, on Dec. 10, the company
issued another press release -- this one claiming that
Cyberfast had now signed agreements to install
high-speed fiber-optic systems in 22 different European
cities, and was projecting $100 million in revenue from the
business per year. The release didn't identify which cities
-- or even which countries -- were involved, and Blackwell,
from his place in Florida, now says he can't supply the
names because, well, he doesn't know them.
This Jan. 4, the printing press rolled again and out came a
release claiming that Cyberfast was in the process of
installing telecommunications circuitry in a "large Eastern
European city." Blackwell now says -- yep, you guessed it
-- he can't divulge the name because he doesn't know it.
(Let's hope it wasn't Belgrade or Pristina.)
On Feb. 8, the company issued yet another press release
-- this one claiming it had obtained a line of credit from
Cisco (CSCO:Nasdaq) to finance construction of the
aforementioned fiber-optic systems in the aforementioned
22 European cities. In an interview, Blackwell expanded on
that to say that Cisco had in fact extended a "virtually
unlimited line of credit" to Cyberfast. But according to a
Cisco spokesman, Cisco never extends unlimited lines of
credit to anyone and, moreover, the name Cyberfast
doesn't even appear in Cisco's database of customers.
Be that as it may, on May 5, Cyberfast issued a press
release claiming that the first three of its European
systems were up and running and were generating net
pretax income of $283,510 per month. Extrapolating from
the financials provided in the release, the statement
implied that Cyberfast would be netting close to $25
million annually from its European operations alone.
(Blackwell says it will actually be closer to $30 million.)
On June 3, the company issued a follow-up release
claiming that it had signed agreements to install systems
in five more (unnamed) cities -- this time in Asia -- that
would add a total of $9 million more to net pretax income.
All together, the claims add up to close to $40 million in
net income annually, which is to say, more net income
than that of any publicly traded phone company in the
country except the major long-distance carriers and the
Baby Bells.
So how is Cyberfast going to manage that explosive
growth? When I asked Blackwell how substantial an
operation Cyberfast really is, he answered that the
company has 50 employees around the world. But when I
told him that a Dun & Bradstreet report on Cyberfast
reveals the company to have no credit rating and exactly
two employees -- Stackpole and his wife -- Blackwell said,
oops, he didn't know that.
When I asked Blackwell what Stackpole's experience in
the telecommunications field was, he said that Stackpole
had run the biggest AT&T (T:NYSE) distributorship in
Turkey, and had sold it back to AT&T for "millions" before
returning to the U.S. to set up Cyberfast. But when I
phoned back a day or two later to inform him that federal
court records in New York show that Stackpole had been
arrested by Turkish customs officials and charged with
illegally smuggling AT&T phones into Turkey in 1991,
Blackwell said, oops, he didn't know that either. And when
Stackpole himself finally told me that he didn't sell his
distributorship business to AT&T because there was
nothing much left to sell, Blackwell said -- well, you know
what he said.
As for Stackpole, he claimed the whole thing was caused
by negligence on the part of AT&T shippers and wound up
suing the company. Court papers show that AT&T
eventually admitted its error, and the charges against
Stackpole in Turkey appear to have been dropped.
The interview with Fast Eddie himself, who phoned in from
an undisclosed location in the Caribbean at press time to
"clear up any doubts," only added to those doubts. When I
asked him who Cyberfast's main competition was, and
which rival watched his company most closely, he named
the Net 2 Phone operation at New Jersey-based IDT
(IDTC:Nasdaq). But a check with sources at IDT revealed
the company knew nothing of Edward Stackpole or
Cyberfast. Nor did AT&T know of him, or his company. Nor
had Cyberfast signed up as an exhibitor in Atlanta at the
June 7 Supercomm '99 -- a leading trade show on the
voice-over-the-Internet industry, with 800 exhibitors.
Finally, when I asked Stackpole to name even one single
customer who was now using his service or to identify
even one single city -- in Europe or anywhere else -- to
which one could make a call using his equipment, he said,
"I'll get back to you on that." He never did.
In spite of all that -- the whole mountainous collection of
doubts that surround the company thanks to its status as
a nonfiling bulletin board company -- it's still possible that
Cyberfast may emerge as precisely what its press
releases claim it to be: one of the fastest zero-to-hero
companies in the history of Wall Street.
But it's equally possible that in the fullness of time the
whole business will be revealed to have amounted to
nothing more than the latest in the over-the-counter bulletin
board's endless parade of phony-baloney stock hustles --
in which case, having read this far, you at least won't be
able to say, "Oops, I didn't know that."
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