Well done, one of my best students: "Questions Surround Firm That Promises IPO Play
By AARON ELSTEIN
THE WALL STREET JOURNAL INTERACTIVE EDITION
With initial public offerings in Internet companies shooting through the
stratosphere, individual investors pounced when Sara Hallitex Corp. said it
will offer buyers of its stock first crack at IPOs of its majority-owned
Internet startups.
Sara Hallitex, a Marina del Rey, Calif., firm
that bills itself as an incubator for emerging
companies, helped stoke the fire by
comparing itself to CMGI Inc. and
Safeguard Scientifics Inc., two popular venture-capital firms that set aside
a piece of the Internet IPOs they create for their stockholders.
Investors pushed the company's OTC Bulletin Board shares as high as 20
1/8 in April from a low of 1 11/16 after word of the IPO plan made the
rounds. But the stock has since retreated to around 7 amid mounting
concerns about the company.
Critics on the Internet have raised questions about the credibility of Sara
Hallitex and of its chairman, Garrett K. Krause, a 32-year-old Canadian.
Mr. Krause, a former minor-league hockey
player, restaurant entrepreneur, sports
promoter, and investment banker, was
suspended from the securities business in
Canada for seven years in 1992 for selling
unregistered stock. He also acknowledges
paying a stock promoter to push Sara Hallitex. The stock promoter was
banned from the securities business in Canada for 18 years in 1996 for
stock manipulation.
And that's not all. Financial Stock Marketing Inc., a financial-services
public-relations firm, prepared a bullish research report on Sara Hallitex in
December without disclosing its close relationship with the firm. Sara
Hallitex also has been featured on a stock-promoting Web site
(www.stockpicks.com), which it owns but didn't disclose on the site until
recently.
Critics have hammered Mr. Krause and Sara Hallitex in message boards
on the Silicon Investor (www.techstocks.com) and Raging Bull
(www.ragingbull.com) Web sites. Mr. Krause dismisses their criticisms as
the work of investors trying to manipulate the company's stock. "I'm pretty
sure the people on the boards are being paid by short-sellers," Mr. Krause
says. Short sellers are investors who sell borrowed stock hoping to buy it
back later at a lower price and pocket the difference.
Mr. Krause insists he's been honest with Sara Hallitex shareholders. He
says he didn't tell them of his 1992 suspension in Canada for securities
violations because he didn't have to. "There was no form in which I had to
say any of that, and, in any case, if people want to find out something
about me, they can," he said. "If I've had a DUI or filed for bankruptcy, it's
out there on a computer somewhere."
Nevertheless, it's tough for any investor to get an objective view of Sara
Hallitex. The company's books haven't been independently audited. Nor is
the company required to file disclosure documents with securities
regulators about its stock offerings, which it calls an "IPO Dividend Spinoff
Program." Sara Hallitex avoids such scrutiny because its shares trade on
the OTC Bulletin Board, which has minimal disclosure requirements
compared with the Nasdaq Stock Market and the major exchanges.
The National Association of Securities Dealers, which oversees the OTC
Bulletin Board, is starting to require companies like Sara Hallitex to
disclose basic financial information. Mr. Krause says his firm is preparing
an annual report to file with the U.S. Securities and Exchange Commission
at the end of this month in anticipation of listing on Nasdaq. In the
meantime, Mr. Krause said he plans to hire a brokerage firm to underwrite
some of Sara Hallitex's coming spin-offs. "We plan to elevate everything
so it's all above-board," he says.
Sara Hallitex first gained the attention of investors in March, when it
started issuing press releases comparing itself to CMGI and Safeguard
Scientifics, two firms renowned for financing nascent Internet companies.
CMGI, of Andover, Mass., finances such well-established e-commerce
companies as Lycos Inc. and GeoCities, which was recently acquired by
Yahoo! Inc. The past endeavors of Safeguard, of Wayne, Pa., include
Novell Inc. and USData Corp. Sara Hallitex ventures include, Janus
International, which owns a crab-fishing fleet and harvests timber in Brazil.
The stock has floundered. It now trades for 1 5/8.
Nevertheless, Sara Hallitex the company has generated excitement with its
shift to Internet-related companies and its IPO program. Participants on
online message boards seem thrilled to find in Sara Hallitex what appears
to be a cheap way into the Internet IPO action. "It might take us a year but
CMGI took 10 years to get where they are now," said one writer on
Silicon Investor. "I do not need the profit now as I can wait for those
dividends."
And there's a lot more than just press releases. There are the bullish
research reports commissioned by the company. "Modest investors can
participate in potentially explosive projects at ground level," said the report
in December by Financial Stock Marketing. "This is your Window to
Worldwide Entrepreneurial Ingenuity!"
Financial Stock Marketing was run by Holmes Stoner, Sara Hallitex's own
investor-relations director. Mr. Stoner says that he had little to do with the
report.
Mr. Stoner also is president of Wilmington Rexford Inc., a primary
investor in Sara Hallitex and the companies it finances. Mr. Stoner
assumed the reins in the middle of 1996 from Mr. Krause, who founded
Wilmington Rexford. Mr. Krause says he is no longer affiliated with the
company or any of its subsidiaries as an officer.
Meanwhile, regulatory filings show that a company that Mr. Krause says
he had a role in creating has registered to sell a big block of Sara Hallitex
shares. In June 1998, Future Vest America registered to sell shares of
Sara Hallitex that were worth $925,000 at the time.
Nevertheless, investor appetite for Internet-related IPOs is so strong that
investors have piled into Sara Hallitex's stock to get shares in the
majority-owned Internet firms it is spinning off.
The first Internet spinoff was for a company called SolutionNet
International, a software maker. Sara Hallitex pitched the offering by telling
investors that SolutionNet's clients include such major corporations as
Citibank, a unit of Citigroup Inc. But a spokeswoman for Citibank said the
company has no relationship with SolutionNet. Sara Hallitex officials
referred questions to V. Suresh, the head of SolutionNet, which is based in
Singapore.
Mr. Suresh did not return telephone calls or respond to e-mail messages
for this article.
Sara Hallitex's second Internet offering came in May, for an entity the
company describes as a "leading Internet incubator," USlab.com.
USlab.com owns three Web sites. One is Stockpicks.com, the site that
recommended Sara Hallitex shares without disclosing the relationship
between the companies. Another site, Xselnet.com (www.xselnet.com),
offers nothing but a link to Uslab.com (www.uslab.com). And the third
site, Dietadvice.com (www.dietadvice.com), features a newsletter on
nutrition, plus links to chiropractors, lawyers, a travel agency and a link
back to Stockpicks.com.
Some message board writers weren't pleased about the undisclosed Sara
Hallitex affiliations and Mr. Krause's past securities-law violations. Floyd
Schneider, a New Jersey mortgage banker, who goes by the name
"Truthseeker" on the Raging Bull message boards, criticized Sara Hallitex
so strongly that Mr. Krause posted a response on Sara Hallitex's Web
site. He rebutted the criticism and dismissed it as part of smear campaign
orchestrated by short-sellers.
Some investors, also have complained that they didn't realize the company
was selling restricted shares they are mandated to hold for at least one
year. Mr. Krause said the shares are restricted because Sara Hallitex
shareholders are considered insiders and the dividends are a result of Sara
passing its inside position to shareholders. "All has been disclosed," he
said.
Mr. Krause's "IPO Dividend Spinoff Program" works like this: Investors
receive restricted stock and warrants in a Sara Hallitex spinoff based on
how many Sara Hallitex shares they own. Mr. Krause requires people to
purchase Sara Hallitex's stock by a certain date to acquire shares in the
spinoff. It is similar to Safeguard Scientifics's program, but there are key
differences. For example, after Safeguard Scientifics announces a spinoff,
it files a prospectus with the SEC that all potential shareholders can review
before investing. Sara Hallitex makes no such filings for its spinoffs. And
holders of Safeguard's spinoffs can buy or sell their shares whenever they
wish. Holders of Sara Hallitex's spinoffs have no choice but to hold their
shares for at least a year.
Steven Wallman, a former SEC commissioner, said that it is up to
company officials to ensure that investors understand exactly what they are
getting when they distribute shares to stockholders. Otherwise, he said,
they "are potentially misleading their investors" which violates securities
law. The SEC declined to comment on Sara Hallitex.
Harvey Pitt, a partner at the law firm Fried, Frank, Harris, Shriver &
Jacobson and former general counsel at the SEC, said calling a
restricted-share offering for an IPO "troublesome," because the term IPO
suggests the shares can be freely bought and sold. "Perhaps they would
argue that 'IPO' means 'initial private offering,' " he said.
As for the future, Mr. Krause said he has up to 10 more transactions in the
works, and his first spinoff using an outside underwriter will be for a new
venture-capital unit called Saraonline.com. "It will be a 100% Internet
financing company," Mr. Krause said. "You know, a la CMGI."
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