GenesisIntermedia Soars With Help of a Banned Broker (Update2)
By David Evans
Van Nuys, California, May 11 (Bloomberg) -- GenesisIntermedia shares soared as much as 42 percent this week after a buy recommendation from Rafi Khan, an ex-stockbroker banned from the securities industry, now on probation for income tax evasion.
The four-page report, titled ``The Genie in Genesis Potentially a Mega Blow for the Shorts,'' suggests a short squeeze will drive up the shares of the money-losing company, which operates Internet kiosks in shopping malls.
In a short squeeze, investors who have lent shares to others demand them back. That forces the borrowers to buy shares, driving up the price of the stock and creating losses for the short sellers, who bet the price would fall.
Khan recently spent several days meeting with GenesisIntermedia executives, said Robert Bleckman, director of investor relations. ``He was here last week and Monday,'' Bleckman said. ``He said he has the ears of several financial institutions.'' Bleckman said Khan wasn't compensated by the company for writing the report.
GenesisIntermedia shares, which traded as low as $1.75 last year, traded as high as $16.25 yesterday, up from $11.48 last Friday. They fell $1.01 in early afternoon trading to $14.78.
Bleckman expressed surprise upon learning that Khan is a convicted felon, barred from the securities industry.
``This is all news to me,'' he said.
Bleckman added of Khan's report, ``We have to emphasize -- it's not endorsed by us.''
Khan, reached at his home in La Canada, California, declined to comment.
The report, which bore the name of no firm, was distributed to investors by fax and e-mail. It warned that pessimists who shorted GenesisIntermedia stock would wind up losing ``tens of millions of dollars or much more.''
In 1999, Khan pleaded guilty to income tax fraud in Los Angeles and was sentenced to six months of house arrest and three years of probation.
Securities Fraud
Last year, Khan, 50, settled a civil complaint for securities fraud filed by the Securities and Exchange Commission by agreeing to be ``barred from association with any broker or dealer.'' He also agreed to a permanent injunction forbidding him from committing securities fraud in the future, without admitting or denying the SEC's allegations.
The SEC alleged that Khan orchestrated stock manipulations in the early and mid-1990's with ``wildly exaggerated earnings and price projections'' and by ``promoting a short squeeze scheme.''
GenesisIntermedia shares are vulnerable to a short squeeze, because the number of shares held by the public is less than the number of shares sold short. Only about 2.6 percent, or 564,973, of the company's 21.4 million shares are held by the public, according to the company. That's about one third of the 1.58 million shares sold short, according to last month's short interest report.
The company's loss widened fourfold in 2000 to $33.5 million from a loss of $8.3 million in 1999. Revenue increased to $42.3 million from $31.7 million.
Although GenesisIntermedia had a negative net worth of $7.4 million on Dec. 31, the market valued the company's 21.4 million shares at $321 million, at its recent price of $15.
To stay afloat, the company borrowed $20 million from Ultimate Holdings, LTD, its largest outside shareholder, earlier this year. That's in addition to the $30.4 million GenesisIntermedia had already borrowed from Ultimate as of Dec. 31. Ultimate owns 43.6 percent of GenesisIntermedia, according to Bleckman. Insiders own 48.13 percent, and two institutions own a combined 5.6 percent.
Khashoggi
Ultimate Holdings' president is international arms dealer and financier Adnan Khashoggi. He is wanted by police in Thailand on suspicion of loan fraud in connection with the collapse of the Bangkok Bank of Commerce in May 1996, according to the Economic Crime Division of that nation's police.
Ramy El-Batrawi, chief executive of Genesis, said in a January interview that he has known Khashoggi for about 15 years and worked with him ``on deals'' between 1988 and 1993. He said the two speak ``almost every day,'' and Khashoggi has visited the company's California office.
El-Batrawi is in New York on a roadshow, meeting with investors, and was not available for comment.
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