August 12, 2001
>How C.E.O. Alex Vic Sucked $400 Million by Selling Xcelera
by Christopher Byron
Here at Curmudgeonly Arms, where the sun never shines, and where our mongrel Rottweiler—Cerberus—recently
attacked a beggar who approached the castle pleading for bread, we have a new hero. Forget about Ronald Perelman (at
least for the nonce) as we place before you the handiwork of a fellow who could obviously teach the Finagle King a thing or
two.
This week, C.A.’s world-famous Pump-and-Dump Hallelujah Choir (it may sing off-key, but it can certainly sing loud) will
lift our sagging stock-market spirits in praise of one of the greatest and most spectacular penny-stock hustles in the history of
Wall Street. We speak, of course, of the 70,000 percent price surge—and subsequent collapse—in the stock of a Cayman
Islands shell company known as Xcelera Inc. And no story about Xcelera would be complete without a special chorus of
praise for the antics of its chairman and chief executive, a Greenwich, Conn., financier named Alexander Vik. Big Al’s
vaporous claims for the company helped push it from pennies per share to more than $100 on the American Stock
Exchange by March of last year. Meanwhile, an off-shore company of which Big Al was an officer and director—which
outfit, in turn, controlled the bulk of Xcelera’s stock—steadily sold an estimated $425 million worth of that stock as it
surged, then sank.
Finally, on Aug. 6, Big Al dropped the bombshell: a filing with the Securities and Exchange Commission declaring that his
company’s crown jewel—an outfit going by the name of Mirror Image Internet—had been slapped with a “going concern”
warning by the company’s auditors and might not even survive the year. Big Al Vapo-Vik: our kinda guy!
On certain days, when the wind blows from a foul southwesterly direction across the moors, it is possible to catch the
distant aromas of Wall Street. Such were the conditions in C.A. ’s north tower when, lifting our nostrils to the air not long
ago, we once again caught the scent of Vapo-Vik Al. In this case, his aroma arrived in the form of an uncharacteristically
quiet and unassuming press announcement that fluttered in on the breeze, bringing us back to an earlier time, when a
veritable blizzard of markedly less unprepossessing press releases were streaming in through the window, courtesy of our
guy.
The time was the spring of 1999, and Big Al, anxious to get in on the action of the dot-com bubble that was swelling up all
around him, had already used an Amex-listed investment company he controlled—theScandinaviaCompany Inc.— to
acquire a bit more than half the shares in Stockholm-based penny stock Mirror Image. The stake had cost a mere $5.9
million, but the shares had sunk so low that the entire business was being valued on the Stockholm Stock Exchange at barely
$700,000.
Mindful that the Scandinavia Company was based in the Cayman Islands, and thus didn’t have to file up-to-date financial
information with the S.E.C., Big Al began blanketing the wires with press releases designed to pump up the Scandinavia
Company as a dot-com play. He knew he had carte blanche to make the most doubtful claims imaginable, too, since the
Cayman-based outfit was required to file only one financial report per year, and it was never due until six months after the
close of the company’s fiscal year. This, of course, meant that the next one wouldn’t be due until the late summer of 2000,
by which time everything he was claiming in the meantime might actually have come true.
Thus, on April 1, 1999, the Scandinavia Company issued the first of more than 50 press releases on Mirror Image—this
one declaring that it had acquired a majority interest in the company, which the release described as “a Leading Internet
Caching Company.” In reality, Mirror Image wasn’t a “leading” anything, and during the three months prior to the issuance
of that press release had booked actual gross revenues of a ridiculous $261,000.
The claim sent the Scandinavia Company’s stock soaring, though it wasn’t until many months later, when the company
issued its annual financial report, that the truth was revealed: Mirror Image was, in fact, nothing more than a “start-up”
company with no “significant revenues or expenses” and no assets, either—except the money that Big Al had invested in its
stock. By that time, however, the Vik crewhad not only acquired most of the rest of Mirror Image, but had issued a dozen
more press releases hyping the company as a dot-com up-and-comer, helping the company’s stock price rise fivefold in
value, to more than $1 per share. To underscore its new pedigree, the company even announced that it was dumping its
boring old Scandinavia Company name and adopting the bold new moniker of Xcelera.com.
After that, things really got wild. A writer for Microsoft’s MoneyCentral Web site began pumping the company to readers,
claiming at one point that its stock “could advance 10,000 percent or more in the next decade.” By mid-December
1999—that is, in less than nine months’ time—the price of the stock had soared more than 1,600 percent, to $11.50 per
share, as the parade of press releases continued. Then, on Dec. 21, Big Al somehow nailed down a deal with the
Hewlett-Packard Company, in which H.-P. agreed to provide Mirror Image with a bunch of computers in return for $32
million in XLA stock and debt. This ramped up Xcelera’s share price even more.
Days later, the shares got yet another boost when Big Al announced that he’d recruited a fellow named Cosmo Santullo
from the big Massachusetts data-storage outfit, EMC Corporation, to join Mirror Image as its chief executive. Then, in
February 2000, tech-stock guru George Gilder chimed in, recommending Xcelera in a newsletter, and this caused the stock
to surge yet another 50 percent in a single day. This was followed in March—at the absolute zenith of the dot-com
bubble—with an announcement that Exodus Communications Inc., a California-based server company, had agreed to invest
$75 million in cash, plus 3.7 million Exodus shares, in return for 15 percent of Mirror Image, giving the stock yet another
booster shot into orbit.
On the day this deal was announced, Xcelera’s stock touched its all-time high of $112.50 per share, for a record-shattering
70,000 percent run-up in 15 months’ time. The next day, PaineWebber produced an instant analysis of the deal that
said—based apparently on a Mirror Image and/or Xcelera briefing—that Mirror Image “was expected to generate $25-30
million in revenue” by the end of the year, and “$100-150 million” in 2001. A Morgan Stanley analyst, citing Mirror Image
directly as his source, pegged the company’s year-2000 revenues at $27 million and its 2001 revenues at $130 million. The
forecasts of both analysts amplified a January statement by Cosmo Santullo that Mirror Image could take in revenues of $10
million in 2000 and $20 million or more in 2001.
But the deal with Exodus had already put the top into Xcelera’s runaway stock price, which almost instantly thereafter fell
apart, collapsing in the 16 months that followed all the way back to its current price of less than $3 per share.
So would you like to know what Big Al was doing throughout the whole of his company’s rocket ride to nowhere? Well,
there’s not a lot we can tell you about Big Al. There’s almost nothing in the way of biographical information about him in
Xcelera’s skimpy filings, and a search of other records reveals little more than the fact that he’s 46 years of age, went to
Harvard, lives in Greenwich and is said to be a pretty decent long-distance runner.
On the other hand, there’s at least one thing we do know about what he was doing around this time: He was participating in
a massive and ongoing sale of Xcelera stock.
Remember that off-shore company of which he’s an officer and a director? The company, named VBI Corporation (which
stands for Vik Brothers International) and based in the Turks and Caicos Islands, was selling its Xcelera stake big time. The
boys dumped about $425 million in all: an estimated $283 million on the way up, and another $142 million on the way back
down.
Now it may be coincidence—I just don’t know—but it turns out that at least two of the brokers who appear in the S.E.C.
database as having executed VBI Corporation’s sales of Xcelera stock also happen to be the two aforementioned firms that
had obtained multimillion-dollar revenue forecasts from Xcelera and/or Mirror Image at the time of the Exodus deal:
PaineWebber and Morgan Stanley Dean Witter.
As for the press release that fluttered in through our window the other day to remind us once again of Vapo-Vik Al and his
penny-stock heroics, well, let us begin by reminding you that, as of January 2000, Big Al’s baloney machine—in the person
of Cosmo Santullo—was on record as stating that, in the year ahead, Mirror Image was expected to take in revenues of
$10 million. We’ll skip over the fact that the fellow at Morgan Stanley was soon spouting an even bigger revenue number
that he said he got directly from the company, and note only that nine months after the Exodus deal was announced, Mr.
Santullo was asked by a reporter from Interactive Week Online to state specifically how many actual “paying customers”
Mirror Image really possessed.
Cosmo ducked the question, saying, “We will start talking about the revenue in the first quarter of 2001.” Somehow, he just
never got back to it. A company spokesman says he can’t explain why Cosmo said it at all, because “it is against company
policy to discuss revenues.”
In fact, I think there’s a different—and much more understandable—reason than “company policy” why Cosmo didn’t want
to return to the topic: The company has barely any revenues—certainly none worth counting. Mirror Image is 78 percent
owned by Xcelera, and, on Aug. 6, Xcelera filed its much-awaited annual report with the S.E.C., revealing that Mirror
Image generated the only revenue the company received.
Want to guess how much that was? According to both the annual S.E.C. filing and the aforementioned press release of
several days earlier, here’s the number: No, it wasn’t the $27 million of revenues that the Morgan Stanley analyst had
predicted for Mirror Image at the start of 2000. And no, it wasn’t even the $10 million that Cosmo Santullo had predicted,
either. In fact, it wasn’t even $1 million … or even half a million. According to the press release, actual gross revenues for
Xcelera Inc. in the reporting year ended Jan. 31, 2001, totaled—and I hope you’re ready for this—a whole, entire
$299,619.
There are no numbers missing there, folks. That’s it … that’s all there was: less than $300,000 for a flamed-out dot-com
high-flyer that at one point reached a Wall Street market value of more than $11 billion. (Maybe that’s why Big Al has lately
put his outfit through yet another name change, dropping the “.com” so that the company is now known simply as Xcelera
Inc.)
Certainly the company’s trivial revenue, and the “going concern” flag that the auditors have now slapped on Mirror Image,
will be of interest to the 19 class-action plaintiffs that are now pursuing lawsuits against the company. One group of plaintiffs,
in Sweden , is claiming they were improperly induced to join the deal whereby the Vik folks gained control of Mirror Image
in the first place. Oy vey, what a mess!
Would you like to know what Big Al and the gang have to say about all this? Well, so would I, but there’s a problem: No
one except a flack from Mirror Image would return any phone calls—and his explanation was that the company wasn’t
actually in business in the year 2000 at all, just “beta-testing” its equipment.
Now beta-testing is a fine thing, I am sure. But I am also sure that there was nothing in any of Xcelera’s or Mirror Image’s
public comments or press releases at the time to inform investors that “beta-testing” was what was going on. Instead, the
whole tenor of their comments throughout the period was to create the impression of a large, well-established, thriving
company. Here, for example, is Big Al telling an interviewer on CNBC what’s what in a February 2000 appearance: “We
deploy very large, scaleable content-access points all around the world, so that all the uses of the Internet in the world are
very close to effectively the entire Internet [sic].”
And here’s Big Al elsewhere in the same interview: “The first commercial product that we released was this year ….” And
here again: “We just now upgraded our facility in Washington, D.C., by about a hundred times …. ” And again: “We have
about 50 networks running traffic on our network.”
Didn’t sound like “beta-testing” then, and it doesn’t now. It sounded like the description of a global dot-com business that
turned out not to exist. What should we call it? A Vapo-business? Yes, that’s it—a Vapo-business from Vapo-Vik Al. He
gave the world a $299,000-per-year dot-com stock, and a company in the Turks and Caicos Islands wound up with $425
million in cash. Like I said, Big Al’s our kinda guy. |
