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Khashoggi Firm May Have Kept $125M After GenesisIntermedia Fall
By David Evans
Los Angeles, Oct. 25 (Bloomberg) -- A company headed by Saudi financier Adnan Khashoggi may have reaped as much as $125 million by borrowing against a stake in a money-losing telemarketer and failing to make good when the stock collapsed.
Khashoggi's Bermuda-based Ultimate Holdings Ltd. controlled 75 percent of GenesisIntermedia Inc.'s stock when a person, still unidentified, used 7.2 million shares as collateral in a chain of loans that reached an estimated $125 million. Ultimate Holdings alone controlled a block that large, according to filings with the U.S. Securities and Exchange Commission.
``It appears that Khashoggi is the only person who could have borrowed money secured by 7.2 million shares,'' said Frank Partnoy, professor of securities law at the University of San Diego Law School, after reviewing the filings at the request of Bloomberg News.
Khashoggi, 66, is best known as an arms broker in the Iran- Contra scandal of the mid-1980s, when he served as middleman for illegal sales of weapons to Iran. He was often described then as one of the world's richest men. He is wanted by police in Thailand on suspicion of loan fraud in connection with the failure of the Bangkok Bank of Commerce in May 1996, according to the Economic Crime Division of that nation's police.
SEC Probe
GenesisIntermedia said on Oct. 8 that the SEC and the National Association of Securities Dealers were investigating transactions involving Ultimate Holdings, GenesisIntermedia Chief Executive Officer Ramy El-Batrawi and Native Nations Securities Inc., a New Jersey brokerage that accepted the 7.2 million shares as collateral. El-Batrawi resigned as CEO the same day.
Trading in GenesisIntermedia shares was halted after they plunged 65 percent last month. The wreckage caused the failure of MJK Clearing Inc. of Minneapolis, saddled the Securities Investor Protection Corp. with a $42 million payout, and exposed nine firms, including E*Trade Group Inc. of Menlo Park, California, Ferris, Baker Watts Inc. of Baltimore, Pax Clearing Inc. of Chicago and Robert W. Baird & Co. of Milwaukee, to $60 million in potential losses. E*Trade is at risk for as much as $29 million.
Khashoggi, the president of Ultimate Holdings, couldn't be reached for comment. Colette Johnson, corporate secretary of Ultimate Holdings, declined an interview. El-Batrawi and GenesisIntermedia officials did not return calls seeking comment. The SEC and NASD declined comment.
Close Relationship
El-Batrawi, 40, has operated businesses that chartered jet planes, offered vacation and travel services and built customized vans. He said in a January interview that he talked to Khashoggi almost every day, adding, ``He knows me real well.''
In 1993, El-Batrawi founded GenesisIntermedia as a telemarketing and infomercial company. In 1999, the company's 100 sales agents made more than 1 million calls a month selling courses such as ``Secrets of Stock Investing'' and ``Ted Thomas' Personal Fortune Real Estate Investment Program'' with price tags of as much as $5,000.
El-Batrawi took the company public that year after acquiring an Internet-related business called Centerlinq that installed kiosks in shopping malls through which people could access the Internet for free. The service would be supported by advertising revenue, said the company. The IPO raised $17 million.
The plans fizzled. GenesisIntermedia suffered eight consecutive quarters of red ink, with cumulative losses of more than $50 million. Still, the company's shares did well. After hitting a low of $1.17 in Dec. 1999, they hovered between $5 and $6 for a year starting in April 2000 and then climbed to between $16 and $18 from June through early September, giving the company a market value of about $400 million.
Rule Violation
The shares rose as Ultimate Holdings traded them more than 200 times from Feb. 2000 to August of this year and ran afoul of a U.S. regulation forbidding major shareholders from making so- called short-swing profits. Ultimate Holdings relinquished almost $7 million in gains because of the violations.
Positive public statements about GenesisIntermedia's prospects and the involvement of Carl Icahn, a corporate raider of the 1980s who owns the Stratosphere casino in Las Vegas, also boosted the shares.
Money manager Courtney Smith recommended the shares on 18 television appearances on CNBC, CNNfn and Bloomberg Television, helping them rise as much as 70 percent in a day, without revealing that GenesisIntermedia purchased and wrote off a Web site developed by Smith in March 2000. The company paid Smith through an intermediary with shares that were worth more than $3 million early this year.
A GenesisIntermedia shareholder, David Osher, filed suit in Los Angeles last Thursday, alleging the company, El-Batrawi and Smith plotted to inflate the price of the shares and thus committed securities fraud. Smith was paid the stock to tout the shares on television, the suit alleges. Smith didn't respond to messages seeking comment.
Rising Shares
The shares soared again the week of May 7 after former stockbroker Rafi Khan met with GenesisIntermedia officials and issued a report suggesting a short squeeze would drive up the stock price. Khan was convicted of filing a false tax return in 1999 and was banned from the securities industry by the SEC for five years on stock manipulation charges.
In a short squeeze, investors demand the return of shares they had lent to people who sold them short in the hope of making money on a price drop. Such a demand forces the borrowers to buy shares, driving up the price.
Price Spike
GenesisIntermedia shares spiked a third time on June 29, hitting $25 after the company issued a press release stating it received a ``conditional commitment'' from Icahn for a $100 million line of credit to help GenesisIntermedia make acquisitions.
An SEC filing disclosed that Icahn's involvement had a price: the company paid him $275,000 and stock options worth $74 million. There have been no loans or acquisitions. Icahn declined comment.
GenesisIntermedia shares began plummeting Sept. 17, the day trading resumed after the Sept. 11 terrorist attacks. Over seven consecutive trading days they fell from $17.03 to $5.90 before trading was halted.
At that point, according to September regulatory filings, Ultimate Holdings owned 9.5 million shares and held 8 million shares as collateral for a loan extended to El-Batrawi, who had authorized Khashoggi to use his shares as security for further borrowing. Together, the two blocks gave Ultimate Holdings control of three quarters of GenesisIntermedia's stock.
Stock Lending
The stock's plunge exposed Ultimate Holdings to a loss of more than $100 million on just the shares it owned -- unless Khashoggi had found a way to recoup the money without selling. One shareholder did that through stock lending transactions involving 7.2 million shares.
Stock lending is transaction used by brokerage firms to accommodate investors who want to borrow shares for short selling. A firm that needs such shares borrows them from a firm that has them in return for a cash loan of 100 percent of their value. As the price of the shares fluctuates, the firms engage in a process called marking the shares to market that equalizes the value of the shares and the money loaned.
If the shares rise, the stock borrower gives the cash appreciation to the stock lender, and the loan grows. If the shares fall, the stock lender is required to return the amount of the cash loss, and the loan shrinks. Stock can be lent from one brokerage firm to another along a chain.
Chain of Transactions
The 7.2 million GenesisIntermedia shares moved through a chain that involved nine brokerages beginning with Freeman Securities, a Jersey City, New Jersey-firm that served institutional investors, and ending with Deutsche Bank AG, Europe's largest bank.
Freeman and Native Nations Securities, which acquired Freeman, accepted the shares and loaned the shareholder their value before moving them to MJK Clearing and recouping the funds, said Matthew Kyler, executive vice president of Stockwalk Group, former parent of MJK Clearing.
MJK Clearing disbursed the shares among four brokerages: 3.3 million shares at E*Trade; 2 million shares at Ferris, Baker Watts; 1 million shares at Pax Clearing; and 885,000 shares at Robert W. Baird. Those firms moved the shares to AG Edwards Inc. of St. Louis, Nomura Securities Co. of New York, and Wedbush Morgan Securities of Los Angeles before all the shares were turned over to Deutsche Bank, Kyler said.
On the Hook
Mark-to-market payments flowed along the chain to and from the shareholder and Deutsche Bank until the shares plummeted. By Friday, Sept. 21, Native Nations was on the hook to repay MJK Clearing $60 million of the $125 million it had borrowed against the stock. MJK Clearing owed the same amount to its lenders.
Kyler said MJK Clearing met its obligations by exhausting its $18 million net capital and tapping $42 million of customer funds, expecting to receive payment from Native Nations. The money never came. SIPC took control of MJK Clearing and reimbursed its customers.
``We want to know if Khashoggi has the money,'' Kyler said.
Native Nations Chief Executive Officer Valerie Red-Horse, a 42-year-old actress and former Drexel Burnham Lambert office manager, declined to discuss her firm's business with Ultimate Holdings.
She said the lending transactions began at Freeman Securities before her firm bought the company and that Native Nations fired the executive responsible for them. She declined to identify the individual. Native Nations spokesman Michael Mandelbaum said last month that the executive had misrepresented the source of the stock and ``completely doctored the books.''
Big Losses
If GenesisIntermedia shares never resume trading, the firms holding them as collateral face a cumulative loss of $65 million. Based on their value when the shares were was last marked to market, E*Trade is at risk for up to about $29 million, Ferris, Baker for about $18 million, Pax Clearing for about $9 million and Robert W. Baird for about $8 million.
Nomura filed suit in Manhattan federal court this week, alleging that E*Trade had refused to return $9.9 million loaned against 1.6 million GenesisIntermedia shares on June 21. The New York Stock Exchange has advised Nomura to value GenesisIntermedia shares at zero, the court papers state.
Spokesman for Nomura, A.G. Edwards, Wedbush Morgan and Pax declined comment. E*Trade spokesman John Metaxas said the firm ``is working to formulate a fair resolution to the situation.'' Ted Urban, general counsel for Ferris, Baker said, ``We have some exposure,'' and declined further comment. Robert W. Baird spokesman John Rumpf said, ``We don't think we have any exposure. Any loss would be less than $8 million and would not be material to our business.''
Persons close to Deutsche Bank said that before trading was halted, Deutsche Bank returned the stock to AG Edwards, Nomura and Wedbush Morgan and recouped its money |
