Michael Fuchs Is Back, With a Lot of Baggage
by Christopher Byron
Bloomberg News
"We’re going to take on the biggest dragon there is. We’re talking the David- versus-Goliath fight of all time."
So says Michael Fuchs, former chairman and chief executive of Time Warner Inc.’s Home Box Office unit, describing a future he’s been planning for an obscure computer company named MyTurn.com Inc. The question is whether fate, dwindling finances and MyTurn’s distinctly troubled history as a corporate plaything of Wall Street swindlers and stock promoters will give him a chance.
This Alameda, Calif.-based firm, which Mr. Fuchs has headed since April, owns an uncommonly easy-to-use personal computer program known as the GEOS operating system. With $15 million and 400 man-years of programming costs already sunk into GEOS, MyTurn this summer began a retail marketing drive to sell $299 ultra-low-cost computers — dubbed "Global PCs" — based on the system in Wal-Marts, Kmarts and other discount outlets around the country.
Mr. Fuchs’s objective? Nothing less than to dislodge Microsoft Corporation from its dominant role in the worldwide market for personal-computer software and operating systems. It’s a daunting enough challenge for anyone, Mr. Fuchs included, especially since MyTurn.com has barely four months of operating cash left on the balance sheet.
Yet raising capital may not prove as easy as Mr. Fuchs might have expected when he joined the company last winter as an outside director. Mr. Fuchs has lately discovered certain things about his company that he insists no one told him about when he came aboard.
The big mystery? From the moment of MyTurn’s birth three years ago as a company bearing the name Compu-Dawn Inc., its shares in the public market have been dogged by stock promoters and charlatans—even as the bear-hug embrace of the stock by organized crime has never lurked very far away.
All this has come as a shock to Mr. Fuchs, a highly regarded business executive who is generally credited with having built HBO into a cable-programming powerhouse that revolutionized the entire cable-television industry. Mr. Fuchs says everyone—including the man who brought him to the company, Robert E. (Teddy) Turner IV, a MyTurn director and son of Time Warner Inc. vice chairman Ted Turner, founder of the CNN media empire—kept him in the dark.
Now Mr. Fuchs is on the hook personally for more than $6 million of his own funds in MyTurn, even as he suddenly finds himself as its largest single shareholder, awkwardly aligned financially with a vague and largely anonymous group of Wall Street stock manipulators.
One key individual in the MyTurn matter turns out to be a Long Island stockbroker named David Lee Stetson. Like other stockbrokers in Wall Street’s seedy sub-basement of micro-cap and penny-stock promotion, Mr. Stetson has sometimes dealt with those either directly involved in, or otherwise connected with, the criminal underworld. That now makes what Mr. Stetson knows of interest to federal authorities. "I came close to some very bad people" is all he will say of the matter.
Mr. Stetson’s own sense of business ethics seems to leave something to be desired. While a stockbroker for MyTurn’s original investment bank—a Mineola, N.Y., firm named E.C. Capital—Mr. Stetson and an E.C. Capital colleague were caught and fined by Connecticut state regulators for fraudulently hyping the shares of MyTurn (then known as Compu-Dawn Inc.) on Internet message boards. His disciplinary history at the National Association of Securities Dealers shows other offenses for which he was substantially fined over the years as well.
Mr. Stetson, who claims to own or control roughly 10 percent of MyTurn’s stock through accounts in a Long Island brokerage named Donald & Company, once was a friend and colleague of a stockbroker named Jeffrey Supinsky, whose NASD records show him to be currently employed at a Mineola, N.Y., brokerage called Morgan, Taylor & Associates—the name under which E.C. Capital has been doing business since last year. A spokesman for the firm says Mr. Supinsky no longer works there and has no idea where to reach him.
Mr. Stetson, who acknowledges Mr. Supinsky had once been his friend, also says he doesn’t know where he is. Two other sources on Wall Street say that Mr. Supinsky may have been questioned by investigators who are building a case against Philip Abramo, described by the Federal Bureau of Investigation in court papers as a capo in the DeCavalcante crime family. Efforts to locate Mr. Supinsky for comment were unsuccessful. Mr. Abramo has been charged with stock fraud and racketeering.
The activities of Mr. Abramo are under intense scrutiny by federal prosecutors in Florida, and that probe now appears to have broadened into the current stock-trading activities of individuals who may have had only indirect contact with the Abramo people. Sources in the case say that, in recent days, at least two individuals who’d been actively trading stock in both MyTurn and another company—Vianet Technologies Inc.—were questioned by federal agents.
Sources in the Abramo case say Mr. Stetson himself has recently been interrogated by the F.B.I. regarding Mr. Abramo’s activities, which Mr. Stetson won’t confirm or deny. Said he: "Look, you have to understand, I have a wife and kids, okay?"
Mr. Stetson has not been charged with anything in the Abramo matter and is not thought to be the focus of any investigation. Authorities are apparently interested in him only because of what he may have seen or heard at a firm called Sovereign Equity Management Corporation.
Mr. Stetson figures in the MyTurn story because, says Mr. Fuchs, no sooner did he take over full operation of the company in April than Mr. Stetson approached him, representing himself to be one of MyTurn’s largest stockholders, and began urging him to issue press releases to stir up interest and activity in the stock.
Mr. Fuchs accepted Mr. Stetson’s claims at face value. He began communicating with Mr. Stetson about his plans for the company. Mr. Fuchs exchanged e-mails with Mr. Stetson, spoke on the phone with him and even welcomed him to his office. "He was a big and important stockholder," says Mr. Fuchs. "Of course I took his calls."
Mr. Stetson’s involvement in MyTurn.com Inc. goes back to 1997, when it began life as a public company under the name Compu-Dawn Inc., with 13 employees and revenues of less than $1.2 million a year. Mr. Stetson’s brokerage—E.C. Capital Ltd.—did the underwriting on the initial public offering, and Mr. Stetson helped hype the shares in the after-market.
E. C. Capital was itself an offshoot of a Florida investment firm known as Sovereign Equity Management Corporation, whose New York business had by the mid-1990s allegedly been infiltrated by the DeCavalcante crime family under Mr. Abramo.
Mr. Stetson and Mr. Supinsky both worked at Sovereign Equity, and before then at another troubled firm, Madison Chapin Associates, where Mr. Stetson ran the trading desk. In 1991 they decamped for Sovereign, and both remained there until December 1995. In the weeks that followed, they and some two dozen Sovereign brokers from its Long Island office departed and opened E. C. Capital.
In December 1996, the group filed a registration statement to take Compu-Dawn public. In June 1997, the I.P.O. went to market, with a businessman named Mark Honigsfeld as Compu-Dawn’s chairman and chief executive.
By the following spring, after Compu-Dawn’s stock had slid from a high of $15 per share, Mr. Honigsfeld and Mr. Stetson began logging onto the Internet under aliases and posting comments on Yahoo message boards about the company, its business prospects and its multi-talented chief executive.
This caught the eye of state banking regulators in Connecticut, who’d been watching the company as part of a multi-state crackdown on penny-stock telemarketing practices. As a result of the investigation that followed, Mr. Stetson was fined $5,000, while Mr. Honigsfeld was slapped with a $100,000 fine for his fraudulent stock-touting activities.
Mr. Stetson maintains he never posted anything fraudulent, inflammatory or untrue on the message boards; his error was in failing to acknowledge who he was in the postings. "It was a mistake and I’m sorry for it," says Mr. Stetson now.
In May 1999, mere days before state investigators completed their work and issued a cease-and-desist order in the case, Mr. Honigsfeld abruptly announced he was stepping down from Compu-Dawn. No press release on the stock touting was ever issued by the company, and nothing was ever said on the matter in any filing with the Securities and Exchange Commission.
The man who says he’s responsible for Mr. Honigsfeld’s departure turns out to be none other than Robert (Teddy) Turner IV, 37, the newly arrived chairman of Compu-Dawn and the son of the CNN media mogul. Mr. Turner says he didn’t know of Mr. Honigsfeld’s activities, but that he didn’t like his style. "We bought him out," Mr. Turner said, adding it was only after Mr. Honigsfeld departed that he discovered what he’d been up to.
Yet Mr. Turner had no trouble continuing to make himself available to Mr. Stetson as a favored shareholder of the company. Said Mr. Turner, "We were in a difficult situation. The man had a million shares of our stock. What were we going to do, tell him to take a hike?"
Unfortunately, Mr. Fuchs says, he was never informed by Mr. Turner—or indeed anyone else at the company—of either Mr. Honigsfeld’s activities or those of Mr. Stetson.
The Honigsfeld matter wasn’t the only thing that Mr. Turner failed to share with him, says Mr. Fuchs. In late 1996, Mr. Turner left a mid-level management job within his father’s organization when, he says, the 200-person department in which he worked was eliminated. Thereafter, Mr. Turner founded a company named Zekko Corporation In October 1997, he attended a marketing presentation Zekko held in Florida to introduce a technology it claimed could quickly send high-volume data over conventional phone lines.
Based on the presentation, a California software company, Level One Communications Inc., paid $3.5 million for a stake in Zekko. But 16 months later, in February 1999, Level One filed a federal fraud suit against Zekko, Mr. Turner and others, charging that the demonstration had been rigged and that the technology was phony.
Officials at Intel Corporation, which has since acquired Level One, say the case is still pending. Mr. Turner said he’s no longer part of the case, but that he’s now being sued over the same issues in a new suit in Colorado. "It’s all a big mess," said Mr. Turner. Mr. Fuchs says Mr. Turner never told him of any of that, either. Mr. Turner said he never mentioned the matter because it didn’t involve MyTurn.
Meanwhile, Mr. Turner had hooked up with a smooth-talking young Gen-X’er named Rudy Theale, 26. In 1997, the two created a telecommunications marketing company named LocalNet Communications to promote a high-speed data service, and eventually ran into problems with this company as well.
In 1999, the Sacramento Business Journal reported that LocalNet—which it described as a Florida-based "multilevel marketing operation"—had been beset with complaints from distributors who’d signed up to sell the company’s product (once again, high-volume data transmission over conventional phone lines), then never got their money refunded when the service failed to materialize. In his defense, Mr. Turner says: "Look, LocalNet grew very fast, and we did the best we could, but we ran out of runway." These complaints as well were something that Mr. Fuchs now says Mr. Turner never told him about when he joined the company. Mr. Turner says he never mentioned them because LocalNet had ceased to exist by the time Mr. Fuchs joined MyTurn.
As these problems multiplied in the latter half of 1998, a Compu-Dawn board member named Louis Libin arranged for Mr. Honigsfeld and Mr. Turner to meet. Recent S.E.C. filings show Mr. Libin to be an investor in Vianet Technologies, which is one of several stocks—MyTurn among them—in the trading of which the F.B.I. is thought to have become interested in connection with the case against Mr. Abramo. Mr. Libin is not thought to be part of any investigation.
Mr. Libin, who has a background in technology, was on Compu-Dawn’s board from the time of its I.P.O. until this April. Mr. Libin had been a friend of Mr. Turner’s after meeting him in Atlanta during the 1996 Summer Olympics. Mr. Libin knew Compu-Dawn would benefit by having the son of Ted Turner associated with it, says Mr. Turner, and asked him to become a board member at the time of the I.P.O.
Mr. Turner says he turned Mr. Libin down because he was uneasy about getting involved with an obscure company that apparently only wanted to trade on his family name. But 18 months later, after LocalNet’s finances had keeled over, the company became desperate. "We were going down the tubes" is how Mr. Turner puts it.
So Mr. Turner reopened contact with Mr. Libin. As a result of Mr. Libin’s introduction, Mr. Honigsfeld had Compu-Dawn lend Mr. Turner’s outfit, LocalNet, some $1.8 million in cash in October 1998, taking back Mr. Turner’s and Mr. Theale’s interest in LocalNet as collateral. Scarcely had the loan been consummated than Compu-Dawn foreclosed on it, claiming LocalNet was in breach of certain covenants. Four months later, Mr. Honigsfeld left and Mr. Turner surfaced as Compu-Dawn’s new chairman, with plans to reposition the company’s strategy toward Internet-based e-commerce and communications.
It was more or less at this point—with Mr. Honigsfeld having recently departed and the company now headed by Mr. Turner floundering about as the money ran out—that Compu-Dawn was approached by Geoworks Corporation, the California software outfit, and offered the rights to a software package that was touted as capable of beating Microsoft’s Windows system hands down. Mr. Turner and Mr. Theale took one look at the software—the GEOS operating system—and saw in it the company’s salvation. Soon they were approaching Mr. Fuchs to become involved.
Mr. Fuchs admits he knows nothing about computers and finds them almost terrifying in their complexity. After a demonstration of the program, set up for him by in Los Angeles by Mr. Turner, Mr. Fuchs also became a believer. "I was blown away," Mr. Fuchs says. The software was so user-friendly and non-threatening, says Mr. Fuchs, that "even I understood it."
Mr. Fuchs, it should be noted, hasn’t been especially successful in his post–Time Warner career in establishing himself as a player in the digital age. He sits on the board of a company called Wink Communications Inc., whose stock has been a disappointment. He also serves as chairman of Irvine, Calif.-based Autobytel.com Inc., another investment dud.
But the pitch from young Mr. Turner reached Mr. Fuchs at a level that he found irresistible. Combative by nature, he had harbored bad feelings toward Time Warner Inc.—and especially its chief executive, Gerald Levin—from the moment Levin fired him in late 1995 in a power struggle.
Mr. Fuchs felt put out not simply because of who he was, but also for what he’d achieved. As the man who had presided over HBO and built it into the powerhouse that it was, he felt that, in some inexpressible way, he really was personally responsible for much of the success of Time Inc.
In Compu-Dawn he may have seen his vindication, a chance to suit up for the crowning battle of his career. Taking on the Hollywood studios as head of a pipsqueak cable-TV programming service—Home Box Office—and eventually overshadowing them would be nothing compared with building Compu-Dawn into something that would slay the feared corporate monster, Microsoft. And what could be better than having the son of Time Warner’s vice chairman, Ted Turner, at his elbow?
So Mr. Fuchs charged ahead, and by this April he’d taken over entirely. With the company now calling itself MyTurn.com Inc., Mr. Fuchs became the company’s chairman and chief executive. Mr. Turner stepped aside to become simply an outside director.
Yet the legacy of MyTurn’s involvement with the sub-basement of Wall Street lingered. Compu-Dawn, for example, in 1998 had become embroiled in talks to buy a 50 percent stake in a company claiming the rights to run a national online lottery in Russia. The deal never materialized, but in the dispute that followed, the company had to give up 25,000 shares of MyTurn stock.
Mr. Fuchs was also surprised to learn that talks were underway to raise desperately needed cash through a financing with Hornblower and Weeks Inc., a brokerage Mr. Fuchs regarded as unattractive at best.
Mr. Fuchs says he instructed his company to break off talks with Hornblower, resulting in a dispute. It was finally settled in June, when MyTurn agreed to issue Hornblower 59,850 shares of MyTurn stock, valued at just under $16 per share. MyTurn’s stock price then fell to about $10.50, which may be one reason Hornblower and Weeks issued a "strong buy" recommendation on the stock on August 30, with a 12-month price target of $55.
Unwilling to accept financing from such sources in the future, Mr. Fuchs has in effect cut off the wellspring of MyTurn’s lifeblood; he now faces serious problems in simply keeping his company afloat.
To demonstrate his belief in the company and its let’s-whup-Microsoft operating system, he announced in March that he’d personally underwrite and absorb any MyTurn.com working-capital deficit, up to $500,000 per month, through year’s end. By August, he was $6.4 million in the hole, with no turnaround in sight.
The company’s finances have continued to deteriorate. Take $1.5 million of restricted cash out of the picture and MyTurn.com Inc. shows no day-to-day working capital on its balance sheet, with operating cash flying out the door at a rate of $4.5 million per quarter—a burn rate at which all balance-sheet cash and equivalents will be gone well before year’s end.
One cause of the financial drain has been the largesse of the top brass toward themselves. In the year ended Dec. 31, 1999, the five top officials in the company collectively paid themselves salaries and bonuses of more than $2 million in cash and stock, even as the company reported gross revenue of only $233,660.
To turn this situation around, Michael Fuchs will have to be the Goliath-slayer of all time, somehow getting this company’s troubled history behind him while simultaneously trying to land a desperately needed infusion of private placement capital. All the while he’ll have to convince the world that a $299 computer, powered by an operating system that may work great but can only run a handful of basic applications, is exactly what everyone has been waiting for. If he does, he’ll deserve the crown as Wall Street’s turnaround champ of the ages.
If he fails, well, with balance sheet liquidation assets of maybe no more than 50 cents per share, MyTurn.com’s $9.00 stock price could quickly turn out to be $8.50 too high. Stay tuned, for the ultimate high-wire act of Michael Fuchs’ career may now only be beginning. |
