Giuliani firm's deal to advise company raises questions
By Edward Iwata, USA TODAY Posted 3/17/2005 10:03 PM Updated 3/18/2005 2:26 PM
usatoday.com
Giuliani Partners, the security consulting firm of former New York mayor Rudy Giuliani, has signed a multimillion-dollar deal with a struggling Los Angeles business backed by investors with a history of securities-related charges, regulatory records show.
Applied DNA Sciences, whose financial backers have had run-ins with regulators, signed a contract with Giuliani's company.
By Chris Hondros, Getty Images
The marketing partnership raises the question of how much Giuliani and his firm know about Applied DNA Sciences (APDN), a fast-rising "penny stock," or a small company that trades for under $5 a share on the OTC Bulletin Board.
Giuliani made his reputation in the 1980s as a tough U.S. Attorney in New York, prosecuting the Mafia and Wall Street cases involving junk bond financier Michael Milken and investor Ivan Boesky. He is a potential 2008 Republican presidential candidate.
Under a one-year agreement signed Aug. 6, Giuliani Partners will receive $2 million in fees over 12 months to advise Applied on marketing strategies for security and homeland defense products.
Giuliani's firm also stands to receive 21 million Applied shares, which would make it the largest shareholder of Applied. The shares were worth $10 million when the agreement was signed.
Applied makes DNA-marking technology, which embeds plant DNA in labels, ink and semiconductor chips for clothing, credit cards and other goods to thwart counterfeiting. The company recently announced it is buying the assets of Biowell Technology, a Taiwan firm with DNA technology.
But Applied is suffering from $35 million in losses from 2002 through 2004 and no revenue, according to Securities and Exchange Commission filings. Shortly before Giuliani Partners signed on, Applied had no cash for operations and no customers, according to an internal company document and an SEC filing.
Two securities lawyers say it's curious that Giuliani's firm signed a marketing deal with an ailing company backed by investors with regulatory records.
Stephen Meagher, a San Francisco attorney and former federal prosecutor, says Applied's stock price has risen rapidly despite no profits or solid business record.
After Applied first disclosed the Giuliani Partners deal in an SEC filing Nov. 10, Applied's shares leaped 268%, from 65 cents to $2.39 Dec. 7. It closed at 97 cents Thursday.
"It has all the markings of something Giuliani himself would have looked into as U.S. attorney in the old days," Meagher says.
Former federal prosecutor Lee Rubin, an attorney at Mayer Brown Rowe & Maw in Palo Alto, Calif., says Applied's shares — in addition to climbing quickly — have been lightly traded and closely held by a small number of investors.
Rubin says such stock activities are red flags that can signal market manipulation and "likely draw the SEC's attention."
Giuliani was unavailable for comment. Giuliani Partners managing director Stephen Oesterle says the firm is not yet a shareholder of Applied. Giuliani Partners has extended its "due diligence" investigation of the company and will decide later whether to take equity in it.
Several of Applied's financial backers have had run-ins with regulators, according to SEC, NASD and Justice Department records:
•Co-founder Richard Langley Jr. Federal authorities charged Langley in a 1996 case involving a nationwide kickback scheme of stockbrokers and stock promoters. He pleaded guilty to conspiracy to commit wire fraud, according to an SEC filing by Langley's firm, RHL Management. He did not return a phone call for comment Thursday.
RHL Management owned 5 million, or 10.3%, of Applied's shares, making it Applied's largest shareholder, according to an SEC filing last month. Langley owns another 5 million shares.
In 2000, the SEC issued a cease-and-desist order barring Langley from participating in penny-stock offerings after his role in an alleged stock scam involving a Phoenix firm called Pollution Control International. Langley did not admit or deny the SEC's findings.
•Jeffrey Salzwedel. NASD fined Salzwedel, one of Applied's investor-relations officials, $107,000 in 1998 for allegedly making "unsuitable" stock recommendations for customers while he headed Salzwedel Financial. He did not admit or deny the charges.
•Vertical Capital Partners. Vertical, a New York brokerage firm also known as Security Capital Trading, helped launch Applied in 2003 with a $1.6 million loan.
In August, the NASD fined Vertical, firm President Ronald M. Heineman and an employee a total of $75,000 for failing to disclose the nature of SEC sanctions against a company in its research reports. In 2003, the NASD fined Security and Heineman $125,000 for terminating an initial public offering of another company after the stock was traded for four days.
Vertical co-Chairman Robert Fallah, as head of Robert Todd Financial, had his agent registration revoked in 1995 by Connecticut banking regulators for allowing the sales of unregistered securities.
Oesterle says Giuliani Partners has had no contact with Langley, Salzwedel or Vertical.
He says Applied is under new management, which asked Giuliani Partners to help "turn around" and "resuscitate" the firm. But those services were not described in the contract filed by Applied with the SEC Feb. 15.
Since starting his firm in 2002, Giuliani has advised Nextel, Merrill Lynch and others. The firm bought Ernst & Young's corporate finance arm and launched an investment banking service to advise firms on mergers and restructurings.
|
