Xybernaut Stock Sold Like Its Computers Didn't
By Jerry Knight
Monday, May 2, 2005; Page E01
As a maker of "wearable computers," Xybernaut Corp. of Fairfax has been far more successful at selling stock than selling computers.
Xybernaut has sold fewer than 10,000 of its purse-size computers, but more than 200 million shares of its penny-priced stock.
Losing money quarter after quarter -- $162 million since 1990 -- Xybernaut has been able to stay in business largely by printing and selling more stock whenever its bank account runs low.
Now the stock-printing press is effectively shut down and authorities are investigating.
Criminal charges have been filed in New York against three men accused of defrauding investors out of $16.8 million in the sale of Xybernaut stock.
The chief target of the 64-count federal indictment is John Marciano, a former Long Island stockbroker who was the chief executive of the brokerage firm that managed Xybernaut's initial public offering in 1996.
Xybernaut is not a defendant in the New York criminal case, nor are any of its past or present officers. Law enforcement sources and Xybernaut officers would not discuss whether there are connections between the New York case and two current investigations of Xybernaut. Xybernaut disclosed recently that the Securities and Exchange Commission has subpoenaed company records, including those of securities sales, and that the U.S. attorney in Alexandria is conducting a separate inquiry.
Xybernaut said in a news release on April 19 that chairman and chief executive Edward G. Newman "improperly used substantial Company funds for personal expenses," that members of his family were "hired and evaluated/not evaluated in direct violation of the Company's anti-nepotism policy" and that major "transactions were entered into by certain members of senior management in violation of Company internal controls." Edward Newman and his brother Steven A. Newman, the president and chief operating officer, were fired by the board of directors.
The company remains in turmoil. It laid off half its staff. Its auditor, Grant Thornton LLP, quit. And Xybernaut warned in an SEC filing that it faces "a severe liquidity crisis and possible insolvency."
In the New York case, Marciano is accused of securities fraud, conspiracy to commit securities fraud, conspiracy to commit money laundering and money laundering involving a series of Xybernaut stock transactions that began before the company went public and allegedly continued for several years thereafter.
Marciano and his two co-defendants were indicted in secret last summer by a federal grand jury in Brooklyn. The indictment was kept sealed until December and went unnoticed until it was reported recently by Newsday, the Long Island newspaper.
The indictment was initially kept under wraps because the case is part of an ongoing investigation, said a spokesman for Roslynn R. Mauskopf, the U.S. attorney for the Eastern District of New York, which includes Brooklyn, Queens and Long Island. The spokesman would not comment on why the case has become public now, just as other investigations of Xybernaut are being disclosed.
David Smith, a New York lawyer who represents Marciano, described the charges against his client as "old and baseless," involving transactions going as far back as 1995. Marciano is free on bond.
Marciano is the former chairman and chief executive of Royce Investment Group Inc., the Long Island firm that took Xybernaut public almost a decade ago. Royce's operations were sold in 1999. Also out of business is Kensington Wells Inc., another Long Island securities firm, which the indictment said helped manipulate Xybernaut's stock prices and launder money. Kensington Wells is no longer registered as a securities dealer.
The indictments describe transactions in which large blocks of Xybernaut stock wound up in the hands of offshore investors and then were resold to the public at inflated prices. The indictments allege that Marciano and others traded Xybernaut stock through front companies in Israel, the Cayman Islands and the Turks and Caicos Islands.
Marciano and other defendants "opened bank and brokerage accounts in the names of front corporations," the indictment says. Then, it says, they "devised, implemented, oversaw and participated in a fraudulent scheme . . . to manipulate the market price of Xybernaut securities."
The transactions specified in the criminal case occurred in the 1990s. Xybernaut's stock sales since then have also involved private sales to foreign investors in Israel and the Caribbean, according to SEC filings. The company had about 13 million shares of stock outstanding after its IPO and now has about 210 million shares in circulation.
Xybernaut repeatedly raised capital without the heightened regulatory scrutiny that occurs with a public stock offering. Instead of selling shares directly to the public, which requires extensive disclosure, endorsement by underwriters and review by the SEC, Xybernaut sold large blocks of stock to foreign investors, SEC filings show. Most of the transactions were structured as loans to Xybernaut, which were later converted into stock. The shares were then registered by Xybernaut, allowing the original buyers to resell them to the public.
On four different occasions, four different companies listing the same address on Grand Turk Island bought multimillion-dollar blocks of Xybernaut stock, SEC records show. The address of all four companies is also the office of Turks & Caicos First Secretarial Ltd., a firm that provides services for corporations using the islands as their official place of business. The phone listed for First Secretarial was not answered Friday.
Xybernaut has managed to find foreign investors willing to buy its stock despite its continuing losses and fragile financial condition.
In the first nine months of last year, for example, Xybernaut collected $11 million from sales of wearable computers, related hardware and computer services. But the company's expenses for the three quarters came to more than twice that. Xybernaut reported a loss of $12.5 million for the first nine months, which projects to about $17 million for the year.
Covering those losses, Xybernaut last year raised $19 million by selling stock.
All the private investors who acquired million-plus blocks of Xybernaut shares through private transactions were foreign firms, SEC records show. None of those investors show up on publicly reported lists of the company's major shareholders, which apparently means they sold the shares.
Sales of publicly tradable stocks directly to private investors are not illegal, but they were uncommon until the past few years. Recently they have been encouraged by securities regulators as a cheaper, more efficient way for companies to raise capital without the expense of a full-blown public offering. The transactions are sometimes known as PIPEs, an acronym for Private Investments in Public Equity securities.
Xybernaut's private stock sales stand out not only because of the heavy involvement of foreign investors, but also because the company used the technique so often, raised so much money and was able to keep selling stock privately despite its continuing losses.
Just last December, Xybernaut found two investors in Israel who were willing to buy 18 million shares of the struggling company's stock. Filings show the foreign investors got a 20 percent discount from the $1.16 a share the stock was trading for at the time, which means they paid roughly 97 cents a share. After getting such a big discount, all those investors had to do to earn a quick profit was to resell the stock. If they didn't sell quickly, however, they could have lost money because the stock went into free fall.
Xybernaut shares closed Friday at 17 cents.
Staff researcher Richard Drezen contributed to this report. |
