Re: 9/25/06 - 10/3/06 - [PGWC] Liz Moyer, Forbes: Attack On Pegasus; Oxbridge Scams Pegasus; Beating Fails; Pegasus Is De-Listing
Attack On Pegasus
Liz Moyer, 10.03.06, 6:00 AM ET
Jay Knabb
There's a hit out on Pegasus Wireless.
As if a 95% plummet in its stock price since May weren't enough, signs of trouble were already popping up before the Fremont, Calif., wireless equipment maker moved its stock from the over-the-counter bulletin boards to the Nasdaq national market in April.
In March, Pegasus (nasdaq: PGWC - news - people ) Chief Executive Jasper Knabb began getting e-mails from individuals in Europe who said they had questions about a private placement in Pegasus. Trouble is, Pegasus had not arranged a private placement.
Instead, a Nevis-based advisory firm called Oxbridge International had arranged it without the knowledge or authorization of Pegasus. According to e-mails and other records, Oxbridge representatives cold-called the investors and got them to invest amounts in the range of $1,700 to $2,800 each by wiring money to bank accounts in Spain or the U.S. and filling out a few forms.
"How stupid I have been," writes one U.K. investor. (See: " Oxbridge Scams Pegasus.")
What took place during the following six months would become a source of increasing alarm inside Pegasus.
It all started in April, when Pegasus listed on Nasdaq. An increase in trading volume was to be expected, as Pegasus shares got wider scrutiny and as they were added to the Russell 2000 index. Institutions stepped in to buy shares. By the end of June, top institutional holders included Goldman Sachs Group (nyse: GS - news - people ), Vanguard and the Ohio Public Employees Retirement System.
But the volume continued to accelerate beyond what some thought was normal-- beyond 1 million shares a day--and the stock, which peaked at $18.90 a share in late May, began a precipitous collapse.
Negative news reports started appearing, even as the company reported positive earnings and made plans to unveil its promising new technology that allows video streaming from a home computer to television sets throughout a house. In late August, Pegasus customers and suppliers began getting strange e-mails attempting to warn them away from Pegasus, claiming mismanagement in one of its majority-owned subsidiaries.
Records held by Pegasus' transfer agent indicated there may be as many as 30 million more shares out there than it has on record. That suggests that short-sellers have been selling shares without actually borrowing them--a controversial practice known as naked short-selling.
Knabb says he pleaded with market regulation officials at Nasdaq to look into the seemingly unusual activity, but it continued. The unrelenting pressure prompted Knabb to make a critical decision a week ago: he would voluntarily de-list his company from the Nasdaq rather than stick around.
"The fight is just beginning," Knabb said in an interview last month. "But I can't win a battle in this market when no one is willing to help us."
Knabb has reluctantly joined a group of companies and individuals who are contending that loopholes in the financial system are giving manipulators wide latitude with which to operate, under the not so watchful eye of regulators and largely outside the knowledge of small-time investors, who won't realize what hit them until it's too late.
Of course it could be that Pegasus is just a poor investment, as some have asserted. At $18.90 a share, the valuation was rich. Revenues are on a trajectory to hit $100 million this year, up from $3 million last year, but a good portion of the growth came from acquisitions. Margins are improving, and sales are set to increase once new products hit the shelves, but they haven't hit the shelves yet.
Pegasus shares have fallen from $18.90 to about 61 cents. They were trading at $13 a share on April 21, the day of the Nasdaq listing.
Pegasus, best known for its wireless Ethernet bridges, is the amalgamation of several reverse mergers and several partial acquisitions in the last few years. Last week, it unveiled what it considers to be its most exciting product yet, a device that allows consumers to wirelessly stream DVD-quality video from a computer or a camera to any television in their home. TV production company Boxx Communications won a technical Emmy Award this year using the technology.
It's the same type of product virtually all of Pegasus' rivals are developing, including Apple Computer (nasdaq: AAPL - news - people ), Intel (nasdaq: INTC - news - people ), Hewlett-Packard (nyse: HPQ - news - people ) and smaller companies like NetGear (nasdaq: NTGR - news - people ). Pegasus claims to be the first out with its version, however.
The technology is the next evolution in a market that has seen an explosion in the popularity of devices for downloading music or real-time news broadcasts. "This is a chance where smaller, more nimbly fitted companies can step out of the shadow" of behemoths like Cisco Systems (nasdaq: CSCO - news - people ) and Apple, says Robert Egan, a consultant at Tower Group.
But while it was gearing up for market, Pegasus found itself mired in something largely out of its control. An official at the U.S. Securities and Exchange Commission wouldn't confirm whether any investigation was taking place. Nasdaq also won't comment on whether an investigation had been opened.
But a market regulator, speaking on background, said, "It's clear that there are certainly some red flags" here.
Published accounts about the company focus on Knabb's prior business history, and allege that Pegasus is a scam run by a penniless snake oil salesman. One article called him a "self-promotional huckster" and concluded that the company was "doomed under his leadership."
Much of what has been written is a distortion or an outright fabrication, Knabb says. At least to the point of his financial condition, a review of his personal bank accounts shows Knabb invested more than $16 million of his own money in Pegasus over the last year, all of it in cash, in exchange for restricted shares.
And the records show Knabb has plenty more cash available to invest in the company.
The steepest drop in Pegasus came after the company laid out the terms of a warrant issue in early August. Knabb says he wanted to reward investors for sticking around while the stock dropped, and he wanted to do so without diluting the shares.
The warrant was payable only to beneficial owners, however, meaning brokerages holding shares in street name for investors would have to report to the transfer agent who owned what and how many shares they had. Some brokers resisted.
The episode raised a fresh round of criticism directed at Knabb, who was accused of trying to manipulate his share price up by forcing short-sellers to cover their positions.
It remains to be seen whether the attack on the stock will make it harder for Pegasus to get its product on store shelves. Costco (nasdaq: COST - news - people ) representatives attended an event last Thursday in New York when the new video-streaming technology was unveiled. Best Buy (nyse: BBY - news - people ), which had also been invited, pulled out.
Knabb says that there are five more products in the pipeline and that the company is exploring a number of opportunities, including a licensing arrangement with Microsoft (nasdaq: MSFT - news - people ).
Just because the stock is down doesn't mean he's going away. "We're going to survive this," says Knabb. "Hopefully, if we've done everything right, our numbers will reflect what we've put in our business."
forbes.com
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Oxbridge Scams Pegasus
Liz Moyer, 10.03.06, 6:00 AM ET
Oxbridge International portrays itself as a provider of structured financial services and expert advice whose primary aim "is to help our clients become financially independent."
That's what it says on its Web site, anyway.
But the Financial Services Authority, the British version of the U.S. Securities and Exchange Commission, has been warning consumers about Oxbridge since last fall. The Nevis-based advisory company is not authorized to do business in the U.K., the FSA said, and it was believed to be targeting individuals in the U.K. with various financial schemes.
One such scheme appears to have been a phony private placement in Fremont, Calif.-based Pegasus Wireless (nasdaq: PGWC - news - people ). (For a broader look at the attacks on Pegasus shares, see: "Attack On Pegasus.")
In March, Pegasus Chief Executive Jasper Knabb began getting e-mails from individuals in the U.K. who were inquiring about their shares from a private placement organized by Oxbridge.
One participant was instructed to wire her payment to an account in the name of Delaware Escrow Co., which turns out to be run by L. Van Stillman, a disbarred Florida attorney who had been one of the targets of a 2000-2001 pump and dump scheme that resulted in SEC sanctions. A telephone number listed for Stillman in Florida has been disconnected, and other efforts to locate him for comment were not successful.
The street address given for Delaware Escrow turns out to be a private residence with a backyard pool in Las Vegas.
The would-be investor, describing herself as a pensioner, laments her decision to participate, telling Knabb, "All along I have had the feeling that something was not right with these shares."
Oxbridge International solicited an individual in Scotland by telling him that Pegasus was the likely subject of a takeover by a much bigger tech firm, Cisco Systems (nasdaq: CSCO - news - people ). No such takeover happened.
A spokeswoman for the FSA said that such schemes had been popping up with increasing frequency.
Messages left with a receptionist at Oxbridge's offices in Nevis went unreturned by any of the executives at the firm.
Knabb says the unauthorized placement of stock in his company was reported to the SEC and to Nasdaq, as part of the process of moving Pegasus from the over-the-counter bulletin boards to the Nasdaq in April.
forbes.com
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Beating Fails
Liz Moyer, 09.28.06, 1:00 PM ET
More data sooner could help put a stake through the heart of stock manipulators.
The National Securities Clearing Corporation has told federal regulators that it would be willing to back the release of more data earlier on trade settlement failures in the interest of promoting a greater understanding of the somewhat murky back office world of trade clearing and settlement.
Until now, NSCC, the division of the Depository Trust & Clearing Corporation that handles the daily settlement of stock, bond and other trades, has jealously guarded information on trades that "fail to deliver," calling it proprietary to its member firms (and owners), Wall Street brokerages.
It sees part of its mission as protecting the integrity of the markets by preventing the disclosure of confidential data that could be used to manipulate trading.
But in a letter Wednesday to the U.S. Securities and Exchange Commission, DTCC General Counsel Larry Thompson appeared to soften his stance on the disclosure issue. "We believe it would be appropriate for the Commission to authorize greater disclosure of aggregated information" on trade settlement failures, Thompson wrote. The DTCC submitted the comments on behalf of the NSCC.
The letter was submitted as part of the SEC's comment period on proposed amendments to short-selling rules that are supposed to curb manipulative trading tactics. A range of academics, regulators, elected politicians and corporate executives have called for more data on trade fails to be released sooner, saying transparency would reduce the potential for fraud.
"Lack of transparency and oversight contributes to the danger that hedge funds may engage in possible use of naked short selling," wrote Richard Blumenthal, the attorney general for Connecticut, home to many of the biggest hedge funds.
Some want the data to be published each day, saying there's no reason why it can't be.
But banks have commented that the SEC should take care not to impose new rules that would damage the liquidity of the markets by clamping down on trading, put burdensome processes in place and force the disclosure of sensitive information.
"We oppose any requirement that firms publicly disclose their fail positions," wrote Gerard Citera, the executive director of U.S. equities at UBS Securities, in his letter on Sept. 22. "This information is proprietary to the firm and its customers and could result in disclosure of confidential information such as trading strategies."
NSCC is not proposing that; rather, it is supporting the disclosure of aggregated data. Thompson left it up to the SEC to set a new timeframe and didn't hint at which way he was leaning: disclosure after one day, five days or one month and 29 days.
NSCC reports trade settlement failures daily to the SEC and the national stock exchanges. These reports show when a stock purchase has been made but shares have not been delivered to the buyer by the three-day settlement deadline. Both the SEC and the exchanges use the data to determine whether a stock has high enough and persistent enough trade settlement failures to warrant including it on a list of similar securities for which special trading restrictions are supposed to kick in.
The SEC will provide the trade failure data, but only on request and only after a two month lag. NSCC and others defend the delay by saying earlier disclosure of specific stock failures could jeopardize proprietary strategies.
"Such an outcome would discourage legitimate short sellers from expressing their views," Thompson said. But, he said, providing aggregated information and not disclosing specific information about failed trades by individual firm, "may help alleviate some of these concerns."
The data already publicly available through the SEC does not disclose specific firms or trading positions, just aggregate fails by day.
Thompson's letter declined to address trading practices that could lead to high levels of settlement failures, including the controversial practice of naked short selling, because its mission does not include monitoring trading at the "front-end."
forbes.com
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Pegasus Is De-Listing
Liz Moyer, 09.25.06, 10:45 PM ET
Jasper Knabb and his streaming video technology is about to beat Steve Jobs to the punch.
But before that, the chief executive of Pegasus Wireless (nasdaq: PGWC - news - people ), a Freemont, Calif., wireless equipment maker, has to contend with forces that have hammered down the company’s stock by more than 90% since May in an aggressive and seemingly relentless bear raid.
Late Monday, Pegasus announced it was applying voluntarily to de-list its stock from the Nasdaq national market, with plans to move to another national market or the over-the-counter market by the end of October.
The move comes after an attack of short selling that began shortly after the company’s Nasdaq listing in April and accelerated through the summer. Right now, shares of Pegasus are trading around $1.07, down from $18.60 in mid-May. This comes despite positive earnings in June and the announcement that the company would soon unveil patent-pending wireless video streaming technology for consumer use.
The technology that Knabb is scheduled to unveil days from now, he says, will beat Apple Computer (nasdaq: AAPL - news - people ) to market by several months.
Pegasus' patent-pending device allows consumers to wirelessly stream DVD-quality video content from the Internet in real-time to a TV elsewhere in their house. Last week, Jobs, Apple's chief executive, announced that his company would be ready to unveil similar technology for home use early next year.
Meanwhile, Pegasus shares are under constant attack. What’s striking about the activity affecting the company’s stock are the concurrent volume spikes in trading, the build-up of short interest from almost nothing to about half the available float, and the sharp decline in the price. All of this has occurred in the last three months.
Pegasus said in a statement that that it is in compliance with all the Nasdaq Global Market listing requirements. Knabb said, explaining the move, “Taking into consideration current market environments and trading patterns over the last six months, the board has determined that maintaining the listing of Pegasus Wireless’ common stock on Nasdaq no longer serves the best interests of the company and its stockholders.”
Spokespersons for Nasdaq were not immediately available Monday night.
The steepest declines in Pegasus shares have come in the last month, after a series of negative news articles taking Knabb to task for his background and his prior business associations.
The stock's decline also coincides with the publication of 11 negative research notes from July through August by well-known short-seller Manuel Asensio, who runs his own research firm, Asensio & Co.
An e-mail message to Asensio’s firm earlier on Monday was not answered.
Pegasus shares are down 86% since Aug. 23. That's bad news not just for Knabb, who has sunk some $16.5 million of his own money into the company and given up a salary and cash bonus in favor of stock grants. Institutional holders as of June 30 included Barclays Global (nyse: BCS - news - people ), Goldman Sachs (nyse: GS - news - people ), Deutsche Bank (nyse: DB - news - people ), Vanguard, Mellon Financial (nyse: MEL - news - people ), and the Ohio Public Employees Retirement System.
Knabb invited criticism when he announced in early August that he would pay a warrant to shareholders as a way of saying thanks to those who had stuck around while the price dropped during the early summer.
From the May 5 peak of $18.60 a share, the price had dropped some 67% by the time he announced the warrant offer on Aug. 4.
But the warrant would only be paid to registered shareholders. That meant brokerages holding the shares for clients in "street name" would have to submit lists to Pegasus' transfer agent to match up their clients with the shares they had on record. The warrant was not transferable, meaning it would only be paid to beneficial shareholders, not to the brokerages to distribute to clients.
Some accused Knabb of trying to manipulate his stock by structuring the warrant offer this way. It had the effect of forcing anyone who lent the stock out to call it back in, forcing shorts to cover their positions. Such a quick buy-in--the deadline was originally Aug. 11--can push the shares up as the shorts scramble for shares to cover.
Knabb has denied any such intent to force his stock higher.
In trying to sort out the information coming to Pegasus’ transfer agent from brokers and information on the company’s stock held at the Depository Trust & Clearing Corp., it became clear that there was a problem. Brokers are reporting more shares--3 million to 22 million, depending on what data is examined--than exist.
Such share discrepancies can result from innocent errors or from something more: naked short sales of Pegasus stock, meaning a short-seller has not properly gotten dibs on shares to borrow before selling. Naked short-selling can result in the same share being lent to more than one trader, creating phantom share entitlements.
In simple supply and demand economics, artificially increasing supply will push down the price of even the strongest of shares.
By mid-August, it was becoming increasingly obvious that traders were betting heavily on a decline in Pegasus. Short interest reported by Nasdaq rose to 8.3 million in August from 5.1 million in July. It was 8.3 million for September. The Nasdaq reports short interest on the fifth or six of the month.
Volume on Pegasus soared from basically nothing at the beginning of 2006 to more than 1 million trades a day. On Sept. 5, more than 17 million shares traded hands. Pegasus has a free float of about 16 million shares.
On Aug. 17, Pegasus also joined a list of Nasdaq stocks that have the most trade settlement failures. It has stayed there since.
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