Hi everyone,
More on my favorite scam stock, TALK. Not that anyone's in this one, but it's worth understanding how bad it can get.
I've said before that TALK's chairman has been doing everything he can to artificially raise the stock price by getting brokers to recommend it to individual investors. I thought this was simply to get his 25 million shares bought out at $30. Now it seems there was much more to it. It looks like this guy is actually going to jail.
Below is an article from TheStreet.com just posted last night. It shows how increases in TALK's stock price were actually meant to pay for marketing costs paid on behalf of TALK by one of its resellers. The reseller ate tons of expenses for the company, then bought TALK warrants with the expectation that better than expected results (because the costs would be artificially low) would jack up TALK's share price. What they didn't count on was TALK's results being so far below expectations that the share price kept dropping....and that probably explains the desperate attempts that Borislow made to get brokers to recommend the stock with "hints" of a buyout. What makes it even worse is the fact that the reseller is also a publicly traded company and by eating TALK's expenses it made their own stock price plummet. What were these people thinking?????????
I don't think TheStreet.com knows about the broker manipulation part of the story. I'll drop the writer a note and let him know what was happening in March.
I have never shorted a stock. On Tuesday I will short TALK at the open. This is only the beginning of the end. The next thing will be for AOL to claim breach of contract and throw them out giving TALK almost no distribution channel.
Sorry for the profanity in the article. It's pretty telling when the CEO resorts to this type of mouthing off. A real bigshot.
Phil
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*Exclusive* Tel-Save Hid Expenses, Letter Charges; Borislow Blasts Back
By Alex Berenson
Staff Reporter
Tel-Save Holdings (TALK:Nasdaq) shifted millions of dollars in marketing
expenses off its books to Group Long Distance (GLDI:Nasdaq), according to
two large shareholders in GLD, a Florida company that resells telephone
service for Tel-Save.
Filings by Tel-Save and GLD with the Securities and Exchange Commission
appear to support the accusation, which, if true, raises questions about
Tel-Save's reported financial results.
Ronald Assaf and James Lineberger made the charge and demanded "a full
disclosure of [Tel-Save's] relationship with GLD" in a May 7 letter to
Tel-Save Chairman Daniel Borislow. TheStreet.com obtained the letter from a
third party.
Four days later, Borislow faxed Assaf a four-paragraph note calling Assaf
and Lineberger "criminal" and "ungrateful bastards" and telling them to
"take your letter and shove it up your ass." Borislow also referred to
Assaf and Lineberger as "scum balls" and added, "You are not worthy of
being in business, maybe life."
(For the full text of Borislow's letter to Assaf and Lineberger, please
go to the following address: thestreet.com .)
"It was the most unprofessional thing I've ever seen in my life," says
Assaf, chairman of Sensormatic Electronics (SRM:NYSE), a billion-dollar
company based in Boca Raton, Fla. "I've been in business 30 years, and I
can't ever remember a piece of paper changing hands like that."
(Assaf and Sensormatic are not exactly blemish-free, either. In March,
Assaf settled SEC civil charges that Sensormatic cooked its books in 1994
and 1995 by turning back the clocks on its computers so the company could
record shipments in one quarter as if they'd occurred in the previous
quarter. Without admitting to or denying the charges, Assaf agreed to pay a
$50,000 fine. The case is unrelated to Tel-Save or Group Long Distance.)
Borislow refused to confirm or deny the language in the letter, which bears
his signature, but acknowledged, "I did write [Assaf and Lineberger] a
letter in May." Borislow refused to comment further unless he was told how
TheStreet.com obtained the letters. After TSC declined to reveal its
sources, Tel-Save didn't respond to a faxed list of questions about its
relationship with GLD.
Tel-Save, a Pennsylvania-based company that's best known for selling
long-distance service to America Online (AOL:NYSE) subscribers for 9 cents
per minute, uses tiny Group Long Distance and other little-known
"resellers" to market its service to small and midsized businesses.
Tel-Save works with the resellers, providing them with loans "to support
their marketing activities," according to Tel-Save's 10-K.
Tel-Save has grown quickly since going public three years ago, with
revenues increasing from $180 million in 1995 to $305 million last year.
But its shares have been under pressure recently, falling from 30 in
February to about 20 Friday.
Tel-Save bears argue that the company's AOL deal has not lived up to
expectations, and point to its most recent quarterly results, in which the
company fell well short of analysts' revenue targets, as proof. But
Borislow, who owns almost 25 million Tel-Save shares, insists his company
is on target. "You don't know what you're talking about, you really don't,"
he told TSC on Tuesday, punctuating his comments with expletives.
But if the charges Assaf and Lineberger are making are accurate, Tel-Save's
problems may go much deeper than weakness in its AOL deal or Borislow's
volatile style. Essentially, the men, who say they together control about
3% of the shares of Group Long Distance, allege that Tel-Save used GLD as a
conduit to shift the cost of marketing Tel-Save's long-distance service off
Tel-Save's books, boosting its bottom line. They charge that the shift
muddled GLD's balance sheet and helped depress GLD stock from almost 6 3/4
in July to 2 7/16 Friday.
According to Assaf and Lineberger, the transfer of expenses worked as
follows: Tel-Save lent GLD millions of dollars to pay for the costs of
marketing Tel-Save to small and midsized businesses. Reselling
long-distance service is a low-margin business, and the added marketing
costs far outweighed the profits GLD made from its new customers.
To finance the losses, GLD used warrants to buy Tel-Save stock at
below-market prices. Then Group Long Distance sold the stock it bought with
the warrants and used most of the profits it made to repay Tel-Save for the
loans Tel-Save had made to GLD.
In effect, the men charge, Tel-Save found a way to sell stock without
having to report the sales to the SEC, and used the money to fund marketing
expenses that didn't show up on its balance sheet. "GLD suffer[ed]
substantial losses while your company benefited from not having to directly
bear those costs and expenses," Assaf and Lineberger wrote to Borislow.
"If [Borislow] didn't have Group Long Distance do the telemarketing, he
would have had to do it and get the business directly," says Lineberger, a
founder of Sensormatic who now is a private investor based in Connecticut.
During the nine months ended Jan. 31, 1998, GLD reported sales of $41.6
million, "cost of sales" of $29.2 million, marketing costs of $15.4
million, and other costs, including taxes, depreciation, and general and
administrative expenses, of $9.7 million. But the company showed a total
profit of $667,000, or 19 cents per share, thanks to "other income" of
$13.4 million -- nearly the same amount as its marketing costs.
For all of 1997, Tel-Save reported a loss of $21 million, or 33 cents a
share, on revenue of $305 million, so the $15.4 million in marketing
expenses could have materially affected its bottom line.
The other income, GLD says later in its report, was "a direct result of the
profit on sale of Tel-Save stock ... as a result of the private sale of
1,347,000 shares of common stock of Tel-Save Holdings at approximately
$19.76 per share, for gross proceeds to the company of approximately $26.6
million" and gross profits of more than $21 million.
The company acquired the warrants, which had an average exercise price of
$4.08 per Tel-Save share, "in connection with" its August 1997 takeover of
Eastern Telecommunications, a small long-distance reseller based in
Brooklyn, N.Y., for $8.3 million. But because the warrants vested in
proportion to the amount of Tel-Save long distance a reseller sold, they
were worth more to GLD than Eastern Telecom. GLD exercised warrants for
600,000 Tel-Save shares in August and for an additional 747,000 in October.
Then, on Oct. 17, 1997, GLD cashed out, selling the shares to Anschutz
Family Investment, a private Colorado company. (On the day GLD sold its
Tel-Save stock to Anschutz, Tel-Save traded on the Nasdaq for 23 1/4 to 25
1/4 per share, well above the $19.76 that GLD received.)
It's not clear whether GLD needed Tel-Save's approval to take possession of
the Eastern Telecom warrants. In his May 11 letter, Borislow refers to "the
independent warrant transaction GLD did with another company, ETI (which
needed our consent)." But in its quarterly filing, Group Long Distance
makes an explicit connection between the profits from the warrant sale and
its Tel-Save marketing. GLD says it used about two-thirds of the $21
million in profits from the warrant sale "to pay down debt and accounts
payable owed to Tel-Save, including ... marketing expenses incurred in
connection with the Company's telemarketing effort during the first half of
fiscal year 1998."
Group Long Distance Chairman Gerald Dunne Jr. says GLD "is very positive on
its long-term relationship with Tel-Save... They provide us with
exceptional networking services as well as financing." Like Borislow, Dunne
declined to answer more questions about Tel-Save's relationship with GLD
unless he was told how TSC obtained the letters between Borislow and Assaf.
But Assaf says, "If I were Gerald Dunne, I wouldn't be able to say anything
else either. [Tel-Save] can pull the plug on GLD in a moment... They
control the cash." Indeed, in his reply to Assaf and Lineberger, Borislow
threatens to "take control of GLD assets."
"You guys are a bunch of ungrateful bastards," Borislow's letter concludes.
"Go back to the section of hell you came from, and tell [GLD founder] Gerry
Sr. I said hi when you get there. Sincerely, Daniel Borislow."
Assaf and Lineberger say they're considering referring the matter to
securities regulators. "It would be interesting to see what kind of letter
he would send to an inquiry from the SEC," Assaf says.
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