**OT**..technically....but applies...
Reverse Stock Splits
Trigger Complaints
By JOHN R. EMSHWILLER
Staff Reporter of THE WALL STREET JOURNAL
LOS ANGELES -- Last December, Irving Hirschfield paid about $1,500 for 10,000 shares of a little company called AgriTherm Corp. When he received the stock certificate several months Later, it was for five shares of a company called Infotex Holdings Ltd. with a current total
market value of about $5.
The 80-year-old retired Air Force colonel says he concluded "something was radically wrong."
Mr. Hirschfield's share shrinkage was due to a 1-for-2,000 reverse stock split by the company, promptly followed by a large issuance of new stock that massively diluted his holdings. What happened to Mr. Hirschfield could happen to shareholders in thousands of companies,
particularly small ones on the fringes of the public markets.
A company usually does a reverse split to raise its stock price by reducing the number of shares outstanding. Boosting the share price can help a company get on or stay on the Nasdaq Stock Market, which has minimum price requirements. The splits can also make shares more usable as currency for purchasing other companies or assets.
Such splits have become more frequent with the market's recent price gyrations. Data compiled by Standard & Poor's show that more than 100 Nasdaq-listed companies have done reverse splits so far this year, compared with 64 last year and 36 in 1996.
No Rules on Size of Splits
While most of these splits are perfectly legitimate, some are used in stock manipulations, law-enforcement officials say. By shrinking the number of shares held by outsiders and issuing new shares to confederates, securities crooks can gain firmer control of a company. In one recent stock-manipulation case in New York federal court, several individuals were convicted in connection with a stock fraud involving reverse splits, says Mark Ressler, the prosecutor on the case. At a recent conference on securities regulation, Jacob Frenkel, a former Securities and Exchange Commission attorney, said reverse splits have become a "common characteristic" of manipulations.
A review of reverse splits announced over the past 12 months indicates that they generally ranged in size from 1 for 2 to 1 for 10, though some were substantially higher. One small company even announced a 1-for-38,000 reverse split in August, but later canceled the move.
Federal and state regulators say there are no rules governing the size of reverse splits. In Nevada, where Infotex (and AgriTherm before it) is incorporated, companies don't even need shareholder approval for such a move.
In the Infotex case, no government agency has charged the company or its officials with wrongdoing in connection with the reverse split.
Began Buying in the 1980s
Mr. Hirschfield says he began buying AgriTherm stock in the mid-1980s when it was a public "shell" looking to merge with a private operating company. Over the next decade, the company went into various businesses, none very successfully, says former chairman Leonard
Turner, who estimates that when he left the company prior to the reverse split last year there were about 1,000 stockholders.
Mr. Hirschfield says he accumulated about one million shares, which were slashed to 100,000 by a 1-for-10 reverse split in 1995. Management at the time at least notified shareholders of that move, says Mr. Hirschfield.
The 1-for-2,000 reverse split cut his holdings to about 50 shares. This time, he says the company didn't inform him of the split, and never even sent him information on how AgriTherm became Infotex. Such lack of communication "is a scandal," says Mr. Hirschfield.
Like thousands of other small public companies, Infotex isn't required to file reports with the SEC. While some states require fairly extensive annual reports from companies incorporated there, others, including Nevada, don't. "If there is a trend over the past 10 years it probably has been to minimize reporting requirements by the states," says Donald J. Reis, Nevada's chief deputy secretary of state.
Genesis of Reverse Split
So it can be difficult to answer such questions as how Infotex's 1-for-2,000 reverse split came about.
"I had nothing to do with the reverse split. That was done [in December] before I got here," says Russell Varnado, chairman and chief executive of Springfield, Va.-based Infotex. Mr. Varnado says he took over in March when he merged his closely held information-technology
company into AgriTherm, which changed its name to Infotex. In the deal, Mr. Varnado says he received 24 million post-split Infotex shares, about 80% of the stock currently outstanding.
Mr. Varnado says Infotex sent a letter to shareholders, but declined to provide a copy of it. Infotex also has put out press releases about the merger and other activities.
Mr. Varnado suggested talking to Jesse Clayton, who was president of the company before the merger. Reached in Tulsa, Okla., Mr. Clayton says he essentially was just a "good soldier" working for a Tulsa attorney named David Gordon.
Mr. Gordon says he represented a foreign company that purchased a majority interest in AgriTherm from Mr. Turner, the former chairman, and arranged the merger with Mr. Varnado's firm. It was his client that decided on the reverse split, he says. Mr. Gordon declines to
identify the individuals connected with his client.
After Mr. Hirschfield received his five shares, he sent a letter to SEC Chairman Arthur Levitt asking for action. He received no reply to that letter -- or to the second, third or fourth ones he sent.
Lack of Response an 'Oversight'
An SEC spokesman says the failure to answer Mr. Hirschfield's letters was an "unfortunate oversight." Earlier this month, after a call from this newspaper to the agency, Mr. Hirschfield was telephoned by two SEC attorneys asking him about his complaint.
In July, in an action apparently unrelated to Mr. Hirschfield's complaints, the SEC temporarily halted trading in Infotex shares. Among other things, the agency cited questions about the "nature and value" of contracts Infotex claimed to have. Mr. Varnado denies any
wrongdoing. Infotex, which traded as high as $8 a share before the halt, has recently been trading at about $1 a share.
Mr. Hirschfield says his Infotex experience increasingly seems "like a weird sitcom from Hollywood." He vows that if the SEC doesn't act, he will take his case to Congress. If what happened to him and other Infotex shareholders "isn't a violation of federal securities law, it
should be," he says. |
