November 20, 1998
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. |
