TODAYS SANDIEGO TRIBUNE!!!!!!!!!!!
DON BAUDER
SEC halts trading in San Diego's USATalks.com for now
January 30, 1999
The Securities and Exchange Commission (SEC) yesterday suspended trading for two weeks in San Diego's high-flying -- and highly questionable -- USATalks.com.
Also, two law firms announced they are filing class-action lawsuits in U.S. District Court here against the company and key officers, alleging a fraudulent scheme to inflate the stock.
The last trade was Thursday at $52.25, putting the company's market capitalization at a stunning $1.36 billion.
The company claims that next month it will roll out Internet-based long-distance telephone service to be sold for a flat monthly fee.
The stock rose in a parabolic curve beginning in mid-December, with one interruption. In this column a week ago, I pointed out alarming danger signals, such as the chief executive's former involvement with a telecom stock that had soared and crashed, the company's extremely weak financial structure, and also a Federal Trade Commission (FTC) finding that the company's multi-level marketing operation had made numerous unsubstantiated claims about products being hawked.
In the next two trading sessions, the stock backed down from $50 to $38. Then on Wednesday the company put out a news release quoting chief executive Allen J. Portnoy boasting that its "California network is performing beautifully," and the company would soon have "a successful nationwide installation."
The stock jumped back above $50.
The SEC suspended trading "because of questions that have been raised about the accuracy and adequacy of publicly disseminated information concerning, among other things, the status and extent of USATalks' business operations."
Portnoy believes that the SEC is challenging the company's news releases, which he defends.
An SEC spokesman says that the agency is looking into whether USATalks has made adequate and accurate disclosure of matters that are material to investment decisions.
Further investigation into the company reveals numerous details that were not disclosed in its public documents. Portnoy claims the information did not have to be disclosed.
First, both Portnoy and the company's president, William H. Ervine Jr., have filed for bankruptcy at least twice in this decade.
Portnoy filed a personal Chapter 11 reorganization in 1993 in San Diego, and then filed a Chapter 7 liquidation in 1995 here. "Certain debtors did not get paid," he admits of the Chapter 7 resolution.
(Those unpaid creditors would certainly like to know that Portnoy controls 20 percent of a company with a market capitalization of $1.36 billion.)
Ervine filed a Chapter 7 in 1990 in San Angelo, Texas, and a Chapter 13 in 1993 in Houston. Ervine was not available for comment yesterday, but Portnoy says the first filing was the result of financial problems at Ervine's law firm.
Records also show that both Portnoy and Ervine have piled up substantial tax liens. Those have been cleared up, Portnoy says.
Last fall, USATalks announced its intention to purchase a Memphis multi-level marketing operation called TrendMark. Shortly, the FTC revealed that there had been a consent decree on the agency's charges of misleading marketing practices at TrendMark.
But, it turns out, there is much more. One of the principals of that firm, E. Robert Gates, was president of a Memphis company named Victory Investment that went into bankruptcy in 1986. The state of Tennessee issued a cease and desist order against Victory for acting as an unregistered investment adviser.
Another TrendMark principal, William F. McCormack, was involved with a Kentucky multi-level marketing concern named Gold Unlimited. In 1996, its principals were convicted of multiple counts of mail fraud and money laundering and sentenced to prison. "They skipped the country, are at large," says Hopkinsville, Ky., attorney Daniel Kemp, receiver for Gold Unlimited.
McCormack was not one of those convicted or charged. A person named Robert Gates was also involved in Gold Unlimited, but it cannot be determined if it is E. Robert Gates. TrendMark did not return calls yesterday.
Portnoy says he was aware of most of the information on McCormack and Gates, and also knew about the FTC matter. Yesterday, however, Ervine told Bloomberg News Service that he had not been aware of the FTC matter until after he signed the letter of intent to buy the company.
Portnoy told me last week that TrendMark would no longer tout nutritional products. But it is still doing so.
Portnoy then explains that the purchase of TrendMark has not been consummated. But that is directly contradicted by TrendMark's own sales materials, which say TrendMark merged with USATalks in August of last year.
In USATalks' private placement memorandum of Aug. 10, Portnoy was listed as president of Missouri-based Spartech Corp., a New York Stock Exchange company, from 1979 through 1985.
The company has provided me documents showing that Portnoy was president of a predecessor company, Spartan Manufacturing, from 1979 through 1983, but was not president of Spartech. Portnoy claims that he, in fact, changed the name. In 1991, Spartech sued Portnoy in a dispute over stock. It was settled.
In the mid-1980s, Spartan spun off Digitech, a telecom company headed by Portnoy.
Digitech stock soared, crashed, and ultimately the company was liquidated. Portnoy's involvement with Digitech is not mentioned in the Aug. 10 memorandum. A person who knows about the Digitech runup/rundown says that the company regularly put out news releases touting its technology.
Portnoy admits that voice recognition technology was the key in both the failed Digitech and USATalks. "In USATalks it's a finished technology that works," says Portnoy. "In Digitech it was never a finished technology."
Anthony Elgindy of Encinitas-based Pacific Investigations says that the technology isn't finished at USATalks, either. One of his employees signed up as a customer: "I tried to get on the system and it was busy for ten, twenty, thirty minutes. I never made a connection," says Elgindy, who has a short position in USATalks (a bet the stock will go down).
Each evening, TrendMark holds pep-talk sessions with its distributors. During such sessions, some of the salespersons have had similar complaints about the technology, Elgindy says.
Nonetheless, the TrendMark leaders tout the technology endlessly. I listened in Thursday night. One cheerleader bubbled that the technology would wow "a huge cross-section of the population." And, of course, he touted the huge bonuses and commissions the salespeople will make.
The salespeople can also earn USATalks stock.
TrendMark's so-called Sizzle Line calls Portnoy a "world famous inventor," and says USATalks' technology is "100 percent successful."
Ervine even told Bloomberg that the company will earn $16 million on revenues of $85 million this year.
Given the backgrounds of the people involved with this company, this technology better work, or there will be some unhappy investors and ravenous attorneys, and perhaps government regulators, asking questions.
Union-Tribune library researcher Anne Magill assisted with this column. Don Bauder's email address is don.bauder@uniontrib.com
Copyright 1999 Union-Tribune Publishing Co.
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