Interesting TheStreet.Com Story on One of IDTC's "Competitors"
Playing CyberFast and Loose With the Facts
By Christopher Byron
Special to TheStreet.com
6/17/99 10:01 AM ET
A most extraordinary series of press releases crossed my desk recently.
They revealed that a Highland Beach, Fla., telecommunications start-up
company bearing the name Cyberfast Systems (CYSI:OTC BB) expects to be
drowning in riches any minute now.
The company's product? So-called voice-over-the-Internet
telecommunications services. This is the technology that's supposed to
enable people to place long-distance telephone calls over the Internet,
thereby cutting out the phone company and saving greatly on costs.
Those press releases, plus some aggressive promotional efforts on the
part of the company's paid stock promoter, have lifted Cyberfast --
which trades on the National Association of Securities Dealers'
over-the-counter bulletin board market -- from 5 cents last October to
nearly $18 by June 9. (That didn't last long, however: The shares are
currently changing hands around 8 5/8.)
And that in turn has made a rich man indeed of one Edward Stackpole, who
turns out to own about 85% of Cyberfast's 5.82 million shares
outstanding. At the stock's recent peak of 18, Cyberfast itself was
being valued at $104 million, with Mr. Stackpole's stake at just under
$90 million.
Now, one may observe many things about all this, beginning with the fact
that $104 million just ain't what it once was -- on Wall Street or
anywhere else. But this simply leads to the more basic question of
whether, financial inflation notwithstanding, Cyberfast Systems is in
fact worth much of anything at all.
We'll get to the particulars in a minute, but first some observations on
the enormous risks that any investor takes when he or she puts a dollar
into almost any company traded on the NASD's rob-you-blind
over-the-counter bulletin board.
More than 6,500 stocks are traded on the bulletin board, which makes it
by far the largest equities market on Wall Street, at least in terms of
the number of companies traded. Though the value of those companies is
dwarfed by the companies on the larger exchanges like the Nasdaq
National Market and the New York Stock Exchange, the over-the-counter
bulletin board is by far the most rapidly growing equities market on
Wall Street, with trading volume that has more than doubled in the past
year to 432 million shares per day.
That would be great except for one thing: Almost none of those companies
is required to file audited financial reports to their shareholders or
to the Securities and Exchange Commission, so few do. As a result, the
only way for most investors to learn about the health and business
prospects of a bulletin board stock is to read the company's own
self-serving press release -- the production of which has become a
growth industry of its own on Wall Street.
Every day, hundreds of press releases pour forth via two distribution
services -- the New York-based PR Newswire and the San Francisco-based
Business Wire -- all of them geared to catch the attention of naive
investors looking for the next hot new stock that's likely to triple by
noon.
The whole game of hyping such stocks begins with what's known on Wall
Street as a "reverse merger into a penny-stock shell" -- the
facilitating of which also has become a booming business in the darker
alleyways of downtown Manhattan.
To merge a company into a penny-stock shell, all you need to do is find
one -- which isn't hard, because currently more than 3,000 actively
traded bulletin board stocks are selling for between 1 cent and 50 cents
per share. These might be companies created from scratch as penny stocks
under Section 504 of Regulation D of the 1933 Securities Act (we won't
get into any of that) or companies that started out as real businesses,
then basically went bust.
In any case, a company with, say, 5 million shares at 5 cents per share
can be bought lock, stock and barrel for $250,000. Then all you do is
merge your own private company into the penny-stock shell you've just
bought and you've in effect gone public via a cheapo initial public
offering, without having to file a single audited financial statement
with anyone.
What you do next is hire a stock promoter -- they go these days by the
hoity-toity name of "investor relations consultants" -- to start
cranking out press releases to get your stock price rising. In this way,
a pump-priming investment of only a few hundred thousand dollars, spread
out among a half-dozen or so investors, can easily be transformed into
millions via bulletin board stock hype, which is why the game has become
so popular.
And it's also why those who get suckered into playing it in the
aftermarket are playing with fire: There is simply no way to know
whether a promoter's breathless claims about a bulletin board stock are
accurate -- and thus whether the shares themselves will blow up in
investors' faces the minute they buy them.
Thus, on May 5, questions began to circulate in the press regarding the
accuracy of certain claims made via press releases for an
over-the-counter company called Net Command Tech. Its stock price had
recently climbed from pennies to more than $30, even though the company
was nearly three years behind in its SEC filings. Too bad more investors
didn't heed those warnings, for on June 11 the SEC abruptly suspended
trading of Net Command's shares, leaving thousands of gullible
"stuckholders" holding the bag at $15.
Whether that fate now awaits holders in Cyberfast is hard to say. For
all the world knows, every claim in every press release the company has
issued since it reverse-merged itself into a defunct penny-stock shell
back in November 1998 may be the very quintessence of truth. But they
also may be nothing more than a skein of lies, distortions and
half-truths. Evidence on the matter isn't encouraging.
For starters, there are the company's press release projections
concerning revenue. On Nov. 12, 1998, with the stock trading at 3 1/2,
Cyberfast issued a press release claiming to be in possession of audited
financials showing that it had collected $6 million in revenue for the
first six months of 1998, with earnings of $1.4 million. Sound trivial?
Then read on, for within weeks the company claimed looming revenue 20
times as large.
Cyberfast's hired-gun promoter, Doug Blackwell of somewhere in Florida,
now says he personally had nothing to do with that first release and
that it had been a mistake to call the financials "audited" because,
well, they weren't.
In any case, a few weeks later, on Dec. 10, the company issued another
press release -- this one claiming that Cyberfast had now signed
agreements to install high-speed fiber-optic systems in 22 different
European cities, and was projecting $100 million in revenue from the
business per year. The release didn't identify which cities -- or even
which countries -- were involved, and Blackwell, from his place in
Florida, now says he can't supply the names because, well, he doesn't
know them.
This Jan. 4, the printing press rolled again and out came a release
claiming that Cyberfast was in the process of installing
telecommunications circuitry in a "large Eastern European city."
Blackwell now says -- yep, you guessed it -- he can't divulge the name
because he doesn't know it. (Let's hope it wasn't Belgrade or Pristina.)
On Feb. 8, the company issued yet another press release -- this one
claiming it had obtained a line of credit from Cisco (CSCO:Nasdaq) to
finance construction of the aforementioned fiber-optic systems in the
aforementioned 22 European cities. In an interview, Blackwell expanded
on that to say that Cisco had in fact extended a "virtually unlimited
line of credit" to Cyberfast. But according to a Cisco spokesman, Cisco
never extends unlimited lines of credit to anyone and, moreover, the
name Cyberfast doesn't even appear in Cisco's database of customers.
Be that as it may, on May 5, Cyberfast issued a press release claiming
that the first three of its European systems were up and running and
were generating net pretax income of $283,510 per month. Extrapolating
from the financials provided in the release, the statement implied that
Cyberfast would be netting close to $25 million annually from its
European operations alone. (Blackwell says it will actually be closer to
$30 million.) On June 3, the company issued a follow-up release claiming
that it had signed agreements to install systems in five more (unnamed)
cities -- this time in Asia -- that would add a total of $9 million more
to net pretax income.
All together, the claims add up to close to $40 million in net income
annually, which is to say, more net income than that of any publicly
traded phone company in the country except the major long-distance
carriers and the Baby Bells.
So how is Cyberfast going to manage that explosive growth? When I asked
Blackwell how substantial an operation Cyberfast really is, he answered
that the company has 50 employees around the world. But when I told him
that a Dun & Bradstreet report on Cyberfast reveals the company to have
no credit rating and exactly two employees -- Stackpole and his wife --
Blackwell said, oops, he didn't know that.
When I asked Blackwell what Stackpole's experience in the
telecommunications field was, he said that Stackpole had run the biggest
AT&T (T:NYSE) distributorship in Turkey, and had sold it back to AT&T
for "millions" before returning to the U.S. to set up Cyberfast. But
when I phoned back a day or two later to inform him that federal court
records in New York show that Stackpole had been arrested by Turkish
customs officials and charged with illegally smuggling AT&T phones into
Turkey in 1991, Blackwell said, oops, he didn't know that either. And
when Stackpole himself finally told me that he didn't sell his
distributorship business to AT&T because there was nothing much left to
sell, Blackwell said -- well, you know what he said.
As for Stackpole, he claimed the whole thing was caused by negligence on
the part of AT&T shippers and wound up suing the company. Court papers
show that AT&T eventually admitted its error, and the charges against
Stackpole in Turkey appear to have been dropped.
The interview with Fast Eddie himself, who phoned in from an undisclosed
location in the Caribbean at press time to "clear up any doubts," only
added to those doubts. When I asked him who Cyberfast's main competition
was, and which rival watched his company most closely, he named the Net
2 Phone operation at New Jersey-based IDT (IDTC:Nasdaq). But a check
with sources at IDT revealed the company knew nothing of Edward
Stackpole or Cyberfast. Nor did AT&T know of him, or his company. Nor
had Cyberfast signed up as an exhibitor in Atlanta at the June 7
Supercomm '99 -- a leading trade show on the voice-over-the-Internet
industry, with 800 exhibitors.
Finally, when I asked Stackpole to name even one single customer who was
now using his service or to identify even one single city -- in Europe
or anywhere else -- to which one could make a call using his equipment,
he said, "I'll get back to you on that." He never did.
In spite of all that -- the whole mountainous collection of doubts that
surround the company thanks to its status as a nonfiling bulletin board
company -- it's still possible that Cyberfast may emerge as precisely
what its press releases claim it to be: one of the fastest zero-to-hero
companies in the history of Wall Street.
But it's equally possible that in the fullness of time the whole
business will be revealed to have amounted to nothing more than the
latest in the over-the-counter bulletin board's endless parade of
phony-baloney stock hustles -- in which case, having read this far, you
at least won't be able to say, "Oops, I didn't know that."
------------------------------------------------------------------------
Christopher Byron's column appears in the New York Observer, and he also
writes a Wall Street and investing column for Playboy. He is the former
assistant managing editor for Forbes, the Wall Street correspondent for
Time and the Bottom Line columnist for New York. Byron holds no
positions in any of the stocks discussed in his column. While he cannot
provide investment advice or recommendations, he welcomes your feedback
at commentarymail@thestreet.com. |
