Internet Defamation Battle Rages Over Alleged IR Hype
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Who draws the line between hype and a well-told story? On the Internet, Financial-Web.com has emerged as a new watchdog. And according to its mission statement, it wants to pick up the slack for an over-worked and undermanned Securities and Exchange Commission.
But not every one is pleased with the new watchdog. In particular, one small bulletin board-listed company, ZiaSun Technologies Inc., which was caught in the FinancialWeb's "Stinky Stock" section, is suing
for defamation. ZiaSun, based in China, but with offices in San Diego, is a holding company for a handful of firms offering global online stock trading, seminars for Internet investors and e-mail.
FinancialWeb.com Attorney James Gagel said the website has filed a motion to have the suit dismissed because it fails point out the exact defamatory clauses, or how the firm was damaged.
"It's all defamatory," countered ZiaSun VP of IR Mark Harris, saying the damage was done to the stock price. Harris also attributes heavy negative attention the company has received on the Silicon Investor Internet chatroom to the April 28 article on FinancialWeb.com.
In fact, two weeks after suing FinancialWeb, ZiaSun filed a separate defamation suit against eight individuals, alleging that their postings on Silicon Investor contained "defamatory statements intended to manipulate the company's share price."
The messages, posted by individuals using aliases such as "trader14U," "Auric Goldfinger" and "realmoney," refer to ZiaSun as the "Stinky Stock."
More than 3,000 messages have been posted about ZiaSun on Silicon Investor's electronic message board since November 1998 when a ZiaSun page was established for stocks priced at $5 or less, the lawsuit noted.
Here's Looking at Ya
In that article entitled "Sunburn," FinancialWeb staff writer Lynn Duke assailed the company as "an unproven entity that talks big but comes up short on facts and figures."
The stock traded for as low as $5 a share last November before hitting a high of $35 in March. It was off its high the day the article ran, pushing the stock down a further $6 to close at $22.13, Harris said.
After a 2-for-1 split on May 24, ZiaSun, with a market cap of $135 million, traded at press time for about $10 a share.
In the month prior to the publication of the article, more than 5.3 million shares changed hands, a heavy volume for a company with only 10 million shares outstanding. The high trading volume and vaulting stock price was attributed by Duke to a flurry of news releases, which announced "non-events," and "ambiguous information that could lead the reader to believe the company had relationships with both America Online and Microsoft," she wrote.
What's behind this "upstart" company? Duke asked. "Not much, so far as we can tell besides a slew of press releases and some pretty outrageous hype," she wrote.
In a rebuttal to the article-which ZiaSun hoped to have FinancialWeb publish, but which it so far has declined to do-the company said it stands by its releases, claiming that comparisons made with other high tech companies were valid and not at all misleading.
The company also noted that the so-called non-event press releases "in fact related to significant events relating to the stock, such as stock splits, announced earnings and a major acquisition."
Still, the company seems to be short on filing its financials. An April 20 ZiaSun press release announced 1998 earnings of $1.15 million, or 11 cents a share, on revenues of $3.53 million. To date, those have been the only numbers released.
And as Duke pointed out in her article, while the company said the numbers were audited, the auditor wasn't named. A subsequent May 12 earnings release which published the same two numbers, named Salt Lake City-based Jones, Jensen & Co. as the auditor. Harris says the firm was always the auditor and that information was a matter of public record.
As an OTC-listed company, ZiaSun is not legally required to file the same level of financials with the SEC as are most companies. However, that is in the process of changing. In January, the National Association of Securities Dealers, parent organization of the OTC Bulletin Board and Nasdaq, received approval from the SEC to force Bulletin Board companies to file the same financial reports as companies listed on bigger exchanges.
But the new rules have just begun to be implemented. And since the NASD is implementing the rules using a 12-month staggered schedule based on the alphabet, companies whose ticker symbols start with Z, like ZiaSun, actually have until June of next year to file.
Still, ZiaSun has told investors it would file its form 10SB with the SEC by the end of this past March. In March, the company said the numbers would be out in 60 days. At press time, the numbers still hadn't been filed.
According to Harris, a recent ZiaSun acquisition has dramatically affected its asset base, but the numbers should be filed in a matter of weeks.
Duke also said that ZiaSun paid at least two stock promoters-Veritas Group and Interactive Business Channel-to hype its stock. Duke said Veritas received $5,000 in cash and 5,000 ZiaSun shares a month for its services while IBC was paid 50,000 ZiaSun shares.
Duke also noted that ZiaSun shared an address with Veritas, which ZiaSun said wasn't unusual.
Attacking the IR firm
In its lawsuit against FinancialWeb, ZiaSun cited "...inaccuracies [that] painted a very negative and inaccurate picture of ZiaSun." Among the supposed inaccuracies was the labeling of Veritas as a stock promoter. Veritas is not a "promoter" paid to "hype the company," Harris said. It is "a highly professional investor relations group and full member of the National Investor Relations Institute."
Highly professional or not, ZiaSun replaced the firm as chief IR counsel late last month with the Financial Relations Board, a well-known, national IR firm.
Before FRB signed on did they get the scoop on ZiaSun's prospects?
"Our L.A. office spoke with them," FRB Chairman Ted Pincus said, noting that each branch of the firm handles its own due diligence. There is normally significant due dilligence before the firm takes on any client, Pincus said.
Pincus said he couldn't speak to the specfics of ZiaSun, but he noted there are many technology companies that have never had any earnings but still get investor support.
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