More on Memory Metals
---
The Troubled Little Company
Stirs Fresh Controversy
By Kathryn M. Welling
09/07/1987
Barron's
(Copyright (c) 1987, Dow Jones & Co., Inc.)
REMEMBER Memory Metals?
In the spring and summer of '86, it was a very hot stock.What got investors all worked up about the tiny, Stamford,Conn.-based company was its know-how in making shape-memorycopper alloys, a special type of metal that, after beingformed, instantly reverts to its original shape when heated.Its fans on Wall Street saw practically limitless potentialfor Memory Metals' products, in everything from anti-scaldshower heads to nimble robot fingers.
Then, abruptly last fall, the shares collapsed, when --under SEC pressure -- Memory Metals "clarified" itsdescription of numerous "contracts" it had announced withcompanies invariably better-known than itself, and after aquestioning article in this magazine. Among other things,Barron's noted insider selling in the shares and filled in anomission from Memory Metals's disclosure documents -- namely,that its founder, Neil Rogen, had signed a consent decree tosettle SEC charges of securities fraud in connection with theinitial public offering of another shape-memory alloy firm,back in the 'Seventies.
The company's outside directors quickly removed Rogen andMemory Metal's President, L. MacDonald Schetky, as officers.A formal SEC investigation was launched. And this spring, afederal grand jury in New York City indicted two members ofan alleged ring of conspirators on charges of manipulatingthe shares of Memory Metals, as well as those of two otherOTC companies.
Sentencing of the two, who pleaded guilty and signedsealed plea agreements -- has been put off until this fall.That delay, it appears, was designed to give the prosecutorstime to test their cooperativeness in a much larger probe ofthe group's trading activities. That investigation, which theSEC has been pursuing at least since September 1985, involvesa number of over-the-counter issues. Implicated, according toSEC and federal court documents unearthed by Barron's BillAlpert, and the recollections of many of the participants,are some of the same people connected with Memory Metals orits stock.
In the meantime, though, effective control of thecompany's board has returned to some of the same hands thatgot Memory Metals into trouble in the first place. Thisremarkable development comes despite a raft of shareholdersuits and the continuing criminal investigation.
One of those shareholder suits, filed in federal court inMiami, recently made headlines in the financial press byalleging that one of the most prominent firms on Wall Street,PaineWebber, and Peter Butler, a top-ranked chemicals analystformerly in its employ, had helped manipulate the market inMemory Metals shares. It's clear, from the informationBarron's has turned up, that Butler's enthusiasm for thestock was a major factor fueling Memory Metals' ascent. Butjust how witting, or unwitting, was his -- or PaineWebber's-- participation in the alleged manipulation, it's hard tosay; Butler, PaineWebber, and his current employer, FirstBoston, all refuse to comment on the allegations.
At most, however, Butler seems to have played a supportingrole in the Memory Metals melodrama. The leading charactersin the story were the stock promoters who are the apparenttargets of the SEC and Justice Department probe. Althoughthey rank as habitual violators of federal securities laws,with histories in some cases going back to the 1960s, theyare not well-known. Indeed, the fact that they aren't reallybig-time operators is perhaps the reason they haven't,despite the urging of the courts and the SEC, left thesecurities business.
The indictment returned last April against one of theconspirators, William Rodman -- who at the time was onprobation stemming from another securities fraud case --throws light on the group's activities. While the indictmentalleges securities law violations in the trading of two otherstocks, Memory Protection Devices and Intravision, itconcentrates on Memory Metals.
According to the indictment, Rodman and hisco-conspirators arranged for a small over-the-counterbroker-dealer firm, Securities First Inc., to be officiallylisted as the underwriter for Memory Metals' IPO and to hire"a registered representative whom they controlled." Inreality, though, the indictment charges, Rodman -- who'd beenpreviously permanently enjoined from affiliating with abroker-dealer -- acted as an undisclosed underwriter ofMemory Metals, allocating the stock to both brokers andretail customers.
The indictment further charges that Rodman and his groupthen purchased large quantities of Memory Metals stock andactively traded it through "more than 100 accounts at atleast 35 brokerage firms."
Many of these transactions, according to the government,were actually wash trades that involved no actual change inbeneficial ownership, or were matched orders, in whichmembers of the group took both sides of the deals. They alsoallegedly "parked" large quantities of the stock in variousaccounts to artificially reduce its float, and engaged in"free riding," purchasing the stock without intending to payfor it, except out of profits after it was sold.
Rodman and his co-conspirators, court and SEC documentsindicate, were intent on kiting the value of "founders"shares in Memory Metals, Memory Protection Devices andIntravision. They had acquired these shares by providing"bridge financing," by acting as "consultants" or undisclosedunderwriters, and in at least one instance, throughextortion.
During the hearing at which Rodman entered his guiltyplea, an assistant U.S. attorney handling the case let slipthe name of one of Rodman's alleged co-conspirators: "anindividual by the name of Pericles Constantinou." And as ithappens, Constantinou, who's also known as Perry Constantino,is a key link between the various manipulation schemes thegovernment is trying to unravel.
Last February, a federal court judge in New York City,ruling in a civil case over the collapse of the shares inanother issue, found that Constantinou "engaged in aconcerted effort over a period of time to manipulate theprice of Keystone {Medical} stock." But Constantinou's recordof multiple securities law violations extends back at leastto the early 1970s. It includes rigging the market for theshares of an issue named Fantastic Fudge Inc. and criminalsanctions growing out of an indictment that charged, in part,that Constantinou bribed an adviser to a mutual fund torecommend certain stocks. 1975 was a particularly eventfulyear for Constantinou, the onetime president of a now-defunctOTC firm, Provident Securities. In two completely separatecases, the SEC first enjoined him from associating with anybroker, dealer, investment company or investment adviser, andthen barred him from associating with any broker-dealer.
When contacted by Barron's, Constantinou refused to answerany substantive questions. But court records offer insightinto his activities. Particularly illuminating is thedecision rendered in a civil suit, Competitive AssociatesInc. v. International Health Sciences Inc. et al, in federaldistrict court in New York back in '75.
The suit involves not only Constantinou but Akiyoshi Yamada , whose record of scrapes with securities regulatorsalso considerably longer than Constantinou's, and who alsofigures prominently in the Memory Metals story, and RobertVesco, the infamous fugitive financier best-known for hislooting of I.O.S.
On this occasion, the three landed in court essentiallybecause Competitive Associates, which ran a mutual fund, gotstuck holding the bag when the shares of International HealthSciences, an initial public offering in which it had taken alarge position, went into the tank in the early 1970s. Vescowas International Health's largest shareholder and he, Yamada and Constantinou conspired to distribute the shares through,if need be, crooked means. ( Yamada , through his attorney,declined to answer Barron's queries for the record.)
The Constantinou connection helps explain why MemoryMetals' outside directors, all five of whom had held theirseats for less than four months, acted so quickly last fallto oust its chairman and founder, Rogen, and its president,Schetky, from the company's management, and asked them tostep down from its board.
To briefly recap: Barron's first piece on Memory Metalsappeared on the newsstands on Saturday, Sept. 27. Thefollowing Monday, Rogen and Schetky were relieved ofexecutive authority, although they remained directors and onthe payroll. The move was made, according to Memory Metals'10k report for the year ended that June, but because of aletter Memory Metals had received, dated Aug. 20, 1986, fromthe SEC's enforcement division, advising Memory Metals thatit had begun an informal inquiry into its promotionalactivities.
But only three days later, on Oct. 2, the board convenedagain, to remove Rogen as chairman and CEO, for cause, overhis objections, and to accept Schetky's resignation as anofficer and director. (Rogen remained on the board, thefilings indicate, only because the other directors were toldthat they lacked the legal authority to oust him.)
Rogen and Schetky were dumped with such dispatch, severalof the outside directors explained to Barron's, because ofinformation they were given by the pair's personal attorney.That information, the directors say, indicated that, viadealings with Perry Constantinou and Aki Yamada , Rogen andSchetky had placed Memory Metals in clear violation of thelimits the SEC places on compensation that can be paid tounderwriters.
The company's 10k described what Rogen and Schetky'slawyer told the board, albeit in somewhat stilted andmysterious terms: Just prior to the initial public offeringof Memory Metals shares, in November 1984, "a certainindividual ('Mr. A'), who had introduced Mr. Rogen to thecompany's underwriter, asked Mr. Rogen to transfer to him360,000 shares of the company's common stock. According totheir counsel, 'Mr. A' had been introduced to Mr. Rogen byanother individual ('Mr. B') who Mr. Rogen had met at thecompany's original, but later replaced, underwriter."
To satisfy "Mr. A's" demand, the board was told, Rogendelivered 240,000 shares to him while Schetky gave him120,000 shares, although the certificates weren't endorsedfor transfer. But shortly before the underwriting was slatedto close on March 9, 1985, the documents continue, "'Mr.A'told Mr. Rogen that the offering would not close unless Mr.Rogen and Dr. Schetky gave him signed stock powers forattachment to the previously delivered stock certificates."They were delivered, gratis.
None of Memory Metals' subsequent SEC filings hasidentified the mysterious "Mr. A" or "Mr. B" (the 10Kexplained that they weren't named because the investigationhadn't been concluded). But the 10K did provide a clue:"'Mr.A' is believed by the company to be a principal, officeror employee of the firm which served as a financial relationsconsultant to the company for a fee of $1,500 a month fromSeptember 1985 to September 1986."
Pericles Constantinou confirms that, "I was a financialconsultant to the company, back in -- I think it was throughlast July, a year ago. And then they let me go."Constantinou, then, is undoubtedly "Mr. A."
And "Mr. B," Schetky says, is Akiyoshi Yamada . As MemoryMetals' former president tells it, Yamada was associated withA.T. Brod, the brokerage firm that was first lined up to takethe company public. When Brod backed away from theunderwriting, recalls Schetky, "Aki Yamada . . . thenintroduced us to Perry Constantinou, who in turn introducedus to the brokerage firm {Securities First} which took uspublic."
Schetky still insists that he sees nothing wrong with thedeal that turned over 360,000 Memory Metals shares toConstantinou and Yamada . When the company first went public,he says, "there were all kinds of finder's fees rollingaround in there . . . But it was not company money. Neil{Rogen} and I gave up our own stock . . . to make sure thatthe company went forward."
Yet a complaint the outside directors filed last Februaryin state court in Delaware against Constantinou and a groupof investors charged that they were "attempting to seizecontrol of Memory Metals through a blitzkrieg consentsolicitation" and implied that the payment was something verydifferent from a "finder's fee." Specifically, the complaintalleged, "Constantinou threatened Rogen that the offeringwould fail unless he personally was given 360,000 shares inpayment for his services with respect thereto."
What's more, the fact that Constantinou and Yamada received 360,000 shares at the time of the initial publicoffering was nowhere disclosed in the company's prospectus.
To be sure, Memory Metals' outside directors didn't haveto inquire deeply into Constantinou and Yamada 's past to comeup with reasons aplenty for wanting to sever any ties the twohad to the company. But testimony given in an SEC probe ofthe trading in another stock in which Constantinou wasactive, Keystone Medical, as well as in some recent civilsuits, indicates that "ownership" of that 360,000-share block-- so far as Constantinou and Yamada 's involvement in therigging of Memory Metals shares went -- was only the tip ofthe iceberg.
Some of this testimony came from Constantinou himself. Itwas given last October, at the trial of a suit filed infederal district court in New York by E.F. Hutton over tradesthat were left unsettled when Keystone Medical's stockcollapsed. In it, Constantinou explained how he managed to beactive in the underwriting business, at least on anunofficial level. He testified: "I am not a broker, but dealscome to me, companies to be underwritten, and I bring them tocertain brokerage houses to underwrite. I get a fee for that. . . sort of a finder's fee."
Constantinou went on to explain to the court that hedidn't directly introduce fledgling firms to prospectiveunderwriters; that he worked instead through "certainbrokers" who he'd placed at those firms. The brokers, hesaid, got hefty commissions plus a significant portion of theunderwriters' warrants for their trouble in each deal.
Under questioning, Constantinou conceded that he'drecommended a broker named Joe Tavormina for severalbrokerage industry jobs, including one with Securities First,Memory Metals' underwriter. And Constantinou acknowledgedthat he had recommended "30, 40, maybe 50" clients toTavormina, a former male model who also uses the name, JoeTabor. The significance of that testimony became clear laterin Constantinou's cross-examination.
"Q: Now, those underwritings that you would refer to thebroker . . . didn't you anticipate that you or some companylike World Wide Capital that you were affiliated with, wouldprovide bridge financing to the company before theunderwriting?
"A: If it was needed, yes.
"Q: And World Wide Capital or some other company wouldhave restricted stock in that company, is that correct?
"A: Hopefully.
"Q: And then, hopefully, the underwriting would be sold .. . in part to clients that you recommended . . . Therestrictions would come off the stock. World Wide would sellthe restricted stock and make a lot of money. Wasn't that thetransaction that was contemplated?
"A: If you want to take a scenario from now to three yearsfrom now, yes."
World Wide Capital is a "consulting and bridge financing"outfit based in New York City. Its president is Constantinouand, according to disclosure documents filed before itsregistration with the SEC was terminated in 1986, its othermajor shareholders include William Rodman -- the same WilliamRodman who has already pleaded guilty to manipulating MemoryMetals stock. Its corporate headquarters were at 225 ParkAve., suite 339, at least during 1985.
The picture of suite 339 that emerges from the variouscourt testimony is of a very cramped, chaotic and activeplace, where Perry Constantinou and Bill Rodman were verymuch in evidence, almost always on the phone, and oftenshared in the same conversations. Their offices also servedas at least temporary quarters for, besides World Wide, FirstFlorida Securities, a brokerage firm that became the targetof lawsuits stemming from Keystone Medical's collapse; WasteTechnology, an OTC-traded "pyrolytic resource recovery firm"of which Constantinou in a January 1986 deposition, said hewas a vice president, and, in connection with which, he iscurrently under indictment in Florida; Multivest, a realestate and construction products firm that also dabbles inproviding bridge financing and whose president, BarryPomerantz, is a third major shareholder in Constantinou'sWorld Wide Capital; and, Consulcor Corp., which providedbridge financing to Memory Metals that was repaid out of theproceeds of its initial offering, and wound up with warrantsto purchase 270,000 shares.
These various firms' bridge financing activities are athread that ties them to several of the stocks allegedlymanipulated by the trading ring the government isinvestigating. One example: Constantinou's office mate,Rodman pleaded guilty to manipulating the shares of MemoryProtection Devices as well as Memory Metals. And Rodman was amajor shareholder of World Wide Capital. That firm's mostrecent 10k, for 1984, lists among its scant assets 100,000restricted shares of Memory Protection, acquired for $1,000.Memory Protection's own more recent SEC filings, in turn,disclose that in order to finance an acquisition at the endof last year, it obtained a loan, at 5% over the prime, fromU.S.I. Venture Corp. and some private individuals, who gotpreferred stock convertible into common and warrants asadditional consideration for making the loan. One of theprincipals of U.S.I. is William Spier, a former vice chairmanof Phibro-Salomon and a current director of GAF Corp., whoserved briefly last summer as one of Memory Metals' outsidedirectors.
Spier, who declined to answer Barron's inquiries, was oneof the five business and academic luminaries added to MemoryMetals' board in June '86, at the peak of the effort to hypethe stock. As Schetky, the company's former president,recalls, it was analyst Peter Butler who strongly recommendedSpier be elected a director. But in any event, Spier was alsothe first of those five to quit the board, on Sept. 29, whenthe rest of the directors -- who at that point knew only thatthe SEC was investigating the company's promotionalactivities -- failed to go along with his motion that Rogenand Schetky be relieved of their duties that day.
It's possible that Spier and Constantinou eachindependently got involved in the two Memory companies.However, Constantinou, in his Keystone testimony, listed a"William Spier" as one of the investors to whom he'drecommended Keystone shares.
In any case, Constantinou was not only Memory Metals'financial relations consultant, and a major holder of itsrestricted shares, via the certificates he extracted fromRogen and Schetky, but also, according to a former FirstFlorida broker who worked with him in suite 339, effectivelyacted as Memory Metals' underwriter. The broker and trader,Rochelle Slovis, told the SEC in a deposition how, in early'85, after she went to work for First Florida in theconference room of Constantinou's small suite of offices,there were more than a few times when Constantinou and Rodmangave her direct and sometimes unusually specific orders, tocross trades, for example, without going through theirbroker, who, she said, was Joe Tabor.
Slovis also told the SEC that "I helped Perry Constantinouclose his deal" for Memory Metals. How? "They just needed toknow what accounts had paid for the stock, Memory Metals, inorder to close the deal because they needed, I think, $3million to close the deal or something like that. They didnot have records of checks coming in, checks that cleared,number of shares. They didn't know how to correlate the wholebit, which I did. The bank didn't have the records that wereclear enough so that they could systematically just checkoff. They had commingled their funds."
"Q: This was an underwriting by Securities First?"
"A: Yes."
"Q: Do you know what Mr. Constantinou's association waswith Securities First or Memory Metals?"
"A: Well, there was an association. Obviously. . . Ireally didn't want to know more than that. I didn't reallycare."
Former Memory Metals president Schetky recently insistedto Barron's that all the "flak" Memory Metals has taken wascaused by two outsiders, who have been "apprehended and havepleaded guilty to the charges." He added, "It was veryclearly this group which was hyping the stock and driving itup to what we considered a very high price, one that couldn'treally be justified by what we were doing." But, he asserted,"We had no control over that."
Yet they did have at least some nominal control overConstantinou, whom they hired, after all, to do financial PRfor them. What's more, Schetky's warm endorsement of thisspring's effective takeover of Memory Metals by a group ledby Ernest Barbella is puzzling. The "takeover" placed controlof the company back in virtually the same hands that had heldit at the start of its meteoric speculative rise. "This is agroup of bona fide investors who had every reason to beconcerned," he insists. "They had substantial moneyinvolved."
Less than a month after Memory Metals' outside directorsousted Rogen and Schetky last October, Barbella sent thecompany a letter requesting a shareholders' meeting. Hefollowed that up, on Nov. 3, with a letter saying he plannedto propose his own slate of directors, and then with an SECfiling that indicated he indicated to solicit proxies.
At this point, the company's affairs were being run by atwo-man team of outside directors. They were M. BrianO'Shaughnessy, a senior vice president-marketing ofInspiration Resources Corp., and L.G. Schafran, managingpartner of the real estate investing firm of the same name.One of the first things they'd done, upon taking over, was tohire some high-powered legal talent to investigate theallegations being made about the company, and handle thenumerous suits and countersuits that were quickly filed, notonly by shareholders, but by the company itself against itsformer officers.
Nor did it take long for Memory Metals' outside board todecide to battle the Barbella overtures. The board hadinformation that suggested Barbella had ties not only toConstantinou and Yamada , but to Schetky, Memory Metals'former president.
When Rogen and Schetky's attorney, sometime around Oct. 1,had told the outside directors about the 360,000 shares thatwere given to Constantinou and Yamada , he also traced 100,000of those shares in their subsequent journey to ErnestBarbella. Yamada had given him the shares, Barbella claimed,to satisfy a $200,000 debt from an unrelated businessdealing. A few months later, Barbella tried to get the sharesregistered, Schetky's lawyer reported, but was informed thatrecord ownership of the shares couldn't be transferred.That's when Barbella cut a deal with Schetky, in whose namethe shares were still officially recorded. Barbella returnedthe certificate to Schetky, who proceeded to sell another100,000 shares, and then turned over about 75% of theproceeds, or $600,000, to Barbella.
In less than a year's time, in other words, Barbella's"loan" to Yamada was paid back threefold.
In their legal challenge to Barbella's threatened proxyfight, Memory Metals' outside directors raised severalobjections, starting with the fact that his disclosurematerials failed to reveal from whom he'd gotten those100,000 shares (from "an individual" is the way the documentsread). Nor did the filings disclose, according to thecomplaint, that "Barbella has been acquainted with Yamada forsome time, and it was Yamada that originally introducedBarbella to Constantinou and, indeed, Memory Metals.Thereafter, Barbella has introduced other brokers, with whomhe has long done business, to Memory Metals, throughConstantinou. He has kept in touch with Constantinou eversince and admits talking with him two or three times a weekin recent weeks."
Memory Metals' board was uncomfortable too, over some ofthe details of Barbella's business career -- not all of whichwere reported in the documents he filed with the SEC. Listedin the resume Barbella did disclose were two littleover-the-counter firms on whose boards he had served:Musikahn Corp. and HME Records; both filed for Chapter 11 in1985, shortly after Barbella became a director. Omitted fromthe resume was a consent agreement he'd signed and an $85,000fine he'd paid last summer to the Agriculture Department, tosettle charges that one of his companies, Mid-West Meat Co.,bribed New York area supermarket executives.
Yet another significant omission from Barbella'sdisclosure documents, Memory Metals' board complained, wasthat Perry Constantinou, though he hadn't filed with the SECas an official member of Barbella's group, was in fact tryingto persuade shareholders to side with the insurgents. MemoryMetals' complaint recounts a series of three contacts with abroker in Hawaii (who owns shares himself and has a number ofcustomers who own shares) by Constantinou, and alleges theywere illegal: "Those conversations consisted of praisingBarbella's business acumen, with the likely consequence ofinducing that broker, and hence his customers, to giveBarbella a written consent."
The legal skirmishes between Memory Metals and theBarbella group were called to a halt on Feb. 13. Barbellaagreed to a four-year standstill pact, in exchange for thecompany's promise to elect two of his nominees to the board.Barbella was also named to a panel that was to advise theboard on employee compensationa group with some unusual teethin its charter. If O'Shaughnessy, who by then had beenelected the company's chairman and CEO, refused to go alongwith its recommendations, the peace treaty would be scuttled.
Memory Metals' board decided to negotiate with Barbella,according to former director Paul Kaestle, becausenegotiating "was better than continuing to fight, because itwas so expensive that it was going to drive the companybankrupt. You'd have won, and you'd have had nothing. That'sthe kind of choice we faced."
The main objections of the existing directors to theBarbella group, says Kaestle, were that "it wasn't clear thatBarbella and some of the people with him in the takeoverattempt were squeaky clean. And some of their own admitteddealings were less than desirable, in our view. On the otherhand, the resolution was semi-acceptable, in that he hadproposed a couple of directors who were not part of hisimmediate group, who had impeccable business records, andthose were the two who were put on the board."
The agreement quickly came under fire, however, from someof Memory Metals' outside directors. On April 7, thereconstituted board ousted O'Shaughnessy, in favor of StephenFisher, who'd been Memory Metals' vice president in charge ofoperations since 1985, and its chief operating officer sinceSchetky's removal from that post. At that same meeting, L.G.Schafran and Paul Kaestle resigned, and Barbella's twonominees joined the board. They are Jean-Paul Marx, presidentof Rhone-Poulenc Capital, and Martin H. Kern, an executivevice president of the Great Atlantic & Pacific Tea Co.
The upshot of all the maneuvering was that only two ofMemory Metals' outside directors, who had been strugglingsince the previous fall to keep the company afloat, remainedon the board. These two, however, weren't terribly "outside."Both had long been associated with Memory Metals, even ifthey only joined its board in June of '86. Indeed, back in1984, the company's red herring identified the pair, Dr. C.Marvin Wayman of the University of Illinois, and Dr. NicholasJ. Grant, a former director of MIT's Center for MaterialsSciences and Engineering, as members of its "advisory board."That nine-member group, the prospectus said, advised thecompany's management and board "with respect to business,financial, and technological planning and development." Thegroup had purchased 130,000 Memory Metals shares in 1983 fora penny a share.
Exactly two weeks after O'Schaughnessy was removed,Schetky was re-elected to the board. Today, in other words,Memory Metals' board consists of Rogen and Schetky and one oftheir long-time employees, Fisher, plus two outside directorswho've been associated with the company from its verybeginnings -- and Barbella's two nominees.
So, despite the continuing SEC and Justice Departmentinvestigations into Memory Metals and the parts severalhabitual violators of the securities laws played in itsorigins and last year's dramatic appreciation in its stock --and despite the collapse in the company's stock, theshareholder suits, and evidence of dubious dealings uncoveredby its own lawyers -- control of Memory Metals' board hasessentially reverted to the people in charge when all thoseterrible things began to happen to it.
But then, Memory Metals has always claimed that what'sspecial about its products is that, after they change shape,they snap back to their original |
