Re: 11/15/00 - [ECNC] WSJ: EConnect's Trading Comeback Is Another Twist in Firm's Tale
November 15, 2000
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EConnect's Trading Comeback
Is Another Twist in Firm's Tale
By JOHN EMSHWILLER
Staff Reporter of THE WALL STREET JOURNAL
Once unplugged, eConnect Inc. has been reconnected.
On the over-the-counter Bulletin Board, that is. In March, the Securities and Exchange Commission suspended trading in the firm's shares and sued the small San Pedro, Calif., online-technology company and its chief executive, Thomas Hughes, for fraud in connection with allegedly false news releases. Without admitting wrongdoing, the defendants agreed to an injunction to settle the suit.
Getting back to the Bulletin Board is no small feat. Of several dozen stocks suspended by the SEC in the Bulletin Board's decade-long history, eConnect is only the second to make it back to trading and the first to do so after being charged with fraud.
The comeback is the latest twist in a strange tale that involves a cadre of fervent investors, wild stock trading and a fugitive tree-trimmer. EConnect's Bulletin Board reinstatement also could provide a guide to other companies facing similar problems.
At the beginning of this year, eConnect seemed to be just another fledgling firm with lots of optimism and little revenue. Starting in late February, eConnect issued news releases about a "strategic alliance" with a Florida brokerage firm and a "unique" licensing arrangement involving the Palm handheld organizer.
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At the same time, a Los Angeles tree-trimmer turned Internet stock picker named Stephen Sayre put out news releases touting eConnect shares, citing the Palm deal among other things. The stock price rocketed to $16.50 from less than $1.50, giving the company a market value of more than $2 billion. Daily trading volume topped 19 million shares.
The SEC suit, filed in a Los Angeles federal court, contended that eConnect didn't have the brokerage alliance or licensing deal. Company officials insisted that the releases essentially were accurate because there had been some dealings regarding the brokerage firm and the Palm product, and said they settled the SEC suit to avoid litigation costs.
Federal criminal charges have been filed by prosecutors in a Los Angeles federal court against Mr. Sayre, who left the country and is being sought by authorities. EConnect has denied any connection to Mr. Sayre. An attorney for Mr. Sayre says his client denies wrongdoing and plans to come back to face the charges after satisfactory terms for his return are negotiated with prosecutors.
While an SEC trading halt lasts just 10 business days, a stock doesn't automatically return to its old trading venue. The National Association of Securities Dealers, which operates the Bulletin Board as well as the Nasdaq Stock Market, requires that a licensed brokerage firm apply to resume making a market in the suspended stock. (After the 10-day halt ended, eConnect began trading in the less widely followed over-the-counter market.)
Such reinstatement applications are frequently filed after trading halts and just as frequently turned down. The NASD must be convinced that there aren't questions concerning the accuracy and adequacy of a company's public disclosures, say people familiar with the process. This standard has tripped up most applications, because SEC trading halts usually are prompted by questions over a company's disclosure practices. "How can you be reliable if you've been suspended?" asks one regulator.
A NASD spokeswoman would only say that "we take a very cautious approach" in reviewing reinstatement applications.
J. Alexander Securities Inc., the Los Angeles brokerage firm that is now making a market in eConnect stock, spent hundreds of hours preparing the eConnect application and answering NASD questions, says James Alexander, J. Alexander's president. EConnect's Mr. Hughes says he averaged about two hours a day for weeks on the matter. The NASD initially "didn't want us back," but "we weren't going to quit," says Mr. Hughes.
Company shareholders flooded regulators and Internet stock-chat boards with thousands of messages supporting eConnect. One fan began posting a count of how many days eConnect had been held "hostage." Mr. Hughes says he worked to keep the enthusiastic investors from becoming "a raving mob." For example, he says he discouraged shareholders who talked of filing suit against the NASD over the reinstatement question.
The SEC, perhaps inadvertently, lent a helping hand. Each year, the agency receives several thousand registration statements from companies seeking to make public stock offerings. These documents are supposed to reveal all material information about the firm. Recently, eConnect filed such a statement that included information about the SEC's charges; the statement was cleared by the agency. Once the SEC took that action, the NASD effectively no longer had grounds to question the adequacy of eConnect's public disclosure, says a person familiar with the matter.
An SEC spokesman says the agency doesn't discuss its internal review of a specific filing.
Since returning to the Bulletin Board Nov. 1, eConnect's daily trading volume has topped nine million shares and its stock price has surged at one point to more than $2 from 33 cents. At 4 p.m. in over-the-counter Bulletin Board trading, eConnect was up 4 cents to $1.23.
After the March problems, eConnect officials promised to be more careful in their press releases and other public utterances and hired a Los Angeles public-relations firm, Sitrick & Co., to help.
An Oct. 24 news release said the company would have a booth at this month's Comdex computer show in Las Vegas "in the same pavilion as Sun Microsystems." The release didn't say eConnect's booth has no connection to the Palo Alto, Calif., computer giant or that the same pavilion would be housing dozens of other companies.
In an Oct. 31 press release about its annual meeting, eConnect said Sun Microsystems Inc. had been "represented" at the meeting by account executive Don Yarter. The release quoted Mr. Yarter as saying "Sun is really embracing" some of eConnect's technology.
However, a Sun spokesman says Mr. Yarter didn't go to the eConnect meeting as a Sun representative and wasn't authorized to speak on its behalf. The spokesman says he believes that Sun has looked at eConnect's technology -- and that of dozens of other companies. The two companies don't have any business arrangements, he adds.
The Oct. 31 release also didn't mention that eConnect had, in August, paid Mr. Yarter 25,000 shares of its stock. Mr. Hughes said the stock was for "advising us how best to work with Sun."
Mr. Yarter declined to discuss what he said at the annual meeting. However, he described the stock payment as a "finder's fee" for referring some investors to eConnect. Mr. Yarter says he is restricted from selling the stock for two years and doesn't see any conflict of interest between his work at Sun and his getting the shares. The Sun spokesman declined to comment on the stock payment.
A spokesman for eConnect, for his part, says the company believed Mr. Yarter was at the annual meeting on Sun's behalf. EConnect also believes it didn't need to mention the stock payment in the release. In the technology sector, he says, it is common for an employee of one company to be "knee deep" in another company.
Write to John Emshwiller at john.emshwiller@wsj.com
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