I LIKED THIS ARTICLE TOO
Stock scam: 'It made us look like hypocrites'
Lawsuit shines new light on a little stock with big troubles
Chad Eric Watt Staff Writer
ALTAMONTE SPRINGS -- FinancialWeb.com's Stock Detective built a reputation for uncovering "stinky stocks," those manipulated by unethical investors looking to capitalize on the Internet's capacity for hype.
The now-defunct Web site never inspected its own company's shares.
Maybe it should have.
Last June, a federal crackdown on Mob manipulation of stocks identified FinancialWeb's own stock as the subject of an Internet "pump-and-dump" scam ("Little stock, big troubles," Orlando Business Journal, June 6, 2000).
Now, a class-action suit suggests the company wasn't just a victim. A California investor in FinancialWeb alleges the company lined the pockets of insiders and consultants with millions of shares of stock; that a co-founder was a convicted felon still on probation; and that the company's largest single shareholder had twice been suspended from the Chicago Mercantile Exchange.
Named as defendants in the suit are Kevin Lichtman, former CEO; James P. Gagel, the company's former executive vice president; Jere John Lane, its former auditor; and the firm Robb Peck McCooey Clearing Corp. Lane declined to comment. Lichtman, Gagel and Robb Peck did not return calls seeking comment.
Pump and dump
Formed in July 1997, FinancialWeb.com never showed a profit. In November of last year, creditors foreclosed and sold its assets.
Today, the stock is worthless. It last traded at a half-cent per share on Dec. 20 after topping the $10 mark in the previous year.
But in its early years, it made a name as a consumer watchdog dedicated to sniffing out bad stocks -- especially stocks involved in so-called "pump-and-dump" schemes.
By touting a tiny and unfamiliar stock to unsuspecting investors through the Internet, unscrupulous market players have been able to reap windfalls by "pumping" the price of a stock entirely on hype -- then dumping the stock before the price collapses.
Crusading against such scams earned FinancialWeb's editorial staff praise from business publications and government regulators. In its short life, FinancialWeb garnered mentions in business publications including, Forbes, Barron's, Businessweek, The Wall Street Journal and Money.
But that's what FinancialWeb's largest single shareholder, a Chicago trader and company consultant named Glenn Laken, was indicted for in June.
The Web site's staff was in the dark
"We didn't know anything about this until the guy was indicted -- it made us look like hypocrites," says former Editor-in-chief Carl Surran.
A rogue's gallery?
Potential investors also were in the dark about FinancialWeb's largest options holders, the lawsuit contends.
Laken and another company consultant, John J. Katsock Jr., each received options on 1 million shares in early 1999. A year and a half later, the company revealed those immediately vested options added nearly $27.6 million in costs to FinancialWeb's bottom line.
The two consultants' agreements were notable for another reason: a lack of specifics. According to SEC filings, there was no defined role for the consultants. There was no specific dollar value placed on their work.
Yet the deal appeared to make Laken and Katsock the two largest stockholders -- with 15.7 and 14.4 percent of its value, according to federal filings.
There were more surprises. In addition to his June indictment, Laken had been twice suspended from commodities trading on the Chicago Mercantile Exchange. In one instance, he punched and seriously injured another trader on the exchange floor.
And Jack Cabasso, identified as a co-founder of FinancialWeb, was a convicted felon who in 1999 received millions of shares of FinancialWeb stock based on a previously undisclosed verbal agreement with co-founder Lichtman, then the chief executive officer of FinancialWeb. Cabasso, who had been convicted of jury tampering, was on parole when the company was organized. He also was involved in personal bankruptcy proceedings, according to the civil lawsuit.
In its last SEC filing, the company acknowledged Cabasso's role in forming the company and that Cabasso and companies he controlled received options on about 3.1 million shares. According to the filing, Lichtman and Cabasso "had an oral understanding" that Cabasso would "own half" of FinancialWeb's stock.
By contrast, four private placements between January and April distributed about 2.6 million shares among about 100 investors.
The filing revealing Cabasso's role came too late for investors to be warned off. FinancialWeb did not notify the SEC of his holdings until June -- even though the SEC requires such disclosures to be filed within 90 days of the end of the year.
Editor Surran says he only knew of Cabasso as the "money man" in the company's start-up. The criminal history was unknown to Surran until it was mentioned in the SEC filing. "What I would like to know is if Kevin Lichtman knew about that," Surran says.
'Like a death knell'
The Laken and Cabasso deals were just part of the problem. FinancialWeb issued options on millions of shares to board members and insiders, giving them the potential to reap massive rewards.
Some of the stock deals were wildly generous. Among the stock options given to executives, Gagel, FinancialWeb's general counsel, received the option to purchase 10,000 shares for just $10. Even if the stock had been trading at just $1 a share, when Gagel exercised his options, he would stand to to make $9,990.
The flood of new shares diluted the value of stock held by shareholders. They also account for the bulk of FinancialWeb's reported $57.8 million net loss in 1999: Fully $45.3 million of that loss could be traced to the company's stock-based consulting fees.
In June of last year, when federal indictments revealed the company's own stock was involved in a pump-and-dump scam, little of that was known. At the time, company officers maintained the scam was the work of an outsider.
Still, says Surran, "It was like a death knell came over our office."
Yet the site continued to operate for another five months.
In October -- less than two weeks before the company laid off most of its staff -- Money magazine put FinancialWeb on its list of the top 50 financial information Web sites.
"We tried to do some good things," says Surran.
But by then, he admits, FinancialWeb's fate had been sealed.
Bob Davis, a free-lance reporter who wrote for FinancialWeb's Stock Detective in the wake of Laken's indictment, insists "the Web site and the company is absolutely legitimate."
In fact, Davis has continued the stock watchdog work he did for FinancialWeb on his own Web site, The Napeague Letter (http://www.napeague.com). Still, he says, the only way to make smart investments is to do your own homework. "Don't believe anything you read on the Internet," he advises. "Including me."
Copyright 2001 American City Business Journals Inc.
Click for permission to reprint (PRC# 1.1655.407793)
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