Re: 10/11/01 - [GENI] LA Times: Brokers Face $100 Million in Losses From MJK Failure; Bloomberg: GenesisIntermedia CEO Quits; SEC, Nasdaq Investigate (Update2); Bloomberg: E*Trade, Others Face $100 Mln Losses From MJK Failure (Update1)
Brokers Face $100 Million in Losses From MJK Failure
By JERRY HIRSCH, TIMES STAFF WRITER
Four brokerage firms may have lost more than $100 million in a stock trading scheme involving a cast of characters including a global arms dealer and a woman who claims to have been the model for Mattel Inc.'s Pocahontas doll.
The firms, which include E-Trade Group Inc., the nation's second-largest online broker, were involved in lending money to MJK Clearing Inc. in exchange for 7.2 million shares of Van Nuys-based GenesisIntermedia Inc.
GenesisIntermedia is a telemarketing firm. MJK, which failed in late September, was the securities clearing unit of Minneapolis-based brokerage Stockwalk Group Inc. Genesis stock apparently was lent among the brokerages to accommodate "short-selling" requests. In a short sale, an investor borrows stock and sells it, expecting to replace the borrowed shares later at a lower price.
Genesis, which has lost nearly $16 million this year, became a target of short sellers as the stock soared from $6 to $18 amid the firm's plans to expand its Internet business.
Two individuals--Saudi arms dealer Adnan Khashoggi and Ramy El-Batrawi, who resigned as chief executive of Genesis on Monday--combined control 85% of the company's shares.
Genesis said Monday that the Securities and Exchange Commission has begun a formal investigation of the firm and its stock.
The lending of 7.2 million Genesis shares began with Native Nations Securities of New Jersey, a brokerage founded by Valerie Red-Horse.
Red-Horse, once an official at defunct brokerage Drexel Burnham Lambert, has been involved in a variety of Hollywood projects with Native American themes through her Red-Horse Native Productions. She also has said she modeled for the Mattel Pocahontas doll.
Native Nations lent the Genesis shares to MJK, which in turn lent them to other brokerages.
As Genesis stock began to collapse last month, falling from $16.20 on Sept. 17 to $5.90 on Sept. 25--when Nasdaq halted trading--the decline rippled through the daisy chain of transactions in the shares, said Matthew Kyler, executive vice president of marketing at Stockwalk Group.
Native Nations owed $60 million to MJK but defaulted on that payment and ceased trading Sept. 21. MJK, in turn, made some payments owed to other brokerages in the stock-lending chain but stopped when it fell into violation of SEC minimum capital requirements. The federal Securities Investor Protection Corp. took control of MJK in late September.
Kyler told The Times that MJK still owes about $30 million to E-Trade, about $18 million to Ferris, Baker Watts Inc. of Baltimore, $9 million to Pax Clearing Inc. of Chicago and $8 million to Robert W. Baird & Co. of Milwaukee.
What's more, those brokerages may have to return tens of millions they received from MJK because the firm paid them using money from its customers' accounts while waiting for Native Nations' payment, Kyler said. With the plunge in Genesis stock, Kyler estimated the total losses involved will exceed $100 million.
"This is a very complex web of transactions," said Ken Caputo, an attorney with SIPC, created in 1970 to handle brokerage failures. "We are investigating, but we only have half a story at this point," he said.
Michael Mendelbaum, a spokesman for Native Nations, blamed the problems on what he called a rogue trader who conducted "improper stock loan transactions."
Mendelbaum said the worker, who has since been fired, joined the firm as part of its merger with Freeman Securities this year. Native Nations is attempting to unwind that merger, he said, and leave any liabilities with Freeman Securities.
Red-Horse could not be reached for comment Wednesday.
For its part, E-Trade said it "continues to be hopeful that this matter can be resolved fairly and amicably." E-Trade said Wednesday that it earned $9.3 million, or 3 cents a share, in the third quarter, excluding one-time charges. That compares with $7.2 million, or 2 cents, a year earlier. After charges, primarily for office closures, the firm lost $244 million in the latest quarter.
Copyright 2001 Los Angeles Times
latimes.com
=====
GenesisIntermedia CEO Quits; SEC, Nasdaq Investigate (Update2)
By David Evans
Van Nuys, California, Oct. 8 (Bloomberg) -- Ramy El-Batrawi resigned as chief executive of GenesisIntermedia Inc., amid investigations by the Securities and Exchange Commission and Nasdaq into trading of the telemarketing company's shares by Saudi arms dealer Adnan Khashoggi and others.
The company also fired 60 employees, or 15 percent, of its 397 employees since August to cut expenses, said vice president Robert Bleckman, in a telephone interview.
Nasdaq is probing trading in the company's shares by Khashoggi's Ultimate Holdings, an investment company based in Bermuda, and the SEC has launched a formal investigation, the company said. Ultimate is a Bermuda-based company that controls 75 percent of GenesisIntermedia.
The Nasdaq Stock Market halted the stock on Sept. 25, the same day the shares played a role in the largest failure of a U.S. brokerage firm in at least 30 years. MJK Clearing Inc. was seized by the Securities Investors Protection Corp. after Native Nations Securities Inc. defaulted on a $60 million payment due to MJK on a loan of 7.2 million shares of GenesisIntermedia. That placed MJK in violation of the SEC's minimum net capital requirements, and forced it to halt operations.
Khashoggi's Ultimate Holdings is the only entity that controlled as much as 7.2 million shares. The default by Native Nations came after GenesisIntermedia's shares plunged 65 percent in the seven trading days following the terrorist attacks in New York and Washington. MJK, which cleared accounts for 175,000 customers with $10 billion in assets, was liquidated last week. Southwest Securities Group Inc. of Dallas took over clearing its accounts.
That money is now missing. Native Nations says a rogue employee falsified documents to conceal the identity of the source of the GenesisIntermedia shares.
``Khashoggi is the only person who could have loaned 7.2 million shares to Native Nations,'' said Frank Partnoy, professor of securities law at the University of San Diego Law School, after reviewing regulatory filings.
The Securities Investors Protection Corp. said the failure of MJK has so far cost SIPC about $42 million. The 7.2 million shares had previously been loaned by Native Nations to MJK Clearing Inc. in exchange for $125 million, said Matthew Kyler, vice president of Stockwalk Group, MJK Clearing's parent before it was taken over by SIPC.
Khashoggi is wanted by police in Thailand on suspicion of loan fraud in connection with the collapse of the Bangkok Bank of Commerce in May 1996, according to the Economic Crime Division of that nation's police.
Missing Money
GenesisIntermedia said Nasdaq is investigating ``certain transactions'' involving Native Nations and Khashoggi's Ultimate Holdings, as well as El-Batrawi's possible role in them.
The losses don't end with Native Nations and MJK. That's because MJK re-loaned the GenesisIntermedia stock to additional firms receiving back a total of $125 million, which it forwarded to Native Nations, according to Kyler. As GenesisIntermedia plunged to $9, MJK complied with its mark-to-market obligation, and sent those firms a total of $60 million.
``This is yet another example of the daisy-chain problem associated with counter-party risk,'' said Partnoy.
Stephen A. Weber, a director, was named interim chief executive of GenesisIntermedia, which is 85 percent-owned by El- Batrawi and Khashoggi.
Weber, already a director and consultant to GenesisIntermedia, was chief financial officer of Valcom, a film production company until earlier this year. He remains a member of the board at Valcom, whose shares have declined 84 percent in 2001.
He co-founded Positive Response TV Inc., best known for its ``Amazing Discoveries'' infomercials for products like Perfect Hair, a do-it-yourself $89.95 hair-weave kit. He served as president until Positive Response was acquired by National Media Corp. in 1996.
GenesisIntermedia, which had a market value of about $137 when it last traded on Sept 25 at $5.90, had a negative net worth of $9.3 million as of June 30.
The company's loss widened to $15.7 million in the first half of 2001, from $12.5 million a year earlier. Sales rose to $24.9 million from $14.8 million.
GenesisIntermedia lost $33.5 million in 2000, on sales of $42.3 million.
quote.bloomberg.com
=====
E*Trade, Others Face $100 Mln Losses From MJK Failure (Update1)
By David Evans
Los Angeles, Oct. 10 (Bloomberg) -- E*Trade Group Inc., the second largest online broker, and three other brokerage firms face losses of more than $100 million after the clearing firm from which they borrowed shares failed last month.
The firms lent $125 million to MJK Clearing Inc., the clearing unit of Minneapolis-based brokerage Stockwalk Group Inc., in exchange for 7.2 million shares of GenesisIntermedia Inc. When MJK was unable to repay those loans it collapsed, becoming the biggest brokerage firm failure in at least 30 years.
The firms that are owed the money are Menlo Park, California- based E*Trade, Ferris, Baker Watts Inc. of Baltimore, Pax Clearing Inc. of Chicago and Robert W. Baird & Co. of Milwaukee, said Matthew Kyler, vice president of Stockwalk, which owned MJK before it was taken over by James Stephenson, a trustee appointed by the Securities Investor Protection Corp. The SIPC is liquidating MJK.
``I think they've got a significant problem, because the shares don't appear to have a significant value,'' said John Coffee, professor of law at Columbia University Law School.
GenesisIntermedia, a Los Angeles telemarketing company controlled by Saudi arms dealer Adnan Khashoggi has been halted since Sept. 25 as the Securities and Exchange Commission and Nasdaq probe whether someone manipulated the stock.
MJK ran out of cash after repaying $60 million borrowed from the four firms, which became due after last month's 66 percent plunge in GenesisIntermedia shares. That's because Native Nations Securities Inc., which loaned MJK the 7.2 million shares, defaulted on a related $60 million payment that was due to MJK.
Money Owed
MJK still owes about $65 million to the four firms. The securities firms may also have to return $42 million they have already received from MJK because the money was improperly paid with funds from MJK's customers, said Kyler.
Of the $65 million, about $30 million is owed to E*Trade, $18 million to Ferris, Baker Watts, $9 million to Pax Clearing and $8 million to Robert W. Baird, said Kyler at Stockwalk.
The $42 million of MJK's customer money includes about $19 million received by E*Trade, $12 million by Ferris, Baker, $6 million by Pax and $5 million by Robert W. Baird, said Kyler. The remaining $18 million paid by MJK was the last of its capital.
``E*Trade continues to be hopeful that this matter can be resolved fairly and amicably,'' said spokesman John Metaxas. ``We do not anticipate any impact on E*Trade's business operations as a result of this situation.'' E*Trade is scheduled to report earnings for the third quarter after the close or trading today.
Kyler said the number of shares of GenesisIntermedia backing the loan to each firm is: E*Trade, 3.3 million shares; Ferris, Baker Watts Inc., 2 million shares; Pax Clearing Inc., 1 million shares and Robert W. Baird & Co., 885,000 shares.
``We have some exposure,'' said Ted Urban, general counsel for Ferris, Baker. ``Relative to our capital, that exposure is not material.''
John Rumpf, spokesman for Baird, downplayed the impact. ``Any impact would be less than $8 million and would not be material to our business.''
A Pax spokesman declined comment. The four firms reloaned the GenesisIntermedia shares to three additional firms, who reloaned them yet again to Deutsche Bank AG, according to Stockwalk.
Spokesmen for the three firms, A.G. Edwards Inc., Nomura Securities Co. and Wedbush Morgan Securities, declined comment, as did a spokeswoman for Deutsche Bank.
``I anticipate this is going to be a messy situation, with litigation between multiple parties,'' said Coffee.
quote.bloomberg.com |
