REMEMBER HARRIS FREEDMAN THE EUNI WARRANT ENTITY HOLDER AND FINGERMATRIX A/K/A FINX GROUP THE COMPANY WHICH PT DOLOK A/K/A PT DOLAK OWNED SHARES OF FXGP? HERE IS A STORY WHICH MENTIONS HARRIS FREEDMAN AND ALSO LEWIS SCHILLER WHO IS
FXGP'S CEO.
THE SAD SAGA OF A PENNY-STOCK COMPANY
BYLINE: Gary Weiss in New York
HIGHLIGHT:Big perks for the brass, lethargic authorities, and, finally, an AWOL company
BODY:It was February, 1978, the worst winter in years, and Buffalo, N. Y., was frozen solid. But the phone lines were running red-hot between a soft-spoken,middle-aged postal worker named William Walter and his broker at First Jersey
1989 McGraw-Hill, Inc., Business Week, May 15, 1989 Securities.
The subject: Sequential Information Systems Inc., a New York-base delectronics company that the broker insisted was brimming with potential. Walter, suitably impressed, took $ 5,000 of his life savings and bought 8,000 shares of Sequential common stock at 62 1/2~ apiece. Eleven years have come and gone, and Sequential -- one of the most widely held penny stocks in history -- has vanished from public view. Its shares have no bid price. That means Walter and the 20,000 other small-time investors who bought Sequential over the years, mainly from the now-defunct First Jersey and Rooney, Pace Inc. penny-stock brokerages, cannot unload their shares -- not even for a penny. Many shareholders may not even know if the company is alive. Though it shares an office with a subsidiary in lower Manhattan, Sequential's listed phone is disconnected. For four years, it has not sent out an annual report nor held an annual meeting -- a failing that does not run a foul of the federal securities laws. The last financial filing with the Securities & Exchange Commission is asparsely worded statement for the quarter that ended Apr. 30, 1988. There's been no filing, as required by law, for the fiscal year that ended last July 31 or the two quarters since then -- and the SEC has not sued to force a filing. Sequential's super-low profile has made Walter, now retired from the U. S.Postal Service, just a tad cynical. ''Anybody can start a company, sell stock,and make a ton of money,'' he says ruefully. ''They all live high off the hog, and the investors just go to ####.''Well, it so happens that Walter has very neatly summed up Sequential's recent history. According to voluminous internal corporate records made available to BUSINESS WEEK and details obtained in interviews with a former Sequential vice-president and director, Anthony Verni, Sequential has indeed provided a very good living for its top executives as it has slid into financial Gehenna. Over the past two years, Sequential allegedly has engaged in a variety of wasteful spending practices, sapping its dwindling resources with ill-fatedbusiness deals and flamboyant executive perks. As recounted by Verni, the main beneficiaries of Sequential's largesse have been Lewis S. Schiller, 58, its CEO since October, 1987, and his predecessor, Irving E. Hertz. Verni's decision to go public, which followed a bitter dispute with Schiller, has provided a rare inside look at the kind of company that has received scant attention from regulators of the scandal-beset penny-stock business. Although both First Jersey and Rooney, Pace were accused by the SEC of manipulating Sequential shares, misleading customers about the company, and over charging customers for the stock and Rooney, Pace was found guilty of thecharges, the business practices and finances of Sequential itself have goneunexamined.POPULAR STOCK. Schiller and Hertz declined to be interviewed for this article. Are quest for comment from Hertz, who was described by his son as ailing, wasreferred to Schiller, who declined comment through Sequential's attorney, Stanley Schwartz. Schwartz cited a civil suit that the company has filed againstVerni, who was discharged in March after a series of disputes with Schiller overthe management of the company. Accused by Sequential of misappropriating companyfunds and other misdeeds, Verni scoffs at the suit as baseless retaliation forobjecting to company practices and for contacting the SEC. Sequential's early history gives hardly a clue to its lamentable recentexistence. Founded in 1961 as a manufacturer of optical encoders and other high-tech gadgetry, it went through an unremarkable first decade. Schiller, an accountant in a firm headed by his father, became president of the company in 1970. ''Its beginnings were perfectly respectable,'' says a former associate of Schiller's. Viable as the company surely was, it had nagging financial troubles, and early in the '80s, a need for capital caused the company to turn to the thriving penny-stock market. In October, 1981, Rooney, Pace raised $ 3 million in apublic offering for Sequential, and three years later First Jersey managed a $ 6 million offering. Stock in the company was aggressively peddled to small1989 McGraw-Hill, Inc., investors, and by the fall of 1985, there were 22,379 holders of Sequentialcommon stock -- more than own such major companies as CBS, Gannett, andMotorola.It was in 1984, after the First Jersey offering, that Irving Hertz, then 62,appeared on the scene. He had been a senior partner of a brokerage, Hertz,Warner & Co., in the 1960s and had since consulted and served on the boards ofseveral small companies. He is described by former associates as a savvybusinessman. But his involvement didn't seem to do much good: The companyremained chronically unprofitable. Only one recent year, 1986, saw black ink -- and even then, only barely. So the company decided to cut its losses. In 1987,Sequential sold its operating company, Sequential Electronics Systems, with the idea of using the proceeds from the sale to engage in investments.For Sequential, the terms were not exactly bountiful. The deal called for Sequential's electronics operations to be sold to General Aero Products Corp. ofCopiague, N. Y., for $ 2.7 million. But the sale to General Aero, which sincehas changed its name to General Technologies Group Ltd., was not for cash butfor 1.5 million General Aero shares and a $ 2 million promissory note thatmatures in 1997. The only cash immediately to change hands was received not bySequential but by General Aero, which was loaned $ 500,000 by Sequential as part of the deal. When Anthony Verni came on the scene as a consultant in mid-1987, his relations with Schiller were cordial. An accountant who was formerly employed by Coopers & Lybrand in Chicago and Arthur Andersen & Co. in New Mexico, Verni, now35, worked with Sequential in putting together investment deals. Early in 1988, he was put in charge of an effort to acquire bankrupt health clubs in NewMexico. Although that foray was a failure, it apparently did not unduly upset Schiller, who hired Verni as a vice-president and had him elected to the boardof directors early in September, 1988. NO RUBBER STAMP. It was a decision Verni and Schiller were to bitterly regret. Aformer business associate who is familiar with (and dislikes) both men assertsthat Verni was put on the board in the belief that he would be a pawn, someonewho would quietly do Schiller's bidding. Instead, the two men soon began toclash.Verni says that he took his job as vice-president and director seriously andthat the company's operations began to trouble him more and more. Some of hisconcerns regarding the company involve legitimate but, he asserts, inept business dealings. For example, he says that in February, 1988, a subsidiary bought accounts receivable of a travel agency without properly determining theirvalidity -- and that they turned out to be based on forged invoices. Sequential,he says, lost some $ 79,000., May 15, 1989 But his allegations concerning Schiller's conduct are far more grave. He and another former employee, who requested anonymity, maintain that they both sawSchiller frequently take cash from the company for his own personal use -- such as ''when he needed spending money on the weekend,'' Verni says. Company records obtained by BUSINESS WEEK show checks made out to Schiller, many cashed by him, that totaled $ 30,654.66 in 1987, $ 25,650 in 1988, and $ 3,250 during the first two months of 1989. The checks were not drawn on Sequential's payroll account and were mainly in round numbers -- $ 1,000 here, $ 1,500 there. Some of the checks have notations as ''advances,'' or as expense reimbursement, and other shave no notation. As last disclosed to the SEC in 1987, Schiller's annual salaryas president was $ 111,597.As a result of the company's silence, it is not known how Sequential justifies the checks. Nor is it known whether the company was ever reimbursed for those checks or the perks that have been granted Schiller and Hertz. One of these perks is an apartment that the company rented for Schiller on Manhattan's Upper East Side two months after he became chairman and CEO. The rent is $ 3,140a month. A rider to the lease lists as occupants Lewis Schiller and anotherperson not employed by the company. The lease stipulates that the apartment beused ''for living purposes only'' -- not, as Schiller had described it to Verni,as an office for Sequential. To be sure, there is some evidence that the apartment was to be used forbusiness: Among the furniture rented in January, 1988, for a total of $ 1,289.02a month, is an ''exec. desk'' and a ''lateral file.'' But the array of other furniture rented indicate that the apartment was hardly furnished asSequential's nerve center. Company records also show Sequential was billed forthe purchase in March, 1988, of ''two #701 tub enclosures'' for $ 600 and ''two full-size door mirrors'' for $ 420, both for the apartment. Schiller also signeda company check for $ 1,294.61, dated Dec. 28, 1988, as payment for two television sets and a VCR. The purpose of this purchase is unclear, just as itis unknown if the company was reimbursed.FANCY WHEELS. Corporate records also disclose that the company has paid for the leasing and garaging of Jaguars for Schiller and Hertz -- even after Hertz left as chairman and became a consultant to the company. The generosity apparently did not end there. Company records show that from March through August of 1988, the company ran up a $ 16,000 limousine-service bill, of which just over half was for the personal use of a friend and relative of Schiller's. The friend used the car service for trips to Manhattan locales such as Bloomingdale's, while the relative used the service mainly for nocturnal trips to and from various neighborhoods in the Bronx. It could not be determined if the company was reimbursed by Schiller for any of these expenses. Verni asserts that Hertz sought to exercise restraint over Schiller'sspending, but with limited success. The former Sequential employee agrees andvividly remembers ''horrible screaming fights'' between Schiller and Hertz inwhich Hertz would accuse Schiller of stealing from the company. Hertz quit thecompany as chairman and CEO on Oct. 19, 1987 -- Bloody Monday, by coincidence. Hertz did not leave empty-handed. Under an agreement dated Nov. 1, 1987, he was retained as a consultant at a starting salary of $ 75,000 a year, with annual increases of $ 5,000, and provided with the use a car and garage. Butanother alleged windfall would have been more than just a perk. According to SECrecords, on Oct. 1, 1987, in a private sale, Hertz sold five million shares ofSequential stock at 5~ a share, for a total of $ 250,000. According to internal corporate records, those same shares were acquired a year before in an exercise of an option for 1/10th of a cent pershare. Thus, Hertz's profit would have been$ 245,000 -- a 5,000% return on his investment.NO WATCHDOG. How did Hertz manage to make money in a stock that had long been worthless? Verni has a simple explanation: Sequential bought out Hertz. Half of the shares were bought by SMACS Corp., a consultant to Sequential, and the otherhalf by Schiller ''acting as agent for Sequential Information Systems,'' Verniasserts in a detailed memorandum that he has provided the SEC. As Verni'smemorandum tells it, SMACS was to recoup, through consulting fees, the money it paid for the stock.Schiller allegedly paid Hertz with $ 75,000 in cash borrowed from a New Yorkbank and a promissory note for $ 50,000. Verni's missive to the SEC asserts thatSchiller defaulted on the loan, which Verni maintains was guaranteed by asubsidiary of Sequential. If so, Sequential indirectly paid for most of Hertz's shares.An official of SMACS, Harris Freedman, did not return calls to his office. But Schiller's son Douglas, a formerofficer of Sequential, does not denyVerni's account of the deal. ''Certainly it can be looked at that way, superficially, butt here's so much more toit than that,'' he said, declining toelaborate.Whatever the validity of the company's spending practices, there's evidence that Sequential has been sapped of its only liquid asset, Treasury bills. According to internal company records, on an unconsolidated basis (not including subsidiaries), Sequential had $ 1,485,930 in marketable securities -- Treasury bills, according to Verni -- and $ 7,000 in cash as of Apr. 30, 1988. The total for T-bills is the same as was recorded in the company's consolidated balancesheet as of Apr. 30, as filed with the SEC. But a draft unconsolidated balancesheet as of Jan. 30, 1989 shows a $ 45,000 increase in cash -- but no marketable securities at all. Were the T-bills benignly shifted to a subsidiary? Or were they consumed by the company's carefree spending?Verni, for one, would like to see these questions resolved by theauthorities and would welcome the appointment of a receiver to oversee thecompany. He has submitted detailed allegations against Sequential with the SECand the U. S. Attorney for the Southern District of New York -- although neitheroffice, he says, has shown any interest in the matter. Officials of the SEC and U. S. Attorney's Office declined to comment.Even if the federal authorities do not intervene, the saga of Sequential Information Systems may well be played out in court. The Sequential suit,seeking more than $ 1 million in damages, is an unorthodox twist in the story ofa company that has rarely followed a predictable course. It maintains that Verni misappropriated for his own use over $ 100,000 in funds that were supposed to beused for various business ventures, including the effort to acquire health clubsin New Mexico. That is hotly denied by Verni, who asserts that in fact, he hadto spend money of his own in New Mexico for which he was never reimbursed.Verni's version is supported by another former employee of Sequential, who wasin a position to have direct knowledge of Verni's activities in the Southwest.DEEPER STORY? The company also maintains that Verni has stolen corporaterecords. Verni says that before he was fired, he removed records showing improprieties by Sequential, that he has kept them in safekeeping to preventthem from being destroyed by company officials, and that he would be more thanhappy to turn them over to the authorities. Verni says he was improperly removedas vice-president and director and that he intends to vigorously fight the suit -- and involve shareholders in a countersuit against the company.Douglas Schiller maintains that the story of Sequential is not black andwhite, and that there is another side of the story involving his father'spersonal problems. Unless that is understood, he says, ''it looks like acomplete fraud on the public, and it really isn't.'' But he would not elaborate. Whatever the underlying reason for Sequential's troubles, at least one shareholder has already learned his lesson -- to stay away from penny stockslike the plague. ''Had some woman call me from Rochester just a couple of daysago, fast talker, insisted I buy something, said it was good. I hung up and she called back,'' William Walter marvels. ''Never met anybody so insistent.'
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Copyright 1995 McGraw-Hill, Inc.
Business Week View Related Topics March 27, 1995
SECTION: FINANCE; PENNY STOCKS; Number 3417; Pg. 170
LENGTH: 1284 words
HEADLINE: 'I NEVER SCREWED ANYBODY'
BYLINE: By Gary Weiss in New York
HIGHLIGHT:Shareholders of Lew Schiller's Consolidated Tech might disagree
BODY:Lewis A. Schiller, chief executive officer of Consolidated Technology Group Ltd., takes a drag on a thin cigar and leans back in his chair. He is a bear like, affable man, 63 years old. He is in the conference room at Business Week, March 27, 1995 Consolidated's corporate headquarters, on the ninth floor of an old brick officebuilding in lower Manhattan. The atmosphere is mellow. Schiller is recountingone of Consolidated's latest exploits: the acquisition of a string of diagnosticfacilities in Florida. Consolidated has been on a takeover binge in recentmonths, buying an array of impressive-sounding high-tech companies. Schiller is enthused, excited. But suddenly, Schiller becomes less affable. A sensitive subject has been brought up: the shareholders. There are 20,000 of them, and most lost at least97 cents out of every dollar they put into Consolidated stock in the 1970s and 1980s -- back in the days when Consolidated was called Sequential Information Systems Inc. Sequential was probably the most widely peddled stock to be churned from the penny-stock mills of that era. Schiller, however, is tired of hearing about the penny-stock era. "I'm an honest man," he says. "I never screwed anybody."The future is bright for Consolidated, he insists. And there's no question that Consolidated is doing quite nicely, at least compared with the bad old days. The company is no longer starved for cash. It is expected to report pretax earnings of $ 3 million, or 40 cents a share, on sales of $ 100 million for 1994. Its shares, not traded for years, were listed under the new name on the NASDAQ stock market in September, 1993. But for the sad army of shareholders, any rejoicing is premature. At Consolidated, the old penny-stock days are alive,if not well. CONVOLUTED TALE. To begin with, the acquisition binge was largelyfinanced the old-fashioned way -- by issuing stock, this time to foreign investors. And Consolidated has also been pushed on U.S. investors by the new generation of penny-stock peddlers -- Hibbard Brown & Co., the penny-stock firm that went out of business last August. As a key Consolidated market-maker,Hibbard Brown's demise last August was one of the reasons for the collapse of Consolidated stock, from $ 6 to $ 1 a share, over the past year (chart). By contrast, the hapless stock buyers in the Eighties paid the post-splitequivalent of $ 40 a share or more. But that's not to say that nobody has beenable to turn a profit on Consolidated shares. One man has done that: Robert E. Brennan, the legendary penny-stock merchant. Indeed, the recent twists in the Sequential-Consolidated story are the latest chapter in a fascinating -- if convoluted -- tale. Sequential began life in the early 1960s as an electronics firm, but its primary claim to fame involves another invention: the telephone. Sequential shares were aggressively pushed by cold-calling salesmen at Brennan's First Jersey Securities and thenow-defunct Rooney Pace Inc. Rooney Pace was later found guilty of manipulating Sequential shares and misleading customers. HIGH-TECH ACQUISITIONS. When thepenny-stock schemes collapsed, so did Sequential stock. By the late 1980s, theshares could not even fetch a penny. The late Eighties and early Nineties wereBusiness Week, March 27, 1995 a dizzying nightmare of a nearly insolvent company, lawsuits, and blunders --above all the ill-fated sale of its operating company, Sequential ElectronicsSystems, to a Long Island firm called General Technologies Group Ltd. A Dickensian succession of lawsuits followed. When the smoke cleared, the SEC had acted decisively -- against the people Schiller had sued.Schiller insists that he didn't blow the whistle on his former cohorts. But he cooperated, and actively, he says. In the end, General Technologies GroupLtd. Chairman Eli Reiter pleaded guilty to fraud charges, as did an auditor atthe company's accounting firm, Frederick Todman & Co. Schiller says he iscooperating with the SEC in civil proceedings against another former Todman executive.All the litigating and cooperating haven't deterred Schiller from expanding Consolidated. The company has purchased magnetic resonance imaging centers and asmattering of other development-stage companies -- an employee outsourcing company here, a tele communications outfit there. The aggressive acquisition campaign was noted favorably by Emerging & Special Situations, a Standard &Poor's publication, in its Dec. 19 issue. (S&P is owned by McGraw-Hill Inc.,publisher of BUSINESS WEEK.) The editor, Robert S. Natale, says he was aware of Consolidated's penny-stock pedigree when he listed the firm -- which, he notes, was not a formal recommendation.Business Week, March 27, 1995 Another penny-stock watcher has also had his eye on Consolidated -- Bob Brennan. According to SEC records, last May 13, Brennan's company, InternationalThoroughbred Breeders, bought 750,000 Consolidated shares at $ 6.00 a share --62 cents cheaper than the closing price on that day. ITB then sold 131,000shares on May 18 at $ 6.46, 170,000 shares on May 19 at $ 6.46, and 100,000shares the following day at $ 6.47. Brennan is hazy about how much more he wasable to unload before the price collapsed. Overall, he says, he "probably sustained a modest loss." Brennan has an intriguing explanation for the swift dumping of the stock. In an interview, he maintained that the purchase, 6.48% of Consolidated's shares outstanding, violated ITB's policy of not buying more than5% of a company's shares. The error, he says, was discovered "by the guy whoprocesses our trades." ITB then sold the shares -- far more than was needed toput ITB below 5%. Why so much? He doesn't recall.An SEC filing says the shares were purchased in the over-the-counter market. Yet the huge trade was not made public at the time. NASDAQ records show only15,000 shares traded on May 13. Was Brennan's huge purchase reported to NASDAQ? Brennan isn't sure -- and neither is NASDAQ. James Spellman, a NASDAQ spokesman,says the trade may have been reported out of sequence, and such trades are notalways publicly disclosed.Business Week, March 27, 1995 Brennan narrowly escaped a calamity. In the summer of '94, Consolidatedshares began their sickening decline from $ 6 to about $ 1.19. The pre-splitequivalent: 2 cents. Schiller has no explanation for the decline. But the lossof Hibbard Brown clearly hurt Consolidated, because Hibbard was aggressivelypushing Consolidated shares. How aggressively? Well, in April, four monthsbefore Hibbard bit the dust, the state of Wisconsin suspended Hibbard Brown'sbroker-dealer license, alleging that the firm used misleading, hard-sell tacticsin selling Consolidated shares and two other stocks to Wisconsin residents.State officials said Hibbard Brown was running an old-fashioned boiler-roomoperation -- just the way Sequential had been sold in the Eighties. OVERSEASCASH. Schiller denies knowledge of such chicanery. In any event, in his ownstock sales he is steering clear of U.S. regulators. The company's biggest injection of cash in recent years came from overseas, mainly Canadian investors,who bought $ 14 million in Consolidated shares sometime over the past year. As aRegulation S offering, its terms did not have to be disclosed in this countryand are of no concern to U.S. regulators.So Consolidated's army of shareholders has been reinforced. Will the newrecruits fare better than the old? "Schiller is quite a guy -- he's a survivor. He's dedicated to make the company work," says Brennan, a Schiller friend for 20 years. Schiller, like Brennan, is a master survivor -- and so is Consolidated.But will the shareholders ever be made whole? An old expression may put itBusiness Week, March 27, 1995 |
