Hughes Capital’s Deals Reap Only SEC Allegations

Howard E. Blumenthal, a new executive with Hughes Capital Corp., said his latest idea is to market a biodegradable process that converts everyday trash into something valuable such as energy. Blumenthal said it’s a way of “turning garbage into gold.”

If only it had worked for his company’s shareholders.

Hughes Capital, with headquarters in Valencia, went public in August, 1986, and eventually raised more than $650,000 from investors.

A year and a half later, all they have to show for it is ownership in a company that has a small office in Valencia with a bookkeeper and a secretary, a stock with no value at the moment, and a string of allegations by the Securities and Exchange Commission.

Blind Pools Risky

If nothing else, the murky story of Hughes Capital is yet another example of how investors can go wrong. Hughes Capital is one of about 200 blind pools in the United States. In a blind pool, companies take investors’ money without specifying how it will be spent. Usually blind pools are risky.

Blind pools “are run by people with no business experience looking to sell cheap stock to the public,” said Irving Einhorn, regional administrator for the SEC in Los Angeles. “If they’re really unscrupulous, they just form a shell company that they intend to merge with some other company in which they have some kind of interest. But they don’t disclose any of that.”

Hughes Capital’s game plan was to buy existing companies, let current management keep running them and, thanks to Hughes’ shrewd eye for bargains, spread the resulting wealth to its shareholders.

Hughes Capital did manage to buy one company. In January, Hughes Capital paid $3.5 million in stock to acquire Conserdyne, a solar energy firm in Valencia that was losing money.

According to the SEC, John Knoblauch, Hughes Capital’s chief executive at the time of the deal, owned 55% of Conserdyne. Five months later, Hughes Capital decided the solar energy business wasn’t that hot after all and closed Conserdyne’s operation.

Shortly before the deal, however, Hughes Capital’s stock scooted from $6.50 a share to $15.50, the SEC said, for no apparent reason. In February, the SEC suspended trading in the company’s stock for 10 days.

In July, after an investigation, the SEC charged Knoblauch, Hughes Capital’s director Gilbert Beall, and a Hughes Capital promoter, Lionel Reifler, of making false statements in the company’s stock offering, of manipulating its stock price and of planning acquisitions by Hughes Capital in companies in which the three had financial interests.

Hughes Capital’s public offering, the SEC concluded, was “a sham.”

Because of the investigation, the SEC ordered the company to file new registration documents and prohibited it from issuing any more stock. Hughes Capital still has not filed the amended papers, a delay Blumenthal blames on “internal problems, management difficulties, a whole series of problems.”

Hughes Capital neither admitted nor denied the SEC’s allegations in the July report. No disciplinary action has been taken against company insiders, or its underwriter, F. D. Roberts Securities in Paramus, N.J. The SEC alleges that Roberts played a part in the stock manipulation scheme. Blumenthal said the SEC investigation is continuing.

Since last summer’s investigation, Hughes Capital’s president, Bruce Raiman, along with chief executive Knoblauch and director Beall, have left the company. Blumenthal, 42, a lawyer, was brought into Hughes Capital’s operation last winter and is part of a four-man team (without specific titles) running the firm.

Not that there is much to run.

Hughes Capital is essentially a shell company, with no continuing business and revenue that is “down to virtually nothing now,” Blumenthal said. The company has about $2 million in assets, primarily from long-term notes owed by former Conserdyne customers, he said.

Understandably, Blumenthal would rather focus on the future than the past. Blumenthal, who owns 55,000 shares of Hughes Capital’s now worthless stock, said he feels an obligation to its investors to try and build the company into something. Blumenthal also said he is afraid the company may be the target of shareholder lawsuits.

Blumenthal is busy trying to raise funds so the company can start work on some alternative energy project ideas. Last spring, Hughes Capital signed a $12-million deal to build an alternative energy plant for a hospital in San Bernardino. So far Blumenthal has not raised the necessary money, although he said last week he had an oral commitment from a bank to finance the plant.

Just a few weeks ago Blumenthal was optimistic about getting a line of credit with two banks. But one of them, the Bank of Los Angeles, decided Hughes Capital was not worth the risk. “It was a credit request that was denied,” said Burt Griffin, the bank’s senior loan and credit officer.

Blumenthal’s track record for raising money isn’t the best. In 1982, Blumenthal was one of five people indicted by the U. S. attorney in San Diego on charges of securities fraud, conspiracy and mail fraud, for illegally diverting $6.5 million of $17 million that had been raised to finance Drywood Corp., a San Diego company developing a vacuum-wood drying process.

Guilty of Fraud

Blumenthal pleaded guilty to one misdemeanor count of fraud, and was sentenced to three years of unsupervised probation. “It’s something I’m not terribly proud of, but it’s true,” he said.

Hughes Capital gots its start in 1985 in Boca Raton, Fla., a popular breeding ground for blind pools. The company--one in name only because it had no continuing business--changed hands a couple of times before it was bought for $10,000 in December, 1985, by Reifler and Beall. Four months later, they sold it to Knoblauch.

The three men effectively ran Hughes Capital but, according to the SEC, Reifler and Beall were not mentioned in the company’s stock prospectus. In August, 1986, Hughes Capital sold its stock to the public, although the SEC doesn’t view the sale as a textbook example of a public offering.

The company issued 90,000 units at $2 each. Each unit was good for one share of stock and 21 warrants that could be converted into another 21 shares of stock.

The SEC said Hughes Capital insiders Reifler and Beall, and their associates, snatched up at least 88% of the offering before the public had a chance to buy it, and, in effect, drove up the price of the stock.

This was accomplished, the SEC said, because Fred Galiardo, F. D. Roberts’ chairman, and John Perfetti, a Roberts’ director, opened 33 accounts at their company in the name of Reifler, Reifler’s family, Reifler’s housekeeper and members of Beall’s family, among others.

The group purchased at least 80,000 of the 90,000 units available through the Roberts’ accounts, the SEC said, while Knoblauch delivered 33 checks to pay for it. The SEC noted that Hughes Capital’s prospectus had assured would-be investors that units would be sold to insiders only as a “last resort.”

The next day, the insiders sold some of their stock back to F. D. Roberts Securities. To outside investors, Hughes looked like a hot stock because the price was climbing so quickly. By the end of the day, Hughes Capital’s stock had jumped from $2 to $6.50 and, according to the SEC, Reifler and Beall had turned $160,000 in cash into $5 million in paper profits.

(Perfetti and Galiardo refused to cooperate with the SEC investigation, citing the Fifth Amendment privilege against self-incrimination.)

After the dust settled, Hughes Capital had raised more than $650,000, and it planned to acquire four companies in which Beall, Reifler or Knoblauch had some financial interest, even though, as the SEC points out, Hughes Capital’s prospectus assured prospective investors that it had “identified no potential acquisition candidates.”

One of the deals fell apart before Hughes Capital could complete it because the targeted real estate development firm was undergoing foreclosure proceedings; another deal failed because the target company, an interior design firm, was in Chapter 11 bankruptcy proceedings. Both companies were owned by Reifler or his wife.

In January, 1987, Hughes Capital did acquire Conserdyne in a $3.5-million stock deal.

Conserdyne was founded in 1974 by S. Howard Kraye, an engineer and environmentalist. For a while, thanks to higher oil prices, the company’s solar energy systems sold well. In the fiscal year ended in January, 1986, Conserdyne made a $502,000 profit on $2.5 million in sales. By the time of the Hughes Capital deal, however, oil prices had fallen and legislation had canceled most tax credits on solar projects.

As a result, for the fiscal year ended Jan. 31, 1987--just 16 days after the Hughes Capital acquisition--Conserdyne reported a loss of $389,000 on a 69% drop in revenue, to $784,000.

Agreed to Takeover

Conserdyne was running out of money, but Kraye still was committed to the technology. In 1985, Knoblauch had merged a solar energy marketing firm into Conserdyne and gained majority control of Conserdyne’s stock. Kraye said he agreed to the Hughes Capital takeover because Knoblauch told him that Hughes Capital could give Conserdyne the money needed for new projects.

But, five months after the Conserdyne deal, Hughes Capital shut the solar energy business. “We pursued that business plan for a short period of time and realized that it was improperly conceived, to put it mildly,” Blumenthal said.

Knoblauch stood to be the principal beneficiary of the Conserdyne acquisition because Hughes Capital’s stock was worth about $15 a share at the time of the deal. Other insiders profited handsomely. Reifler and Beall received $50,000 in cash and 12,778 shares of Hughes Capital stock as a finder’s fee for recommending the deal.

Blumenthal, who was the attorney for Knoblauch and Kraye, was brought in as Hughes Capital’s secretary-treasurer so it could save on the legal fees that accompany a merger.

After the Conserdyne acquisition, Knoblauch, Raiman and Blumenthal signed employment contracts for a total of $575,000 annually in cash. According to Hughes Capital’s last SEC filing, the company’s revenue was less than $800,000 for the fiscal year ended in January, 1987, and it had only $408,000 in cash.

The SEC contended that the Hughes Capital executives had violated the plans laid out in the company’s prospectus: No officer or director would “receive any compensation until the company has adequate revenue from the operations of acquired businesses to make such payments.”

Was Hughes Capital simply a vehicle to line the pockets of company insiders? “I’d rather not comment on that,” Blumenthal said. “There’s no way I can answer that question.”

Blumenthal added that he has not accepted any salary since July.

In August, Hughes Capital closed its Florida office and moved into Conserdyne’s Valencia headquarters. Kraye says former CEO Knoblauch is somewhere in the Midwest and could not be reached for comment. Reifler, who still is a paid consultant, was reached by phone at his Florida home. But he declined to comment on Hughes Capital. Blumenthal said he doesn’t know Beall’s whereabouts.

At the moment, one of the alternative energy methods Blumenthal is banking on to revive the company is called pyrolysis. In the 1970s the process was experimented with to turn garbage into energy, fertilizer or building bricks. At the time, cities decided the process was too expensive and unreliable. John Rowden, a manager at the California Waste Management Board, said pyrolysis still isn’t very practical.

Last March, Hughes Capital did sign a $50,000 alternative energy research contract with Southern California Edison. And, in April, Hughes Capital signed a $12-million contract with the San Bernardino Community Hospital to build a thermal energy system. In this technology, blocks of ice and chilled water are used to provide air conditioning.

But the terms of the hospital contract specify that the company, other than receiving a small deposit, will not get paid until the system is running. Besides trying to raise enough money to finance the project, Blumenthal said he is spending much of his time in merger negotiations with other energy companies.

Blumenthal said he learned a couple of lessons from his earlier, unsavory experience with Drywood Corp. in San Diego. One was to never give up. “I saw a company that had tremendous potential shot down to hell,” he said.

Hughes Capital, Blumenthal said, “has equal potential.”

Hughes Capital shelved its solar-energy plan after managers ‘realized that it was improperly conceived, to put it mildly,’ said Howard E. Blumenthal.