Soaring Stock Raises Red Flag for Investigators : Lawsuit: The Securities and Exchange Commission charges that the president of a small Santa Ana firm and five others manipulated stock prices to stave off an attack by short sellers.

Southland Communications Inc. isn’t listed in the phone book. The small firm, which does business as National Paging Co., has about 70 employees and an unassuming, single-story headquarters on Village Way in Santa Ana.

Plagued by working capital deficits and net losses for the past five years, publicly held Southland is hardly the kind of company that catches the eye of the press or big Wall Street investors.

It was, however, the kind of company that drew a network of short sellers, who this spring speculated that the company’s stock price would collapse. Instead, the stock rose dramatically in a trading frenzy last March and the short sellers lost their shorts.

The reason, the Securities and Exchange Commission now charges in a lawsuit filed Monday, was that the company’s president, Ahmad Bayaa, and an Atlanta broker-dealer, Shaw Tehrani, and four others allegedly committed securities fraud by conspiring to manipulate the stock price. The actions were a desperate attempt to keep the firm afloat so they could sell it at a huge profit, the SEC says.

The Southland saga, as outlined in the SEC’s 28-page civil complaint filed in U.S. District Court in New York, provides a rare glimpse into the shadowy world of short selling and insider stock manipulation.

What sets the Southland case apart is the extent of the alleged fraud--Bayaa and his cohorts allegedly drove the stock price up dramatically by cornering nearly 83% of the company’s stock through numerous secret trades, the SEC claims.

“This is about as rare as a Tyrannosaurus Rex walking through Greenwich Village,” said Daniel R. Schnipper, senior counsel with the SEC in New York.

Bayaa declined to comment on the lawsuit. The other defendants either declined comment or could not be reached.

The key figures in the alleged scheme are Bayaa and Tehrani, who met in early 1988 when Southland’s chief executive gave a presentation at a brokerage where Tehrani worked as a stockbroker, the suit says. Tehrani later moved to B.C. Financial, a brokerage based in Atlanta.

They conspired to manipulate the stock as early as January, 1989, by positioning themselves to secretly control large blocks of stock owned by the four other defendants and 22 other friends, family members and brokerage customers, the suit charges.

During the year, Bayaa’s ownership of stock fluctuated from about 35% to 40% of the outstanding shares, but through Tehrani’s accounts the two men secretly controlled more than three-fourths of the total. The SEC requires that shareholders who acquire more than 5% of a company’s shares disclose their holdings and intentions.

Bayaa, 36, is a hard-working Palestinian refugee who moved to the United States virtually penniless in the 1970s and studied electrical engineering at Cal State Long Beach. In 1981, he founded Southland Communications, which provides customers with radio paging services that allow them to receive messages away from the office. The company went public in 1987.

By October, 1989, the company had about 48,000 subscribers. The subscriber base was mainly in the Los Angeles area, though an account providing Sears Roebuck & Co.’s service technicians with paging services generated 21% of sales.

Hurt by heavy price competition and the costs of investing in paging technology, Southland continually lost money. The company stayed afloat during 1989 with $1.2 million in loans from five unnamed individuals, who were repaid with 146,246 shares of stock at $7 a share.

Still Bayaa, a quintessential salesman who sports a well-trimmed mustache and wears expensive suits, always kept up an upbeat front. He sincerely believed in the company’s future and said he was in for the long haul.

In December, Bayaa was characteristically optimistic about the company, former employees said. Despite its large contingent of Palestinians, who, as Muslims, do not observe Christmas, the company threw a Christmas party that cost $3,000. At the party, Bayaa said the company’s prospects for recovery were bright.

But after the first quarter ended Jan. 31, the company acknowledged that it was in “serious condition” and reported a loss of $324,129 on revenue of $1.9 million. The report said the company was unable to get additional financing and acknowledged an auditor’s statements that the company might not be able to continue as a “going concern.”

During the quarter, Bayaa and Tehrani realized that the sagging performance of the company could prompt a stock sell-off that would lower prices dramatically. They also feared that short sellers had taken positions in the firm’s stock.

In a short sale, an investor speculates that a company’s stock will fall in value over a given time. The short seller borrows stock and then sells it on the open market. The seller must buy back the same number of shares later and return them to the lender. If the stock price drops as expected, the short seller will make a profit from the difference between the purchase prices. If the price is higher, more money will be needed to “cover” the same number of shares and the short seller will lose money.

Short sellers have a shadowy reputation on Wall Street. Mainstream brokers often view them as vultures who sometimes generate false rumors about a company and operate on the edge of legality.

In any case, the short sellers’ interests ran counter to the management of Southland, and a classic confrontation set in.

“Someone is trying to destroy the company,” Bayaa reportedly told employees when short sellers began targeting the company this year.

Bayaa sought to get the company out of its financial mess by positioning Southland as a takeover candidate. That plan itself required the acquisition of another paging firm, A+ Beepers of California in Torrance, to give Southland almost 80,000 subscribers.

That level would be near the 100,000 mark that Tehrani believed Southland had to have to be an attractive takeover candidate, the SEC says. Since Southland’s subscriber growth had always been healthy, the mark was, according to the SEC, “well within sight.”

To finance the acquisition, Bayaa needed cash. He tried to secure $5 million in a private placement of stock with unnamed investors in the Middle East. For both ventures--the private placement and the acquisition--it was crucial that the company’s stock price be stable or on the rise, the SEC says.

One snag arose in October when Pacific Bell petitioned the California Public Utilities Commission to block the takeover, saying that A+ Beepers had worked as its agent and that, therefore, its customers belonged to Pacific Bell. A+ Beepers and Pacific Bell are negotiating to settle the dispute, said Pacific Bell spokeswoman Linda Bonniksen.

But the real trouble for Southland began on March 3.

That day, Tehrani angrily heaved a telephone through his office window when he learned of a written recommendation circulated on Wall Street. It urged investors to sell the company’s stock short, a sure sign that the drop in price was imminent, the SEC says.

The unsigned report was allegedly generated by John Pehrson, owner of K.A. Knapp & Co., a firm with a checkered history that also happened to take Southland public, sources said. Pehrson declined to comment.

After the report emerged, the short sellers swarmed over Southland. The defendants countered aggressively.

Bayaa and Tehrani obtained their “ultimate weapon” in their battle with the short sellers from BHC Securities, a firm in Philadelphia that handled trades for a company with many Tehrani-controlled accounts. BHC agreed to Tehrani’s request not to loan out any more shares to the short sellers, the SEC says.

By March 14, Tehrani had cornered the market in Southland’s stock, the SEC alleges, and the share price skyrocketed 49% in one day.

Trading volume on Southland stock rose to a frenzy level of 3.3 million shares in March, compared to 103,500 in February. At the same time, the short sellers were dramatically increasing their investment in the company, the SEC says.

To counteract the short sellers, Bayaa and Tehrani allegedly plotted to “squeeze” them by artificially withholding shares from the market, thereby manipulating the price upward, the SEC says, and forcing the short sellers to take losses.

The SEC claims the pair orchestrated the manipulation in a number of ways: Through accounts they controlled, they withdrew from the market as much of the freely trading securities as possible and created the illusion of nationwide buying interest; they engaged in prearranged transactions; and Bayaa fabricated optimistic reports about Southland’s future, such as a statement in November that the company had rejected a $17-a-share takeover bid in hopes of receiving a $25-a-share bid.

The broker-dealer firms that Bayaa and Tehrani allegedly used were scattered throughout the country, with each one trading only a small percentage of the stock the two men controlled. Bayaa and Tehrani directed brokers to open accounts in the names of their associates.

Tehrani directly controlled 24 accounts associated with Bayaa or himself at B.C. Financial, the SEC alleges. Bayaa reportedly set up four bogus accounts with Stifel Nicolaus & Co. in St. Louis. The accounts were later spread to other firms, including Baird Patrick & Co. in New York; Legg Mason Wood Walker in Baltimore; PaineWebber in New York; Blunt Ellis & Loewi in Milwaukee; Prudential Bache in New York; Suplee Reed & Co., a defunct firm in Media, Penn.; and Newhard, Cook, Advest Inc. in St. Louis.

While SEC officials declined to comment on how they collected evidence about the trading, the details in the lawsuit suggest that the agency has evidence that Bayaa told a public relations agent that he was planning a “short squeeze” and that he phoned brokers with instructions on how to manipulate the stock prices.

The instructions apparently worked. Southland’s price soared from $8.75 a share bid and $8.875 ask on March 13 to $16.75 a share bid and $17 ask on April 3, a 91% increase over three weeks. The final bid price was 87 times the company’s book value for the first quarter and 6 1/2 times annual sales.

The price increase was fueled by the squeeze on the short sellers, who had to cover their positions. That is, as the stock price rose, the short sellers--who borrowed stock at lower prices--had to cover their positions by buying back more-expensive shares.

On April 4, the SEC ordered a halt in trading and began its investigation. One source said Bayaa cooperated fully with the SEC, perhaps telling more than he should have to investigators outside the presence of his attorney.

In its suit, the SEC charges that Bayaa and Tehrani held direct or indirect control over 83% of the company’s 2.3 million shares by early April, far more than the 919,804 shares that Bayaa reported he controlled at the end of October. The SEC alleges that the defendants failed to disclose changes in their holdings, which exceeded 5%.

The suit also charges that the defendants ran up an unpaid bill of $11.6 million from thousands of shares bought on margin--that is, without immediately paying the full purchase price of the stock. Of six securities firms owed money by customers affiliated with Tehrani and Bayaa, the SEC says, BHC is owed the most, $7.5 million, and it has been unable to collect from Tehrani.

The SEC is seeking to recover profits as well as other relief from the defendants’ allegedly fraudulent activities. The SEC did not specify the damages it is seeking.

Schnipper said the SEC had not been able to contact defendants Abdul Rahman Deeb, a San Diego oil consultant; Ramzia Kriedly, an oil company owner who lives in Tripoli, Lebanon; and Francois Alhaj, an oil consultant with an address in Dubai, the United Arab Emirates. The last defendant, Ziad Twal, a financial adviser, was contacted in Amman, Jordan.

The court granted a motion to freeze Bayaa’s and Tehrani’s personal assets, except for what they need for essential living expenses and attorneys’ fees. Schnipper declined to comment on whether there is a criminal investigation under way.

Meanwhile, under the unwanted public spotlight, Bayaa must spend time dealing with lawyers and still try to manage the company’s crises.

The deal to raise capital from private investors has been delayed. Southland issued press releases saying that it did not know the reasons for the fluctuations in the stock price and that the private placement would not close by March 31, as had been expected earlier. Bayaa’s attorney said that discussions concerning the private placement continue.

The company’s working capital is expected to last until June. Motorola Corp. sued Southland last week to recover about $6 million in paging equipment, Motorola spokesman Bob Walsh confirmed. The company has three weeks to respond.

And the National Assn. of Securities Dealers removed Southland from its exchange because the company failed to establish that it could meet its working capital minimum of $375,000, said NASD spokesman Enno Hobbing.

Still, Bayaa and his family are keeping stiff upper lips. His wife, Jill, is standing by her man. “He is an honest, sincere man who was only trying to save his company,” she said.

SOUTHLAND COMMUNICATIONS INC. AT A GLANCE Location: 1224 Village Way, Santa Ana Business: Supplier of radio paging services Founded: 1981 Operating name: National Paging

Top executives: Ahmad N. Bayaa, president; Ziad N. Bayaa, chief financial officer Employees: 77 (Dec. 31, 1989) Subscribers: 48,000 subscribers as of Oct. 31 Major customer: Sears Roebuck & Co. Board of directors: Ahmad N. Bayaa; Ziad N. Bayaa; Robert A. Pomeroy; Benjamin L. Wallace; Edmund F. Shaheen

Source: Southland Communications Inc.