Inflated Share Price Allegations Sink Firm’s Stock
Shares of online retailer Shopping.com fell 31% Monday after critics questioned its prospects as well as any role a brokerage that sold its stock last November may have had in keeping the stock price high.
The stock, which trades over the counter, dropped $10.14 a share to close at $21.88, though some trades in the $24 range were reported after regular trading hours.
The brokerage, Waldron & Co. in Irvine, denies any wrongdoing and doesn’t exercise enough control over the stock to keep its price artificially high, its attorney, Tom Fehn, said. He said Waldron stopped buying and selling Shopping.com shares for clients Monday “to let the situation settle down.”
But NASD Regulation Inc., the enforcement arm of the National Assn. of Securities Dealers, said it had been advised that Waldron was no longer being allowed to clear deals through its clearing broker, Wedbush Morgan Securities in Los Angeles.
The regulator would not say whether it is investigating, but Anthony Elgindy, a broker who complained about Waldron to the NASD last week, said Monday that both the U.S. Department of Justice and the Securities and Exchange Commission have called him about the situation. The agencies declined to comment.
“Waldron completely dominates and controls almost every share and can basically place the price anywhere [it] wants,” said Elgindy, chief analyst for Key West Securities in Hurst, Texas. “This is not a fair or real market.”
Fehn said the problems are being caused by “short sellers,” speculators who try to benefit from a stock going down. “This is a ‘short squeeze,’ and sometimes they get ugly,” Fehn said.
But Key West and another brokerage house have recommended that investors sell their Shopping.com shares for other reasons. The head of Chatfield Dean in Englewood, Colo., said the advice was based solely on an analysis of the company’s publicly disclosed information.
“Anyone who invests in this company’s stock should look at it no differently than putting a bet down on the craps table in Vegas,” said Sandy Greenberg, Chatfield’s chief executive.
Shopping.com, based in Corona del Mar, had raised $11.7 million in its initial public offering in November, selling 1.3 million shares at $9 each. Its stock had been rising since, hitting a high of $32.13 a share Thursday.
Chatfield Dean said last week that Shopping.com stock could slide to $5 a share. Greenberg said the company will lose $5 million this year and only has about $4 million in cash left from its initial offering.
The company takes orders for other firms’ goods and services through its Internet site, which operates 24 hours a day. The firm has said it expects to report a $4.7-million loss on sales of $802,000 in its latest fiscal year, which ended Jan. 31. But Greenberg doubted even that revenue figure, pointing out that the company keeps just 5% of the sales price of goods and services purchased through it.
He contends that actual revenue for Shopping.com was just $18,000 for the first nine months of its fiscal year, the only time period documented in SEC filings.
Shopping.com has said it withdrew its application for listing on the Nasdaq Small Cap stock market late last year after learning the application would be denied.
It linked the expected denial to a permanent order barring its president, Robert McNulty, from violating securities laws. He had consented to the order in October 1995, without admitting SEC allegations that he orchestrated a complex scheme to defraud investors in four other publicly traded retail companies.
McNulty founded Shopping.com four months later. He owns 1.3 million shares of the company, worth about $29 million at Monday’s closing price.
He and other Shopping.com executives could not be reached for comment.
In 1992, the SEC obtained a temporary order barring Fehn, the Waldron lawyer, from practicing law before the agency. The ban is based on Fehn’s advice to the head of a Las Vegas-based marketer of diet patches that criminal convictions need not be disclosed to investors.
Fehn said he had relied upon a U.S. 2nd Circuit Court of Appeals ruling when he gave the advice. The 9th Circuit Court, which handles cases from California and Nevada, has ruled otherwise, he said. He is seeking to overturn the ban at a trial before an administrative law judge.
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Downhill Ride
Shopping.com shares plummeted more than 30% Monday on news that its underwriter, Waldron & Co., would no longer serve as market maker for the company’s stock. Weekly closing prices and Monday’s closing price:
Monday close $21.88
Source: Bloomberg News
