Net Firm’s Stock Plunges on News of Fraud Probe
After soaring to a market value of $1 billion by appealing to investor enthusiasm for Internet stocks, shares of a Rancho Cucamonga-based Internet company nose-dived Tuesday amid reports that its founder failed to disclose federal accusations that he misled investors at an earlier firm.
Hitsgalore.com Inc., whose market value vaulted from $53 million to $1 billion in three months, tanked Tuesday as word spread that company official Dorian Reed hadn’t mentioned his earlier troubles with regulators in filings with the Securities and Exchange Commission.
The company’s stock, which trades on the NASD’s over-the-counter bulletin board, plunged $10.75 to $9.38 on volume of 3.7 million shares Tuesday. The stock, just $1.88 a share as recently as mid-March, had reached a high of $20.69 on Monday.
Lawyers for the Federal Trade Commission alleged last year that Reed and his earlier firm, Internet Business Broadcasting, made inflated claims of 100.8% returns on investments in World Wide Web advertising. FTC officials said they won a default judgment against Reed and two other defendants for $613,110 and a court order barring him from assisting in the making of false statements in the future.
Hitsgalore.com said none of its officers or employees were the subject of a governmental investigation when it filed documents with the SEC to merge on Feb. 11 with Systems Communications Inc. of Clearwater, Fla. Reed’s failure to disclose the FTC allegations was first reported by Bloomberg News.
The Hitsgalore.com Web site solicits individuals to pay $99 to “sponsor” banner ads on the Internet, but it is unclear what the ads are for or what they promote. The sponsors are supposed to make money from a “25% referral fee.”
“There is no limit on how many banners you can sponsor and that means no limit on your income for doing nothing more than being a sponsor! Why not become a proactive sponsor and make a killing!” the Hitsgalore.com site claims.
Reed, named in the FTC case as IBB’s top telemarketer, said in a statement that he had “heard nothing since I responded [to the FTC allegations], and I assumed the matter was taken care of last spring.”
The statement said Reed had not received a copy of the FTC’s March 30 motion for a default judgment.
If he is found to have assisted in making false statements at Hitsgalore.com, he could be jailed for contempt of court, authorities said.
Steve Bradford, Hitsgalore.com’s chief executive, said: “I do not believe that the company has made any fraudulent filing with the SEC. . . . However, we have appointed a committee of independent directors to fully investigate this matter.”
According to the merger filing, Hitsgalore.com was organized in July and launched its Web site in November. Reported revenue for last year was less than $10,000.
On Monday, Hitsgalore.com stock rose as high as $20.69, making its 49.7 million shares worth about $1 billion. The shares shot upward as the firm issued a news release saying an entity called Life Foundation Trust would invest $100 million for an equity stake at $25 per share. A man who answered the phone for Life Foundation Trust in Scottsdale, Ariz., said no one was available to comment.
Hitsgalore.com’s statement quotes a trustee of Life Foundation Trust, Jeanette Wilcher, as saying the trust “is interested in the products and services of Hitsgalore.com. . . . No rumor concerning the personnel is of any interest to us.”
In a separate, unrelated case involving allegations of Internet fraud, a federal judge ordered Inetintl.com Inc., a Santa Monica firm pitching Internet service provider franchises, to pay $1.8 million to consumers lured by deceptive claims of high returns. FTC officials said the firm, also known as Inet International, told investors they could earn $100,000 in their first year marketing Internet access and services. But investors earned little or no return, the agency said.
A judge has issued an arrest warrant for one of the principals, Craig A. Lawson, who disappeared during the FTC investigation, authorities said.
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Taking a Hit
Shares of Hitsgalore.com, which crashed Tuesday, had run up from less thanr $1 earlier this year to more than $20 on Monday. Weekly closes and latest on the OTC Bulletin Board:
Tuesday: $9.38, down $10.75
Source: Bloomberg News
