FBI Probes Unauthorized Shares in Software Firm

Federal authorities said Tuesday they are investigating how 1.1 million unauthorized shares of stock in a small Orange County Internet software company may have been sold to the public.

The company, MindArrow Systems Inc., said it notified authorities after an audit turned up a major discrepancy between the number of authorized shares and the number of publicly held shares.

The FBI confirmed that it is investigating the alleged irregularities. On Monday, Nasdaq officials halted trading in the Aliso Viejo company’s stock.

MindArrow said the audit found questionable transactions in the records of a former transfer agent--a middleman hired to keep shareholder records, issue new stock certificates and distribute proxies, among other duties.

The company said it determined that the agent, RTT Transfers Inc. in Vacaville, or others acting on the agent’s behalf, issued unauthorized shares between May 1999 and March 2000, when the company was still known as ECommercial.com.

The shares in question were recorded as void on the stock ledger records kept by RTT, but they were distributed to brokerage firms, said Michael Friedl, MindArrow’s chief financial officer. RTT went out of business last year, according to MindArrow Chief Executive Robert I. Webber.

Shareholders who unwittingly purchased unauthorized shares can convert them into legitimate stock, Webber said.

MindArrow Co-Chairmen Tom Blakeley and Eric McAfee, who were the chief executive and corporate secretary when the shares were issued, agreed to contribute about 1.1 million of their personal shares to offset the potential impact of additional shares.

The pair hold a total of about 3.1 million shares, according to public records. The company had 10.2 million shares of stock outstanding as of Nov. 30.

“We are the victims in this and are doing our best to mitigate any damage,” Webber said.

The company hired a new transfer agent, U.S. Stock Transfer Corp., in July.

MindArrow’s stock, which has lost nearly 85% of its value in the last year, last traded at $4.50 on Monday.

The company, which provides flashy Internet brochures and other multimedia services, has 95 employees, including 65 in Orange County.

In its most recent quarter, the company lost $5.38 million on revenue of $998,726.