Unusual Cast of Characters in Genesis ‘Short Squeeze’
Rafi Khan, a La Canada Flintridge man who was barred from the securities industry for stock manipulation, is emerging as a player in the GenesisIntermedia “short squeeze,” adding to what one analyst calls the “soap opera” atmosphere surrounding the company.
Khan, who also had a 1999 conviction for tax fraud, has circulated an investment report on Genesis, a Van Nuys company with no earnings that’s mostly owned by former Saudi arms dealer Adnan Khashoggi.
Shares of Genesis have soared in recent weeks on an investing phenomenon known as a short squeeze in which investors borrow shares of a company from brokers and sell the stock into the market. If the company’s share price goes down, the short sellers then buy stock at the lower price and use it to repay the broker, pocketing the difference.
Sometimes the price of the company rises, forcing “short” sellers to pay back the brokers with more expensive shares.
Genesis shares hit a 52-week high of $16.35 on Thursday but have since dipped, closing at $14.50, down $1.29 on Nasdaq on Friday. Its shares have risen 154% this year.
Because about 90% of Genesis stock is held by Khashoggi and Genesis Chief Executive Ramy El-Batrawi, there are scant shares available for purchase, meaning the trading of a relatively few shares can drive the stock up or down.
Khan, who has historically focused on similar squeezes, might have added to the Genesis increase with his privately distributed report.
Robert Bleckman, who heads investor relations for Genesis, said he and the company’s senior executives were unaware of Khan’s past when they agreed to meet with the former broker Monday.
“He said he had a few financial institutions he had relationships with,” Bleckman said, but Khan did not elaborate. “We showed him around like we would any other investor or potential investor.”
Reached at home Friday, Khan declined to provide a copy of the report or to respond to questions. However, according to copies of the report posted on the Internet, Khan said investors betting that Genesis “would get crushed” like other dot-com companies could lose millions of dollars.
He then made a series of positive comments about Genesis’ Internet business, which consists of advertising kiosks in shopping malls.
But according to Genesis officials, the company’s primary business is telemarketing, which supplies 85% of its revenue, and a small car-rental business. The Internet is only a tiny slice of the company.
“I am telling anyone who calls me to stay as far away as possible from this company,” said Michael Roesler, an analyst at Taglich Bros. Inc. in New York. Roesler, who issued a “sell” recommendation in March, said Khan is helping to turn the company’s short squeeze into a soap opera.
Although the stock price rally has given Genesis a market value of more than $300 million, the company has a negative net worth, having lost $33.5 million in 2000. It has less than $2 million in cash, and it owes Khashoggi’s Ultimate Holdings Ltd. of Hamilton, Bermuda, nearly $50 million. All told, the company has only 1,500 shareholders.
Although Khan has run afoul of regulators in the past, his report might not violate the terms of a settlement of investment fraud charges reached with the Securities and Exchange Commission a year ago, said Andrew Gross, a securities attorney at Irell & Manella in Los Angeles.
According to SEC documents, Khan is “barred from association with any broker or dealer” for five years. The agreement settled charges that Khan manipulated the share prices of Future Communications Inc. in 1993 and L.L. Knickerbocker Co. in 1995.
“It doesn’t look like he was barred from telling his friends what to do,” Gross said.
One factor that would make a difference is whether Khan was paid for his advice--otherwise he was simply doing research and expressing his opinion, Gross said.
SEC enforcement officials in Los Angeles declined to comment.
Besides his securities troubles, Khan was sentenced to three years’ probation in 1999 after pleading guilty to filing a false tax return. The sentence, handed down in U.S. District Court in Los Angeles, included six months of home detention.
Khashoggi, 65, is a controversial millionaire known for his role as a middleman in the Reagan administration’s arms sales to Iran. In 1997, the Economic Crimes Investigation Division in Thailand issued an arrest warrant for Khashoggi, charging that he embezzled $64 million from the Bangkok Bank of Commerce, which was pushed under by bad loans.
