|CARL'S SHELL GAME BY CHRIS BYRON|
AN ICAHN REVERSE MERGER BEARS POTENTIAL FOR DANGER
May 8, 2006 -- THREE weeks ago, the Securities and Exchange Commission finally brought closure of sorts to one of Wall Street's biggest and ugliest swindle-romps ever, charging fugitive financier Adnan Khashoggi in the stock-rigging scheme that came to be known as the Genesis Intermedia affair.
Yet don't be surprised if you wake up one morning not long from now to discover that an eerie echo of the five-year-old Genesis affair is making headlines all over again, this time featuring a Nasdaq-traded "China bubble" stock called Intac International Inc.
We'll get to the particulars of the Intac situation in a minute. For now, it is enough to know that the billionaire who has lately emerged as the central figure in the Intac case is the same Wall Street moneyman who surfaced in the final weeks of the Genesis affair back in June of 2001, all teed up to become Khashoggi's reluctant patsy - none other than corporate raider Carl Icahn.
To understand how a man with Icahn's reputed ruthlessness and market smarts could wind up as anyone's patsy, it may help to recall what the Genesis Intermedia affair was all about from the start: the tug of easy money from the land of penny stocks.
Beginning in 1999 from his offshore hideout in Bermuda, Khashoggi orchestrated a price-rigging scheme that over two years illegally lifted Genesis shares by 1,400 percent to a high of $25, giving Khashoggi more than $130 million.
By summer 2001, Genesis Intermedia's rising stock price had caught the eye of Icahn, who seems to have been more impressed by the company's share price performance than its business fundamentals or the creepy reputation of the man who was really running the company: Khashoggi himself.
By the time Icahn became involved in June 2001, Genesis Intermedia's SEC filings had already named Khashoggi as the company's largest shareholder, with a controlling 45.3 percent block of its stock in an offshore front company in Bermuda.
The filings also revealed that Khashoggi had gotten the stock through warrants issued to him by the company in return for $71 million worth of junk loans that made Khashoggi not just Genesis Intermedia's largest stockholder but its largest creditor as well - in effect, the man who was actually running the entire company.
It's simply amazing that Icahn would have been willing to climb in bed with Khashoggi in the first place. By the spring of 2001, Khashoggi's curriculum vitae already included a well-documented history of arms trafficking in the Third World as well as a stint in a Swiss prison on fraud charges, not to mention his fishy middleman role in the Iran-Contra affair.
BUT Icahn jumped right in anyway and agreed to lend Genesis a star tling $100 million in return for stock options and warrants, just like Khashoggi had gotten. And Icahn was plainly interested in the deal as a stock play, too, because he insisted on terms at least as good as those that Khashoggi had been getting, causing a lot of back and forth haggling over details even after the deal was announced on June 29.
That haggling may in fact have saved Icahn's bacon, because subsequent SEC filings show that none of Icahn's $100 million got lent out before the terrorist attacks of Sept. 11 roiled the markets, sending Genesis into a tailspin that ended in the company's demise before the $100 million credit line was ever tapped.
Given all that, you'd think Icahn would have learned his lesson and sworn off any future excursions into the land of penny stocks, where the inhabitants all seem low rent, wretched and sublimely slimy.
Yet that is where we now find Icahn all over again, this time using Intac International in a ploy known as a reverse merger to pump up the value of an investment he made months earlier in a privately held Atlanta, Ga., Internet company called HowStuffWorks.com Inc.
Icahn declined to be interviewed for this column, so it hasn't been possible to nail down just how much money he actually pumped into the Atlanta outfit, or what he received back in return. But one can make a pretty good guess.
Six months ago, the Atlanta company's founder and CEO, Jeff Arnold, told reporters that Icahn had by then become a "significant" shareholder in the operation in return for financial support totaling "tens of millions" of dollars.
Given the fact that data from the D&B credit reporting agency suggests that HowStuffWorks generated less than $1.2 million in gross revenues last year, an investment of the size Arnold says Icahn made may well be enough to rank Icahn as the company's largest shareholder and creditor alike, just as Khashoggi had been at Genesis Intermedia.
IN late April, Intac an nounced plans to merge with HowStuffWorks in a way that seems likely to transfer Intac's valuation as a publicly traded Nasdaq stock onto the privately held shares of How Stuff Works, which Icahn holds much (if not most) of already. And to say that Intac's shares are grossly overvalued would be an understatement.
Like many penny stocks, Intac began life as a Nevada-incorporated shell company, with its shares listed on the fraud-drenched Vancouver Exchange under the name Commodore Minerals Inc.
Though the company's registration papers described it as being in the gold exploration business, its real objective was to be taken over by anyone looking to obtain freely trading public stock for a private company without incurring the expense and bother of an actual IPO.
The gimmick: buy the penny stock shell and merge the private business into it. In October 2001, a Hong Kong businessman named Wei Zhou did just that, acquiring a controlling 64 percent block of Commodore's stock and eventually merging the company with a Hong Kong-based business he was running that imported used cell phones from Germany for resale in China.
But the business was flimsy, to say the least, and by the end of 2003 just one customer - vaguely identified in the filings as a "Mr. Lam" - accounted for 68.6 percent of sales. Though Intac reported $91.3 million of revenues for the year, the cost of acquiring the used cell phones to resell to Lam and other customers ate up nearly $88 million of that money, leaving an illusory gross profit of $3.5 million that actually consisted of uncollected receivables.
Zhou himself soon realized that he needed a sexier business to peddle than used cell phones from Germany, and launched Intac on a string of new ventures that also went nowhere.
So, why would a man with Icahn's financial acumen want to put even 5 cents into such an operation? The answer seems obvious. With most of Intac's 22.2 million shares held by Zhou, and with an average of less than 80,000 of the remaining shares traded day-to-day, the market conditions for Intac were both volatile and easily manipulated, creating valuation multiples for the stock that stood at nose-bleed levels.
At Intac's closing price last week of just under $11 a share, investors are valuing the company at roughly $240 million, an absurd price for an outfit with crumbling revenues, soaring losses and a balance sheet on which goodwill and uncollected receivables account for 83 percent of assets.
With the merger terms between HowStuffWorks and Intac structured to make the current shareholders of each company 50/50 owners of Intac as the surviving entity, the number of Intac shares will wind up doubling.
And with many (or perhaps even most) of those shares winding up in the hands of Icahn, the public market will stay tight, supporting the stock price, while Intac instantly balloons from a $240 million company into a nearly $500 million business, with Icahn's stake surging as well. It's the penny stock market in action, and it helps explain why so many otherwise cautious investors become so beguiled by its charms.
Unlike Khashoggi, Icahn seems so far to have done nothing wrong or acted improperly in his penny stock excursions. Yet his emerging role in Intac presents exactly the sorts of opportunities for abuse that Khashoggi found irresistible at Genesis Intermedia.
And there is no denying that Icahn is a moth now circling ever closer to the flame.