EUniverse Signed Deal With Controversial Stock Broker

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EUniverse Signed Deal With Controversial Stock Broker

Wall Street West

by Benjamin Mark Cole

It seems like only yesterday when eUniverse Inc. was the toast of Wall Street and for good reason. Here was an e-company that actually posted profits. But lately the stock has been sinking, to about $5 a share from a recent high of $8.50.

The first sign of trouble was the collapse of a merger with another e-advertiser, Marina del Rey-based L90 Inc., in March. The deal was called off after L90 disclosed a Securities and Exchange Commission investigation into whether it inflated its revenues.

Then, in early April, the SEC revealed in federal court that former Los Angeles stockbroker Rafi Kahn, who was banned from the industry in May 2001, was being investigated for manipulating the prices of four stocks. One of them was e-Universe; Kahn’s lawyer has denied any wrongdoing.

Now, in a bit of a shocker, eUniverse chairman and chief executive Brad Greenspan has told the Business Journal that he actually hired Kahn. “About a year-and-a-half ago, we signed a consulting deal with Aura Private Ltd., a company in which Kahn was a principal,” said Greenspan. “He was to set up a road trip with institutional investors.”

The decision to hire Aura came before Kahn was banned. Greenspan said he disclosed the deal in one of eUniverse’s filings with the SEC. He didn’t go into detail about his relationship with Kahn.

The SEC alleged in federal court that Kahn issued “buy” recommendations on eUniverse and several other stocks in exchange for warrants issued to a Pakistani firm owned by his brother-in-law.

The SEC also said that Kahn received eUniverse warrants valued at just under $500,000. Such payments are legal, but only when fully disclosed and even then it’s a questionable tactic, although some would argue all of Wall Street turned shades of gray in the late 1990s.

Greenspan said he knew Kahn was controversial, but defended his decision to hire him. “If he was so controversial, why did he have relationships with so many institutional investors? And nobody else wanted to get our story out.”

Greenspan said eUniverse has never taken large sums of money from the investing public, like companies that did IPOs during better times. “They jammed stock down the throats of investors with analyst hype,” he said. “We went public through a reverse merger, and no active member of management has ever sold a share of our stock.”

Rule Change

Public companies are taking charges to reported earnings in the first quarter due to a change in accounting regulations specifically, how to account for changes in the value of “goodwill” and other assets associated with acquired companies.

New accounting rules require goodwill and other merger-related losses to be counted against net income immediately. “In past years, a company could take up to 40 years to amortize lost goodwill associated with a merger,” said Greg Soukup, co-director of Ernst & Young’s National Office West, an M & A; advisory arm.

The new rules took effect in the first quarter, and some big names have reported net earnings that fell below analyst expectations. That led to price drops in stocks such as Yahoo! Inc. and General Electric Co., Soukup asserts.

Operating earnings were unaffected, and did meet targets. So why didn’t GE, Yahoo or other companies bring Wall Street analysts up-to-date on the rule change’s effect on reported profits?

Both GE and Yahoo said they did. “We published in our annual report, on March 8, an estimate of the (goodwill impairment) charge we would have in our first quarter (2002),” said GE spokesman David Frail.

“Wall Street was very aware of this rule change…. We discussed this issue in our fourth quarter earnings conference call on Jan. 16,” said Joanna Stevens, a Yahoo spokeswoman.

Indeed, sub-par revenue played a role in subsequent stock slides at both companies. But Soukup said he believes that even at Fortune 500 companies, the investor relations departments have been caught off guard. Accounting firms are uncovering lost goodwill and telling clients what they must report, but it’s a scramble to meet deadlines. In short, the IR folks are learning late in the quarter that net earnings are taking a hit. “It’s coming out late in the game,” he said.

Also, under SEC Regulation FD (put into effect last year), news from public companies must be disseminated to all relevant market players at once, not selectively.

That said, Soukup wonders if Wall Street is over-reacting to downsized earnings due to goodwill write-downs, which are paper losses. Ernst & Young has concluded that three out of every eight public companies is going to take a goodwill hit in the first quarter.

Redpoint

Founding Partner Brad Jones last week confirmed that his Westside-based Redpoint Ventures, the biggest venture capital shop in Southern California with nearly $1.25 billion in committed capital, had decided to let investors off the hook for 25 percent of that amount. VC funds do not collect the money from limited partners until it is actually time to deploy, having obtained commitments that the money will be there when needed. Jones said he doesn’t need the money anymore. “We didn’t return capital; it was just a decision on our part that we didn’t need the money,” Jones said.

He flatly denied scuttlebutt that limited partners asked for the commitment reduction, as they needed the dough to shore up other investments. According to a report in The New York Times, an investor stood up at Redpoint’s annual meeting in February and challenged the firm’s ability to invest so much money. One month later, Redpoint reduced the commitment. “This was our decision,” Jones said.

Rare IPO

There’s been a dearth of IPOs this year, locally as well as nationally. Intra-Asia Entertainment Corp. of Los Angeles is scheduled to buck the trend this week with a $12.9 million offering. Intra-Asia, operator of a large amusement park in China’s Shandong Province, plans to offer 1.4 million shares at between $8 and $10 each, on the American Stock Exchange. According to Intra-Asia’s registration statement filed with the SEC, the Weifang Fuhua Amusement Park has been profitable since opening in 1994. The company is majority owned by an arm of Weifang State Asset Administration Bureau, and is run by Michael Demetrios, a former Marine World and Sea World executive.

Contributing columnist Benjamin Mark Cole writes about the local investment community. He can be reached at

[email protected].

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