Fraud Charges for Another Dotcom Ex-CFO

Advertising barter deals are called into question once again. Also: Poison pill at Hartmarx now less poisonous; outsourcing gives control over business results, say executives; and more.


Another former chief financial officer could be heading to the slammer — and once again, the cause may be alleged fraud at a puny Internet company.

Thomas Sebastian, who resigned in March 2002 from MaxWorldwide Inc. when it was known as L90 Inc., was charged Thursday with conspiracy to commit securities fraud. According to the U.S. Attorney’s Office in Los Angeles and the Securities and Exchange Commission, he helped the Internet advertising company overstate revenues in 2000 and 2001 so that it could meet analysts’ consensus estimates.

Sebastian is accused of generating the phony revenues through advertising barter deals with other Internet companies — a popular strategy among the dotcom set during the roaring ’90s. (Seven former executives at one of those companies, Homestore Inc., recently settled charges stemming from fraudulent “round-trip” transactions.)

The advertising barter deals led the company to overstate revenues in the third quarter of 2000 through the third quarter of 2001 by at least $4.3 million, or 7.9 percent, according to a joint statement by the two government agencies.

“Without honesty in financial reporting, no investor has a fair chance in assessing the true value of a corporation,” U.S. Attorney Debra Yang said in a statement. “Any responsible party who knowingly misleads the investing public will be subject to the most vigorous prosecution, as well as new sentencing laws that carry significant prison terms for those who are found guilty.”

If convicted of conspiracy to commit securities fraud, Sebastian faces up to five years in prison.

In April, MaxWorldwide, without admitting or denying any wrongdoing, settled an SEC investigation. The SEC ordered the company to cease and desist from violating federal financial reporting rules in the future; according to the company, the settlement did not involve any fine or finding of fraud.

In May, the company said that it would restate results for the third quarter of 2000 and the first three quarters of 2001.

Poison Pill at Hartmarx: Now with Less Poison

Apparel maker Hartmarx Corp. has announced that it will amend its poison pill. When the closing price of the company’s common stock exceeds the then-current book value per share for 60 consecutive calendar days, the company elaborated, the so-called shareholder rights plan will automatically expire.

In other words, when Hartmarx’s stock price is at a level that makes it less likely that an unwanted suitor will try to make an unsolicited bid, the company will make it easier for an unwanted suitor to make an unsolicited bid.

In defense of the pill, president and chief executive officer Homi B. Patel said in a statement, “In adopting this amendment, the Board of Directors has retained appropriate protections against coercive and opportunistic takeover attempts, while acknowledging the sentiments of those stockholders who are opposed to the Rights Plan by providing for its early termination in appropriate circumstances.”

Patel did acknowledge that the company’s stock price and performance have improved significantly over the past 18 months. He added, however, that he believes the stock is still trading well below the intrinsic value of the company, and even below its book value.

“Under these circumstances, if we had no rights plan in effect, the company would be vulnerable to abusive takeover tactics and offers which may not provide fair value to all stockholders,” he added. “We believe that this is the right decision which also reflects an appropriate balance of the differing views of our stockholders.”

In April, for the second straight year, shareholders approved a proposal to eliminate the poison pill. According to the Chicago Sun-Times, 84.6 percent of the shares voting were in favor; last year that figure was approximately 80 percent — though management counted it as 49 percent of all shares outstanding.

The Sun-Times also pointed out that shareholder advocacy group Institutional Shareholder Services as well as corporate-governance watchdogs had supported the proposal, in line with their general contention that poison pills protect weak management.

Outsourcing Gives Control over Business Results, Say Executives

Outsourcing isn’t just about saving money, according to a new research study.

When Accenture interviewed more than 800 health, manufacturing, retail, and travel executives in the United States and Europe, a whopping 86 percent said that outsourcing gave them more control over business results in a variety of critical areas — most importantly, the ability to plan.

Granted, cost-cutting ranks among these critical areas. However, the executives also reported equal levels of control in reliability, cost variability improvements, and effective implementation of ideas, Accenture found. Indeed, 55 percent of respondents said that outsourcing allows their companies to implement strategies and change faster and at a more controlled rate.

“Industry leaders are beginning to view outsourcing as a prescription for change, versus an antidote to rising costs,” said John Rollins, a partner in Accenture’s Products operating group.

More than 80 percent of the executives surveyed said they are committed to outsourcing at least one business function permanently. Perhaps more significantly, only 14 percent said that they plan to use outsourcing as a stopgap measure to fix problems at key functions, only to bring them back in-house once efficiencies are realized.

How long does it take executives to see a payoff from outsourcing?

Some 57 percent said they begin to experience control gains within the first eight months of an outsourcing agreement. Of these, 47 percent (27 percent of all respondents) said they saw control improve as soon as the deal was signed. The other 53 percent (30 percent of all respondents) said that control increased once operations were transferred and stabilized — an adjustment period that typically lasts six to eight months.

Most outsourcing agreements are structured to last 5 to 10 years, according to Accenture.

IT, cited by 43 percent of the executives surveyed, is still the most commonly outsourced function. Other favored processes for outsourcing include supply chain (36 percent), learning/training (31 percent), human resources (25 percent), finance and accounting (21 percent), and customer relationship management (13 percent).

Short Takes

  • Allegheny Energy announced that it received a modified opinion from its auditor, PricewaterhouseCoopers, that indicates there is substantial doubt about the company’s ability to continue as a going concern.

Allegheny said the company and certain of its subsidiaries are not current with their financial reporting and are not in compliance with certain reporting covenants in certain debt agreements. This noncompliance has resulted in the reclassification of approximately $3.7 billion of long-term debt to current debt on the company’s balance sheet for 2002.

Since Allegheny intends to file its quarterly financial reports for 2003 during the fourth quarter of this year, however, it expects that the company will again be in compliance. “At this time, the company believes that its cash-on-hand and cash flows will be adequate to meet its payment obligations under debt agreements and to fund other working capital needs in 2003,” it added.

  • Worldwide, 19 percent of companies were victims of product piracy during the last two years, and nearly 61 percent of the victims fell prey more than once, according to PricewaterhouseCoopers’ Product Piracy Survey 2003.

PwC found that 34 percent of these instances of piracy were discovered accidentally. Only 26 percent were uncovered by security measures, and just 22 percent by internal or external audit.

  • The U.S. economy grew at a 3.3 percent annual rate in the second quarter, the most since last year’s third quarter, driven by strong consumer, corporate, and government spending.
  • Wal-Mart Stores issued $1 billion in 5-year notes, led by J.P. Morgan and Credit Suisse First Boston. They were priced to yield 3.458 percent, 42 basis points over comparable Treasurys. The notes were rated Aa2 by Moody’s and AA by Standard & Poor’s.
  • Bristol-Myers Squibb Co. raised $1 billion from selling 20-year floating rate convertible senior notes in the private placement market. The securities were sold with a coupon of 3-month LIBOR minus 50 basis points and at a premium of 60 percent above Thursday’s $25.80 closing price of the company’s common stock, according to published reports. The issue was rated AA-minus by S&P, but was not rated by Moody’s.
  • Dollar Thrifty Automotive Group Inc. announced that chairman and chief executive officer Joseph Cappy is retiring and that it will split those positions.

Dollar Thrifty named Gary Paxton president and CEO and Thomas Capo chairman, effective October 1. Cappy will remain on the board of the car-rental company until his retirement December 31.

  • Apria Healthcare Group Inc. named Amin Khalifa chief financial officer, a position he held at Beckman Coulter Inc. and in Monsanto’s agricultural division. He succeeds James Baker, Apria’s CFO since 2001, who will assume the new position of executive vice president and treasurer, and who will report to Khalifa.
  • Silicon Valley Bancshares said Lauren Friedman will retire as chief financial officer on October 17. Chief strategy and risk officer Marc Verissimo, who has overseen the company’s financial operations in the past, will take on the role of acting CFO until a replacement is named.

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