Watch Those Transfer Agents!

One agent issued over one million bogus shares of a software vendor. Plus: bankers apply pressure to drum up business, and Fed says fewer banks tightening loan terms.

CFOs will have to monitor the activities of stock transfer agents more closely if a recent case of fraud proves to be a harbinger. Transfer agents normally issue and store paper certificates that represent the stock holdings of investors. But when direct digital marketing software maker MindArrow Systems Inc. replaced RTT Transfers Inc. with U.S. Stock Transfer Corp., a company the new CEO had previously worked with, MindArrow executives found that RTT had issued 1.1 million counterfeit shares. Those bogus certificates represented additional equity MindArrow had not authorized — but that threatened to dilute existing shares.

Once the new agent raised the matter in February, CFO Michael Friedl and CEO Robert Webber swung into action, notifying Nasdaq, the U.S Attorney, and the Securities and Exchange Commission. “We found our situation was virtually unprecedented — we had never seen anything like it, and neither had any of the agencies,” says Friedl.

The SEC registers and oversees transfer agents, but historically has taken few actions against them, according to SEC spokesman John Heine. And those in the stock transfer industry, such as Leon Urbaitel, CEO of advisory service, say that such fraud is rare, if not unprecedented.

Nasdaq immediately suspended the company’s shares, then trading at $4.50, and the FBI swooped in to investigate the fraud. Two RTT agents later pleaded guilty to fraudulently issuing the additional shares to companies they owned, reselling them, and pocketing $16 million in proceeds. RTT is no longer in business.

The fraud didn’t affect MindArrow’s net worth, since its two founders surrendered 1.1 million of their own shares for cancellation to keep outside investors whole. However, to document the event, the SEC required MindArrow to take an $18.7 million noncash, nonoperating charge in the quarter ending March 31, 2001, increasing its loss-per-share for the quarter from $1.24 to $3.

Turning the Screws

Here’s empirical evidence to support what every financial executive already knows but won’t discuss openly: banks pressure short-term credit customers to buy other products and services in exchange for a loan commitment or attractive terms. And on the flip side, corporate customers expect better treatment from banks if they place additional business with the lender.

A new survey, conducted by the Bethesda, Md.-based Association for Financial Professionals (AFP) and Georgetown University, reports that half of the 427 corporate financial professionals polled say they are “required” or “strongly encouraged” by their commercial bank to purchase high-margin cash-management services to secure short-term credit instruments. Among other findings, the survey also concluded that 27 percent say they were pushed to use the debt underwriting services of their short-term provider.

Conversely, 80 percent of the respondents classify the availability of short-term credit as either “very important” or “important” in selecting cash-management banking relationships, while 51 percent view credit provision as a determining factor in their selection of a debt underwriter.

“It’s all a leverage game: whoever has more leverage applies the most pressure,” says a treasury executive at a $2.5 billion retailer who requested anonymity. But that doesn’t cut off corporate options. Recently, the executive’s company switched from a traditional credit line to an asset-based lending facility. In the process, a different bank was selected to lead the new facility — which upset executives at a major bank involved in the original credit deal. The offended bank punished the retailer by changing its disbursement-services rules and making it more expensive and difficult for the retailer to do business. “So I took my disbursement business elsewhere,” declares the executive.


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