Disaster Stocks

By Reza Ganjavi

Vertel (Nasdaq: VRTL)

by Reza Ganjavi

Vertel was one of my early investment experiences – and boy what a disaster that was – mainly because of some apparently questionable actions of the CEO, Bruce Brown who walked away with a huge sum of cash before Vertel went bankrupt.

Bruce Brown sold his shares at a very high price. Shares had risen from 50 cents to 50 Dollars. I bought it at $5 – saw it go to $0.50 – then saw it go to $50 – only for it to go back down to zero. But Bruce sold at a very high price after pumping the stock with e.g. potentials in a deal with Compaq Computer to use Vertel’s e-Orb in their intelligent network – which never took off.

Bruce walked away with millions – and Cyrus Irani became the CEO – and Craig Scott was the CFO. Irani became a CEO two months after becoming the President. It seemed like a smooth exit path for Bruce Brown. Cyrus was Bruce’s buddy – so it’s not known how he participated in the “pump & dump” which in my opinion was what Bruce did.

Analysts saw through the BS sooner than retail and started dumping soon after Bruce took off with the mega cash from selling his shares at the pumped price.

Many investors were very angry at Bruce Brown while he was laughing his way to the bank. I don’t see how he could ever feel good about himself. I am not alleging that he broke any laws but his actions, in my opinion, were unethical.

After Vertel, Brown became the CEO of Efficient Networks (EFNT), then CEO of Strix Systems, then Unsocial, then Hot Nife, and now he’s marked himself as being contract CEO at AppMash. I can’t find any company by name of AppMash. Hot Nife lands me on a page hotnife.com which is an 18+ year old site apparently selling pot-related stuff like “live resin” and various marijuana “joint” products including “hash infused joint”. No information on the company is available on the website except an email address.

Unsocial, Inc. doesn’t return any results that resemble a software company in messaging. I found one reference for a company that has an operating status of “Closed” as of Nov 1 2013 – Bruce claims he worked at Unisocial for 10 years till 2019. Maybe it’s a company with no internet presence but that’s hard to believe. Aside from “antisocial personality”, Unsocial in Ventura, California also returns no results.

~~~

Beacon Power (Nasdaq: BCON)

by Reza Ganjavi

One of the companies I bought stock in was Beacon Power (Nasdaq: BCON) near Boston Massachusetts. I put some money into the stock of this company because I really liked their technology. Years later, the technology turned out to be very successful and a very useful clean-energy solution with regards to storage of power on flywheels which are used for frequency regulation of the power grid instead of using the dirty coal-burning old plants which are very inefficient and polluting.

I have some memories of this company that I want to share here but first I must say that at some point I saw that the company was being mismanaged, and that it was not going to have a good future for the shareholders and therefore I sold my shares – I took a loss but it turned out that if I hadn't sold then I would have lost my entire investment, so it was a good move to get out when I had the realization that it was time to get out.

Of course, I learned several lessons from this experience, and one of the most important lessons which actually I have encountered two times in my investing experience, is that when a CFO looks pessimistic, get out. Also, I learned from other experiences when a CFO quits it’s a bad sign).

My father was visiting the East Coast (USA) once and we went together for a meeting with the management of Beacon, and I met with Bill Capp who was the CEO, Jim Spiezio who was the CFO, and Matt Lazarewicz who was the chief technical guru.

In this meeting, Jim Spiezio was very depressed and even what he was saying was not very encouraging. Bill Capp, was different: he was always pumping but nevertheless, I read between the lines that these guys have problems. Of course, they did not tell me anything that was not disclosed publicly. I never had insider information and it was purely my own perception that sometime later I decided to sell the shares. I should not have even waited that long.

Several things raised alarms in my mind during that visit but I was too much in love with the company to pay full attention to my perception – that cost me a lot of money. For example, building these flywheels required massive amounts of material and it just did not seem feasible for this team to pull it off.

Also, there were regulatory issues and they were struggling with permissions etc., and that was another red flag because the company did not have a lot of excess money, and paying the lawyers to fight these battles was going to be very expensive.

When I was in Europe, I attended a conference where Bill Capp was also attending. He did a presentation on Beacon Power. Several things raised alarms in my mind. For example, he was not eating lunch with the group. At the conference, free lunch was served at the hotel. I believe instead he went to another place which I'm guessing was an expensive restaurant, to have a plush free lunch funded by shareholders (at the time the company was not making any significant revenue).

Once I was in the Boston area and I stopped by to visit them, and this was just around the time the ship had started sinking. I realized Bill Capp spent probably a lot of money setting himself up with a home office instead of being in the office. I just did not have a feeling these guys were being prudent in the way they spend money. Don't get me wrong I’m all for home offices, but that was a red flag for me at the time given the rest of the red flags.

Another red flag was I found out that they were paying for some dodgy service that predicts short squeezes. This is pretty desperate. Also to fund their operations they were resorting to some toxic financial deals, a typical sign of a ship going down. Needless to say the stock suffered big drops.

They were really counting on retail investors to continue funding their sinking ship. They had an effective IR director, Gene Hunt - a smooth talker and competent IR guy, but he seemed to be playing the game the way they wanted it: to lure retail investors; e.g. once when I was talking with him he said he was passing by Bill’s office and he heard something that made his ears perk up – portraying or making it imply that it was something very positive without explicitly doing so.

I believe that was done to pump the stock – to pump investor emotions. It's the retail investor's fault. I'm not alleging they broke the law by doing this but I think from an ethical perspective it was questionable; many things in life that are legal are not necessarily ethical. They all had their own interest in mind: Gene was a consultant and wanted to continue his billable work. Bill was taking a fat salary and wanted it to continue. So it was an insider-enriching gig as many of such public companies are, especially when they have a sizzling attractive technology that lures retail "bag-holders". And that’s why such companies typically have a low institutional interest – institutions don’t act emotionally and see through these things.

Anyway, I got out and eventually, the company went bankrupt. They were bought for penny on the dollar by a company with competent management and they made Beacon a success but after wiping out the shareholders.

Around that time the CFO Jim Spiezio passed away. He was a smoker. But also I'm sure the stress of Beacon's finances took a toll on him.

Bottom line is that Bill Capp was an inept CEO. True the company faced macro challenges like falling price of natural gas which affects the price of frequency regulation. I also learned the lesson, that one must do a detailed background check on the CEO before investing in a company. Had I done that I would have seen Bill Capp was never a successful CEO of any company. Track record matters. It takes a special talent to deliver results.