SmarTalk, a DRTV vendor of calling cards and prepaid wireless services based in Columbus, OH, was sued by investors in several class action suits filed in the last two months.
The suits have not prevented the company from rolling out a DRTV campaign with celebrity spokesperson Dick Clark pitching SmarTalk's prepaid cellular services.
Class action suits filed separately by law firms Abbey, Gardy & Squitieri, New York, and Schatz & Nobel, Hartford, CT, allege that several SmarTalk corporate officers made false and misleading public statements that boosted SmarTalk's stock price while they profited by dumping shares at inflated prices.
“[The] statements and omissions … failed to disclose material adverse information and misrepresented the truth about the company, its financial condition, performance and accounting procedures,” the Abbey, Gardy & Squitieri complaint alleges.
“They [SmarTalk officers] wanted to profit from their actions,” said Andrew M. Schatz, partner of Schatz & Nobel, who represents one client who purchased 300 shares of SmarTalk stock at about $31.56 a share. Its class includes persons who purchased SmarTalk stock between July 31, 1997 and Aug. 10 this year.
His firm's complaint alleges corporate officers committed fraud in violation of the Securities Exchange Act, which was passed in 1934 to govern the trading of share holdings of public companies. The act states that it is illegal for companies and individuals to artificially inflate stock prices by either withholding information that would prevent somebody from purchasing stock or issuing statements that would mislead a potential investor about the financial well-being of the company.
As evidence, both complaints cite several examples of when company officers made false and misleading statements about the company's performance during a period when they were selling their shares.
In one prominent example, company officers made a “surprising switch” in their public statements about the company's financial results relating to the acquisition of ConQuest Telecommunications Services Corp., a marketer of prepaid calling cards based in Dublin, OH, according to the Schatz & Nobel complaint. SmarTalk sold ConQuest to New Millennium Communications Corp. on June 5 for $18 million.
The complaint contends that while SmarTalk last year had stressed the importance of the ConQuest acquisition – which helped to boost its stock price — company officers were selling large portions of SmarTalk stock. On April 1, two weeks after the last big sell-off occurred, the company “indicated that nearly 40 percent of its $71.9 million in sales in 1997, or $28 million, were attributable to a call center acquired during the ConQuest acquisition which the company had elected to treat as discontinued operations as of Jan. 1, 1998.”
That dramatic revelation, combined with other statements by vice chairman and CEO Erich L. Spangenberg, caused the company's stock price to fall the next day by 28 percent to $22-7/16 a share.
“In explaining this surprising switch from what had previously only been positive news about the ConQuest acquisition, defendant Spangenberg stated: 'The call center is not part of our core business and we are evaluating alternatives for this line of business…,'” according to the complaint.
The dramatic announcement on April 1 occurred after SmarTalk officers “sold suspiciously large amounts of SmarTalk common stock at prices affected by their fraud,” according to the Abbey, Gardy & Squitieri complaint. “The SmarTalk insiders sold over 3.2 million shares of common stock for proceeds in excess of $50 million.”
The single biggest trader was Robert L. Lorsch, co-founder and chairman of the board for SmarTalk, who sold 1.3 million of his shares of company stock on Nov. 10, 1997, for $23 a share, allegedly earning him a profit of about $30 million.
Lorsch is not alone in facing investor scrutiny; other corporate officers are also implicated in the allegations. David A. Hamburger, corporate officer, allegedly sold 160,000 shares from his holdings at prices ranging from $23.19 to $31.20 a share between Jan. 5 and March 3.
Glen Andrew Folk, former vice president of finance and CFO, allegedly sold 25,000 shares between $23.19 and $23.44 a share on Jan. 5. He resigned earlier this year to be replaced by Wayne V. Woodell in September.
Robert M. Smith, director, allegedly sold 15,000 shares on March 2 for $31.04 a share. The complaint also alleges Smith sold an additional 13,240 shares on March 12 for $31.32 each.
Fred F. Fielding, director, allegedly sold 28,240 shares of his holdings at $31.44 a share on March 3.
Investors got another shock on Aug. 10, when company officers announced that the company may to revise its results for the year ended 1997 and the first quarter of this year because its outside auditor, Pricewaterhouse Coopers Llp., “had informed management about 'potentially significant issues with the company's accounting treatment for acquisitions that occurred during 1997 and certain other items relating to 1997,'” according to Abbey, Gardy & Squitieri's complaint.
That announcement caused the company's stock price to fall 57 percent on Aug. 11, from $16-5/8 a share to $7-5/32 a share. That price was about half its initial public offering price in October 1996, the complaint alleges.
Victor Grillo, vice president of SmarTalk, declined to comment on the suit. The company issued a press release Oct. 22 saying that the financial review was nearing completion. Pricewaterhouse Coopers Llp. and Arthur Andersen Llp., another top-ranked accounting firm that acted as an independent advisor to a special committee of the board of directors, were working on the review.
“We are gratified that the review found no fraud or other improprieties,” Spangenberg said in a statement. “We look forward to finalizing this review and restoring credibility with the financial community.”