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Has Local.com Moved into a Bad Neighborhood?
by Melissa Davis - 8/4/2010 8:52:34 AM
Local.com. (Nasdaq: LOCM) investors might want to take a closer look at corporate insiders and the recent deals they’ve inked in order to boost the company’s growth.
CEO Heath Clarke has issued bullish projections, lifted by aggressive acquisitions of website customers, and then dumped almost half of his stock in the company. CFO Brenda Agius has been placed in charge of finances even though her past experience at that post, racked up at former Internet highflier FindWhat.com, ended in disaster for investors. Moreover, one of the company’s directors has worked as an investment banker at several firms – including two with connections to a shady penny-stock outfit known as SpongeTech (SPNG.PK) – that have left stains on his record as well.
Meanwhile, in an effort to expand beyond its core Internet search-engine business, Local has been acquiring customers from companies with some black marks of their own. Local purchased most of those subscribers from LaRoss Partners, a firm that appears to be led by a past target of securities regulators with links to two Internet businesses accused of billing customers for website hosting services they never ordered. It has acquired the rest of its subscribers from LiveDeal (Nasdaq: LIVE), a company with an “F” rating by the Better Business Bureau due to massive customer complaints.
Local launched its new acquisition-fueled growth strategy in February of 2009, the same month that Agius – who previously embraced a similar, but ultimately ill-fated, business plan at FindWhat – took over as CFO. Local has purchased up to 85,000 subscribers since that time but, due to contract cancellations, now has only 70,000 of those customers left. Based on subscription figures supplied by management, Local cannot afford to keep on losing those customers, (unless it buys more to replace them), since they account for a sizable chunk of the company’s recent jump in revenue guidance.
Local insiders have been selling stock in the meantime, with the company’s CEO executing the biggest transactions by far. This May, Clarke sold more than 450,000 shares of Local – pocketing roughly $4 million in proceeds – shortly after issuing impressive revenue guidance that sent the rising stock to a multiyear high of almost $9 a share. Clarke has followed up with two smaller stock sales at lower prices, cutting his original stake in the company by a total of 44%, since banking those millions.
In his latest transaction, carried out on July 2, Clarke cashed out stock options priced at $3.84 a share – recording a meager pre-tax profit of less than $50,000 – when he could have held onto those options, while waiting for much bigger gains, for another six years. The stock, hammered last week by investors hoping for another blowout quarter, has remained under pressure since that time. Down another 2.6% on Tuesday, the stock currently fetches $6.12 a share.
Meanwhile, short sellers smelled potential trouble at Local more than a month ago. During the second half of June, they nearly doubled the number of Local shares sold short in anticipation of a fall. They have now shorted 11% of the entire float, up from about 2% this time last year, sending a strong signal that they expect even more problems to come.
Local failed to answer questions for this story.
CFO with Baggage
FindWhat sure paid a high price after appointing Agius as its CFO. Until 2004, the Gulf Coast Business Review reported, FindWhat relied primarily on organic growth to fuel the company’s success. With Agius taking over as CFO that same year, however, FindWhat launched a buying spree that quickly doubled the company’s revenues but ultimately backfired in the end.
In the spring of 2005, less than a year after Agius became the CFO, FindWhat’s auditors abruptly resigned after identifying multiple weaknesses – involving, among other things, purchase accounting and revenue recognition -- in the company’s financial reporting process. Agius stepped down as CFO the following month, the Gulf Coast newspaper noted, after recognizing the full “threshold of responsibility” involved with overseeing finances for a publicly traded company.
FindWhat changed its name to Miva right after that – and has since reinvented itself yet again as Vertro (Nasdaq: VTRO) – but the company never really recovered from that disaster. The company’s stock, which fell 75% to $5 during Agius’s brief stint as CFO, has continued to lose ground and now trades for just 50 cents a share.
Nevertheless, Local has portrayed Agius as an accomplished CFO with strong public reporting experience in its own regulatory filings. When officially introducing Agius as its new CFO last year, Local even noted that Agius had proven “instrumental in aggressively advancing the FindWhat.com/Miva organization” with help from acquisitions like those that the company now planned to pursue itself.
For her part, Agius promised to play a major role in Local’s new growth strategy.
“It is an exciting time for the company,” she stated back in February of 2009. “The company is well positioned to take advantage of strategic accretive target opportunities, while it promotes organic traffic growth to the company’s core site.
“I believe that 2009 will be Local.com’s inflection year,” she added. “And I am looking forward to leveraging my experience and knowledge to help strengthen Local.com’s financial and market position.”
Closet Full of Skeletons
Local has leaned heavily on deals with LaRoss Partners, a mysterious New York-based operation, to fuel its recent growth.
According to regulatory filings, Tom Rossi serves as the managing director of that firm. Based information contained in brokerage records, as well as that found in an extensive personal background report obtained by TheStreetSweeper, Rossi and his current partner – Jon Lee -- originally worked together about 15 years ago at GKN Securities. They departed from GKN in April of 1996, brokerage records show, the same month the firm ended a stock mark-up scheme that later triggered a crackdown by the National Association of Securities Dealers.
By the following year, Rossi and Lee had joined forces once again at a different firm called Cambridge Capital. There, they both landed in trouble. In October of 2002, brokerage records show, the NASD fined Rossi $105,000 for allegedly executing unauthorized trades in client accounts and barred him from the industry. It followed up by banning Lee from the industry as well a few months later.
By then, information uncovered by TheStreetSweeper indicates, Rossi had already branched out into the Internet business. A firm located at 1 Expressway Plaza, Suite 114, in Roslyn Heights, N.Y. – the exact address currently listed for LaRoss Partners – registered the domain name for an outfit known as BestWebUSA.com in March of 1999. Since then, BestWebUSA.com has come under fire for allegedly operating a “slick website hosting scam” that charges unsuspecting “customers” for unwanted services.
Meanwhile, Rossi himself has gone on to register another Internet business – hostawebsite.biz – that has triggered even more outrage. According to Internet complaints, hostawebsite.biz signs customers up by posing as a legitimate Yellow Pages provider and then splicing together recorded responses that suggest those customers have ordered websites they never actually wanted.
“These charges are not the result of a misunderstanding but a scam done with calculation and forethought,” one alleged victim wrote on the Internet. “What this company is doing is insidiously fraudulent.”
LaRoss did not respond to messages seeking input for this story.
To date, Local has relied on LaRoss Partners for the bulk of its Internet subscription business. Based on company reports, Local has paid LaRoss Partners $7.5 million for up to 70,000 customers – a number roughly equal to its entire subscription base right now – over the course of the past 18 months. Last month, Local further cemented its relationship with LaRoss Partners by hiring the firm to recruit new customers and then bill them for the services.
Failing Grades for Service
Local also inked a deal with LiveDeal in an effort to jumpstart its paid subscription business.
In March of 2009, just two weeks after hiring Agius as its new CFO, Local announced that it had paid $3 million to LiveDeal for 14,000 of the company’s subscribers. At the time, Local celebrated that business as a valuable addition that promised to boost the company’s financial results.
When LiveDeal discussed the deal with its own investors during a conference call a couple of months later, however, the company portrayed that business as a shrinking one that had been weighing heavily on its operations. By then, the Better Business Bureau had been fielding complaints about LiveDeal’s marketing practices for years. Angry customers were also starting to post horror stories on the Internet about the company.
“LiveDeal gets one star only because they don’t allow zero-star ratings,” one customer wrote last year. “In short, these are scam artists who make their money by taking advantage of small businesses who don’t know enough about online advertising to see them for who they are.
“They will take thousands of dollars of your money and promise you the world,” the customer continued. “But in the end, you’ll get a bunch of junk hits from the advertisements they place on your behalf. (And) none of them will generate any business.”
Shortly after selling its Internet advertising business to Local, LiveDeal began shedding top executives as well. The company terminated CEO Michael Edelhart, “effective immediately,” after he spent less than a year on the job. Chairman Rajesh Navar announced his resignation from the board six months later, with CFO Rajeev Seshadri following him out the door – along with Edelhart’s replacement CEO – earlier this year.
LiveDeal’s stock, once a $50 highflier, has fallen into penny-stock territory since that time. After losing more than half its value over the course of the past year, the stock currently trades for just 45 cents a share.
Links to Penny Stocks
Local can be linked to other penny stocks as well.
In 2005, Local COO Michael Sawtell left the company to launch a new Internet-based business known as DigitalPost Interactive (OTC: DGLP.OB). He tapped Local’s CEO and one of the company’s directors, Norman Farra, to serve on his firm’s advisory board.
Last year, DigitalPost relied on a $340,000 contract with a “leading Internet search company” – which sounds a lot like Local itself – for roughly one-quarter of its meager revenue. DigitalPost, still tiny after five years in business, currently trades for 5 cents a share.
DigitalPost did not return a phone call seeking comments for this story.
Despite its limited resources, regulatory filings indicate, DigitalPost found enough cash to pay Farra $5,000 a month to serve as a financial advisor to the company. After inking that deal, Farra went on to become the director of investment banking services at a firm connected to a notorious penny-stock outfit known as Spongetech.
That firm, Cresta Capital Strategies, became the exclusive investment banker for Spongetech with Farra at the helm. In mid-2009, shortly after hiring Cresta, Spongetech soared to an all-time high of 28 cents a share. Farra left Cresta to assume a similar post at R.F. Lafferty, a previous investment banker for Spongetech, later on that year.
By then, Spongetech had sued Cresta for alleged “breach of contract, conversion, unjust enrichment, breach of fiduciary duty and unlawful appropriation of funds” over a dispute that surfaced when Farra oversaw investment banking for the firm. Spongetech faced serious problems of its own, however, with the U.S. Securities and Exchange Commission halting its stock over suspicious company announcements. Federal prosecutors have since filed criminal charges against Spongetech and its leaders for allegedly operating one of the boldest pump-and-dump schemes in recent history.
This spring, while government officials built their case against Spongetech, the Financial Industry Regulatory Authority cracked down on one of Farra’s previous employers. Farra spent six years working as the managing director of investment banking at GunnAllen Financial before going on to assume similar posts at the smaller firms of Cresta and R.F. Lafferty. He left GunnAllen in the fall of 2007 – along with a rouge broker accused of directing clients to a massive Ponzi scheme – and surfaced as the exclusive financial adviser for DigitalPost shortly afterwards.
GunnAllen never bounced back from that scandal. The firm ultimately ceased operations this March, Investment News reported, when FINRA shut the company down because of its poor financial condition.
GunnAllen served as an underwriter for Local’s initial public offering back in 2004, with Farra directing the firm’s investment banking activities, before running into trouble a few years later. It sold its entire 5.4% stake in Local, which debuted at $8 a share, within a few months of that IPO.
TheStreetSweeper could not locate Farra to ask him questions for this story.
Selling at the Top
Local insiders, including both Clarke and Farra, sold company stock at similar prices – very near the 52-week high – earlier this year.
Local peaked this year at $8.85 a share on April 29. Clarke executed his big stock sale, with the shares trading at $8.40, less than one week later. Farra sold stock on three separate occasions during the same rally.
Local sparked that springtime surge by issuing bullish revenue guidance of $81 million to $84 million – up almost 50% from the previous year -- for 2010. Just a few months earlier, investors recall, Wall Street analysts had set revenue targets about $25 million below that bar.
Based on figures supplied in regulatory filings, however, Local may be banking on its latest deals with LaRoss Partners – a firm tainted by serious customer service issues -- for most, if not all, of that extra revenue. With those newly acquired subscribers paying $35 to $50 a month for Local’s services, they should generate $18 million to $26 million in incremental revenue for the company over the course of this year.
Many of those customers have clearly rushed to cancel their contracts, however. At this point, company reports indicate, Local has already lost almost 20% of the subscribers it has acquired since early last year. Meanwhile, other unhappy customers – particularly those signed up by LaRoss Partners’ hostawebsite.biz -- seem eager to cancel their contracts and seek refunds for past payments as well.
Some of those customers, threatening possible legal action, would like to see that business disappear for good.
“I was bilked out of $1,000 over a two-year period before the marauding bandits finally got too cavalier and greedy and charged my telephone bill twice in one month,” a customer complained this June. “It caused me to look into the source of the increase on my phone bill …
“But what about all of the other unsuspecting businesses and individuals who are currently getting scammed by this fraudulent company? I would like to start a class-action suit and go after these criminals. One of us alone can do next to nothing, (but) a large group can bring attention to the company and get them shut down.”