Unusual stock trading at LVEN

Gary Thompson and David Strow

Tuesday, Oct. 12, 1999 | 11:01 a.m.

The convoluted financing involved in Las Vegas Entertainment Network Inc.'s offer to buy Jackpot Enterprises Inc. of Las Vegas has been accompanied by highly irregular trading in LVEN stock.

Friday marked a banner day for Los Angeles-based LVEN's market makers, as 30 times as many shares were bought or sold as were traded on average each day during the three previous months.

Though it's unclear who was trading Friday, a Las Vegas Sun analysis shows sellers may have earned millions of dollars as LVEN's stock price rocketed skyward, at one point reaching a value 2.5 times higher than Thursday's close, before ending with a "mere" 43 percent gain on the day.

On Monday, though, LVEN stock plummeted back to earth, closing just pennies above last Thursday's close. It moved even lower today, as questions about the company's finances mounted.

The remarkable stock performance was fueled by LVEN's Friday announcement that it was making a $95 million cash offer to buy Jackpot, a slot-route operator.

The offer's clear implication -- that LVEN had the money to finance the deal -- seemed all the more remarkable because of the company's increasingly precarious financial condition in recent months.

Since its formation in 1990, LVEN has lost almost $50 million and recently appeared to be on the brink of bankruptcy, saddled with nearly $800,000 in current liabilities, less than $200,000 cash and no revenue-producing operations and just four employees.

In a Sept. 24 filing with the Securities & Exchange Commission, LVEN warned that its independent accountant had "substantial doubts about the company's ability to continue as a going concern." That warning came just nine days after LVEN had told the SEC it couldn't file a quarterly financial report because it had "insufficient financial information at this time to finalize its financial statements."

Since those disclosures, however, LVEN claims to have engineered a miraculous financial turnaround, highlighted by a purported $190 million investment and $305 million in bank guarantees from Dr. Fred Cruz, a retired physician now living in Las Vegas.

LVEN followed up its initial announcement of the Jackpot offer with two more releases late Friday and Monday that were apparently designed to convince investors the deal was for real.

The two releases referred to U.S. Guarantee Corp., a Nevada corporation headquartered in Scottsdale, Ariz., that was last heard from when self-proclaimed Las Vegas "billionaires" Anil Gupta and Shruti Misra were making their failed bid to buy the Minnesota Vikings and reneging on a phony $5.1 million donation to a charitable organization for the blind.

According to LVEN SEC filings and Dr. Cruz, U.S. Guarantee gave the physician a commitment for $400 million in financing payable in five separate tranches of at least $70 million each.

Cruz said Monday a Phoenix branch of Western Security Bank "has certified" to BNI Bank of Indonesia that U.S. Guarantee "can do the deal."

"U.S. Guarantee has assets of $1.8 billion and no debt, so they can fulfill the transaction," Cruz said. "From that commitment, I will give LVEN $190 million to purchase a hotel-casino in Las Vegas.

"The transaction has not yet started because they're still preparing papers. When the transaction is ready, an announcement will be made."

U.S. Guarantee's chief operating officer, Alvin Tang, said Monday his firm has about $1.8 billion in assets. According to a March 15 U.S. Guarantee balance sheet, they include certificates of deposit from the Bank of China and other financial institutions, raw acreage in Tennessee, interests in various trusts and a half interest in gold certificates purporting to represent $1.65 billion of gold concentrates stored in a Las Vegas warehouse.

When Gupta and Misra made their bid to buy the Vikings last year, they claimed U.S. Guarantee had committed to finance the transaction. Gupta and Misra said their assets included $2.4 billion of precious metal concentrates stored in a Las Vegas warehouse -- a claim scoffed at by metals experts who noted that was roughly the value of the entire annual gold production in Nevada, the nation's No. 1 gold producer.

LVEN's Monday release also asserted that Kenneth Pinckard, a Phoenix accountant, had confirmed U.S. Guarantee's assets. In a March 30 report obtained by the Sun, Pinckard wrote his firm "had examined, on a test basis, various items appearing on the balance sheet of U.S. Guarantee and found the items reviewed ... to be fairly presented."

When the Sun phoned Pinckard's office number to ask him about the tests, the operator answered, "U.S. Guarantee." Pinckard was unavailable, she said.

Late Monday, however, Tang said U.S. Guarantee had removed its $825 million stake in those gold concentrates from its latest balance sheet. "We did feel we had enough information to substantiate that original valuation," he said, "but we decided to re-evaluate."

Meanwhile, LVEN officials were reluctant to disclose details of the company's financial status or operations Monday. Tim Noyle, assistant to LVEN Chairman Joseph Corazzi, referred questions to Corazzi, who didn't respond, or Jay Goldberg, whom he identified as a publicist for Corazzi.

Goldberg denied that Monday, saying, "I'm an investor. I disseminate news, but I'm not on the payroll." He also said he "believes" the money to finance the Jackpot deal has been put in escrow. Cruz said that's not the case.

Despite repeated requests for comment, neither Corazzi nor other LVEN officials would say whether they sold stock during the recent price runup.

If such sales did occur, they could raise regulatory concerns about a possible "pump and dump" operation, which is typically characterized by:

* The Pump: A company issues misleading press releases designed to convey the impression it has a major deal pending and the financial ability to consummate it, driving up the price of the stock as investors scramble to get in on a good thing.

* The Dump: Insiders involved in the scam sell their holdings as the stock price rises, while company officials remain "unavailable" or decline to answer specific questions about the purported deal.

The tenor and timing of recent announcements and the unwillingess of LVEN officials to answer questions about their dealings make investment analysts suspicious about the unsolicited takeover offer.

"In the event it's found that the whole reason for announcing the deal was to hike the price of the stock, there's going to be hell to pay," said Las Vegas Investment Advisors Inc. Chairman Dave Ehlers.

"LVEN has a checkered history, if you will," said Bear Stearns & Co. Senior Managing Director Jason Ader. Saying "balance sheets don't lie," Ader noted that the company had only $177,619 of cash and equivalents and $792,066 of current liabilities as of July 31.

"Their ability to finance this transaction is suspect," he said.

LVEN's press releases haven't exactly been models of the full disclosure SEC regulators like to see. On July 6 and 15, for example, Goldberg announced that the company had issued 3 million shares of stock "at $101.60 a share for total equity of $305 million."

What was astounding about that announcement was the price of LVEN stock was just $1.31 a share that day, meaning the buyers, whom Goldberg identified as six anonymous trusts, were paying $301 million more than they would have if the stock could be bought on the open market. The announcement didn't explain why anyone would pay such a premium.

Dr. Cruz said Monday the six trusts are controlled by himself, his wife and other family members, but that there was no $305 million investment.

"That deal was for $5 million in gold, of which they have received $3 million already, and a $300 million bank guarantee which the company can use to purchase 100,000 bingo machines for distribution in Brazil," he said.

The $3 million wasn't cash, but a gold certificate representing 10,601 ounces of gold, LVEN said in an SEC filing. Proceeds from the full $305 million commitment would be used to finance the purchase of a 50 percent stake in a Brazilian company and the bingo machines. LVEN said it would buy the machines for $12,000 each and sell them for a "total expected cash payment for each machine" of $141,317, according to the SEC documents.

By comparison, new slot machines sell in the United States at prices ranging from $6,000 to $13,000.

LVEN's agreement to issue 3 million shares to Cruz and other trust principals constituted a substantial increase in the stock capitalization of LVEN, which had just 1.8 million shares outstanding as of Nov. 1, 1998.

Since then, however, LVEN has issued 3 million shares to the Cruz-related trusts, 1.5 million shares to company insiders and another 250,000 shares to an unnamed investor for $297,500, or about $1.19 per share.

Among the shares awarded insiders were 590,000 to Corazzi and 177,000 to other officers, including President Carl Sambus. The awards were made "as a bonus for their services in securing certain transactions for the company," SEC filings said.

By Sept. 15, LVEN had 6,537,667 shares outstanding -- 4.75 million shares, or 2.6 times, more than had been outstanding just 10 months earlier. The dilution theoretically should have driven the price of LVEN stock lower. But that didn't happen.

LVEN stock has traded for as low as 34.375 cents a share in the past 52 weeks and as late as Aug. 19 was languishing at $1 a share. Investors had apparently been unimpressed with Goldberg's announcement of the $305 million investment.

NASDAQ trading volume for LVEN stock in the three days leading up to Aug. 19 had totaled just 19,800 shares as the stock continued trading in the $1 range.

But after Aug. 19, LVEN stock began a steady climb higher, and trading volume started to increase. On Oct. 1, the stock closed at $2.75 a share, up 50 cents on volume of 110,000 shares. That day, Goldberg issued an announcement saying LVEN was selling 12 million shares of stock to two unnamed investors for $15.80 per share.

They turned out to be Dr. Cruz and his wife Kari, who two days earlier had signed an agreement to buy 12.2 million shares for $190 million, or $15.58 cents a share. Whether the per-share price was $15.80 or $15.58 was relatively immaterial. What was surprising about the transaction, however, was that LVEN stock had traded as low as $2 a share that day and closed at $2.25 on volume of just 5,600 shares.

That meant the Cruzes were paying at least $13.33 per share over the closing price, or nearly six times what they would have paid for stock acquired on the open market.

Goldberg said Monday such open-market purchases weren't feasible because they would "take the stock up to $300 or $400 a share." While that might have pleased LVEN's public shareholders, company officials insisted the two Cruz stock transactions be private.

LVEN's stock price hadn't moved much despite the company's Oct. 1 announcement and a subsequent one by Goldberg two days later saying LVEN has received "a total infusion of $495 million in exchange for 15 million shares of restricted common stock, or $33 per share received. LVEN has incurred no debt as a result of either of these transaction." By last Tuesday, LVEN stock had dropped back to $2.25 a share even though volume was a bit higher than normal.

Apparently investors hadn't gotten the message about the dramatic improvement in LVEN's financial prospects. On Wednesday, though, LVEN issued a brief news release to "reconfirm" that it had received a $190 million investment.

However, neither Goldberg's nor LVEN's announcements disclosed that the company hadn't received any cash. The "infusion" consisted of a gold certificate LVEN valued at $3 million and pledges from an unidentified bank for $300 million and U.S. Guarantee for $190 million.

Nevertheless, the stock jumped to $2.65 a share Wednesday and rose again to $3.625 on Thursday -- one day before the Jackpot offer was announced.

At 8:46 a.m. Friday -- 44 minutes before the stock market opened and nearly two hours before LVEN revealed its offer for Jackpot to the public -- an Internet user reported on the Yahoo message board for LVEN: "LVEN TO BUY JACKPOT ENTERPRISES!!!!!" An hour later, another Web poster reported "LVEN is putting down 100 million."

When LVEN finally disclosed its bid Friday, LVEN's stock price soared, at one point reaching $9.125 a share. Volume was huge -- the stock traded 1,590,200 shares before finally closing at $5.1875 a share.

Whether any of the stock sold Friday included part of the 4,750,000 shares LVEN issued to insiders, consultants and the Cruzes for "services" or gold certificates since last November isn't known.

Steve DuCharme, chairman of the Nevada Gaming Control Board, declined to comment specifically on the LVEN bid for Jackpot, saying that no application had been filed with the board, and that the board had never taken an application from LVEN in the past.

"Any acquisition of control (of Jackpot) is going to require prior approval," DuCharme said. "We'll be looking at (LVEN's) reputation in the business world, the way they conduct business, how complete their financial records are, where their financing came from, and if that's a suitable source."

Don Nichols, a Los Angeles investor who holds 1.6 percent of Jackpot's stock, said he had "no reason to doubt" LVEN's claim that it received $190 million recently. Nichols has been a fierce critic of Jackpot management, and has been pushing for a sale for two years. But he said he would not accept a tender offer of $11.

"In my mind's eye, there's no way (Jackpot's) worth less than $12.75, $13 a share," Nichols said. "I'm not inclined to tender at all."

Nichols said Jackpot currently has about $8.50 per share in cash reserves alone, not counting the company's slot route operations or its cash flow.

"There's a number of us (dissenting shareholders) out there, and we could make it kind of tough," Nichols said. "It's too cheap."

Ken Pavia, a Miami investor holding a 5 percent stake, said he hadn't decided yet if the offer was a fair one.

"I'm cautiously optimistic, because I felt (Jackpot) was undervalued ... the stock price did not reflect its value," Pavia said."I'm trying to establish the validity of the offer, trying to determine whether in fact the folks making the offer are qualified and financed.

"(Jackpot's) last public announcement was they would hire an investment banker. I would like to know what alternative they have, and how that compares to the $11 offer."

But Russ Roth, editor of the Las Vegas Investment Report, pointed out that Jackpot's management still needed to be convinced to go along. LVEN didn't consult with Jackpot before issuing its takeover offer.

"Don Kornstein owns a lot, so I'm not sure you could do an unfriendly deal," Roth said. "Without his cooperation, it will be very hard."

Kornstein, Jackpot's chief executive officer, currently holds 8.9 percent of Jackpot's stock, and a group of six directors and executives hold a 20.38 percent stake.

In a Friday statement, Jackpot appealed to its shareholders not to act on the offer until its board could evaluate LVEN's bid and take a position. It said it would issue an opinion within 10 business days. Jackpot officials had no comment Monday.

Jackpot stock rose 81.25 cents a share, or 13.8 percent, Friday to $9.8125, but slipped back 37.5 cents a share in Monday trading.

LVEN shares didn't fare as well, however, plummeting $1.34375, or 27.1 percent, to close at $3.78125 -- just 15.625 cents above its Thursday close. Today, they fell further, trading as low as $3.125 a share by late morning.

Cruz said Monday he remains confident U.S. Guarantee will meet its commitment to finance the $190 million investment, in part because Barry Goldwater Jr. -- son of the late Arizona senator and Republican presidential candidate -- was listed as an officer and director of the company.

"He wouldn't be involved in anything that would damage his father's name," Cruz said.

Asked about Goldwater's involvement later Monday, Tang disclosed that the senator's son had resigned from U.S. Guarantee "to pursue political aspirations."

LVEN's history includes the purchase and subsequent sale of the El Rancho hotel-casino on the Strip. LVEN bought the closed and run-down property in 1993 for $36.5 million and sold it to International Thoroughbred Breeders in 1996 for $43.5 million.

The sale price included $12.5 million cash and $17 million of promissory notes, plus ITB's assumption of $10.5 million of El Rancho debt. In May 1997, LVEN converted $11.6 million of interest and principal on the promissory notes into 2.1 million ITB shares.

But four months later, some ITB directors sued to rescind the conversion. LVEN returned the ITB stock and got the right to try to find a new buyer for the El Rancho. If it sold the property for ITB by last April, LVEN would have received any net proceeds in excess of a $44.6 million purchase price. It hasn't made a sale yet.

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