Executive Fraud Blog

The complaint charges Globalstar and certain of its officers and directors with violations of the federal securities law. On or about November 2, 2006, the IPO Prospectus (the "Prospectus"), which forms part of the Registration Statement, became effective and at least 7.5 million shares of Globalstar's common stock were sold to the public, thereby raising more than $127 million. The Prospectus failed to disclose that Globalstar's constellation of satellites was degrading at an increasingly fast rate and the length of their commercial viability was decreasing.

Ignore the drumbeat of doom and criticism. U.S. markets are doing just fine, thank you very much, says Fortune's Adam Lashinsky.

February 1 2007

NEW YORK (Fortune) -- Each week, it seems, brings fresh protestations that the sky is falling on the U.S. capital markets. Nobody wants to list on U.S. exchanges anymore, goes the argument, because Sarbanes-Oxley has poisoned the well, because the U.S. regulatory climate is too onerous, because selling out is a far more favorable alternative than the tedium of going public.

Studies and conferences hammer home the point. Shortly after the New Year it was a McKinsey study prepared for New York's Mayor Bloomberg and Senator Schumer. (Question: Has McKinsey ever produced a report that contradicts the assumptions of its client? May I read it?)

This week the parent company of the New York Stock Exchange and Stanford University's Rock Center for Corporate Governance presents a seminar: "Can Our Capital Markets Be Saved and Do They Need Saving?"

The second question hits the mark: Of course they don't need saving. All they need are good companies, well informed investors and a robust economy. The proof is provided by the companies that choose, even in this supposedly horrible environment for public companies, to go public.

After all, 56 companies backed by venture capitalists went public in 2006 in the United States, raising a total of $3.72 billion, the highest number and largest amount raised since 2004, the year of Google, according to Dow Jones VentureOne. More broadly, a Thomson Financial survey of all U.S. IPO activity shows that the 189 IPOs last year raised nearly $43 billion, more than the $41.4 billion raised by 558 deals in 1997. In other words, there were fewer but higher-quality deals. More are on the way.

Stop whining about SarbOx!
Take Limelight Networks, one of techdom's hotter companies, and its not-so-subtle IPO preparations. I had breakfast last week with Jeff Lunsford, an ex-U.S. Navy fighter jock, certified software geek and seasoned CEO who recently signed on to run the Tempe, Ariz.-based company.

Limelight runs technology that helps Web sites that broadcast videos to deliver them more quickly to consumers. Thanks to YouTube, MySpace and the like, it's a hot field, as evidenced by the rapid rise and rich valuation of Limelight's arch-competitor Akamai Technologies.(Akamai and Limelight are locked in patent litigation, naturally, another reason that nobody is supposed to want to do business here anymore.)

According to Lunsford, Limelight's business is sizzling. It's growing revenues at 100 percent per year, he says, and is an "index play" on online video. The company did $13 million in last year's second quarter, $17 million in the third quarter, and it's here that Lunsford clams up.

Why? Well, he can't say. But he does nothing to dissuade me from believing that shortly Limelight will begin the process of preparing its IPO documents. Securities lawyers don't want companies that are close to starting the IPO process to be discussing specific numbers in public, a response to quaint and useless rules designed to protect investors.

The point here is that if the U.S. capital markets were in trouble, Limelight would be figuring out how to go public in London or how to sell out to Akamai. It isn't.

If all goes as the investment and technology communities expect, Limelight's IPO will be huge despite the wrist slap one of its founders received in 2002 from the Securities and Exchange Commission. Co-founder Bill Rinehart paid a civil penalty of $110,000 for his role in an alleged financial fraud while a top sales executive at fallen software company Critical Path. Though he neither admitted for denied the SEC's allegations at the time, he did agree to a five-year ban from being an officer of a public company. That's why Rinehart's official title at the company is "co-founder" rather than an officer position.

VC investing highest since 2001
The capital markets, you see, are functioning just fine. So long as Akamai trades for anywhere near the current 63 times 2006 earnings, Limelight is a shoe-in. (Google, by comparison, is worth about 48 times what analysts expect it will earn this year.) Limelight also needs the money for expansion. Goldman Sachs and two other firms invested $130 million in Limelight last summer, but the bulk of that money went to Rinehart and his three co-founders, not to the company.

The dream is alive, in other words, for entrepreneurs -- even tainted ones -- to bootstrap a company into a sizzling market and take their company public. These are markets that don't need saving.

MUMBAI: Once bitten, but certainly not shy. Even as the Securities and Exchange Board of India (Sebi) is locked in legal battles with the major depositories and depository participants over the IPO share allotment scam, the alleged masterminds of the fraud may be having a field day. Sources close to the regulator reveal that many entities named in the IPO allotment scam are also involved in the manipulation of Nissan Copper shares recently.

A comparison of the two orders one relating to the IPO scam and the other Nissan Copper reveals common names. These include Dhiren Vora, Patel Rajeshkumar, H Nyalchand Financial Services, Rajesh Patel, Sonal Vora, Hasmukh Vora, Khandwala Integrated Financial Services.

On paper, there is no question of doubt. But whether the persons responsible for rigging Nissan Copper share price are the same ones who plotted the demat scam is another question altogether. ET learns that Sebi is aware of this development and is investigating the matter.

Many others named in the Nissan Copper order are actually fronts for the above-mentioned group of people based in Ahmedabad, a person close to the investigations said.

If you are to believe the former Goldman Sachs leadership triad of Treasury Secretary Hank Paulson, NYSE Group CEO John Thain and John Thorton, co-head of the recently created Committee on Capital Markets Regulation, America's competitiveness is on the brink of extinction.

More recently, New York politicians--including New York City Mayor Michael Bloomberg, Sen. Chuck Schumer and, in one of the more classic examples of political flip-flopping, Gov. Eliot Spitzer, the former Wall Street crusader--have joined the fray. Their claim is that the record profits and $23.9 billion worth of bonuses Wall Street received this year are in jeopardy.

But if you choose to listen to another group, the Council on Competitiveness, led in part by Michael Porter, the venerable Harvard business professor and leading authority on global competition, you hear a different story, and certainly a more evenhanded solution.

Paulson's committee includes Donald Evans, a former Bush Commerce Secretary who now heads a lobbying firm that represents the nation's biggest financial firms; Robert Glauber, former chairman and CEO of the National Association of Securities Dealers; and the CEOs of two major accounting firms. Given the committee's make-up, and knowing the charges and fines Goldman Sachs racked up under Paulson's leadership, it's not surprising there isn't one investor advocate on the committee.

Their solution: to fatten up the already outsized Wall Street pay packages by derailing post-Enron reforms and trampling upon the rights of individual investors. Among their other proposed "reforms" are severely limiting criminal and civil penalties for accounting fraud as well as eliminating a rule that allows individual investors to recoup losses from unscrupulous brokers through arbitration.

Paulson's fingerprints can also be found at the NYSE, which is crying regulatory wolf. After Paulson was instrumental in installing Thain as CEO of the NYSE Group (nyse: NYX - news - people ), the once mighty exchange has dramatically lost its prestige. Yet Thain believes his leadership has nothing to do with the erosion of the NYSE's market share, particularly in the initial public offering market. Like his former Goldman Sachs colleagues, he blames a heightened regulatory environment for the lucrative loss of initial public offerings. But the truth is that many of the recent IPOs overseas are floated by dubious companies, which Sarbanes-Oxley rightfully drove from the reach of American small investors.

Further, the companies that do meet the American standard for governance and transparency are understandably apprehensive because of the NYSE's listing fees, which are much higher than its domestic and global rivals. In the past, those fees were justified, because an NYSE listing would generate increased institutional investment and floor traders could limit a stock's volatility. But with the expected elimination of the bulk of its floor traders and loss of its regulatory function, the NYSE is fast becoming one of many electronic trading boxes--wiping out the value added.

The Capital Markets Regulation Committee insists that the NYSE's listing fees are "trivial." That might be true for multi-national corporations, but the smaller and medium-size companies that make up the IPO market would much rather spend that money elsewhere, say on research and development.

Which also happens to be the argument proposed by the aforementioned and more diversified Council on Competitiveness, led by a cross-section of thought leaders including Porter; Charles O. Holiday, CEO of Dupont (nyse: DD - news - people ); and Douglass McCarron, president of the International Union of Carpenters and Joiners of America, among many other representatives from business, labor and academia.

It's unfortunate that lost amid the Paulson committee's Wall Street money grab is the Counsel on Competitiveness' bipartisan effort to pass the National Competitiveness Investment Act, which seeks to improve the United States' competitiveness through increased investment in innovation and education in math and science. Also buried is the recent release of Porter's Competitive Index: Where America Stands," which shows th"at the U.S. "is better positioned than perhaps any other country to benefit from the forces that are reshaping the global economy."

Admittedly, some members of the more enlightened Council on Competitiveness may believe that post-Enron regulations are more onerous and prohibitive than regulations overseas. But while legitimate arguments perhaps can be made to relax some elements of Sarbanes-Oxley, the discussion and decision-making should not be driven by those whose previous collective misdeeds the legislation was designed to thwart.