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Thursday, Mar 28, 2024

Genesis Bust Leads to HQ Sale, Lawsuit

Genesis Bust Leads to HQ Sale, Lawsuit By SHELLY GARCIA Senior Reporter A Van Nuys building, one of the San Fernando Valley’s last remaining vestiges of the dot-com bubble, has been sold to a private investor as its seller faces millions of dollars in lawsuits and an investigation by the Securities and Exchange Commission. The property, at 5805 Sepulveda Blvd., was sold to a private investment group headed by David Weiner for $10,069,000. The seller, GenesisIntermedia, bought the 87,665-square-foot property just short of three years ago for $11.1 million, when its star was rising amid the market run-up of Internet stocks. The company’s name is still displayed prominently at the top of the high rise. Now all but defunct, GenesisIntermedia has defaulted on its loan for the property. Last month, a U.S. District Court appointed the law firm of Berman DeValerio Pease Tabacco Burt & Pucillo lead counsel in a class action lawsuit that charges the company and its principals with bilking what may amount to thousands of investors by manipulating its stock price. GenesisIntermedia, which owed $7.8 million on the building, stands to come away with some proceeds from its sale. The lawsuit charges that the company’s principals walked away from the firm with millions. But in what lawyers say may be a sign of the times, it is possible that investors will not reap a dime from those proceeds. “It’s unfortunate that some of the most egregious frauds are committed by the least collectible defendants,” said Michael Lange, a partner with Berman DeValerio Pease Tabacco Burt & Pucillo, who is based in Boston. Lange said some defendants in the case have already been served with the complaint, but it may take longer to serve some of the other players. Among them are Adnan Khashoggi, the Saudi arms broker at the center of the Iran-Contra scandal during the Reagan administration, and Courtney Smith, a onetime investment analyst and financial commentator. According to the lawsuit, Khashoggi funneled $5 million in “illegal profits” through questionable trading practices to his Bermuda company, Ultimate Holdings Ltd., and it charges that Smith received some $3 million for talking up the stock. The central figure in GenesisIntermedia, Ramy El-Batrawi, who founded the company in 1993 and was its CEO until he resigned in October, sold $1.7 million worth of the company’s stock before trading was halted in September, according to the lawsuit. It was El-Batrawi, 41, who took GenesisIntermedia from a private telemarketer selling self-help videos to a publicly traded company that, at its height, had a market cap of more than $300 million despite huge operating losses. Although the largest share of the company’s revenues came from telemarketing sales, it began in 1999 to develop a chain of Internet kiosks in shopping malls owned by Urban Retail Properties Co. and, for a time, its name bore a dot-com suffix. In an interview with the Business Journal in 1999, El-Batrawi said he dropped out of school and left his home in Canada as a teenager after reading “Think and Grow Rich,” a book written in 1937 by Napoleon Hill and still considered one of the classics of motivational literature. The author, who himself had risen from an impoverished childhood to wealth, was at one time commissioned by Andrew Carnegie to study 500 millionaires and analyze the reasons they became so successful financially. “I believed I was going to become one of the richest men in the world, and the book said don’t procrastinate,” El-Batrawi said during the interview. One day while watching the TV show, “Lifestyles of the Rich and Famous,” El-Batrawi learned of Adnan Khashoggi, who in the 1980s claimed to be the richest man in the world, and set out to learn at the proverbial master’s feet. Supporting himself with money he had made through a series of earlier ventures, including a key duplicating service and a car dealership, El-Batrawi said he began following Khashoggi around the world, showing up at hotels and trying to make himself useful to the Saudi magnate. “He told me to get lost at least 200 times and I just wore him down,” El-Batrawi told the Journal in 1999. El-Batrawi said he eventually secured a job assisting Khashoggi, who also has legitimate interests in a variety of industries. According to the lawsuit, the relationship he ultimately struck with Khashoggi played a pivotal role in the undoing of GenesisIntermedia. According to the complaint filed in October, El-Batrawi and Khashoggi (who by 1999 had acquired a significant stake in GenesisIntermedia through his Bermuda-based Ultimate Holdings Ltd. ultimately he and El-Batrawi together owned more than 90 percent of the company) secretly paid more than $3 million to Courtney Smith “in return for his efforts to tout the Company’s stock during his appearances on CNBC, CNN and Bloomberg Television.” The company’s stock price, which had languished at around $6 per share, began to rise late in 1999 to the $15 to $17 range. At its height, shares in GenesisIntermedia traded at $28. Published reports at the time attributed the run-up to something called a “short squeeze,” a strategy whereby investors borrow shares and sell them at inflated prices, betting that the stock price will go down so they can buy back the shares at lower prices to repay the loan. Brokerages borrow the shares to lend to their investors by providing the cash value of the shares as a kind of collateral. Last September, according to the lawsuit, an unknown person loaned Native Nations Securities Inc., a New Jersey firm owned by Valerie Red-Horse, a Valley businesswoman and filmmaker, 7.2 million shares of GenesisIntermedia. Those shares in turn were loaned to MJK Clearing Inc., another brokerage that then loaned the shares to several other brokerage houses, including E-Trade. El-Batrawi and/or Khashoggi must have been instrumental in setting off the short squeeze chain that ultimately left the brokerages holding the bag for some $60 million worth of stock, the lawsuit charges, because they were the only ones who owned enough shares to make such a loan to Native Nations to begin with. When the Sept. 11 attacks sent the market into a downward spin, investors began buying back the shares to repay their loans. But when MJK came calling on Native Nations to repay the shares in exchange for its cash investment, the brokerage claimed a “rogue employee had doctored its books to hide the identity” of the original lender, and the $60 million was missing, the lawsuit alleges. Trading in GenesisIntermedia shares was halted Sept. 25 when the price had plummeted to about $5.60 a share and the stock has since been delisted. Unable to recover its $60 million, MJK collapsed in what is being called the largest failure of a brokerage house in 30 years, spurring the Securities and Exchange Commission to launch an investigation into the whole affair. (SEC officials would neither confirm nor deny the inquiry.) (Reached last week, Red-Horse said Native Nations was not involved in the transaction; it was carried out at Freeman Securities prior to Native Nations’ acquisition of Freeman. However, a press release issued by Native Nations on Oct. 15, 2001 states that Freeman was acquired by the company in January 2001 and neither Red-Horse nor the company have had any part in business transacted by Freeman since October 2001. Red-Horse, in the release, said the company is cooperating with the government in its investigation.) Neither Khashoggi nor El-Batrawi could be reached for comment. Douglas Jacobson, chief financial officer for GenesisIntermedia, did not return phone calls. A number of lawsuits ensued, but with the appointment of Berman DeValerio Pease Tabacco Burt & Pucillo as lead counsel, those complaints are likely to be consolidated as the lawsuit moves forward. Attorneys for the class action say they have yet to determine the size of the class or the total amount of money at stake, and, due to the administrative requirements of such lawsuits, it will take some time before they can move forward to discover assets. It’s impossible to know what will happen to, for instance, the proceeds of the building sale by then, Lange said. But Lange added that other assets may be tapped if the lawsuit is successful, including those of the individual defendants and liability insurance carried by directors and officers. Still, Lange said he thinks the legal action is the right thing to do in an environment increasingly tainted by charges of wrongdoing at such corporate powerhouses as Enron, Xerox and others. “If somebody took a gun in your back and took money out of your wallet, you wouldn’t base your decision to go after the bad guy based on his collectibility,” Lange said. “You’re in part doing this to right a wrong and strengthen the system.”

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