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State Probes O.C. Firm's Ads on TV : Finance: Official says Interlink Data Network, in seeking investors for L.A. video-phone system, ran impermissible infomercials.


COSTA MESA — State securities regulators have launched a formal investigation into the operations of Interlink Data Network of Los Angeles Inc., an Orange County company that is raising millions of dollars to build a video-phone network in downtown Los Angeles.

William McDonald, chief of enforcement for the state Department of Corporations, which regulates securities law, said Thursday that his agency is looking into infomercials that the company aired on cable television while it was raising money for a limited partnership. Public advertising for investors is not allowed when a company conducts a so-called private placement--a less expensive method of selling securities that doesn't require the same stringent level of disclosure of a company's finances.

The agency is "concerned about the matter and is looking into it," McDonald said. "I think it is a very serious matter. At this point, it is an investigation."

Interlink President Michael Gartner denied any wrongdoing by the the 4-year-old, Costa Mesa-based company or its employees.

"We received questionnaires from the state (last week) but we were not under the impression that we were under investigation," Gartner said.

McDonald said Interlink had received a type of disclosure exemption that allows a company to solicit an unlimited number of wealthy investors--those with annual income in excess of $200,000 and net worth of more than $1 million, or with $150,000 to invest--but only if the investors are contacted privately.

"If public ads are used, the exemption is blown," McDonald said.

Gartner says the private company has raised $2.4 million in equity through the private sale of stock and $7.5 million from limited partners to build a 21-mile, fiber-optic network in downtown Los Angeles and along Wilshire Boulevard. The company hopes to market its $3,995 video phones to businesses in about 140 office buildings along the proposed route. Construction of the network hasn't yet begun.

Video phones, which allow callers to see the person to whom they are talking on a small video screen, were invented years ago but have not caught on in the marketplace. One of the biggest drawbacks of current video phones is the jerky images they produce--a problem resulting from the inability of standard phone lines to send data fast enough to avoid time delays.

But Gartner claims that Interlink's device has an advantage over video phones of other manufacturers, such as American Telephone & Telegraph, because it uses optical switching technology that uses light signals rather than electric ones, allowing large volumes of data to flow through fiber-optic phone lines like a river. The company, however, has not yet found any customers for its video phones.

Optical switches can theoretically manipulate light signals directly, without the need to convert them to the far slower electric signals that create a bottleneck in a system.

Fiber-optic lines, which carry laser light signals, transport much more data than either phone lines or cable television's coaxial cables. A strand of fiber, for example, could deliver up to 500 television channels and numerous amounts of additional electronic information.

Interlink has run into trouble with state regulators before. In November, Iowa regulators ordered Interlink, an El Paso, Tex., brokerage that sells its securities and two individual brokers to stop selling unregistered securities in that state.

One broker, William Moore, had solicited a potential investor who heard about Interlink in a radio commercial, said Gary L. Marquett, enforcement director for the Iowa Securities Bureau.

Moore and Interlink said they were seeking investors for a private placement of stock. Marquett said they did not register the offering with the state, a required procedure in which the company is supposed to disclose investment risks and provide financial information.

Exemptions from registration are allowed in private placements, but public ads such as the one heard by the investor--which listed an 800 telephone number--cannot be used in seeking investors under such exemptions, Marquett said.

The other broker, John Kealy, Interlink's manager of national sales and public relations, said the order against him was for a "minor mistake" in which Moore sent Kealy's business card to an investor in a state where the company had not registered to sell securities.

Gartner said Thursday that he had only recently learned of the Iowa action and that the company did not have an opportunity to respond to the order. Marquett said that the order was sent to those named in the order but that no response was received. Gartner said company lawyers were investigating the matter. Moore could not be reached for comment.

Ron Combs, chairman of Portfolio Asset Management, a broker-dealer in El Paso, could not be reached for comment Thursday. He said in earlier interviews, however, that Portfolio brokers have acted properly in soliciting investors for Interlink.

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