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FBI Probes Trading of MindArrow Stock

Investigation: Auditors find that 1.1 million shares in the Aliso Viejo firm may have been wrongly sold.


Federal authorities said Tuesday they are investigating how 1.1 million unauthorized shares of stock in a small Orange County Internet software company may have been sold to the public.

The company, MindArrow Systems Inc., said it notified authorities after an audit turned up a major discrepancy between the number of authorized shares and the number of shares in the public.

The FBI confirmed that it is investigating the alleged irregularities. And on Monday, Nasdaq officials halted trading in the Aliso Viejo company's stock.

MindArrow said the audit found questionable transactions in the records of a former transfer agent--a middleman hired to keep shareholder records, issue new stock certificates and distribute proxies, among other duties.

The company said it determined that the agent, RTT Transfers Inc. in Vacaville, or others acting on the agent's behalf, issued unauthorized shares between May 1999 and March 2000, when the company was still known as

The shares in question were recorded as void on the stock ledger records kept by RTT, but were distributed to brokerage firms, said Michael Friedl, MindArrow's chief financial officer. RTT went out of business last year, MindArrow Chief Executive Robert I. Webber said.

Shareholders who unwittingly purchased unauthorized shares can convert them into legitimate stock, Webber said.

It is unclear how many of the questionable shares actually were traded.

MindArrow Co-Chairmen Tom Blakeley and Eric McAfee, who were the chief executive and corporate secretary when the shares were issued, agreed to contribute about 1.1 million of their personal shares to offset the potential impact of additional shares.

The pair hold a total of about 3.1 million shares, according to reports filed with the Securities and Exchange Commission. The company had 10.2 million shares of stock outstanding as of Nov. 30.

"We are the victims in this and are doing our best to mitigate any damage," Webber said.

The company hired a new transfer agent, U.S. Stock Transfer Corp., in July.

The SEC, which regulates the more than 900 transfer agents nationwide, brought only one case against a transfer agent last year for alleged wrongdoing, SEC spokesman John Heine said.

MindArrow's stock, which lost nearly 85% of its value in the past year, last traded at $4.50 on Monday.

The company, which provides flashy Internet brochures and other multimedia services, has 95 employees, including 65 in Orange County.

In its most recent quarter, the company lost $5.38 million on revenue of $998,726.

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