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Net Incubator's Investors Asking Where Money Went

Craig N. Kirt's stock offering to prospective backers didn't disclose that regulators had suspended him from selling other securities in Pennsylvania.

February 26, 2001|DEBORA VRANA | TIMES STAFF WRITER

Stacey and Sean Hammond invested more than $30,000 last year in shares of a Los Angeles company that promised to incubate dozens of fast-growing Internet companies.

What they didn't know was that the company's founder, Craig N. Kirt, had a few years earlier been suspended from selling securities in another state.

Now, the Hammonds, residents of Hayden Lake, Idaho (population 338), say they can't get answers about what happened to their investment.

When she calls Kirt's company, "All I get is a voicemail," Stacey Hammond said. "Several of us in town invested. We just wanted to invest in the Internet."

Kirt's firm, which has gone by three different names in the last year--DirectNet Inc., Incubanks Inc. and, most recently, 2M Labs Inc.--solicited money from investors in a so-called private placement offering.

In documents for investors, Kirt described his strategy as assisting start-up firms to become "successful cutting-edge Internet businesses." Newsletters to shareholders described a series of planned initial public stock offerings that would enrich them. Often, Kirt gave specific price forecasts for shares. One, he said, "should open up as an IPO at $10-15 and jump to $20-$30."

As recently as November, Kirt told shareholders that 2M Labs owned "equity interest" in five companies, including "Outside Consulting Inc." and "World Financial Television Inc.," and that "all of these companies are planning for a 2001 entry into the public markets, either in the U.S., the U.K. or Germany."

Private-placement securities offerings are high-risk deals in which investors give funds directly to an entrepreneur or company and receive shares that generally can't be publicly traded. As such, the offerings, and promises made therein, aren't reviewed by any securities market or state or federal agency.

The September 1999 disclosure document the Hammonds received for Kirt's offering in DirectNet said the firm would initially open "eight regional offices in the U.S. and follow with an additional 32 major U.S. markets late 2000 or Qtr. 1 2001."

The document also included many references to the high-risk nature of the securities and that the stock wasn't registered with any state or federal body.

But some of the language in the document was unusual, including a warning to investors not to make copies of the paperwork. It also said if the company requested it, investors must return all the information within three working days.

"That's not standard," said Willie Barnes, a Los Angeles lawyer who headed the California Department of Corporations in the late 1970s and works on private placement deals. "I've never seen language like that."

Bill McDonald, assistant commissioner of enforcement with the Department of Corporations, said such language "has no legal purpose except to obfuscate disclosure. It's unenforceable."

Meanwhile, the offering document makes no mention of Kirt's run-in with Pennsylvania securities regulators.

In 1997, Kirt was barred from selling securities in Pennsylvania for five years after reaching a consent settlement with regulators there for selling unregistered securities in Resort Holdings Inc., a Nevada firm that described itself as a company that acquires resort and gaming properties.

The DirectNet offering document given to the Hammonds lists Kirt as the founder and CEO of Resort Holdings, but doesn't disclose the Pennsylvania ban.

"They should be disclosing our order," said Scott Lane, assistant director of the division of enforcement and litigation for the Pennsylvania Securities Commission. "The law generally states that is a material fact and needs to be disclosed" in a securities offering.

Kirt's offering document said he intended to sell 2 million shares of DirectNet at 50 cents each, raising $1 million. The Hammonds said they bought 80,000 shares after being approached by a local businessman who was a client of a mutual friend. Stacey Hammond said the man has since left their northern Idaho town and moved to Colorado.

In a brief phone interview with The Times, Kirt said with the collapse of most Internet stocks last year, DirectNet's successor, Incubanks, no longer exists. "I shut it down, basically," he said. Incubanks' successor, 2M Labs, "is just a marketing company" now, he said.

Kirt, who leased office space near Los Angeles International Airport, insisted that "we never raised any money from investors. We never got to that point."

But a DirectNet shareholder letter dated July 14, 2000, and signed by Kirt said the firm "officially closed out the $0.50 offering, and the next offering should be $3 per share. For those of you who missed out--we can't say we didn't tell you."

When asked by The Times about the shareholder letters, Kirt became angry.

"You're not supposed to have the newsletters," he said. "That's proprietary information. I don't want to see that in print or you'll have a lawsuit."

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