A Van Nuys direct-marketing firm that has seen its shares nearly double since January said Wednesday that it paid $1 million in stock for a Web site belonging to a financial commentator who touted the company on national television.
The transaction has raised questions about whether GenesisIntermedia Inc. acted properly in its deal with newsletter editor Courtney Smith, who received 72,000 Genesis shares. Genesis shuttered the Web site soon after, although Smith continued to recommend the company's stock in television appearances as recently as March.
After a 3-for-1 stock split, Smith's stake in the company is now worth $3.6 million.
Smith is the publisher of two financial newsletters and has appeared as a commentator on Bloomberg Television, CNN and CNBC.
Genesis Chief Executive Ramy El-Batrawi said the company did nothing wrong in its transaction, which took place in March 2000.
"Our attorneys say we have handled this properly," he said. "The transaction was for a small amount" and wasn't big enough to require public disclosure to shareholders. He said investors could have learned the terms of the deal in Securities and Exchange Commission filings from last year.
Bloomberg News reported Wednesday that Genesis routed payment for the Web site through a tiny vitamin-exporting company owned by a friend of Smith.
Smith said his deal with Genesis might seem to some like a quid pro quo. "It's quite possible that's what was going through their minds," he told Bloomberg. "If [Genesis] was trying to do that, that's OK because everyone made money on this thing."
Securities law experts said the deal could raise some legal issues.
"If the company hid a payment to an analyst" it could violate federal law, Columbia University Law School professor John Coffee told Bloomberg.
The Foreign Corrupt Practices Act requires U.S. companies to maintain honest books and records, and because Genesis routed the payment to Smith through the vitamin firm, "this looks like deliberately doctoring the books and records of the company," Coffee said.
Lewis Lowenfels, a securities law expert with Tolins & Lowenfels in New York, said the deal also could violate the Securities and Exchange Act if Genesis executives gave the shares to Smith knowing that he would continue to praise the company.
The latest controversy comes at a time of increased scrutiny of Genesis, whose stock has been caught up in an unusual trading pattern. Although the company has a negative net worth of about $7.5 million, its stock has nearly doubled since January, giving the company a market value of $365 million.
Genesis lost $33.5 million on revenue of $42.3 million in 2000. Its biggest lender and shareholder is Adnan Khashoggi, a controversial Saudi Arabian millionaire known for his role as a middleman in the Reagan administration's arms sales to Iran.
The Securities and Exchange Commission is investigating Genesis' stock price increase and the role played by Rafi Khan, a stock manipulator who was barred from the securities industry and has a 1999 conviction for tax fraud.
In recent weeks, Genesis gave a tour to Khan, who subsequently issued a positive investment report on the company. El-Batrawi said he was unfamiliar with Khan's run-ins with regulatory officials.
El-Batrawi said he has not been contacted by the SEC.