Heard Off the Street: FAB's lips remain sealed amid allegations

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Message board nabobs have stampeded into an information vacuum created by the proprietors of FAB Universal [ticker: FU], who have failed to respond to allegations questioning the veracity of the Pittsburgh-based digital content provider's financial statements.

Since Nov. 15, FAB has denied what it insists are misleading and inaccurate allegations about its operations. It has promised to respond to them "as soon as possible."

Yet no FAB explanation has been forthcoming.

Trading in FAB shares was halted before the market opened Nov. 22. The shares closed the previous day at $3.07, down $1.10.

Stephanie Prince, the company's hired spokeswoman, did not respond to emails seeking a response to the allegations and other information.

Critics contend the company has overstated the size of its China business, sells pirated movies and failed to disclose a $16.4 million bond offering.

Despite the paucity of facts, stock message board denizens were not shy last week about offering their insights.

"They will reopen Jan. 6th, 2014," promised bethpowersnf on a Yahoo message board. "My price target is $24+ by the end of 2014."

"I believe it opens way higher after the halt for BIG NEWS," offered emmajohn855 on the same board. "Either expect a buyout announcement or a one-time special dividend."

"If all goes well with the SEC, I still say it uploads to $15 very soon," speculated qdog91111, another Yahoo message board habitue.

Here is a timeline that might change what masquerades as the investment thesis of these seers.

On Nov. 14, FAB filed its quarterly report with the Securities and Exchange Commission. The company reported that it "has an installed network base in excess of 16,000 Intelligent Media Kiosks [in China] ... where consumers can download copyrighted music, video games, ringtones, digital books and movies."

In statements accompanying the filing, CEO and president Christopher J. Spencer and CFO John Busshaus certified that the report "does not contain any untrue statement of a material fact or omit to state a material fact."

The same day, Jon Carnes, a short seller who has targeted Chinese companies involved in reverse mergers, wrote at SeekingAlpha.com that FAB has only about 1,600 or 1,700 kiosks in China and that the kiosks offer pirated copies of recently released U.S. movies at an average price of 13 cents. The allegations were based on what his investigators found when they visited FAB facilities in China and purchased movies. The investigators also interviewed kiosk operators as well as companies that manufactured the kiosks.

"FAB's business in China is a tiny fraction of what it claims in its SEC filings," Mr. Carnes wrote.

Mr. Carnes passed his findings on to the SEC and NYSE.

On Nov. 18, a Skippack, Pa., investment research firm charged that FAB failed to disclose $16 million in debt.

"This bond issuance should have been reflected in both FAB's second and third quarter 2013 10Q filings but it was not," GEO Investing wrote in a SeekingAlpha.com post.

Since then, a handful of attorneys have filed shareholder lawsuits in federal court based on the allegations.

Reasonable people have suggested that given Mr. Spencer's and Mr. Busshaus' willingness to certify FAB's quarterly report, the executives are in a position to respond promptly.

"Here we are a week later and there's no response to that at all," said Dan David, co-founder of GEO Investing, said in a telephone interview Wednesday.

Some give FAB the benefit of the doubt. They take comfort in the fact that highly regarded investor Jim Rogers, the one-time partner of George Soros, recently joined FAB's board.

Skeptics cite FAB's origins. The company was created last year by a reverse merger in which Wizzard Software of Pittsburgh merged with Hong Kong-based Digital Entertainment International. The transaction provided DEI with Wizzard's coveted New York Stock Exchange listing and transformed the chronically unprofitable Wizzard into what a Zacks Investment Research analyst described Nov. 14 as a "cash generating machine."

The NYSE has declined to comment on why trading was halted.

According to exchange rules, it was ceased because there was a pending release by FAB "of a material news announcement." In most such cases, the news is released quickly and trading resumes. The rules give NYSE the option of resuming trading even if there is no announcement, but that has not happened with FAB. Its shares remained halted through Friday's abbreviated session.

On Tuesday, the stock exchange indicated that news from the company was forthcoming, then withdrew the statement. Could it be that the NYSE reviewed a draft of FAB's story and was not impressed enough to resume trading?

Message board malcontents may not find that explanation plausible. If they don't, and if you own FAB shares, offer to sell your stock to bethpowersnf, emmajohn855 or qdog91111 for $10 a share and see if they take the bait.

Len Boselovic: lboselovic@post-gazette.com or 412-263-1941.

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