Thought your general readers might be interested in this.
It's a really exciting story, coulda been a movie, full of intrigue, machinations, duplicity, sex, fortunes won and lost, a mixture of gambling, stock markets, and internet, playing out in the grey world between legal and immoral.
It should be noted that the real facts are hard to determine, this could have been one of the greatest pump and dump plays of modern times, or it could just be some guys who made mistakes.
I've had to piece things together and draw some conclusions, inevitably some is incorrect or only partially so, a matter of opinion.
---------------------------------------
The curtain opens in the mid 90's. 3 guys and a video camera are slinking through the strip clubs of Canada, convincing beautiful girls to strip and do sex shows for their new x rated website.
Successful at it, they open a whole string of sites, and diversify into the kinky pleasures at the fringe. They also see an opportunity to combine gambling with their sex, and set up a casino that is linked to their sites.
But a battle is brewing, 2 of the 3 want more legitimacy, they want to start selling the gambling software, in fact, want to start a company to compete with another canadian startup success, cryptologic.
Majority rules,and after a bitter fight which causes the departure of one of the partners, the creation of Starnet (snmm)is complete. They will do something noone has done before, combine the software for sportsbooks and casinos, putting them ahead of cryp, who only does casinos.
Timing is perfect, the offshore is taking off, and internet stocks are about to get hot as hell. They raise money by going public, and their off and running. About this time, a little known offshore book is having major problems with its software, and turns to snmm for a solution. They strike a deal to purchase the software for a fee and pay snmm a % of hold, somewhere between 10-25%, for processing their customers. Little did anyone know at the time, but that sleepy little book would turn into a string of landscape rocking big books called sportsbook.com, wallstreet.com (paid $1mil. at auction to buy the name), and Player's Only.
Snmm company policy at that time was:
A) Commited to making it in the legit world, so hired auditors, became fully reporting, listed their stock on the Berlin, and nasdaq bulletin board exchanges, and set up their operation to accept no customers from illegal jurisdictions, namely the united states.
Or,
B) They were about to embark on one of the slickest most intricate stock frauds of this century proclaiming from the highest pulpits they didn't accept u.s. customers, but all the books did they sold software to and processed transactions for. They were extolling their complete legitimacy, but holding on to their cyper casino, and their string of x-rated porn sites.
Well, the software was pretty good compared to competitors, and not too many bookmakers really cared how legit they really were. Bms wanted software and someone who could run it and handle customer transactions. Snmm was faced with a gold rush combining internet and gambling that was drawing every Guido, Vinnie, and Crooked nose who had ever booked a bet.
In one year snmm went from a couple of licensees to over 50, during that time, they caught my eye through the rapid increase in their revenues, and a mention on a bb by one of their bookmakers. They were getting a supposed 100K per licensee setup and then an ongoing income stream, in addition the comany was closely held, with the officers having a major chunk of stock, in essense, betting on themselves (or waiting to sell out at higher prices). So back when they had 5-6 or so licensees and were signing up more, they started to breakeven financially. Their stock was trading at 4 then, and I bought a piece and put out the word on some bulletin boards, at the same time their president and investor relations department embarked on their own well oiled campaign, touring the country, singing their praises.
Thus the stock pump began.
In that spring and summer of 1999 their stock went skyward, rising to a high of 29 from less than $1 the year before, as they signed up the vast bulk of their 50 odd licensees. At $100k a pop, revenues would be instant we all thought.
At the same time, they became the most popular board at raging bull (the preeminent stock bulletin board). This tiny little company with less than $10mil in revenues and 20 million shares of stock was more popular than microsoft. Since no institutional investors would touch the i-net gaming sector, snmm's stockholders were made up completely of little guys, who liked to spend their time at raging bull talking about how much money they were making, and speculate about when the stock was finally "discovered" how high it was going to go. Remember, at this moment, the internet sector was peaking, and companies with no revenues or business plans were trading in the hundres of dollars per share.
As the most popular rb board, its safe to say they were fully discovered. My suspicions grew about the validity of their licensees, as I became aware of discounting from the 100k fees. In fact, it got so out of hand, there was one up for sale on e-bay, and even a guy (company shill?) posted one for sale on some stock gambling boards for 20K, totally setup (I seem to recall a certain principal of this site having an interest in purchasing it). When their quarterly earnings came out, and the supposed increased revenues from all the 100k signups didn't completely appear, while admin cost were ballooning, I red flagged the stock. This was right about the time that:
On July 6th, 1999 the stock was at 26. A disgruntled licensee named Claude Levy, who had quite a bad reputation, and had trouble with his previous software provider, filed suit against snmm, claiming fraud and accounting irregularities, among a slew of other charges. The stock dropped to the mid-teens.
In august, the Royal Canadian Mounted Police raided the main offices of snmm and siezed everything in sight, claiming gambling transactions were being made there, and snmm ties to child pronography. The stock dropped from 13 to 4 that day. Snmm cooperated fully, including turning over ALL the customer lists from their licensees (are the irs and rcmp friendly?). The RCMP also seized $7 mil. in cash that they hold to this day.
Shortly thereafter it came to light snmm insiders who were holding a large % of stock made massive sales totalling in the millions of shares, all occuring shortly before the lawsuit by Levy, and the rcmp raid.
At the time of those sales I was making posts concerning the perfection of the chart for snmm stock. It was too beautiful to be true. One of the things pump and dumpers like to do is paint a perfect chart, knowing the reliance of stock buyers on this method of analysis. Was there manipulation? We'll never know, but what an unlikely coincidence that the perfect chart came right at the moment insiders were dumping and making 10s of millions of dollars.
Stockholders filed a class action lawsuit against snmm, they lost their auditors, and the curtain closed...
ALMOST!
EPILOGUE:
Over the course of the next several months their president resigned, as did many other officers. They lost their nasdaq listing, and their unaudited quarterly reports revealed a massive increase in administrative costs. Although they sold their x-rated sites, it was somehow at a loss, and looked like they were pillaging the company, diluting the stock by 10mil. shares, equalling about 50%.
Several reorganizations later, a move offshore, and the stock below 1 dollar a share, light started to appear at the end of the tunnel. Revenues had been increasing throughout this period due to the revenue growth of their licensees, which they received the % of hold from, although they didn't sign up any more customers. However, their legal troubles and administrative shenanigans had continued to sap the companies assets.
Then last winter they were able to bring on a new president strong enough to stabilize the company. He put the brakes on administrative spending, slowly reeling in this side of the balance sheet. Losses narrowed, but they still faced daunting challenges in the form of the stockholder lawsuit, the counter suits between them and Levy (who trashed their name unmercifully, even creating a website called Starnet News to run their name through the mud), and the ongoing investigation by the rcmp, who to this day has not brought charges.
In their last quarter report (still unaudited), they almost broke even, but most importantly, their administrative costs are within striking distance of being reasonable, and their president has commited himself to slashing them another 20% in the near term. They have been able to convince some auditors to come on board so appear to be headed for legitimacy.
They made a move to England this spring, renamed themselves World Gaming (symbol wgmgy on the nas bb) in the hope that the higher stock valuations of European gambling companies will rub off on them, and to impress investors they are commited to operating out of a fully regulated legal jurisdiction.
They have been able to lay aside funds to handle the Levy lawsuit, cover the stockholder lawsuit, and the rcmp litigation.
In the last week, they were able to resign their largest customer to a software and transaction processing deal lasting through 2004 (see my earlier post). Sportsbook.com etal. will continue their relationship, and that is the cornerstone of starnet. In addition, the principals of sb were willing to be repaid a $1.5 mil. loan, made to starnet during their gloomy period, in company stock, a further show of support.
Just this past friday, June 23rd, snmm settled the class action suit by stockholders in an extremely favorable way, only costing the company a bit over a $1mil. (see my earlier post). In addition, stockholders were willing to accept stock in lieu of cash, another major hurdle crossed over. The stock of World Gaming rose sharply on Friday in response to the news, closing the session at $1.46, up .25.
The rcmp is their last bridge to cross, and it looks to me like that is just around the corner. Although a judge recently extended the time of their investigation into July, and they are still holding the $7mil., one has to understand the legal system in Canada to get a feel for the potential outcome.
It will boil down to this:
The rcmp has little credible evidence, but enough to keep going until they reach a finacial settlement with snmm. That's right, snmm can buy their way out, which they will, covering the cost's of the rcmp investigation, which will be $3-4mil. The rest of the tied up $7mil will be freed up.
They will sue Levy and win, which will be a minor drag on earnings while it plays out, but more of a non-issue than anything.
They will release a new round of casino games this summer, that is the future, which will help them maintain their footing with competitors like cryp and boss.
On Friday, I took a position in wgmgy after the news came out. I'm not recommending it due to the extremely speculative nature of the stock. They still face major liquidity problems, depending on the outcome of the rcmp deal. They still have to prove to investors they can be trusted (insiders are still selling and we have yet to see an audited financial statement). And they face major cometition from a slew of new and old foes. But I like to buy when the corner is just turning (near the bottom), not when every thing is coming up roses (near the top).
That said, based on the valuations of other similar companies, I have a fundamental target of $3/share. Doesn't seem like much, but it is a greater than 100% return over the current price. At the same time, their downside risk has been significantly minimized, and they have a longterm base around a $1, so at my buyin price, downside is about 25% (about 33% for those buying at next Monday's levels).
In addition, if they start to achieve the returns on revenues that cryp is, the stock can go quite a bit higher than 3.
Wanna bet?
It's a really exciting story, coulda been a movie, full of intrigue, machinations, duplicity, sex, fortunes won and lost, a mixture of gambling, stock markets, and internet, playing out in the grey world between legal and immoral.
It should be noted that the real facts are hard to determine, this could have been one of the greatest pump and dump plays of modern times, or it could just be some guys who made mistakes.
I've had to piece things together and draw some conclusions, inevitably some is incorrect or only partially so, a matter of opinion.
---------------------------------------
The curtain opens in the mid 90's. 3 guys and a video camera are slinking through the strip clubs of Canada, convincing beautiful girls to strip and do sex shows for their new x rated website.
Successful at it, they open a whole string of sites, and diversify into the kinky pleasures at the fringe. They also see an opportunity to combine gambling with their sex, and set up a casino that is linked to their sites.
But a battle is brewing, 2 of the 3 want more legitimacy, they want to start selling the gambling software, in fact, want to start a company to compete with another canadian startup success, cryptologic.
Majority rules,and after a bitter fight which causes the departure of one of the partners, the creation of Starnet (snmm)is complete. They will do something noone has done before, combine the software for sportsbooks and casinos, putting them ahead of cryp, who only does casinos.
Timing is perfect, the offshore is taking off, and internet stocks are about to get hot as hell. They raise money by going public, and their off and running. About this time, a little known offshore book is having major problems with its software, and turns to snmm for a solution. They strike a deal to purchase the software for a fee and pay snmm a % of hold, somewhere between 10-25%, for processing their customers. Little did anyone know at the time, but that sleepy little book would turn into a string of landscape rocking big books called sportsbook.com, wallstreet.com (paid $1mil. at auction to buy the name), and Player's Only.
Snmm company policy at that time was:
A) Commited to making it in the legit world, so hired auditors, became fully reporting, listed their stock on the Berlin, and nasdaq bulletin board exchanges, and set up their operation to accept no customers from illegal jurisdictions, namely the united states.
Or,
B) They were about to embark on one of the slickest most intricate stock frauds of this century proclaiming from the highest pulpits they didn't accept u.s. customers, but all the books did they sold software to and processed transactions for. They were extolling their complete legitimacy, but holding on to their cyper casino, and their string of x-rated porn sites.
Well, the software was pretty good compared to competitors, and not too many bookmakers really cared how legit they really were. Bms wanted software and someone who could run it and handle customer transactions. Snmm was faced with a gold rush combining internet and gambling that was drawing every Guido, Vinnie, and Crooked nose who had ever booked a bet.
In one year snmm went from a couple of licensees to over 50, during that time, they caught my eye through the rapid increase in their revenues, and a mention on a bb by one of their bookmakers. They were getting a supposed 100K per licensee setup and then an ongoing income stream, in addition the comany was closely held, with the officers having a major chunk of stock, in essense, betting on themselves (or waiting to sell out at higher prices). So back when they had 5-6 or so licensees and were signing up more, they started to breakeven financially. Their stock was trading at 4 then, and I bought a piece and put out the word on some bulletin boards, at the same time their president and investor relations department embarked on their own well oiled campaign, touring the country, singing their praises.
Thus the stock pump began.
In that spring and summer of 1999 their stock went skyward, rising to a high of 29 from less than $1 the year before, as they signed up the vast bulk of their 50 odd licensees. At $100k a pop, revenues would be instant we all thought.
At the same time, they became the most popular board at raging bull (the preeminent stock bulletin board). This tiny little company with less than $10mil in revenues and 20 million shares of stock was more popular than microsoft. Since no institutional investors would touch the i-net gaming sector, snmm's stockholders were made up completely of little guys, who liked to spend their time at raging bull talking about how much money they were making, and speculate about when the stock was finally "discovered" how high it was going to go. Remember, at this moment, the internet sector was peaking, and companies with no revenues or business plans were trading in the hundres of dollars per share.
As the most popular rb board, its safe to say they were fully discovered. My suspicions grew about the validity of their licensees, as I became aware of discounting from the 100k fees. In fact, it got so out of hand, there was one up for sale on e-bay, and even a guy (company shill?) posted one for sale on some stock gambling boards for 20K, totally setup (I seem to recall a certain principal of this site having an interest in purchasing it). When their quarterly earnings came out, and the supposed increased revenues from all the 100k signups didn't completely appear, while admin cost were ballooning, I red flagged the stock. This was right about the time that:
On July 6th, 1999 the stock was at 26. A disgruntled licensee named Claude Levy, who had quite a bad reputation, and had trouble with his previous software provider, filed suit against snmm, claiming fraud and accounting irregularities, among a slew of other charges. The stock dropped to the mid-teens.
In august, the Royal Canadian Mounted Police raided the main offices of snmm and siezed everything in sight, claiming gambling transactions were being made there, and snmm ties to child pronography. The stock dropped from 13 to 4 that day. Snmm cooperated fully, including turning over ALL the customer lists from their licensees (are the irs and rcmp friendly?). The RCMP also seized $7 mil. in cash that they hold to this day.
Shortly thereafter it came to light snmm insiders who were holding a large % of stock made massive sales totalling in the millions of shares, all occuring shortly before the lawsuit by Levy, and the rcmp raid.
At the time of those sales I was making posts concerning the perfection of the chart for snmm stock. It was too beautiful to be true. One of the things pump and dumpers like to do is paint a perfect chart, knowing the reliance of stock buyers on this method of analysis. Was there manipulation? We'll never know, but what an unlikely coincidence that the perfect chart came right at the moment insiders were dumping and making 10s of millions of dollars.
Stockholders filed a class action lawsuit against snmm, they lost their auditors, and the curtain closed...
ALMOST!
EPILOGUE:
Over the course of the next several months their president resigned, as did many other officers. They lost their nasdaq listing, and their unaudited quarterly reports revealed a massive increase in administrative costs. Although they sold their x-rated sites, it was somehow at a loss, and looked like they were pillaging the company, diluting the stock by 10mil. shares, equalling about 50%.
Several reorganizations later, a move offshore, and the stock below 1 dollar a share, light started to appear at the end of the tunnel. Revenues had been increasing throughout this period due to the revenue growth of their licensees, which they received the % of hold from, although they didn't sign up any more customers. However, their legal troubles and administrative shenanigans had continued to sap the companies assets.
Then last winter they were able to bring on a new president strong enough to stabilize the company. He put the brakes on administrative spending, slowly reeling in this side of the balance sheet. Losses narrowed, but they still faced daunting challenges in the form of the stockholder lawsuit, the counter suits between them and Levy (who trashed their name unmercifully, even creating a website called Starnet News to run their name through the mud), and the ongoing investigation by the rcmp, who to this day has not brought charges.
In their last quarter report (still unaudited), they almost broke even, but most importantly, their administrative costs are within striking distance of being reasonable, and their president has commited himself to slashing them another 20% in the near term. They have been able to convince some auditors to come on board so appear to be headed for legitimacy.
They made a move to England this spring, renamed themselves World Gaming (symbol wgmgy on the nas bb) in the hope that the higher stock valuations of European gambling companies will rub off on them, and to impress investors they are commited to operating out of a fully regulated legal jurisdiction.
They have been able to lay aside funds to handle the Levy lawsuit, cover the stockholder lawsuit, and the rcmp litigation.
In the last week, they were able to resign their largest customer to a software and transaction processing deal lasting through 2004 (see my earlier post). Sportsbook.com etal. will continue their relationship, and that is the cornerstone of starnet. In addition, the principals of sb were willing to be repaid a $1.5 mil. loan, made to starnet during their gloomy period, in company stock, a further show of support.
Just this past friday, June 23rd, snmm settled the class action suit by stockholders in an extremely favorable way, only costing the company a bit over a $1mil. (see my earlier post). In addition, stockholders were willing to accept stock in lieu of cash, another major hurdle crossed over. The stock of World Gaming rose sharply on Friday in response to the news, closing the session at $1.46, up .25.
The rcmp is their last bridge to cross, and it looks to me like that is just around the corner. Although a judge recently extended the time of their investigation into July, and they are still holding the $7mil., one has to understand the legal system in Canada to get a feel for the potential outcome.
It will boil down to this:
The rcmp has little credible evidence, but enough to keep going until they reach a finacial settlement with snmm. That's right, snmm can buy their way out, which they will, covering the cost's of the rcmp investigation, which will be $3-4mil. The rest of the tied up $7mil will be freed up.
They will sue Levy and win, which will be a minor drag on earnings while it plays out, but more of a non-issue than anything.
They will release a new round of casino games this summer, that is the future, which will help them maintain their footing with competitors like cryp and boss.
On Friday, I took a position in wgmgy after the news came out. I'm not recommending it due to the extremely speculative nature of the stock. They still face major liquidity problems, depending on the outcome of the rcmp deal. They still have to prove to investors they can be trusted (insiders are still selling and we have yet to see an audited financial statement). And they face major cometition from a slew of new and old foes. But I like to buy when the corner is just turning (near the bottom), not when every thing is coming up roses (near the top).
That said, based on the valuations of other similar companies, I have a fundamental target of $3/share. Doesn't seem like much, but it is a greater than 100% return over the current price. At the same time, their downside risk has been significantly minimized, and they have a longterm base around a $1, so at my buyin price, downside is about 25% (about 33% for those buying at next Monday's levels).
In addition, if they start to achieve the returns on revenues that cryp is, the stock can go quite a bit higher than 3.
Wanna bet?