(This column is about a small-cap stock with market capitalization below $100 million. Small-cap trading ideas are highly risky, but present an opportunity for significant payoff if they work. Such ideas are sometimes characterized as "lottery tickets" and are for only the most risk-tolerant investors, as the potential for 100% loss is high.)
Short sellers play an important role in any public equity market.
That said, as a recent New Yorker article correctly points out: "short sellers are often wrong."
And, according to IDI (IDI) Chairman Michael Brauser, CEO Derek Dubner and largest shareholder Dr. Phillip Frost, an article published yesterday by an anonymous blogger about IDI is not only wrong BUT is completely devoid of facts.
Rather than attacking the anonymous blogger, management chose to address the article's main points.
Here's our conversation from last night:
E: Hi Mike.
IDI Chairman Mike BRAUSER: Derek Dubner (CEO of IDI) is also on the line.
Why don't we just address the summary points of the article?
E: (Quoting summary points from anonymous blog post) "Frost mixed up with 'the wrong crowd' as Barry Honig and Michael Brauser have spun a tiny struggling debt collections business, acquired with $5.7m cash, into temporarily inflated ~$200m shell."
How do you respond to that?
BRAUSER: I can't judge myself as the "wrong crowd" and I'm not exactly sure what that means. So that's difficult for me to address.
E: And Dr. Frost has been a partner of yours for a long time?
BRAUSER: Dr. Frost has been a partner of mine for 6-7 years. We've worked together we've socialized together and we've had multiple successful deals together.
We've also had deals that have either been his legacy deals or others that we've worked with and have turned them around into successful companies.
E: Any examples you can provide?
By way of example, Dr. Frost introduced me to BioZone which is mentioned in the body of the article.
BioZone had some technology he was interested in.
We closed on the company and bought it.
And as we dove further into the company we found that the founder had misrepresented tremendous amounts about the company, including a lot of liabilities, the ownership of the technology and his position within the company.
He was eventually removed from the company, was quite bitter about that and started to throw out multiple lawsuits, throwing out allegations against Dr. Frost and everyone associated with him.
The long and short of it is we ended up in federal court where he lost his claims, he was bought out of his stock at a nominal amount and had no further claims to pursue against the company.
So, from my position he lost because he sued for 10s of millions of dollars and ended up walking away with something less than a millions dollars.
E: And none of the allegations proved true?
BRAUSER: None of the allegations.
He went to every investigative body he could trying to stir up as much trouble.
He then tried to sue everyone associated with it.
In fact, he attempted to blackmail Dr. Frost and myself by having a friend of his who's a writer for a very well-known magazine threaten to publish a negative article.
I was able to get him to put that in writing that he would kibosh that article if we'd pay him a certain amount of money.
I showed that to the federal judge in court in SF and really set him back quite a bit and got him into a bit of trouble.
Further to that, the company BioZone has now become a company called Cocrystal (COCP).
It has a large market-cap. The stock rose from $0.15 to $1.15. It trades with good volume and they have significant science and scientists involved with it.
So, there was a story that this author of this article (anonymous blog) tries to show that we were bad guys and stole the company and did all these horrible things.
In fact, we saved the company and created significant shareholder value.
So, that's just one example.
I've been working with Dr. Frost for a long time. He's obviously a man of very significant character.
E: He's not going to work with just anybody.
BRAUSER: No. He wouldn't. And I'm proud to be associated with him.
From my own view, I'd never do anything that would hurt or harm that relationship because I do cherish it.
E: Did you speak to him recently?
BRAUSER: I did. I spoke to him today.
He's very supportive.
I know that he's a very significant shareholder.
And I look forward to him participating in the activity of the stock in the short term.
E: So nothing has changed from Dr. Frost?
Nothing has changed. He's fully supportive of the company.
I can tell you that we have very significant plans TOGETHER for the company's future.
I want to emphasize that.
Dr. Frost and I have significant plans that we've been working on together that will be transformational to the success of this company.
E: And in his mind the allegations are ... he's known you for a long time, he knows your history, you've partnered on deals ...
And I can go one step further.
In the body of the article, the author claims that I was a mere board member of InterClick. In fact, I happen to be one of the founders of InterClick -- myself AND Barry Honig were founders and I was chairman of the board, not just a board member.
That was one of the first deals I did with Dr. Frost. And I brought him into the company where he had a tremendous return on his investment.
The author of the article seems to be misleading on the stock price and where we ended up selling the company.
We sold the company at its all-time high. There were no shareholders that could have lost any money on this sale.
And I will say even further to that I was personally responsible and personally handled the transaction with Yahoo! (YHOO) and dealt with them with the smallest of details to the closing of the transaction.
I was intimately involved in every step of the way. I was very proactive as chairman of the board in the success of the company as well as the sale.
E: And what can you say about Barry Honig?
BRAUSER: Barry Honig was instrumental as well in the success of the company.
Barry was very supportive, was able to raise substantial capital for the company from significant investors, helped us execute the vision and build the company.
When Barry and I founded...
E: Barry is one of your partners?
In a variety of deals, Barry Honig and I are investors and partners.
We co-invest in some deals.
E: And Dr. Frost knows him well as well?
BRAUSER: Yes, he does.
Barry was co-chairman of the company for some period of time as well.
BRAUSER: For the record, when we founded the company it was doing $50,000 a month. When we sold, it was doing $15 million.
E: The one you sold to Yahoo!?
BRAUSER: Yes. InterClick, which the author claims I had nothing to do with.
The next bullet point (quoting from the article): Chairman Brauser's biography has "interesting" omissions including bankruptcy, wipeout, and fraud lawsuits, with Equifax suing him alleging "fraudulent misrepresentations" with Softbank lawsuit alleging "various frauds."
I think this deserves significant attention.
I have never had a bankruptcy in my life.
I've never been part of any bankruptcy.
I've never taken a company bankrupt.
So I don't know where he creates these false claims and allegations.
They are false and can't be substantiated whereby I was a party to any bankruptcy anywhere.
I don't know what the term "wipeout" means.
I've wiped out on a set of skis.
I've probably wiped out on a bicycle here and there and even on a surfboard.
But I've never wiped out a company.
As far as "fraud lawsuits," it needs to be very clear.
I did sell a company to Equifax (EFX). It was a very successful company.
After I left the company, the management did not do as good as a job as I did and the company declined.
Its revenues and its profits declined.
Equifax did sue me and I did go through a long drawn out litigation with them.
At the end of the day, I ended up winning the lawsuit.
They received no compensation from me whatsoever and I was paid by the funds such as Softbank -- where (the author of the blog) claims that I misrepresented. I was paid a significant settlement.
I, Michael Brauser was paid by them. I didn't pay them anything.
So, if I were guilty of anything it would be very strange for them to pay to settle with me.
Next bullet point (quoting from the blog): "IDI stock temporarily inflated from extensive Yahoo message board stock-pumping scheme, touting IDI across dozens of boards with interconnected aliases, similar to halted and bankrupt FNRG."
E: There's not a lot of discussion that happens on Yahoo's IDI message board.
BRAUSER: I can't help what people talk about.
But the fact of the matter is they should be very excited about this company because this is the company that's going to have significant impact.
E: And any knowledgeable person knows you don't rely on information that's posted on Yahoo Finance message boards.
Nor do I ever go on them myself. So I can't comment on that.
Now this is the most interesting one (referring to the bullet point in the article): IDI's Transunion lawsuit could mean instant $0 for stock as IDI future apparently based on IP they don't own, which TransUnion acquired when IDI CSO Poulsen's last company went bankrupt.
The author claims if we were to lose the lawsuit ...
This deserves discussion.
Our IP is NOT the IP that TransUnion is using.
We're developing now our own proprietary intellectual property (IP) and software that will drive our products.
We're building it with our Chief Scientific Officer Ole Poulsen.
Ole Poulsen works for our company AND Ole Poulsen has claimed ownership and in fact developed the IP that TransUnion is now using for their TLO branch.
Ole Poulsen never sold that to TLO, never gave them source codes.
Our company IDI did buy that technology from Ole.
We're not using it.
What we've done is we alerted TransUnion that they're in fact using our IP and that we may be entitled to royalties from their use of our IP.
TransUnion then went to the bankruptcy court and asked them to rule on the fact that they owned the IP.
The bankruptcy court could not make that ruling.
The bankruptcy court, in fact, has opened this up for discovery.
As it seems to me today, we believe we're the rightful owners of that IP and that TransUnion is at risk of losing either the rights to use it or the potential to have to pay us royalties.
But in no way, shape or form ...
If we were to lose our claim that we don't own that IP, it would not cause any damage or deter our company from building our products we're building today. It would not affect the future of our business.
So, this author's claim that it would mean an instant $0 is absurd, it's not based on facts, and I would highly recommend that if he were to read the court records he would find that we're sitting in a very good position and we're very comfortable that we have a good shot at winning this case, which would only benefit us additionally but would not hurt us.
E: And this is exactly what you told me when I interviewed you a few weeks ago.
That being said, the rest of the article is based on false claims.
Our valuation today is based on the fact that we have THE team that has created a multi-billion dollar industry working for us.
The software and IP that was created for Accurant and Reed Elsevier, THAT team is working for us.
The software that is working for TransUnion's TLO division, that team is working for us.
We feel we're in a very strong position.
We feel our company has a tremendous future and we're very excited about it.
Today's stock action is a snapshot in a very long movie. It's just one frame.
In my opinion, it's the author's (of the article) ability to make some money by shorting this stock as he states in the opening of his article and he got away with it.
E: Of course there's a place for shorts in the market, assuming they have their facts straight.
BRAUSER: In fact, I'm going to plagiarize a line from Dr Frost: "Shorts will turn out to be our best friends."
And that could be for more than one reason.
They may learn not to be short and go long.
And when they do have to buy back their stock because of our inevitable success it will only increase value to our shareholders, thereby they become a very good friend to the company.
E: And none of you guys did any selling today?
To be very clear, I, chairman of the board of IDI, I'm an insider, I'm chief principal officer as well, and I bought stock today because I find the stock price very compelling here.
E: And Dr. Frost didn't do any selling today?
BRAUSER: No. Dr. Frost did not sell any shares.
I suspect he may be an acquirer. but I have not confirmed that.
E: And none of the management sold today?
BRAUSER: I believe other management members including our CEO acquired stock today.
DEREK DUBNER, CEO of IDI: I can confirm that I did acquire stock today.
BRAUSER: So Derek Dubner the CEO acquired stock today.
There has been no insider selling that we're aware of -- certainly not today.
E: And Derek, nothing happened today or yesterday that would lead to the stock plummeting as it did. Correct?
DUBNER, CEO of IDI: Absolutely not.
There were no company events that led to this today.
E: And you're just as bullish on this company as you've always been?
DUBNER: Absolutely. Unequivocally.
E: And nothing you learned today about Mike Brauser concerns you?
DUBNER: No. Absolutely not.
BRAUSER: Every day that goes by the company gets a little bit better.
The company is better today than it was yesterday. Will be better tomorrow.
E: Because you're busy building the product.
Every day we're once step closer to releasing a product that will change the industry.
E: And Derek, you support everything that Mike just said?
DUBNER: Yes. Absolutely.
E: Derek, I'm assuming you read the article. Is there anything you feel you need to respond to?
DUBNER: There isn't much to respond to other than our legacy purchase of Interactive Data was a very deliberate purchase. It was NOT to buy a debt collection business, some small nothing player.
It was a business that has been around for many years in the risk management industry.
It has very well established relationships with data suppliers ...
BRAUSER: I'm going to jump off the call and you can call me back. I have Dr. Frost and I need to speak to him.
DUBNER, CEO of IDI: As I was saying, the legacy purchase of Interactive Data has long standing relationships with the data suppliers that are very important to being in the risk management industry.
And of utmost importance it has all the security certifications and infrastructure in place to manage and maintain sensitive consumer information.
It was a very intentional purchase.
These claims throughout the article that there's no R&D whatsoever is completely fabricated.
We have had our next generation systems since we formed the company and brought on our CSO Ole Poulsen. And our team today continues to build that next-generation system and we continue to invest in that. So that's false.
In any event, we're going to continue doing what we're doing, building a very big company here and we're very excited about the opportunity and everybody involved. Nothing has changed.
MIKE BRAUSER, Chairman of IDI: I'm back on the call.
I just got off the phone with Dr. Frost who's wildly supportive.
My suspicion is he'll be in the market acquiring shares.
He actually felt that the article was so off base and such a personal attack that he wanted to speak to counsel about potentially suing them for libel ... slander.
E: So he remains supportive, bullish and it's possible he'll buy stock?
E: And he's 100% supportive of you AND the company?
E: Thank you.