Investors Center
Center Folds: An Underwriter of Penny Stocks Goes Belly-Up

April 29, 1989

DAN Andreozzi of Houston was just getting his feet wet in the stock market. So, last autumn, when a broker from a New York securities house called, describing the firm's "exciting investment opportunities," the 26-year-old Texan was impressed and interested. The broker "sounded like he really knew what he was talking about," Andreozzi recalls.

On Sept. 27, Andreozzi says, he bought 1,000 shares of Packaging Plus and 11,000 of Sani-Tech Industries for a total of $2,480. In November, according to the Houston man, the broker said his holdings were up nicely and convinced him to buy 5,600 shares of Zephyr Associates for $1,000.

The trouble began on Jan. 2, when Andreozzi placed an order to sell his shares and was told he'd receive the proceeds in a week and a half. Two weeks later, still without a check, he says that he spoke with a supervisor, who attributed the delay to that modern bugaboo, a computer malfunction, and advised him to hold on to his stock anyway-it was going up. Unconvinced, the young investor demanded his money. That was the last time he spoke with anyone from the securities firm, Investors Center. Although he called repeatedly and wrote letters, he asserts that he never received a reply from anyone at the Hauppauge, N.Y., company.

Now, Andreozzi's holdings have a market value approaching zero. Recently, shares of Sani-Tech and Zephyr were fetching no bids, according to the National Quotation Bureau, a New Jersey outfit that specializes in providing information on pink-sheet companies. And Packaging Plus common was commanding just 12.5 cents a share. These stocks' low standing is typical of the fate of many issues for which Investors Center served as underwriter or market maker. Quotes on most virtually have disappeared, and so has Investors Center. "I didn't even have a chance," Andreozzi groans.

He isn't alone. Thousands of other people-the exact number is uncertain, but it might surpass 100,000 -- who bought stocks through Investors Center are in similar straits. On Feb. 28, at the request of the Securities Investor Protection Corp., the Long Island company was placed under the control of a temporary court-appointed receiver. SIPC said the firm couldn't meet its obligations to customers and didn't have enough capital to stay in business. Since then, Investors Center has agreed to be placed under control of a permanent trustee.

An Investors Center spokesman has confirmed that the National Association of Securities Dealers had been investigating the firm prior to its demise, and the SEC apparently also has launched a probe.

Although no one at either organization will comment, one question that's certain to be explored is whether Investors Center engaged in a practice that other penny-stock firms have been accused of in the past: secretly controlling the public float, as part of a Ponzi scheme.

In such an arrangement, a firm would encourage its brokers to have shares traded back and forth among its customers. When the stock price hits a level deemed acceptable, shares in the firm's own inventory are unloaded, providing the company with a fat profit and the broker with a juicy commission. It's not unusual to see a penny stock quoted at six cents bid, 12 cents asked. That six-cent spread might represent the firm's potential markup, with the broker receiving two or three cents a share. Put in perspective, if a broker gets a customer to buy 100,000 shares at 12 cents-a total purchase of $12,000 -- he can expect to make a $2,000-$3,000 commission.

Will those who lost money on stocks touted by Investors Center recover what they anted up? That's not likely. While a few of these outfits may have decent prospects, many are unlikely to ever turn a profit, and their share prices probably will continue to reflect that grim reality. Others are clinging to life by a slim thread. If it snaps, they'd be broke. In a bankruptcy, their assets wouldn't pay for much more than a broker's lunch.

But what if it could be proved-as some angry investors believe-that share prices were manipulated? Would investors be entitled to compensation? Probably. But they wouldn't stand much chance of getting it, unless Investors Center, or any individual who could be shown to have played a role in a deception, had substantial assets-something unknown at this point. Even if sizable assets turned up, investors would have to sue to get a chunk of them, or hope that regulators or prosecutors could work out a way to have money returned. In either case, this could take a long time and is a long shot.

And what of SIPC's obligations? They're limited. "All we see to is that the investors get the cash or securities that were supposed to be in their account. We're not responsible for any fall in market price, regardless of whether it resulted from something fraudulent or not," says Michael Don, SIPC's deputy general counsel. If cash is missing, the organization pays up. If securities are missing, the trustee would try to buy replacement shares at the price prevailing in "a fair and orderly market." If such a market no longer existed for a given stock, the price would be whatever was in effect on Feb. 28, the day SIPC requested that a receiver be appointed. Unfortunately for investors, share prices had plunged by then.

The bottom line: The only benefit many buyers of stocks heralded by Investors Center will get is a writeoff on their tax returns.

All this is a bitter ending to a tale impressive even by the standards of the wild-and-woolly penny-stock market. In just five years, Investors Center had come out of nowhere, assembled an aggressive 850-person sales force and racked up considerable success throughout the U.S. in selling penny stocks-generally shares listing for less than $1 -- and blind pools-companies formed solely to buy into other, unspecified outfits.

Despite the after-effects of the Crash and the demise or legal woes of many other penny stock houses (Brooks Weinger, First Jersey Securities, Blinder Robinson and, most recently, Power Securities), Investors Center appeared to be thriving-until it shut down operations on Feb. 23, because of a capital deficiency, apparently brought on when customers, en masse, began demanding that stocks be sold, and brokers, en masse, left the firm. In a few days, several hundred million bucks of paper value was extinguished when bids on almost all Investors Center stocks collapsed. Investors may get some small solace from the fact that many employees didn't get their last few weeks' pay.

What a comedown from the firm's heyday last year, when Anthony Stoisich, its chairman, usually rode to work in a limo! Stoisich, who refused to be interviewed for this article, started Investors Center in 1983 with $40,000. Previously, he'd run a seafood business. Investors Center employed a cadre of high-pressure salesmen who cold-called prospects. The initial contact was merely introductory; follow-ups were hard sells.

The company's practices had gotten it into some trouble over the past year. Last October, the NASD censured the firm and its president, Carl Lombardi, for technical violations. Each was fined $15,000. In addition, Lombardi was suspended from acting as a financial and operation principal for 30 days. And in November, Investors Center agreed to rescind sales to investors in Connecticut and to pay a $5,000 fine to that state. The action came in response to complaints from Connecticut residents who claimed to have been misled by Investors Center brokers.

In any case, the company's sales techniques worked, although great persistence was required. Novice brokers logged 200-300 calls per day and, according to people who worked there, were trained by one of the masters of the telephone stock sales pitch, Jay Goldberg, who had worked at Blinder Robinson, First Jersey and Rooney Pace.

At its height, Investors Center had 27 offices and, on paper at least, fairly decent profits. For the year ended Sept. 30, 1987, it reported revenues of $10,388,000, with net income of $658,000. Recent internal documents showed $37,500,000 in revenues for 1988 with a net of $1,600,000, and a 1989 sales projection called for $75 million. (It must be noted that a good part of Investors Center's "profits" were unrealized gains on the stocks in its portfolio.)

The fuel for this engine: penny stocks and small IPOs.

One of the supporting characters in the Investors Center drama was Michael Duban, a lawyer in Westchester County, N.Y. Duban served as the legal counsel for most of the companies that Investors Center underwrote, including a few of his own. He is also a 5% shareholder of Investors Center's parent, ICI Holding Co.

ICI Holding started in 1984 as International Classic Motorcars and was taken public by Investors Center in 1985 in an offering that raised about $300,000. Duban was the chairman and largest shareholder. The firm remained virtually inactive, but in July 1987 it merged with and adopted the name of a shell company called ICI Holding. Also in July, ICI acquired a 10% interest in Investors Center for $100,000 in cash and six million shares of stock. During 1988, ICI acquired the rest of Investors Center for "an unspecified amount of stock," according to company press releases. After that transaction, the two largest shareholders of ICI were Stoisich and Lombardi. They each own 25%-50% of ICI, according to recent broker-dealer filings with the NASD, and there appear to be over 150 million shares outstanding. Based on the bid price of 75 cents in early February, Stoisich's and Lombardi's holdings were worth $30 million-$60 million each-again, on paper. Duban's holdings were worth a mere $3.5 million. Now, there are no bids for the stock.

Investors Center had a close relationship with many of the companies it underwrote. Take Metro National Corp., which Anthony Stoisich formed to provide brokerage training services and took public in 1985. It subsequently became Satex, an office equipment distributor, and is now Zephyr Associates, which claims to have invented a self-heating, self-cooling beverage can. Zephyr's financial PR firm is Focus Management, an Investors Center affiliate that put out "research reports" for most of the company's deals.

According to one prospect who was cold-called by Investors Center, Zephyr was described this way: "This is it! This can . . . . really works. The company is run by Alan Pfeifer, who turned around Calvin Klein. {A spokesman for Calvin Klein denies this, and Pfeifer declines to comment.} Everything he has touched has turned to gold. The size of the market is over a trillion cans. Laser Arms, which had a similar product, went from 10 cents to $3." Left unmentioned by the broker was that Laser Arms was a fraud and the promoters went to jail.

Zephyr recently spent $800,000 to acquire a 25% interest in a joint venture known as Dix Hills Associates, which intends to develop condominiums. Zephyr's most recent balance sheet showed just $18,000 in cash and a net worth of $770,000. There were no revenues. Still, at the stock's quote of 19 cents not long ago, the 160 million shares outstanding had a market cap of over $30 million. Currently, no market makers are bidding for the stock.

Alan Pfeifer is also president and CEO of Partner's National, a blind pool underwritten by Investors Center in late 1987. Partner's had been one of Investors Center's most successful offerings, with the price increasing from 1.5 cents to 15 cents before collapsing to next-to-nothing in late February. Partner's chairman and 77% controlling shareholder is Michael Duban. His 97 million shares, which cost him $9,700, were valued at $14,500,000, at their peak. Not bad, considering that total shareholders' equity amounted to just $265,000 at the time. Curiously, the Partner's National prospectus (and all other Investors Center prospectuses in which Duban represented the issuer) failed to disclose a very important fact-that Duban was a major shareholder of ICI Holding, Investors Center's parent. Shouldn't this conflict of interest have been disclosed in the prospectus? Asked about this, Duban hung up the phone.

A glossy research report put out by Focus Management stated that Partner's National is a public venture capital company that "envisions dynamic expansion beyond national boundaries, extending globally across three continents." So, what did it invest in? For starters, 15% of Zephyr Associates. And 50% of a newly formed joint venture called National Packaging Plus Services that plans to sell franchises for postal, packaging and shipping services. Partner's has also acquired a 50% stake in Sani-Tech Marketing, which has the distribution rights to the Sani-Seat electronic toilet seat. The Sani-Seat (not yet in production) will be made by Sani-Tech Industries, which was known as Hygolet Metro when it was underwritten by Investors Center in December 1986. In 1987, Hygolet Metro lost $500,000 on $350,000 in revenues. Around that time, its distributorship agreement with Hygolet Inc., the manufacturer of the toilet seat, lapsed.

The Sani-Seat provides a protective plastic covering over a toilet seat with each use. The company's slogan: "Wouldn't you feel safer on a Sani-Seat?" Paul Kohler, the president until early 1988, said that AIDS has made selling this toilet seat "much easier." Despite the company's dismal performance, the stock was up 250% and sported a market cap of about $22 million-until the day Investors Center went bust. Now, as noted, bids have disappeared.

Until last year, by the way, the company's lawyer was Michael Duban.

Another Investors Center IPO that was up sharply before sinking from 10 cents a share to one cent is Affiliated National/Global Environmental. This blind pool went public in January 1988, with headquarters in Duban's office and the stated goal (according to a Focus Management research report) of suppressing "hazardous emissions damaging to the public health and the environment." Says President William Rice, "Our intent is to be on the leading edge of technology." Affiliated has acquired three companies, which are supposed to do over $10 million in sales. Although they've been losing money, Rice predicts a turnaround this year.

Asked whether the $20 million market valuation his company commanded not long ago wasn't very high for a corporation with a net worth of $1 million, debt of $2 million and little in the way of earnings, Rice said, "You're betting on the future. We'll be a $50 million company in two years and a $250 million company in five years." He also added: "To be perfectly honest with you, I wouldn't buy a penny stock."

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