New York Times: Thursday, December 5, 1996 Stock Hyped On Internet Resumes Trading By LESLIE EATON Peter Usinger was incensed. The Rochester business consultant was using the Internet, as he often does, to check up on a little company he had bought stock in called Omnigene Diagnostics Inc. But when Usinger reached the company's site on the World Wide Web, he did not find the usual information about its patented test to diagnose gum disease. Instead, he read that the company was in default on the license agreement that lets it use the patent -- the company's main asset. Usinger fired off an angry electronic message to the Web site manager, who had put up the information. Usinger correctly suspected the site manager was embroiled in a dispute with the company. ``If you are not able to substantiate your claims and we have to take a financial loss,'' Usinger wrote, ``we will notify our lawyers.'' The manager, Robert Gibson, shot back his own e-mail, with enough details to convince Usinger. And that was the beginning of the end of a high-technology hype that had turned Omnigene Diagnostics stock from a dud into a high flyer almost overnight. Within two weeks, the Securities and Exchange Commission halted trading in the stock and announced its action on America Online, the agency's first such use of an electronic bulletin board. With the expiration Wednesday night of the trading suspension, the cyberspace drama resumes Thursday. If the stock follows the usual pattern, it could well fall back to earth with a thud. The Omnigene Diagnostics story shows the effects Internet technology is having, for good and bad, on investors and investing. Reams of information are available -- but truthfulness and accuracy can be almost impossible to judge. Amateur investors find their way to obscure securities and mingle online with both stock promoters trying to drive prices up and short-sellers trying to drive prices down. But the tale also illustrates the changes occurring in the still young world of Internet investing. Securities regulators are becoming more aggressive about online stock fraud; at the same time, individual investors like Usinger are becoming warier and starting to use the power of the Internet to protect themselves. ``A lot has changed -- dramatically -- in the last six months,'' said John Stark, a lawyer for the SEC who specializes in Internet fraud. ``There was a real culture of trust and benevolence; now people are becoming more skeptical.'' And not a moment too soon. Online investing is growing by leaps and bounds; with that growth has come a corresponding rise in scams, including manipulation of small stocks with few shares outstanding. ``It's a growth industry,'' said William McLucas, the director of enforcement for the SEC. Regulators are investigating several suspected ``pump and dumps,'' in which the Internet is used to stir up investor enthusiasm and inflate prices. The perpetrators, who usually own shares they acquired for little or no money, sell them into the rising market. When the scam falls apart, legitimate investors are left holding the worthless shares. To be sure, such schemes have flourished for decades without the Internet. And the Omnigene Diagnostics story includes some traditional elements of stock hype, including the use of a radio talk-show host, who was paid with stock to promote the company. But the Internet was integral to the rise and fall of Omnigene Diagnostics, which is based in West Palm Beach, Fla. The stock was touted on electronic bulletin boards; clues about the company's problems first appeared on its site on the World Wide Web; the details were fleshed out using e-mail, which was also employed to alert regulators, and the company's management took to the Net to defend itself before the SEC stepped in online. When Omnigene Diagnostics first showed up on Internet bulletin boards in early October, virtually identical messages praising the company appeared on different boards, signed with different names. These messages said the company had no competition, had already racked up sales of $400,000, would have revenues of more than $2 million next year and had only 450,000 tradeable shares. Urging readers to call the company's 800 number for more information, the messages concluded, ``This could be your stock buy of the year ... Take a look NOW.'' By then, the share price of Omnigene Diagnostics, known as ``Oh My God'' because of its ticker symbol of OMGD, had already jumped from $1, where it traded over the counter -- very occasionally -- in July, to about $4. But as the Internet messages flew, so did the price, topping $6.50 by mid-November. Even early on there were voices of caution. ``Oh no, not another FL company,'' wrote someone on America Online's Investor Network. ``I have heard that a lot of scams originate out of Florida.'' Other writers noted that the company did not seem to have filed documents with the SEC, and was not traded on an exchange. But naysayers were quickly shouted down by writers who accused them of trying to profit from a drop in the stock price. The boosters hinted of a deal with Procter & Gamble, and cheered each day's rising price with lines like, ``I'm going to ride this train to the gold mine. Toooot!! TOOOOT!!'' Meanwhile, the Internet was helping to bring together two men with a rather different view of Omnigene Diagnostics: Robert Gibson, a computer programmer in Florida, and Peter Mahler, president of the company's former parent, Omnigene Inc. of Cambridge, Mass. With sales at its diagnostics unit declining, Omnigene Inc. sold the unit in May 1995 to the American Biodental Corporation, of Boca Raton, Fla., which makes dental implants. Though its testing operations continued in Cambridge, Omnigene Diagnostics was to be run from Florida. But almost from the beginning, things went wrong, Mahler said. Omnigene Diagnostics quickly fell behind on its rent and royalty payments to its former parent. Most of its staff quit, and Mahler's company went to court to evict its one-time subsidiary. Though the company dropped the suit after receiving a payment, Omnigene Diagnostics still owes it money, Mahler said. Even worse, people were confusing Omnigene Inc. with Omnigene Diagnostics and its troubles; another spinoff, Omnigene Bioproducts, mistakenly had its credit shut off, Mahler said, adding, ``It's an awful situation.'' But the final straw for Mahler may have been Omnigene Diagnostics' Web site, which had the address www.omnigene.com. The site was operated by Gibson, the computer programmer, whose main business includes running Web sites for legal process servers. Last year, at an Office Depot store in West Palm Beach, Gibson bumped into an old acquaintance, Dominic Scacci, and eventually agreed to do some programming for businesses Scacci was involved with, which included Omnigene Diagnostics. In fact, Gibson said, he ended up sharing an office with Scacci, who used his phones, computers and copier. But like Mahler, to whom he had spoken about Omnigene Diagnostics' computer system, Gibson said he was having trouble getting paid. The company did not seem to be doing nearly as much business as Scacci said. And earlier this fall, Gibson began to have suspicions about what Scacci was up to. ``The company was always short of money, and suddenly Dominic drives up in a new car,'' Gibson recalled. He also found a list, left in his computer by Scacci, that indicated the company had been issuing hundreds of thousands of free shares to Scacci's other companies, his friends and family, Gibson said. ``It started to smell,'' he said, so he called the SEC. Shares also went to Jerome Wenger, host of ``The Next Superstock,'' a program that is heard on radio stations around the country, including WEVD in New York. In an interview, Wenger said that he received the stock for serving as a consultant to bring the company to investors' attention, and that he discloses such arrangements to his listeners. On Oct. 31, Mahler sent an e-mail to Gibson complaining that the Web site's address infringed on his trademark and saying that unless the site was removed immediately, ``legal action will result.'' Instead, on Nov. 3, Gibson changed the first page of the site to the message that so irked Usinger, the Rochester investor. (Gibson also took his equipment out of the office he had shared with Scacci.) Which brings the story back to the angry e-mail sent by Usinger, who had bought several hundred shares of Omnigene Diagnostics in October. After Gibson replied to his message, Usinger said, ``all the little tricks you see in shells and scams started surfacing like little bubbles.'' So he decided to send some information to the SEC's online complaint division. He also decided to sell his stock, at a nice profit. As Usinger and a few other investors began posting their information on the bulletin boards, a free-for-all broke out in cyberspace. Some people scolded Usinger for trying to make people panic and sell their shares, and bulls and bears got into online shouting matches. Messages signed by Scacci appeared, saying that Gibson owed him money and had encoded the company's computer data. ``He demanded $10,000 to give us the key,'' read one such message posted on Nov. 7 on a bulletin board on the Silicon Investor Web site. ``I refused. This is when he decided to proceed to send falsehoods out over the Internet.'' As for the default on the patent license, a message on America Online signed Scacci6733 said that Omnigene Diagnostics ``owns the patent purchased from Omnigene Inc. It's as simple as that.'' But there were a number of things Scacci did not tell people in his messages. A former stockbroker with a history of regulatory run-ins, Scacci has filed for personal bankruptcy protection twice, according to regulatory records. Scacci was the agent for something called the Austria International Fund, which was based in the Bahamas, according to documents filed with the SEC by American Biodental. These filings say that it was really the fund, not American Biodental, that spent $189,000 to buy Omnigene Diagnostics. Omnigene Diagnostics was spun off in January, shortly before American Biodental filed for bankruptcy protection. But American Biodental's shareholders never received any OMGD shares, said Ingo Kozak, a director of American Biodental, which has changed its name to Biolok International Inc. Scacci said in a brief interview last week that, on the advice of his lawyers, he could not answer questions about the Omnigene situation. But he said his previous regulatory difficulties were basically problems with record-keeping. And he denied being the agent for the Austria International Fund. On Nov. 20, the SEC said it was suspending trading in Omnigene Diagnostics' shares for 10 business days, the maximum allowed. The reason: questions about the company's ``alleged ownership and other rights as to certain patents and trademarks, ODI's sales, past and projected, ODI's operations and facilities, and the number of freely traded shares.'' The SEC posted a notice of the halt on America Online's bulletin board because ``it looks like one of the vehicles people were using to disseminate a substantial amount of hype'' about the company, said McLucas, the enforcement chief, adding that he expects the agency to make similar electronic announcements in the future. Whether the SEC will go after anyone it believes has hyped the stock electronically is unknown; the commission never comments on current investigations. The company's fate will become clearer Thursday, when trading can resume -- which will occur only if brokerage firms are confident they have enough information to make bids on the stock. In the past, stocks in which trading has been suspended have tended to plunge when it resumes. Gibson is still unhappy about his run-in with Omnigene Diagnostics and the investors who excoriated him online. But, he said, ``the good news is that this stuff can come to the surface quicker because of the open lines of communication'' that the Internet allows. As for Usinger, he said that his Omnigene experiences have made him a more cautious investor. And that despite the abuse he received from some online critics, he does not regret having shared his discoveries about the company with his fellow Internet investors, some of whom also got their money out before trading was halted. ``I thought everyone should know this,'' he said. ``It's the difference between having something more before Christmas and having nothing.'' New York Times: Thursday, December 5, 1996 Mastercard's "Smart Card" Builds Support By SAUL HANSELL Seven financial giants, including Wells Fargo, Chase Manhattan and Dean Witter, Discover, have agreed to market the Mondex electronic-cash product in the United States. The Mondex ``smart card,'' which was developed in Britain, is a plastic card containing a computer chip that can be used to make purchases in vending machines, via pay telephones and over the Internet. Customers can transfer money onto and off the card at an automated teller machine or by using a specially equipped telephone. The backing ensures that Mondex will be one of the leading systems in the country as the market for smart cards evolves. Last month Mastercard International bought 51 percent of the international arm of Mondex, which will sell franchises in various regions. The seven companies plan to announce Thursday that they will form a company to offer Mondex in the United States. Wells Fargo & Co. will own 30 percent of Mondex USA, Chase will own 20 percent, and 10 percent stakes will each be owned by Dean Witter, AT&T, First Chicago NBD, Michigan National Bank and Mastercard. This group will license the right to issue Mondex cards to other financial companies. The card will get its major introduction in the United States in New York City as part of a test by Chase and the Citibank unit of Citicorp. That test, which will involve 50,000 consumers and 500 merchants, was to have introduced another smart-card system, Mastercard Cash. But when Mastercard bought Mondex, it abandoned that system, and Chase will have to modify its systems to use Mondex. ``We were moving along at a real good pace and expected to deliver Mastercard Cash, as promised, in the first quarter,'' said Ronald Braco, senior vice president of Chase. ``But we felt it would be foolish to go forward. Chase is not in the business of having our customers test technology that has no future.'' In the New York test, Citibank will use the Visa Cash smart-card system by Visa International. A primary goal of the test is to develop terminals for merchants to use that will be able to accept both the Visa and the Mondex cards. Unlike Visa Cash and other smart-card programs, Mondex allows people to transfer money between their cards, allowing a parent to put money on a child's card, for example. The transfers use a $100 calculating device called an electronic wallet. The owners of Mondex will conduct several tests in the next year. Plans call for introducing the product more widely in 1998. Initial tests of smart cards -- such as the high-profile introduction Visa Cash had at the Atlanta Olympics -- have shown that the technology is effective but that consumer demand is tepid. ``The technology works well, but the consumer proposition has not been a grand-slam home run,'' said Janet Crane, president of Mondex USA. ``Cash works fine, and getting people to replace something they are quite happy with is very hard.'' Ms. Crane said that additional smart-card applications, such as shopping on the Internet, and frequent-buyer rewards at fast-food restaurants would help spur Mondex's acceptance. Still, it is unclear who will be willing to bear the costs of introducing expensive new technology. Merchants have to buy new terminals that now cost about $500. The cards themselves cost $10 each wholesale. And Mondex USA will charge banks that issue the cards 25 cents each time money is transferred to Mondex cards. The banks, in turn, are expected to pass this fee and their own costs to customers. The inclusion of Dean Witter puts that company in the unusual role of cooperating with Mastercard, which has stringent rules against linking its brand with rival credit-card marketers like Discover. Shawn Healy, a Mastercard spokesman, said that unlike credit cards, Mondex was meant to be an ``open system.'' Dean Witter's main interest is in offering merchants the ability to accept Mondex cards. The company has not decided yet whether to add a chip that can store Mondex cash on its Discover cards or to offer Mondex as a separate product. American Banker: Thursday, December 5, 1996 Wells, Chase Take Lead Stakes As Seven Invest in Mondex USA By JEFFREY KUTLER Wells Fargo & Co. and Chase Manhattan Corp. head a group of seven U.S. companies making equity investments in the Mondex smart card system. Wells and Chase -- through subsidiaries Wells Fargo Bank and Texas Commerce Bank -- have acquired 30% and 20%, respectively, of Mondex USA, the global payment organization's U.S. franchise. They will be joined by five 10% owners in a formal announcement today of the launching of Mondex USA. It will be based in San Francisco, with Wells Fargo executive Janet Hartung Crane as president and chief executive officer. "We have an impressive group of well-capitalized players who are making very significant, long-term commitments," Ms. Crane said in an interview Wednesday. She said her unit would begin in earnest to staff up in January -- it has heretofore relied on about 15 Wells people led by Ms. Crane and executive vice president Dudley Nigg - to "propel Mondex in the United States." Along with Wells and Texas Commerce, two other national banks -- subsidiaries of First Chicago NBD Corp. and Michigan National Corp. -- got approval this week from the Office of the Comptroller of the Currency to participate in Mondex USA. Also owning 10% each will be three nonbanks that did not require OCC clearance: Dean Witter, Discover & Co.; AT&T Corp.'s Universal Card Services unit; and MasterCard International Inc. Only Wells and AT&T were previously listed as Mondex owners. They and Natwest Group, the London banking company that developed Mondex, were the first equity participants in Mondex USA and were among the 17 "global founders" of the Mondex International umbrella organization incorporated in July. Wells and AT&T "sold down" their interests to accommodate the five additional partners, Ms. Crane said. And Natwest Group completely sold what was designed to be a temporary, minority stake. Meanwhile, Mondex International is in a state of flux, awaiting MasterCard's purchase of a 51% interest, leaving the U.S. company, Mondex UK, and other regional entities with pieces of the remaining 49%. The U.S. owners did not disclose the value of their equity stakes. It has been publicly acknowledged only that the original capitalization of Mondex USA was 30 million British pounds, or about $50 million. That is likely to be a fraction of the marketing and development expenditures required to realize Mondex's vision of "global electronic cash." "This is something that is definitely not going to be a smashing success in one year," Ms. Crane said. But given Mondex's blue-chip backing and the owners' desire to sign others as card issuers, merchant-acquirers, and licensees, Ms. Crane said she has every reason to be confident. As evidence that momentum is already building, she cited growing trials in Britain and Canada, the rapid sign-up of 12,000 cardholders for a test in Hong Kong, and commitments from technology vendors like Verifone Inc. to create the necessary infrastructure. Infrastructure-building and pilot testing are the Mondex USA priorities for 1997, the CEO said. Wells has 800 employees using the chip cards at 22 merchants; AT&T just launched a 200-employee test in Jacksonville, Fla., and is planning to handle "virtual" transactions via the Internet and intranets. The last will demonstrate Mondex's ability to operate in both the physical and virtual worlds, which Ms. Crane said gives Mondex a unique advantage. An eagerly awaited New York City trial -- the first attempt by MasterCard and Visa to prove their competing technologies can "interoperate" -- has been put off from the first to the fourth quarter next year, in part to let MasterCard implement the Mondex system. Each of the Mondex USA owners has a seat on the board of directors, with Mr. Nigg of Wells as chairman. Ms. Crane, who joined Wells a year ago from MasterCard, is also a director as well as Mondex International vice chairman. The others are Walter Korchin, senior vice president and general counsel of AT&T Universal Card Services; Ronald Braco, senior vice president at Chase; William Simmons, executive vice president of Novus, the Dean Witter merchant services unit; Bruce Nyberg, senior vice president, First Chicago NBD; Alan Heuer, MasterCard's U.S. region president; and Michael King, senior vice president of alternative delivery at Michigan National. Michigan National's parent, National Australia Bank, is a Mondex global founder. Mondex USA actually consists of two Delaware-incorporated entities: a services company headed by Ms. Hartung and a lower-profile originating company charged with monetary operations and risk management issues. Wells Fargo vice president Jim Rudd is president of the latter.