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Suit claims GenesisIntermedia involved in stock scheme

February 27, 2002

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NEW YORK - GenesisIntermedia Inc. (NASDAQ:GENI), the company's founder, one of its officers, and a financial commentator, are the subject of a class-action lawsuit filed against the company on behalf of shareholders alleging securities fraud.

Rosen Law Firm announced on Oct. 19 that it filed the suit in United States District Court for the Central District of California on Oct. 18, alleging that starting in December of 1999, the company began a scheme to artificially raise the price of the company's stock. GenesisIntermedia's Centerlinq line develops and maintains a line of video and interactive advertising kiosks in shopping malls.

Defendants in the suit are Ramy El-Batrawi, the company's founder and former chief executive officer, chief financial officer Douglas Jacobson, and hedge fund manager and financial commentator Courtney Smith. The suit seeks unspecified damages, interest, and costs on behalf of shareholders who invested in the company between Dec. 21, 1999, and Sept. 25, 2001.

The stock, which traded as high as $25 in late June, began a precipitous drop in early September from the high teens. The stock was valued at $5.90 when trading was halted by NASDAQ on Sept. 25. The exchange is investigating El-Batrawi's dealings with Ultimate Holdings Ltd., a Bermuda-based outfit controlled by Adnan Khashoggi, a Saudi businessman and financial middleman in the Iran-Contra scandal of the 1980s.

El-Batrawi, the company's founder, resigned as chief executive officer and was replaced on an interim basis by GenesisIntermedia director Stephen Weber on Oct. 8.

The suit alleges that Courtney Smith was given more than $3 million worth of GenesisIntermedia shares starting in December 1999. Smith, president and chief executive officer of Pinnacle Capital Strategies and editor of the newsletter Courtney Smith's Wall Street Winners, allegedly helped drive the share price to artificial levels by promoting the company during appearances on CNN, CNBC, and Bloomberg Television.

Allegedly, the payment of 216,000 shares of company stock to Smith was not disclosed to Securities & Exchange Commission (SEC) officials until April of 2001, and Smith was not mentioned when the payment was disclosed.

"Instead, GenesisIntermedia routed the shares to Smith through a tiny New York-based vitamin exporting company (United Pacific Alliance) owned by Angela Chen, a friend of Smith's," the suit states.

"Through these illegal bribes, defendants caused GenesisIntermedia shares to be recommended at least 18 times on financial TV networks beginning in December 1999 and continuing until as recently as March of 2001," the suit continues.

The suit also alleges that El-Batrawi sold more than $1.7 million worth of company stock on Sept. 25, hours before trading was halted. A filing with the Securities and Exchange Commission (SEC) showed that El-Batrawi sold 327,254 shares at $5.47 per share on Sept. 25, taking in proceeds of $1,790,079.

A GenesisIntermedia report filed with the SEC on May 24 listed El-Batrawi as owning more than nine million shares of common stock in the company, a 42.6 percent stake in the company. Ultimate Holdings was listed as owning nearly 9.6 million shares, a 43.8 percent stake.

Bloomberg News reported in early September that securities investigators were looking into Khashoggi's role with the company. Khashoggi sold and bought company shares in quick fashion, triggering securities rules that required him to forfeit stock profits of nearly $7 million back to the company. Allegedly, GenesisIntermedia than used $5 million of that to refund loans it had taken out with Ultimate.

"From November 1999 to June 2001, we borrowed from Ultimate $49,040,683 through the issuance of debentures," the company stated in its second-quarter report on Aug. 14. "Ultimate is a significant stockholder. We repaid $14,379,238 during the same period. In connection with the debenture issues in November 1999, we issued warrants to purchase 2,100,000 shares of common stock with an exercise price of $2.33. The warrant for 2,100,000 shares was exercised in August 2000. The exercise price for these warrants of $4.9 million was paid via a reduction of the debenture."

Securities experts told Bloomberg Newsthat the transactions could amount to illegal insider trading.

"Is (Khashoggi) using inside information - that is really the question," former SEC commissioner Edward Fleischman told Bloomberg News.

El-Batrawi borrowed nearly $23 million from Ultimate Holdings in August according to an SEC filing to obtain 1,329,500 shares of GenesisIntermedia stock. El-Batrawi informed shareholders in a Sept. 4 letter that he purchased the stock as a show of belief in the company.

For the second quarter of 2001, ending June 30, GenesisIntermedia reported a net loss of $7.7 million on revenue of nearly $12.4 million. Intermedia, the business unit that operates the Centerlinq kiosk division, reported a six-month loss of $4.8 million on revenue of $350,154.

All statements in a lawsuit present just one side of the case. GenesisIntermedia officials were unavailable for comment.