Calgary firm linked to hedge fund investigation

Date: Tuesday, August 12, 2003

Financial Post: Sean Silcoff and Scott Adams: Zi Corp., a struggling Calgary-based software company and former stock market darling, is 49% owned by three hedge funds under investigation by the United States Securities Commission for fraud, documents filed in a Miami court show. One of the three funds, Lancer Offshore Inc., has consistently held well over 10% of the stock since at least January, 2000, according to monthly position summaries from its prime broker and custodian, Banc of America Securities LLC, filed with the court. That fact has never been disclosed publicly, a violation of Canadian insider trading rules. Similar rules in the U.S., where Zi trades on Nasdaq, apply to share positions of 5% or greater. Zi Corp. yesterday denied any knowledge of Lancer's huge position in the company, and said it had made repeated efforts to get his funds to disclose the true size of its holdings. "That wasn't information that was available to Zi," said Dale Kearns, the company's chief financial officer. "We've made several requests [to Lancer] to clarify and received no reply." The Zi shares owned by the three hedge funds -- Lancer Offshore, Lancer Partners LP and Omnifund Ltd., all controlled by disgraced former star analyst Michael Lauer -- are in the hands of a court-appointed receiver after the SEC froze their assets last month. Craig Rasile, lead lawyer for the receiver in Miami, said his mandate is "to marshall assets and protect the investors' interests. I don't think it's in anybody's best interests at this point to liquidate positions in the short run" -- an outcome that would flood the market with Zi stock. The Lancer funds were engulfed in scandal after a string of stories in the New York Post last fall linked Mr. Lauer to Bruce Cowen, who has been indicted on charges in the Operation Bermuda Shorts investigation. Mr. Cowen, who was banned in 1999 by the SEC from acting as a director or officer of an SEC issuer for five years, has been identified as a managing director of Lauer's funds. The stories, since backed up by SEC allegations, claimed much of the funds' value was tied up in paper gains in illiquid stocks. Lancer Partners, which attracted such high-profile U.S. investors as singer Britney Spears and former Sotheby's chairman Alfred Taubman, filed for bankruptcy protection after it was inundated with redemption requests. Meanwhile, the Financial Services Commission of the British Virgin Islands, where Lancer Offshore is incorporated, has applied to wind up the fund. The University of Montreal pension fund stands to lose most of its $100-million investment in the offshore fund. In its most recent annual report filed with regulators in the United States, Zi states two Lancer funds held a combined 3.7 million shares in the company, for a 9.6% stake. But that was based on information from Lancer as of Dec. 31, 2001. Zi said it had subsequently "been unable to obtain more current information regarding the Lancer Group's holdings, which may be greater or less than reported within." In fact, the two funds on that date held 12.9 million shares, or 35% of the outstanding shares, according to Banc of America documents in the court filing. "If they're going to give me outright wrong information I'm not sure what I'm supposed to do about that," said Zi's Mr. Kearns. "We're looking for more information, and when we get more information we'll share it with the public." But Zi observers wondered if there weren't other large, undeclared positions in the company, other than the 14% of the stock held by chief executive Michael Lobsinger. "With 13.2 million shares outstanding absent the Lauer/Lobsinger ownership and so few shares sold short, we wonder why it was so difficult to borrow" for short-selling purposes, said a report by investment newsletter The Eyeshade Report of Maryland yesterday. Also yesterday observers questioned two other possible connections between Zi and Lancer. Zi last year bought a company that had belonged to a company run by Cameron Chell, a known associate of Mark Valentine, the former chairman of Thomson Kernaghan & Co., who faces fraud charges from the Bermuda Shorts investigation. Zi then sold that company, called Magic Lantern Communications Inc., to a company controlled by Lauer called JKC Group Inc., for a shares and a promissory note. A review of Zi conference calls also reveals a comfortable relationship in the past between the company and Mr. Cowen. Introduced as a representative of Sterling Technology Partners (a company he chaired from 1997 to 2000), Mr. Cowen peppered management with questions and compliments in a series of conference calls. In a March 22, 2001, call, Zi CEO Michael Lobsinger thanked Mr. Cowen, saying, "I appreciate your ongoing support." On another call five months later, Mr. Cowen implored the company to share more of its apparent good news with investors in press releases, rather than as answers to his questions on the conference calls. "As you know, being a large shareholder, I'm on the conference calls, on every conference call but not every institution actually tracks the calls," Mr. Cowen said on the Aug. 15, 2001 call, according to a transcript on Zi's Web site. Zi sells software that predicts what letters users of cellphone text messaging programs will type next on their keypads. For years the company has been touting China as its big market and signed a series of deals, but they haven't materialized into substantial contributors to the top or bottom line. Zi lost US$1.7-million in the first quarter on revenue of US$3.8-million. The company had just US$4.5-million in cash on March 31 and was forced to issue one million shares for US$2 apiece to pay down a credit facility. The company has lost a cumulative $93-million, compared with $97-million in shareholder equity. Stock in Zi -- which carried a value of more than $2-billion in the last days of the Internet bubble -- has remained surprisingly buoyant, particularly after it was ordered to pay US$9-million in damages to an AOL Time Warner Inc. unit last fall in a patent-infringement case involving one of its main products, its eZiText software. The company had a market capitalization of approximately $138-million, even after the stock fell by 14% yesterday. The company, under its former name Multi-Corp Inc., made headlines in the mid-1990s when it was revealed the company sold stock to the wives of Alberta Premier Ralph Klein and his chief of staff Rod Love, with no payment required until they sold them. Weeks earlier, Mr. Klein had cut the ribbon on the company's Hong Kong office. He was later cleared of wrongdoing by Alberta's ethics watchdog. Mr. Love is now a Zi Corp. director, along with Howard Balloch, a former Canadian ambassador to China. © Copyright 2003 National Post