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Opinion: Commission investigation into Plus SMS will test credibility

By Simon Louisson of NZPA

Saturday 9th September 2006

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When Plus SMS announced a "strategic review and restructure" that sent its stock crashing, the troubled texting company declared it had made a number of "unrealistic statements".

SMS noted some of its earlier news releases were "incorrect".

Among these were claims of exclusive control of 1000 country texting codes and thousands of so-called vanity codes. Contracts claimed to be in place were not.

British cabinet secretary Sir Robert Armstrong during the 1986 Spycatcher trial was famously asked by a lawyer what was the difference between a misleading impression and lie.

Sir Roger explained a lie was a straight untruth whereas a misleading impression was "being economical with the truth".

Which category "unrealistic statements" is eventually found to be in when the Securities Commission completes its investigation will make interesting reading.

The stock exchange referred the company to the commission and whether SMS is found to have misled the stock exchange, the market and its own shareholders will be central to that investigation.

Analyst Bruce McKay said the tricky thing for the commission would be determining an intent to mislead by the board and executives.

"While it is easy to be conspiratorial about the management and directors, it is hard to prove," he said, adding that it was more likely the company had been caught up in its own hyperbole.

Given the commission's whitewash of the Feltex fiasco, investors will doubtless not be holding their breath for a telling judgment.

After a backdoor listing using the shell of RetailX (which itself was a sorry saga and was fined for failing to disclose), SMS had a meteoric rise.

While some made millions, for many it is a tale of caution.

Some 240 million shares were issued last year at 5c and the shares rocketed from the penny dreadful class to 82 cents in November - valuing it at $284m - a pretty astounding value given it had no revenue.

The excitement created by SMS was reminiscent of the hype around revenueless stocks in the boom. It is also an example of the dangers of investors listening to Internet chatrooms. Many postings were blatant attempts to ramp the share price.

What caught some eyes was SMS's technology that apparently allows global text message campaigns using single codes. SMS aimed to buy the rights of words such as "taxi" or "coke" and license users.

The company added to the hype by appointing to its advisory board a number of high-profile personalities, including a 72 year-old, colourful US-born earl and an MTV president, Bill Roedy.

Such appointments can sometimes be investor danger signals.

More tangible trouble signals came in January when Austin Bryan, the newly appointed British manager of the operating company, resigned.

SMS's shares took a more severe tumble in May and SMS was given a "please explain" from the stock exchange. Sean Joyce, a partner in consulting company Jones Young said SMS was in complete compliance with the exchange's continuous disclosure requirements.

How things can change quickly.

Some of those involved in SMS from the start have a record of buying shell companies and securing back-door listings. Sharebroker Brett Wilkinson, of Wilkinson & White, secured a 19%stake (pre expansion) of RetailX with just $30,000.

Jim Bracknell, SMS chairman until last week's tumultuous upheaval, had orchestrated a reverse takeover of New Zealand Salmon in 1999, which later became Blue Chip.

Financier and backroom dealer, John Sorenson, was involved in both SMS and Spectrum Resources' morph into juice company Charlies.

Although not in right at the beginning, entrepreneur Craig Heatley had a big stake and it was his decision to quit part of that early this year that set alarm bells ringing louder for some investors.

One broker reckons investors should be wary of any company listing via the backdoor.

"There's a way of coming through the front door with a proper prospectus and promoters versus the back door where it's all whisper whisper.

"I'd say there'd be an awful lot of people in latte land wondering what the hell their mate's got them in to."

Independent commentator Brian Gaynor of Milford Asset Management believes that as well as sorting out whether there was an intent to mislead, the commission will have to ascertain whether share price rigging was involved.

He said New Zealand has been too soft on making people accountable.

"This was probably one of the more obvious examples of share price ramping, I would call it, where the share price has been pushed up by a succession of releases by the company which the company now says were unrealistic," he said.

"Someone said to me it's another pump and dump. It's people buying shares in a company, giving glowing comments about their future prospects, getting the share price up, and selling a lot of the shares themselves."

While this happens around the world, said Gaynor, people in other countries risk getting caught and prosecuted.

"The difference between New Zealand and the rest of the world is the chances of that happening are extremely slim based on historical precedent in New Zealand and the lack of teeth that the regulator has."

SMS's trading company is incorporated in the Isle of Man, a UK tax haven. Its founder, Garry Donoghue, is an Queenslander who also owns New Zealand firms Prestige Boat Sales and Q-Tel.

Donoghue and significant shareholder Simon Spence were directors in a sport marketing scheme, Ultimate Rugby, that went bust owing more than $800,000. In February, the pair made millions selling SMS shares off-market.

Donoghue quit last week in the restructuring and said he would hand back his 85 million shares, then worth $30m, but today worth $13.6m. He told the NZ Herald he surrendered the shares to allow the company to go forward.

Bracknell also resigned "to pursue other interests".

Recently appointed chief executive Christopher Tiensche said Donoghue had left because he had failed to achieve the company's goals and objectives.

The 38-year-old American ceo, who only joined SMS in June, now has to try and put the company back on the rails.

He said there was no prospect of revenues this year.

So investors who want to stay, can look forward to more losses.

Tiensche said no one was to blame for the "incorrect statements". That has yet to be determined. But whatever the commission findings, damage has been done.

Macquarie Equities investment director Arthur Lim believes people who buy into such stocks know they are in the highly speculative category. Even so, such bad publicity did not help. "I think something like this impacts adversely on the credibility and therefore the ability to access ongoing funding."

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