Penny Stock Spies

By Christopher Byron
New York Post
April 25, 2005

Shares in a high-flying penny stock called Ionatron Inc. had been climbing for months on a steady flow of press releases about the company's opportunities at the sword's point of high technology in the post-9/11 world of homeland defense.

Then suddenly, on March 18, with Ionatron's shares having climbed to a high of $10.41, the company's stock was hit with an avalanche of insider selling, as more than 50 Wall Streeters privy to Ionatron's innermost secrets bailed out of nearly every share of stock they held, knocking more than 30 percent off the price in the days that followed.

Another cautionary tale from the pump-and-dump annals of the penny stock market? In fact, it's a lot more than that, for behind last month's bailout at Arizona-based Ionatron Inc. lies an astonishing tale of taxpayer-financed intrigue on capitalism's street of dreams.

In reality, nearly every one of the more than four dozen insiders who dumped their Ionatron shares on March 18 have now been identified by The Post as employees of a secretive, Arlington, Va., investment group that is owned, operated and financed out of the black box budget of the U.S. Central Intelligence Agency.

The group, which calls itself a "venture capital fund," and goes by the name of In-Q-Tel Inc., was set up in 1999 by the C.I.A's then-director, George Tenet. His idea: that by investing in promising young companies in digital technology, the fund would be able to keep the agency abreast of developments in this fast-changing world while they were still on the drawing boards.

Whether Tenet was troubled by the many worrisome consequences of allowing the CIA to become a force on Wall Street, he clearly saw at least one problem with the approach, and sought to address it by setting up the fund as a not-for-profit corporation -- in this way presumably sanitizing it from any suspicion that employees of the spy agency might be using it to speculate with taxpayer money for their own personal benefit.

Nonetheless, a review of various financial documents filed at the Securities and Exchange Commission reveals at least three public companies in which the CIA-backed fund has taken major equity positions. And in each of the three cases, the fund's employees were able to stage an end-run around In-Q-Tel's not-for-profit legal status and benefit personally from the fund's investments.

They accomplished this by buying shares for themselves in a separate and parallel "for profit" entity called the "In-Q-Tel Employees Fund LLC."

Using the cash contributions from the employees, the LLC there upon took equity stakes on their behalf simultaneously in each of the three companies in which the not-for-profit fund was itself buying shares -- an arrangement almost identical to the so-called "Raptor" partnerships through which top officials at Enron Corp were able to cash in personally on investment activities of the very company that employed them.

In a public-relations strategy that amounts to hiding in plain sight, In-Q-Tel Inc. issues a steady flow of press releases describing various of its activities, while maintaining a Web site at where yet more information is available.

The information raises many more questions. The Web site says In-Q-Tel has a total of 50 employees and a board of trustees, but names only two fund officials -- a former executive of the Hasbro toy company, Gilman Louie, who now serves as In-Q-Tel's "CEO"; and a lawyer from Long Island named Stephen Mendell, who serves as the fund's "executive vice president." No members of the board of trustees are listed.

The Web site lists some 67 different companies, both public and private, in which the fund claims to hold investments. But nothing from the fund specifies which companies are public, which are private, or the size of the stakes the fund holds in any of them.

Two of the companies listed on the Web site -- Convera Corp of Vienna, Va., and Electro-Energy Inc. of Danbury, Conn., -- are currently traded on the Nasdaq Stock Market, and SEC filings show that in both cases blocks of stock wound up with In-Q-Tel's employee fund as well as with In-Q-Tel Inc. itself.

In the case of Electro-Energy, which had been struggling for more than a decade as a private company to develop and market a new kind of "bi-polar" battery, the In-Q-Tel investment was hardly treated as a long-term stake in a promising technology either.

Filings show March of 2004, In-Q-Tel Inc. paid $500,000 to acquire 268,594 shares of private Electro-Energy at an imputed price of roughly $1.86 per share. The fund transferred 67,148 of those shares to the employee fund.

Three months later, Electro-Energy merged with a Florida penny stock in the employee leasing business, and began trading on the Over The Counter bulletin board at more than $3 per share -- creating a public market (and an instant profit of nearly 100 percent) for the In-Q-Tel gang.

Two weeks ago, Electro-Energy filed papers with the SEC to register the shares of In-Q-Tel and other early investors, enabling them to be sold on the open market.

With the shares selling last week for more than $6.50 each, the In-Q-Tel employees have thus snagged a profit of more than 250 percent in barely a year.

But that's nothing compared with the profit of more than 1,000 percent they've reaped on In-Q-Tel's investment in Ionatron Inc. -- another quick killing in a deal set up by the employees for the ostensible purpose of helping the CIA stay up-to-speed on developments in high technology.

In the same way that In-Q-Tel invested in Electro-Energy when it was still privately held and preparing to go public through a "reverse merger" with a defunct penny stock shell company, the fund invested in Ionatron in October of 2003 when it was still privately owned and controlled by a businessman named Robert Howard.

The filings show that initially In-Q-Tel agreed to pay $500,000 for 1,028,076 shares, representing an oddly precise imputed price of 48.6 cents per share. Thereafter it merged with a failed penny stock in the weed killer and grass seed business and began trading in April of last year on the Over The Counter bulletin board at roughly $3 per share.

Whether the fund began to develop doubts about the viability of Ionatron's claims for its product -- a kind of Buck Rogers ray gun for battling terrorists -- SEC filings show that In-Q-Tel began to back away from Howard's company, and by last November had negotiated its exit, agreeing to settle for 725,000 shares of Ionatron instead of the nearly 1.03 million.

It was those 725,000 shares -- 75 percent of them held by the not-for-profit fund and the rest owned by the employee fund -- that were sold on March 18. At the adjusted purchase price of 69 cents per share, and a March 18 high of $10.41, the result has been a staggering 1,400 percent profit for the fund's employees, 17 of whom netted more than $50,000 each -- all for their investment in a stock that started to keel over the instant In-Q-Tel and its employees began to bail out.

Phone calls to Ionatron regarding its relationship with the CIA were not returned. And requests for comment from In-Q-Tel itself on its activities were also turned down. Explained the fund's press spokesman, who uses the name Gayle V Von Eckartsberg on In-Q-Tel press releases but goes by the name of "Katherine" Von Eckartsberg when filing SEC documents as a member of the In-Q-Tel Employee Fund, "We don't comment on the reasons for our investments."

So tell me, people, are we OK with this? Are we OK with letting the CIA use taxpayer money to gamble on Wall Street for the personal profit of their own employees . . . and then not explain why?

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