Claims Made by Interlink of Costa Mesa Cause Static : Probe: Questions on business methods of video phone firm and its hold on crucial patents produce fuzzy picture.
Here, the commercial signaled, was a taste of the future. There was a clip from a science fiction film, mention of “Star Trek,” and, most important, Michael Gartner using a video phone that delivered his image to distant colleagues with the clarity of a motion picture.
The 15-minute infomercial, a mock news interview, was reportedly designed to promote advance sales of $3,995 video phones marketed by Interlink Data Network of Los Angeles Inc., of which Gartner is president. But during a break in the interview came the Costa Mesa-based company’s other important message: “Interlink Data Network has great investment potential. Exercise your investment foresight. Call now.”
With that pitch and others, Interlink Data is seeking to raise $10 million in a second limited partnership. That’s on top of the $7.5 million it raised through brokers in the past 10 months for its first limited partnership and $2.4 million it says it raised from equity investors. The money, the company says, would go toward building a 21-mile fiber-optic network to connect up to 140 buildings in downtown Los Angeles and along Wilshire Boulevard.
Interlink’s methods of raising investor money, particularly the infomercials, have prompted a formal investigation by the California Department of Corporations, said William McDonald, chief of enforcement with the agency.
“I think it is a very serious matter,” said McDonald. The agency “is concerned about it and is looking into it.”
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For all its success at fund raising, however, the picture at Interlink Data Network is notably fuzzy, and a check into its claims produces plenty of static:
* The company’s chief engineer says that the broadcast-quality video phone demonstrated in the company’s corporate videotape is only a simulation. The engineer says working phones have been built in the laboratory, but none have been installed yet.
* Interlink and affiliated companies do not own the patented technology critical to building the proposed network. Gartner said he has the technology under exclusive license. ITT Corp., which holds the patent, says that’s not so.
* The inventor of the technology is identified in investment materials as Interlink’s director of scientific research and technology. The inventor said he has never been an employee of the company, only a consultant, and he still works for ITT.
* In one infomercial, an Interlink representative said the fiber-optic cable was being laid “as we speak,” and Gartner said in a February interview that the installation was “more than halfway there.” To date, in fact, no cable has been installed.
Even though Interlink has not yet generated any revenue from operations, it is making promises to investors of high returns--18% per year over two years. Brokers selling investments in the firm have been trained to deal with any skeptics.
While a book offering guidance to brokers advises them to be “totally honest at all times,” it also recommends that brokers urge potential investors to ignore the advice of their attorneys, financial advisers and accountants. The book says, “I’ve never met an attorney who took a course in how to make money in law school!”
The book suggests that brokers steer clear of prospects who ask for general information about the video telephone industry and concentrate on those who show a willingness to invest. “If the prospect says ‘the information package,’ tell them you’ll have your personal secretary get something right out to you today and hang up. Obviously this individual is not the type of person you want to waste a lot of your very valuable time with. (Needless to say you don’t send this person anything!)”
The guide book says that Interlink will within the next year definitely offer shares of stock to the public that will be listed on a major exchange. Nothing in the book raises the possibility that such a sale of shares may not occur.
Although the guide book for brokers states that it was issued by company management, Gartner said he has not authorized any solicitation guide for brokers.
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Interlink has had problems with securities regulators before. Iowa regulators have ordered the company, the brokerage that sells its securities and two individual brokers to cease efforts to sell unregistered securities in the state. The brokers had promised large investment returns to a prospective investor with no mention of potential risks.
Robert Rosen, an attorney for Interlink, said that the process of issuing such cease-and-desist orders does not necessarily give a company sufficient opportunity to respond. He said Interlink officials were never notified that the order had been issued. Gartner describes himself as a high-tech entrepreneur whose team of engineering experts can bring to 1990s corporate America the kind of visual communications so celebrated in science fiction.
A boyish 31, Gartner grew up in a poor family in Canada. He won’t say exactly where. Gartner, who moved to Southern California as a teen-ager, said he has been running various companies since he was 12, when he operated an office-cleaning business.
Although he has no college degree, Gartner said he managed to make a fortune in real estate, phone directory publishing and video games. Gartner’s name is listed in state records of fictitious businesses as the owner of 10 Orange County companies that operated between 1983 and 1992.
On his resume, Gartner said he ran a real estate firm, a color phone book publisher called National Yellow Page Publishers, and a video game company called Golden State Games Co., which Gartner said folded in 1986.
“He was a self-made person,” said a friend of Gartner, who spoke on the condition of anonymity. “He was a bright young guy who admired (Microsoft Corp. Chairman) Bill Gates, another self-taught person.”
Today, Gartner lives in splendor, driving a Mercedes-Benz and BMW (after giving away a new Corvette to a top salesman). He leases a 16,000-square-foot mansion in the hills of San Juan Capistrano. The lavishly decorated estate, with an eight-car garage, was last appraised at $2.4 million, but Gartner said he leased it at a bargain rate.
Gartner said he got the idea for a video-phone network after meeting Delbert A. Wolverton, an ex-Navy officer who ran a Northern California engineering consulting company, Photonic Industries Inc. In 1988, the two men and five other partners founded Interlink Data Network Inc. in Sonoma County’s Rohnert Park, north of San Francisco.
The company broke up after considerable infighting, in the midst of what Gartner characterized as a “hostile takeover” in which directors voted to expel Gartner. He said he secured restraining orders against his opponents, prohibiting them from interfering in the company’s activities.
After the rift, Gartner moved to Orange County in 1990 and started a similar company. Eventually, he and Wolverton, who abstained in the power struggle, reunited as partners and officers of Interlink Data Network of Los Angeles Inc. The company began seeking outside investors last June.
To find investors, Interlink contracts with a licensed broker-dealer, Portfolio Asset Management/USA Financial Group in El Paso. In August, 1992, Interlink received an exemption from having to file a formal registration with the Securities and Exchange Commission--the federal agency that regulates stock and bond trading. This exemption indicated that Interlink planned to solicit investors for a limited partnership to build the fiber-optic network.
The exemption allows Portfolio’s brokers to solicit up to 35 general investors and an unlimited number of so-called accredited investors--those whose annual income is at least $200,000, whose net worth is $1 million or greater or who have more than $150,000 to invest in limited partnership interests.
The exemption also allows a company to solicit investors in a private manner without fully disclosing its financial data to the SEC. Seeking investors this way, Gartner and Ronald S. Combs, chairman of Portfolio Asset Management, said the first limited partnership raised $7.5 million through February for Interlink.
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Under SEC regulations designed to protect investors from fraud, only licensed broker-dealers--and not employees of a company attempting to raise money--can solicit funds for such private limited partnerships. Combs and Gartner say they have followed this rule.
But three former brokers, who requested anonymity, said in interviews with The Times that they worked directly for Interlink. Internal company memos indicate that Interlink hired brokers and that on Jan. 13 it had employed 48.
“As you are all aware, IDN has recently hired on several new brokers. . . . If you want your job to get done, do not disturb Patty (a secretary), there are 48 of you and only one of her,” the memo said.
Gartner said that all brokers, who work next to Interlink employees in an 11th-floor suite of the South Coast Performing Arts Tower, are employed by Portfolio.
John Kealy, Interlink’s national sales manager and public relations officer, said last week in a phone interview that he managed brokers who worked for both Interlink and Portfolio Asset Management in Costa Mesa.
Kealy and broker William Moore--along with Portfolio and Interlink--were cited in the Iowa cease-and-desist order last November for selling unregistered securities. Neither the brokers nor Portfolio are licensed to sell in that state, said Gary Marquett, the state attorney who handled the case.
Kealy said the order was issued because of a minor mistake in which a broker sent Kealy’s business card to a potential investor in Iowa. Rather than send money, that prospective investor reported the incident to the Iowa state Securities Bureau, Marquett said.
Interlink had included a toll-free number in a radio commercial and the company subsequently sent the Iowan investment solicitations that were signed by Moore and Kealy. The person did not qualify as a wealthy, accredited investor.
Gartner said he only recently learned of the Iowa incident and that the company did not have an opportunity to respond to the order but that its lawyers were investigating the matter. He also said that Kealy worked for both companies at first, but that he now works only for Interlink and not as an investment broker.
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The use of infomercials raises questions about whether Interlink and Portfolio were soliciting only accredited, wealthy investors. The infomercial, entitled “Fiber Optic Technology Report,” encouraged viewers to “find out about the investment opportunities today” by calling a toll-free number. It ran in Southern California for 10 weeks on KWHY-TV, the Business Channel.
SEC regulations prohibit mass solicitations for private placements. But there is disagreement about what constitutes a mass solicitation.
Combs of Portfolio, who said he had not seen the infomercials, said that the ads would not be classified as the sale of unregistered securities as long as they do not disclose the financial information of the offerings, such as the anticipated rate of return.
Using commercials to generate investor lists for a private offering violates securities law, said Manning Warren, a professor of corporate law at the University of Louisville in Kentucky.
Joseph Long, a law professor at the University of Oklahoma and an expert on securities law, said federal law does not specify what can be legally said on infomercials. Long, who also serves as special counsel to the North American Securities Administrators Assn., an umbrella organization of state securities regulators, said it is clear that companies cannot go fishing for accredited investors on a private placement by asking people to call an 800 number.
Along with the infomercial, Interlink used glossy brochures to generate investor funds for its first limited partnership. One brochure said investors in Interlink’s fiber-optic limited partnership would receive interest of 18% a year over two years as well as a share of royalties. Minimum investment: $20,000, or four units at $5,000 each.
The brochure included the standard small-print disclaimer that “this is not an offer to sell nor a solicitation to purchase any securities”; the actual offer is contained in an accompanying offering memorandum.
Although the return is higher than that for most fixed-rate investments, Gartner said Interlink could afford to pay an 18% return to investors in its first limited partnership and that brokers representing the company take care to inform anyone of potential risks. By comparison, the rate of return for the overall stock market--as measured by the Standard & Poor’s 500 index for the 12 months ended March 31--was 15.2%
In the second partnership, for which units are now being sold by Portfolio and Maxxell Securities Inc. of Dallas, the return has been lowered to 12%. Gartner said the company makes its interest payments by drawing upon money raised by the private-placement sale of $2.4 million in stock as well as $400,000 he and company engineers invested.
“Prior to taking any dollars from the public, the company and myself have invested our own money in developing our infrastructure and engineering in this enterprise,” Gartner said. “That took some of the risk out.”
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Last month, the company began raising an additional $10 million to manufacture video phones that Gartner said are based on an optical switching technology. He boasted that AT&T;’s Bell Laboratories has been unable to match the feat. Harry Hall, a researcher at Bell Labs, estimates such optical switching technology is still several years away.
Video phones have been around for decades, but they have been impractical to date because visual images cannot squeeze through electric phone lines fast enough to prevent time delays that produce jerky pictures.
But Gartner said Interlink had outdone industry giant AT&T; by inventing a breakthrough technology--photonic, or optical switching--that would use light signals rather than electric ones, allowing large volumes of data to flow through fiber-optic phone lines like a river.
Optical switches can theoretically manipulate light signals directly, without the need to convert them to the far slower electric signals that create a bottleneck in a system. Fiber-optic lines, which carry laser light signals, transport much more data than either phone lines or cable television’s coaxial cables. A strand of fiber, for example, could deliver up to 500 television channels and numerous amounts of additional electronic information.
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Wolverton, Interlink’s chief engineer, said that the broadcast-quality video phone demonstrated in a corporate promotional videotape and the infomercials are only simulations. The company in February demonstrated a prototype that was bulkier and which had slower motion than a television image. When someone on the video phone moved, the image blurred. Gartner and Wolverton, however, say that the quality of the company’s video phones in the laboratory has since improved dramatically.
Gartner said in that February interview that Interlink had 16 patents on the optical switch technology, which allows the large volume of data generated by video signals to be transmitted quickly over fiber-optic phone lines.
Wolverton and Gartner later acknowledged that the technology was actually developed by an ITT Corp. scientist named Anthony P. Baker. Interlink documents identify Baker as its director of scientific research and technology and as the inventor of the optical switch. However, patent rights on the device are assigned to ITT Corp., according to the U.S. Patent and Trademark Office. Interlink itself does not own any patents.
Baker, who works as a scientist for ITT’s Aerospace Communications Division in Nutley, N.J., said that he has consulted for Interlink but has never been an Interlink employee. He has “been in talks” with Interlink about assigning his patent rights and about becoming an employee, but only a letter of intent--not a legal license agreement or employment contract--has been signed, Baker said.
Wolverton, who is in charge of building the network of video phones, said that Baker’s optical switch elements are “pretty important” to Interlink. He insists that Baker has signed agreements with Interlink on the matter of licensing.
William Elkington, manager of technology investments at the ITT division where Baker works, said that ITT owns sole rights to the patents and has been negotiating with any company that wants to license them on a non-exclusive basis.
He said ITT was considering licensing the patents to a private company Baker owns, Molecular Control, but that no final agreement had been reached. He said neither Interlink nor Photonic Technologies--an affiliated manufacturing company run by Gartner--are currently negotiating with ITT to receive a license.
The information about the status of the patents should be a material fact included in its offering memorandum, which is considered a material fact because it indicates possible license payments and higher risk to investors, said Warren, the University of Louisville professor.
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Gartner said in February interviews that the 21-mile fiber-optic network is more than half complete. In the infomercial, Ken Larsen, identified as Interlink’s principal in charge of financial affairs but who is a broker with Portfolio, said, “The fiber-optic transmission lines in Los Angeles are currently being laid now as we speak.”
But Allied Data Communications, a company based in Norcross, Ga., that Interlink said it had hired to build the network, has not begun scheduled work and no longer works for Interlink.
Ron Bird, chief operating officer of Allied Data, said the company delivered an $80,000 consulting report on the feasibility of installing fiber in Los Angeles to Interlink in December but hadn’t received full payment for it.
Even after the relationship cooled in January and Bird could not get Interlink officials to return his calls, potential investors continued to contact Allied Data asking whether it was a partner with Interlink, Bird said.
Gartner now says the company has changed its plans; it may lease existing fiber lines and delay installation of its own fiber-optic network.
California Public Utilities Commission regulators said Interlink would have to either work under subcontract with Pacific Bell or register with the agency if it plans to install any fiber-optic cable.
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Pacific Bell said it has no agreement in place giving Interlink permission to build a network in Los Angeles. And Joe McIlvain, a PUC regulatory analyst, says that Interlink has not registered to build a public network.
McIlvain said Interlink’s description of its operation suggests that it would probably be considered a public network, but he added that there was a “gray zone” and that the PUC would likely need a hearing to decide the issue.
Gartner said Interlink’s lawyers maintain that its network is private and does not require public registration.
“This is not a company that is here today and gone tomorrow,” Gartner said.
Securities law expert Joseph Long had this suggestion: “I would urge investors here to take a good look at the technology, and the backgrounds of everyone.”
Hold the Phone Interlink Data Network of Los Angeles Inc. is raising more than $17.5 million to build a 21-mile fiber-optic network through downtown Los Angeles. The Costa Mesa-based company says its $3,995 video phones will provide motion picture-quality images, but regulators and securities law experts are concerned with how the company is soliciting limited partners. PATENT PROBLEM The Pitch Interlink’s business plan states it is licensing fiber-optic switching technology from Photonic Technologies Inc., a company owned by its chief scientist, Delbert A. Wolverton. *In Fact ITT Aerospace Communications in Nutley, N.J., has rights to the patent and is granting licenses on a non-exclusive basis. It has not negotiated with Interlink or Photonic Technologies. PERSONNEL QUESTIONS The Pitch In documents to investors last month, Interlink lists Anthony P. Baker as its director of scientific research and technology and Phillip V. Lee as senior engineer, electronic imaging. In Fact Baker is an ITT scientist and has only been a consultant to Interlink, never an employee. Lee left the company last year. SERVICE DELAY The Pitch Interlink told investors it would hire “a third party to lay the fiber-optic cable” and would offer service at the end of 1992. It raised $7.5 million from an earlier limited partnership. On 15-minute commercials airing as recently as February, company representatives said fiber-optic cable was being laid. In Fact The company has no installation contract and now plans to lease existing fiber lines to cut costs, President Michael Gartner said. The company now plans to begin offering video phone service by Dec. 31. UNCOMMON RETURN The Pitch Interlink said limited partners would receive interest of 18% a year over two years on a minimum investment of $20,000. The company projects sales of 20,000 video phones within 12 months and subscription usage fees of $70.2 million. In Fact The National Assn. of Securities Dealers said investors should be wary of promises of higher-than-average returns. “There is no investment that is guaranteeing an 18% rate of return, and you can rest assured there is a significant amount of risk involved,” said an NASD official. Source: Interlink Data Network of Los Angeles, Times interviews; Researched by DEAN TAKAHASHI / Los Angeles Times
