The Tech Company That Couldn’t Invest Straight
Source: Barrons.com
One of the stocks boosted in the recent blockchain mania is Net Element, a small firm that offers a big lesson in the unlikely personal connections and influences that modern global markets facilitate.
Behind this microcap stock at various times were a Kazakh oligarch, tax-shelter touts, Wall Street crooks, a porno financier, CNBC pundit Jon Najarian, and Godfather star James Caan. Oh, and the Miami-based company’s chief is also Grenada’s ambassador to Russia. There’s even a brief appearance by the hedge fund Platinum Partners, which later collapsed as its bosses Murray Huberfeld and Mark Nordlicht were arrested. Huberfeld was charged with bribing a union official to invest in Platinum, while a separate case alleges that Nordlicht helped run Platinum as a billion dollar Ponzi fraud. They’re fighting the charges.
Despite these collective efforts, the stock’s been a stinker, dropping to 10 bucks from its debut five years ago at the equivalent of $1,075, adjusting for 1-for-10 reverse splits, as the business accumulated $165 million in losses. Net Element (ticker: NETE), which processes charge card transactions for websites, has also bounced from business fad to business fad—evolving from a Russian music service like Spotify Technology (SPOT) to a Russian payment processor like Square (SQ) and most recently raising money to become a cryptocurrency play—in the five years since board member Caan rang the Nasdaq opening bell alongside Kenges Rakishev, the 38-year-old chairman of Net Element.
Rakishev, the son-in-law of a top Kazakh government official who has styled himself as his region’s high-tech venture capitalist, has brought the wealth of his resource-rich nation to bourses from Wall Street to Hong Kong. Net Element, however, hasn’t helped the oligarch’s investment record.
“I was an investor from the beginning, from the first day of Nasdaq trading,” Rakishev lamented to Barron’s. “The market capitalization for the first day was almost $300 million. Today, we have under $40 million. My feeling is that this is not a fair valuation.”
After this article was published online, Rakishev wrote Barron’s to highlight some venture investing successes, which included two exits worth about $220 million—in a ride-hailing service and a cancer diagnostic.
Our attempts to interview Net Element directors Najarian and Caan were unsuccessful, but a glimpse of the company’s history is available from examining hundreds of emails between board chairman Rakishev and business associates at the company and elsewhere that were anonymously posted on the internet in 2015. Rakishev’s emails were among thousands belonging to Kazakhstan’s elite that the country’s government said had been hacked. It asked a U.S. district court to bar them from use by a group of Kazak journalists, but was turned down. Barron’s reviewed the allegedly hacked emails in a database maintained by the Organized Crime and Corruption Reporting Project, a nonprofit journalism group based in Eastern Europe.
The stock that is Net Element started as a “blank check” offering in 2010, underwritten by now-shuttered investment bank Rodman & Renshaw. Blank-check deals raise money for a group that promises they’ll use it to acquire and build good businesses. This particular blank-check outfit, Cazador Acquisition, raised $46 million for its chief executive, Jay Johnston, based on his emerging markets experience at Deutsche Bank and at the sovereign debt activist fund Gramercy Advisors.
Omitted from the prospectus were Johnston’s activities as a leading salesman of “DADs,” the distressed asset/debt tax-shelter investments that the Internal Revenue Service widely disallowed thereafter. The schemes sent accountants and lawyers to prison, but no charges were brought against Johnston or his employers. Former colleagues say that the tax-shelter debacle sent Johnston and his longtime lieutenant Francesco Piovanetti to the world of blank-check companies.
Cazador itself was created out of a shell of an emerging markets fund called Arco Capital that Johnston ran with Piovanetti. Arco’s portfolio of real estate investments lost more than 75% in value within Arco’s first two years, according to Arco documents seen by Barron’s.
In 2012, Cazador found a business to buy: a Miami-based internet company called Net Element, owned by someone Piovanetti met in amateur Ferrari races, according to financial filings. By then, Johnston had retired from the day-to-day operations of Cazador to start an assault-rifle maker, where a spokesperson told us, “Mr. Johnston exited Cazador long before the Net Element acquisition and has no knowledge nor involvement in it.”
Piovanetti’s racing chum Mike Zoi had assembled Net Element from a variety of internet properties, including a filmmakers’ website overseen by actor Caan and an online music service with content from Igor Krutoy, the impresario who ran Russia’s counterpart to American Idol. In a major coup, Zoi got Kenges Rakishev to take a 28% stake in Net Element and sign on as the merged company’s chairman.
Rakishev was a rising star in the post-Soviet business world, with an industrial conglomerate SAT & Co. (SATC.Kazakhstan) and a father-in-law who was Kazakhstan’s powerful defense minister. When Net Element debuted on Nasdaq in October 2012, papers in Rakishev’s home region celebrated him as “the first Kazakh on Wall Street.”
But Net Element’s internet businesses were proving to be duds. Traffic and advertising didn’t grow. So in March 2013, Net Element said it would buy a charge-card processor called Unified Payments, which Inc. magazine had just crowned America’s “fastest growing company,” with revenue growing at a 23,646% rate. Its chief executive, Oleg Firer, told Inc. that he’d been a poor immigrant kid from Odessa, who now drove to his Miami office in a Bentley. “It is very rare to see a young company with such an impressive growth record,” Rakishev said in the announcement. Firer became Net Element’s new CEO.
But securities filings show that Firer’s payment-processing business was burdened with tax liens and in need of cash at the time of the acquisition. Although the tax liens had been removed from the acquired business just prior to purchase, cash was still tight at Net Element. “We are now out of cash,” the company’s financial chief told Rakishev in an April 2013 email, one of those published anonymously online. Four days later, Firer wrote Rakishev that Net Element would be unable to make its next week’s payroll unless the chairman could find them additional capital.
“When I became the CEO of Net Element, I inherited its great financial troubles,” Firer told Barron’s. Those troubles persisted. For the 2013 year, Net Element reported revenues of just $19 million and a loss of $49 million.
In conference calls with investors, Firer talked up the company’s exciting prospects as a mobile-payments processor in Russia and the former Soviet states. But the losses continued into 2014. In February 2014, a Net Element director wrote Rakishev that unless the company got an emergency financial infusion “the business will not survive another 10 days.”
Net Element brought in $37 million in 2014 with $27 million of that from new investors in Kyrgyzstan and Azerbaijan, according to the company. (Chairman Rakishev exchanged emails with Firer about the need for funding, but Rakishev was not involved in this financing, says the company.)
Even so, the shares sank under sales by early shareholders like Cazador’s Piovanetti and Net Element founder Zoi, who told the company that he was no longer a “restricted” insider. Firer regretted in an email to Rakishev that he’d given most of his company stock to associates like Leon Goldstein, his partner and financial backer in the payments business and other ventures. State and federal court records in Florida show that while Firer has been running Net Element, he has suffered through years of legal battles involving his partnerships with Goldstein. Those cases involve high-interest loans and investments in an adult-bookstore chain.
“He is a standup guy,” Firer said of Goldstein. “But I had a very limited partnership with Goldstein.” Goldstein couldn’t be reached for comment.
Rakishev wasn’t having much better luck with other tech ventures he’d funded in a partnership that included former Israeli Prime Minister Ehud Olmert. Sirin Labs, one of them, struggled to produce a $14,000 smartphone intended to be secure against government eavesdropping. Another investment, Mobli Media, disappointed hopes of becoming the next Instagram, despite a shareholder list filled with boldface names: Platinum Partners’ founder Murray Huberfeld, Leonardo DiCaprio, Serena Williams, and a dozen other entertainers and professional athletes, according to a spreadsheet Huberfeld emailed Rakishev (for more on the Platinum connection, see “Platinum Partners’ Kazakhstan Connection,” below).
These sour tech bets aside, Rakishev remained a powerhouse at home. He took charge of some of Kazakhstan’s largest banks. As 2017 ended, he bought a controlling stake in a London-listed Russian goldmine from Viktor Vekselberg, the billionaire investor sanctioned this month by the U.S. Treasury Department along with 37 other people the U.S. government says are cronies of the Kremlin.
Net Element’s CEO Firer has a Moscow connection of his own. A year ago, the Caribbean island of Grenada named him its ambassador extraordinary and plenipotentiary to Russia. Despite all of Net Element’s powerful friends and high growth expectations, its ventures in Russia and Kazakhstan failed to bear fruit. Its revenue from international transactions fell 27% last year, to just 15% of Net Element’s total revenue of $60 million.
With a 2017 loss of $10 million, or $5 a share, the company again sought out new funding. In December 2017, Net Element shot to $33, when it reported that it was getting into the blockchain business with $7.5 million it raised from entities whose owners are, according to public records, the sister and wife of Michael Wachs—who in 1997 agreed to be barred from the banking and brokerage industries after pleading guilty to defrauding Chase Manhattan Bank of $20.8 million. (See “On the Internet, a Second Act,” July 28, 2003.) The Wachs family didn’t respond to our inquiries, but Firer told Barron’s that Michael Wachs has been a good shareholder.
Well, at least there’s blockchain, right? Don’t count on it. The blockchain collaboration that Net Element announced in a Dec. 20 press release with cryptocurrency pioneers Bunker Capital was quietly canceled, according to an 8-K filed shortly thereafter.
Most startling among hundreds of leaked emails belonging to Net Element Chairman Kenges Rakishev are those tracing the Kazakh oligarch’s dealings with the hedge fund firm Platinum Partners, which generated headlines when it failed and its executives Murray Huberfeld and Mark Nordlicht were arrested. Huberfeld was charged with bribing a union official to invest in Platinum, while a separate case alleges that Nordlicht helped run Platinum as a billion dollar Ponzi fraud. The emails show that Huberfeld was a silent investor in Israeli tech companies that boasted publicly of Rakishev’s backing. The oligarch even tried to help Platinum launch a hedge fund targeting his wealthy compatriots.
The day in October 2012 that Rakishev rang the Nasdaq opening bell as Net Element chairman, he got a congratulatory email from Huberfeld. Three months later, Huberfeld met Rakishev to plan a Platinum feeder fund for investors in former Soviet states like Kazakhstan. Rakishev would be a principal, according to a slide deck attached to one email. “I look forward starting on a long successful relationship with you,” wrote Huberfeld. “I am excited about all the possibilities.”
Rakishev arranged visas so that Huberfeld and Platinum investment chief Mark Nordlicht could fly on a private jet to Kazakhstan in February 2013 to market the fund, accompanied by former New Mexico Governor Bill Richardson (who had just become chairman of an electric-car-charging company backed by Huberfeld and Rakishev). At the last minute, Huberfeld wrote that he’d miss the trip. “Dear holy brother,” he addressed Rakishev. “I am sorry I am not on trip with my boys. Good luck next two days and thank you for all your arrangements.”
After the Kazakhstan marketing trip, a March 4 email expressed thanks for a meeting in Kazakhstan’s capital, where Richardson and Platinum executives had dined with Rakishev and Timur Kulibayev, the billionaire who controls that country’s petroleum resources and who happens to be the son-in-law of Kazakhstan’s three-decades-long ruler Nursultan Nazarbayev.
Richardson never got back to us, but Huberfeld did. “Nothing ever came of the trip,” he wrote us. After this article was published, Rakishev wrote Barron’s to say neither he nor his companies “have participated in any business dealings or transaction with the Platinum hedge fund.” As most newspaper readers know, Platinum collapsed spectacularly in 2016, after the arrests of Huberfeld and Nordlicht in separate federal prosecutions that charged Huberfeld with bribing a union chief to put pension money in Platinum, while Nordlicht was charged with making Platinum a billion-dollar Ponzi scheme fraud.
They are fighting the charges. Nordlicht’s case has yet to go to trial, while prosecutors are preparing to retry Huberfeld after his trial last fall ended in a hung jury.
