by Wes Grey
Date: March 15, 2001
Subject: Re:ShopTilDrop.com 10-K filing
Congratulations on your appointment as Lead Counsel for the Chapter 11 bankruptcy preparations. Find enclosed my draft of the 10-K statement. As you know, most of the document is boilerplate, so I'm only including the sections where we have significant risk by not disclosing the facts. You'll find my comments in brackets. Because this is my last filing as Corporate Counsel, and likely my last legal filing period—except for the deal I'll cut to keep my own ass out of jail—I hope you'll appreciate (and benefit from) the candor.
Best of luck,
ITEM 1. BUSINESS [The difficulties start right here, Britt—it's an oxymoron. Those ultimate bull-shitters, the Wall Street analysts, get their jibes in now by asking what idiot wrote the original business plan (as if they didn't know what the fuck was going on). That question entirely misses the fucking point. It never was meant to be a "business." Right from the start it was a get rich quick scheme. The founders, CEO Larry-boy, CFO Grisscoe, and COO Jenks—more about those miserable fucks later—had no long-term plan to build a business. Their short-term goal was to capitalize on the internet gold rush by getting venture capitalists to fund their bright idea (which they knew hadn't a chance in hell of succeeding). The medium-term plan was the initial public offering. Even after the venture capitalists took their cut, the founders stood to make hundreds of millions of dollars each. Post IPO they only had one goal: prime the media pump and fuel the hype. Keep that stock price climbing until the lockout provision—which prevented them from selling shares for six-months after the IPO—expired and they could sell their stock and cash in. Beyond that, the only plan they had was to sell the company before it became common knowledge that the business plan was a not so fragrant, steaming pile of bullshit.]
Cautionary Statement Regarding Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements. These statements relate to our, and in some cases our customers' or partners', future plans, objectives, expectations, intentions and financial performance, and the assumptions that underlie these statements. In some cases, you can identify forward-looking statements because they use terms such as "anticipates," "believes," "continue," "could," "estimates," "expects," "intends," "may," "plans," "potential," "predicts," "should," "will" ["we" "may" "lie" "cheat" "and" "steal" "you" "blind"] or the negative of those terms or other comparable words. These statements involve known and unknown risks, uncertainties and other factors that may cause industry trends or our actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these statements. [I don't know about you, Britt, but part of what attracted me to corporate law in the first place was the chance to craft such cover-your-ass masterpieces as this paragraph. Were you one of those kids, like me, who had an excuse for anything that went wrong? Or who always managed to shift the blame onto your brothers and sisters, friends and classmates? Shit, is that where all this duplicity starts? Back there in home-sweet-home? Dad cheating on mom. Mom cheating on dad. Jason, the oldest—the "good" kid among us—stealing fivers and tenners from the envelope with "emergency" written on it that was taped to the underside of the kitchen junk drawer. Don't think I've forgotten Allison. The baby. The bitch. The one who taught me the true meaning of manipulation. And that's just my fucking family! Then we go to school and mix it up with all the other twisted fucks, until the best of the lying, cheating, stealing, manipulating bunch of us end up in law school—where we're taught how to get away with it for a living. Let's face it, Britt, besides corporate law, the only other place we belong is congress. You have your accusers, your Cardinal Richelieu's—"Give me six lines written by any man and I will find within them something with which to hang him"—and your excusers, your Bill Clinton's—"It depends on what your definition of is is." Yep, that's our peer group.] These factors include those listed under this heading and the headings "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Annual Report on Form 10-K. In addition, these forward-looking statements include, but are not limited to, statements regarding the following:
. the anticipated increases in our operating expenditures, including in research and development, sales and marketing and general and administrative expenses [Or, how management will finally disclose all the costs kept off the balance sheet in prior quarters.];
. the anticipated cost of our revenues [Or, how that revenue per subscriber number will plummet once the divisor is changed from the number of people accessing the website (60,000 per day), to the number of customers who actually finalize purchases (100) because our heavily marked up Coach, Prada, and Louis Vutton accessories can't compete with the outlet malls, even after we implemented Jenks's "free shipping" brainstorm. Now there's a fucking scam for you. Do those 100 people a day who actually buy something think they're getting a deal with free shipping? Have they never compared prices? The only thing that's free about that shipping is the lie it's based upon.];
. the anticipated increase in our capital expenditures and lease commitments [Or, that undisclosed balloon-payment coming due on our office space. Not to mention the hush-money paid to the property manager. I can't believe that fucking Larry-boy thinks that no one will turn on the fan, or that none of this shit will hit the fan, or that if it does hit the fan, that none of it will stick to him. Well, Britt, guess what? I just turned on the fan.];
. the anticipated amortization of deferred compensation [Or, how management gets rich by unloading stock options and double shafts the stockholders with both diluted holdings and lowered stock price.];
. the adequacy of our capital resources to fund our operations [Or, how long the CFO can keep the shell-game of shifting capital from one limited partnership to another, because once all the shells are turned over at the same time it will be clear that all the capital is in fact gone. A prediction: that sneaky fuck Grisscoe will be the one to get away with it.]; and
. the ability of our ShopTilDrop(TM) technology to increase the efficiency in which we manage our customers' Internet shopping experience [Or, can the foreign-exchange calculating algorithms be tweaked so that they fleece customers on every transaction. Oh, Canada!];
Although we believe that expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We will not update any of the forward-looking statements after the date of this Annual Report on Form 10-K to conform these statements to actual results or changes in our expectations, except as required by law. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Annual Report on Form 10-K. [In other words, our statements in this filing are not worth the paper they are printed on.]
Recent Sales of Unregistered Securities
During the fiscal year ended January 31, 2001, we issued and sold the following unregistered securities:
From May 15, 2000 to May 18, 2000, we issued and sold 5,664,125 shares of Series C preferred stock to a total of 25 investors, which consisted of 10 venture capital investors, seven investors who are key employees or directors, or that are trusts affiliated with key employees or directors, and eight other individual investors, for an aggregate purchase price of $115,000,835.69. All shares of our Series C preferred stock converted into common stock upon the completion of our initial public offering. [On its surface, there's nothing untoward in this sale, it's the standard way management and early investors get rich off an IPO. But by falsifying the business plan, the IPO prospectus, and the subsequent financial statements until the lock-up period against selling shares had expired, which allowed these early investors—and the trust funds of management's families—to subsequently sell those shares at the height of the stock market bubble, while public shareholders continued to buy the stock based on management's ebullient, but false, public comments, we hold these sales of unregistered securities to be fraudulent.]
On September 7, 2001, we issued and sold 129,550 shares of common stock to three consultants who performed professional services for us for an aggregate purchase price of $893,806.00. [Oh this is a good one, Britt. Who were the three consultants, you might ask? Would it surprise you to learn that they were the three teenage sons of the ShopTilDrop's CFO's sister-in-law? Would it surprise you to learn that their "consulting firm" was a wholly owned subsidiary of a wholly owned subsidiary of a limited partnership of which Grisscoe, said CFO (Sick-fuck Officer), was the managing partner? I know what you would say, and you would be right, I violated no statutes by handling all of the legal and regulatory filings for those businesses. And that attorney-client privileges prevented me from disclosing the conversations I had with Grisscoe, conversations in which it was discussed that the sole purpose of issuing these shares to what I now know to be sham consultants from sham subsidiaries, was, in fact, to siphon equity out of the company. Legally, not guilty, we might agree. But, had I crossed the ethical line at that point? Aren't questionable legal maneuvers what corporate law is all about? Wasn't that what I was supposed to be doing? Ask yourself that one, Britt, and consider your answer carefully, because it is a precipice with a slippery slope on the other side, a precipice with no safe perch in the middle, a precipice you are about to find yourself sliding down one side or the other. Which side will it be, dear Britt? Which side of the slope will you slide down?]
The sales of the above securities were deemed to be exempt from registration [and thus not disclosed to potential shareholders until after the fact] under the Securities Act in reliance on Section 4(2) of the Securities Act, or Rule 506 under Regulation D promulgated thereunder, or Rule 701 promulgated under Section 3(b) of the Securities Act, as transactions by an issuer not involving a public offering or transactions pursuant to compensatory benefit plans and contracts relating to compensation as provided under Rule 701. The recipients of securities in each of these transactions represented their intention to acquire the securities for investment only and not with view to or for sale [Which is bullshit because most of these shares were unloaded as the public bid the stock up—and that was exactly the plan.] in connection with any distribution [Again, distribution of wealth from the capital markets and the investing public to the pockets of those initial thirty investors, was the sole purpose of this company from day one.] thereof and appropriate legends were affixed to the share certificates and instruments issued in such transactions. All recipients had adequate access, through their relationship with us, to information about us. [And, us, in this instance, were liars.]
Set forth below and elsewhere in this Annual Report on Form 10-K and in other documents we file with the Securities and Exchange Commission, are risks and uncertainties that could cause actual results to differ materially [More bullshit—these guys had absolutely no intention of ever putting in writing the real risks to investor's capital. And they certainly won't do so now as bankruptcy approaches because stating those risks would bring in the SEC and the Justice Department with a criminal fraud investigation. At first, I didn't know that non-disclosure was part of the game. I wasn't one of the founders, after all. Early on they used the venture capitalist's lawyers, but post-IPO, when the rock show started, it was time to bring in their own boy. Me. Me? When this whole internet craziness took off I was a foot soldier among an army of lawyers with a giant consumer products company. I'd applied for a few positions, but nothing got me stoked until I talked to the boys at ShopTilDrop. The chance to be a one-man legal department with a hot internet-IPO? Just as the bubble was inflating? What do you think? That was an opportunity I had to hang-ten all over.
They kept me out of the loop at first. Kept me on routine stuff like employment contracts, non-competes, and license agreements. I subbed out the specialty work like patents and intellectual property. They didn't put me on the inside until that first 10-Q filing, and then only after trashing my first draft, which basically reiterated the risks documented in the IPO prospectus, plus added several new sections based on recent company activities I felt needed to be disclosed. The first test of whether I was with them or not came in that meeting up in Larry-boy's office. He was sitting in a leather chair that must have set the company back five grand. Flanking his hulking cherry wood desk were Grisscoe and Jenks. So there they were, the three founders, or as they like to refer to themselves, The Three Musketeers. All former consultants at one of the big-five accounting firms, where, presumably, they cooked up this scheme. Of course, at that point, I still thought the business was legit.
I took the chair across from Larry-boy, and he started right in, telling me how, this being the first public filing an all, we needed to put a good spin on it, "We don't want to spook Wall Street," he said. To which Jenks, the consummate shill, added in his lilting TV preacher voice, "Don't want to give anybody an excuse to dump the stock." This was punctuated with a fake smile that should have hurt his face. Larry-boy laughed and said, "Nobody gets to dump the stock before we do." Grisscoe looked concerned. "Kidding aside, Gregg," he said, "we need you to smooth this Risk Factors section over. Cover our asses, but put a good spin on it." He handed me a copy of the filing. "I've marked some sections you should cut." I flipped through the pages. He'd crossed out all of the new sections I'd added. "None of that is material for the next couple of quarters, right?" Grisscoe said and looked at Jenks. "Nope," Jenks said. "So there's no reason to disclose it now." I glanced at Larry-boy and he shot me a lop-sided grin—the left-side turned up and the right-side turned down—that I would later recognize as his my-way-or-else look. "Think you can handle that, Gregg? Do what you do best? Put that spit and polish on it?" I guess I hesitated a bit, weighing the legalities, because Grisscoe said, "We need to know you're with us, Gregg—part of the team." I looked at Jenks. "Well," I said, "if they're not material . . . " He shook his head, gave me the fake smile. "And Gregg," Larry-boy said, "in appreciation for your creativity on this matter, we're kicking in another fifty-thousand options to your compensation package."
And just like that I'd stepped out onto the slippery slope.] from the results contemplated by the forward-looking statements contained in this Annual Report on Form 10-K.
Our financial results may fluctuate significantly, which could cause our stock price to decline.
Our revenue and operating results could vary significantly from period to period. These fluctuations could cause our stock price to fluctuate significantly or decline. Important factors that could cause our quarterly results to fluctuate materially include:
[Okay, Britt, what were these guys thinking? Did they just think it was okay to rip everyone off? Did they think that was better than running a legitimate business? Or is criminality just part of human DNA? Do we always choose the path of least resistance? Or is it just the miserable scum-bag fucks that go into business? So, here I am, one of them, one of the miserable fucks. Don't think it makes me feel better to admit that, because it gets worse. Time to jettison the boilerplate and start disclosing what was really going on. In no particular order, here are the risks—risks I deliberately left out of all the previous SEC filings—that should have been disclosed to investors:
We will acquire the most expensive office space on the west coast.
After the IPO closes we will move our offices from the warehouse in the Tukwila furniture district to the Carillon Point Marina in Kirkland. Our executive team will occupy the fifth floor and enjoy stunning views of Lake Washington, the Seattle skyline, and the snow capped Olympic Mountains. This move alone will increase our burn rate from $125,000 a month to over three million.
At least once a month we will charter jets and fly employees, selected customers, and Wall Street analysts and investment bankers to Las Vegas.
Their three-days of debauchery in sin-city will, of course, be on us. And all of the expenses will be written off as operating costs, the costs of doing business, which they are, because without such payola, we have no business. These junkets, of course, will not supplant the weekly Friday night champagne and caviar parties we'll sponsor at corporate headquarters, the lawn along the lakeshore being particularly well suited to entertaining.
At this point, Britt, I must confess my own personal failing, the moment when I slid so far down the slippery slope, of which I am just now reaching the bottom, that I could no longer pull myself back up. It happened the first time I went with Jenks, Grisscoe, and Larry-boy on a Vegas junket. We stayed in high-rollers' suites at the Bellagio. The arrival party was in Larry-boy's suite. Polished granite and marble everywhere. Catered spread with lobster, salmon, prime rib, king crab, and caviar. Ice and fruit sculptures decorated the table. A row of single malt scotches on the bar: Lagavulin, Laphroaig, Talisker, and some special issue 40-year old Macallans that I knew went for at least $5,000 per bottle. The women were catered, too. Grisscoe brought in eight showgirl-esque call girls, saying, "Gentlemen, just what the doctor ordered—one for each arm; or wherever else you choose to put them." The scotch wasn't the only thing costing five large each.
I pulled Grisscoe aside. "You never said anything about this," I told him. "What?" he said. "Having a hard time choosing? Don't worry, you'll get to dip your wick in each one before this trip is over." "No, it's not that," I said. "I'm not sure about this whole thing." "Whoa, whoa!" Grisscoe said, and with a sharp grip on my arm and another on the tendons between my neck and shoulder, he steered me into a corner away from the action. "Look, bucko, you're either one of the Musketeers or you're not. No dabbling. You can go back to your suite and say goodbye to the inner circle, or you can partake in this." He spread his arm, palm extended, with a flourish that swept the room. My eyes locked on Larry-boy, leaning back on a leather sofa with his pants around his ankles and getting a blowjob from one of the call girls. "You only get to make this decision once," Grisscoe said. "Understand?"
At first I hesitated, and not just because I'm a married man, although you might think that would be enough, but because I recognized, in the immortal words of another corporate titan, that I was at an "inflection point." I could say no and find myself quickly shunted out of the action—not just the blowjobs, but the business—or I could go along with what Larry-boy and the others were doing and enjoy the ride (pun intended). I chose to go all the way with the liars. I chose the fantasy made reality Grisscoe was offering: a chance to be D'Artangnan, the fourth Musketeer. Rationalizing, at the time, that I could always opt out anytime I wanted. Which, of course, I never did.
So I took a petite and busty blonde named April back to my suite—along with a bottle of Laphroaig to flatten my inhibitions. April took care of the foreplay. "We need to get you loosened up, Gregg," she said, leading me by the hand into the bedroom. "Get on there," she said, and pushed me onto the bed. I kicked off my shoes and tried to act eager, although at that point I was actually scared shitless. She poured the scotch and brought the drinks over. "Here's to getting off," she said as we clinked glasses. The sea-weedy and mediciney scotch burned hot in my throat. Just what I needed to take the edge off.
April stood at the foot of the bed with her hands on her hips and bent forward slightly so that the scoop of her loose black dress showed most of her breasts. The spaghetti straps barely clung to the edge of her shoulders, seemingly held on only by the friction of her freckles. Her smile was gleeful. "Don't worry about getting it up, honey," she said, "I'll make sure you're ready." "It's not that," I said. "It's just that you look a lot like my wife." She clapped her hands together several times and laughed. "So that's why you picked me," she said. "I love it." "No, no—" I tried to say because that wasn't what I'd been thinking, but April wasn't buying it. "Come on, honey," she said, "I hear it all the time. God, you married guys are so predictable. You all want me to do the nasty stuff your wives won't."
Would it surprise you, Britt, that I went limp at that moment? It wasn't just the guilt I felt for cheating on my wife with a call girl who looked like her, although I did feel shitty, at least momentarily, about that. No, the worst part was having April reveal my infantile psychology. At least it didn't seem to bother her as she slid the straps from her shoulders and let the dress fall to her hips. Both her nipples were pierced and I was surprised that her breasts weren't fake. "What do you want to do first?" she said. "Tit fuck me?" She cupped her breasts, pushed them up and together. "Now that you mention it," I said, the blood moving to right places again. She laughed and shimmied out of the dress. "Does your wife do anal?" She turned around and spread her ass cheeks. "Is that what you want to do, Gregg? Fuck me in the ass?" "Maybe," I said. April laughed again. "Or do you want to get kinky?" She went to the dresser and pulled a strap-on dildo from her purse. "Maybe you want me to fuck you in the ass," she said and held the dildo in place and thrust her hips to make the black cock-shaped dildo bob up and down. I felt a tinge of fear and thought, Gregg, what are you getting yourself into? Then I looked at April, with her tits and her cock, and felt a surge of desire. But April said, "Maybe later, I can see you need a few more scotches in you before you're ready for this."
She tossed the dildo on the dresser and took something else from her purse, but kept it hidden behind her back as she came to the bed and quickly straddled me. She did a bump and grind on my crotch. I breathed deep and her smells were in my head: a spicy perfume, vanilla and cinnamon, a hint of sweat, and a heavy dose of pheromones. "See," she said, "I told you I'd get you ready." That gleeful smile again. "Bet your wife doesn't have one of these." She stuck out her tongue, clicked the stud against her teeth. "No, she doesn't," I said. "That excites you, doesn't it?" She thrust her tongue out. "Blow jobs are my specialty. You know why?" I shook my head. "Because of these." She brought her hand from behind her back and held up what looked like marbles connected with string. She swung them like a pendulum over my face. "Anal beads," she said, then flashed her pierced tongue again. "They go in your ass and then I pull them out one at a time as you're coming." She put the beads in her mouth and pulled them out plop plop plop to demonstrate. Saliva dripped from the beads and landed on my shirt. "Makes you shoot like crazy."
At that point I was having difficulty breathing. April scooted back and undid my belt. "Don't worry, Gregg, no one's ever complained." She tugged on my zipper. "And I guarantee you won't be the first."
But I was disclosing risks, wasn't I, Britt?
We will use all means at our disposal to hype the stock price.
We will pay business journalists to write articles hyping our company. We will pay people to log-on to message boards at investor web sites and hype the stock. We will issue a steady stream of press releases so that there is always a buzz about the company.
We will twist the arms of investment bankers seeking our business.
Bribing them, essentially, by offering them our business only if their stock analysts write glowing investment reports and maintain strong buy ratings on our stock.
We will falsify the quarterly statement we file with the Securities and Exchange Commission, thereby committing fraud.
Which is the crux for me personally, Britt, because although management signed off on those 10-Q filings, what's their defense going to be? They relied on legal counsel. My legal counsel. And what's my defense? Management told me what to put in the filings. Like that will fly. Ultimately, there's no way for me to weasel out from under my complicity. I knew I was preparing false documents with the intent—there, I said it, Britt, the prosecutor's favorite word—to deceive investors. Of course, those SEC filings were piddlely-ass fraud compared to this next one.
We will artificially increase our revenues by entering "roundtrip" sales agreements with other retailers.
After the IPO was completed most of my time as corporate counsel was spent negotiating and drafting those sales agreements. And that was the point when I knew I had crossed the ethical line. I could rationalize away the perks I received, after all, there should be some compensation for the sixteen hour days I was working. And I could even rationalize away the carefully worded cover-your-ass regulatory filings because any investor, at least one not also caught up in the speculative greed, should have been scared off by those cryptic filings. But when I put those sales agreements together with other retailers, I knowingly participated in defrauding investors. Those agreements created no shareholder value. In fact, they actually cost us money because our partners netted the proceeds of the sale whereas all we got out of the deal was the ability to report higher revenues. The sole purpose of those agreements was to generate bogus revenue and thus create the illusion for wall street-analysts and investors that our sales were rising quarter over quarter. Why? Because we had no choice. Once it became clear that we weren't going to meet our sales or earnings forecasts we had to do something to keep the stock from tanking. Just keep the sham going for a couple of more quarters, get passed the various lock-up periods for selling shares, and then we could dump our stock and nothing else would matter.
Well, Britt, I suppose you are wondering what the fuck I was thinking. Didn't I have any check on my conscience? Didn't I consider myself a liar, a cheater, and a thief? I'm ashamed to say that I didn't think much about it at the time. I mean, I knew what I was doing was illegal—I had no illusions about that—but it's not like anyone else in business is a choir-boy either. Besides, someone was going to do the job so it might as well have been me. Now? I hang my head and say that it involved not the least bit of soul searching. Although, late in the game, I did tell myself, just six more months, then I'd sell my stock and be set for life. That was the extent of my concern. I wish I could say that I went through a moral struggle and was simply too weak to resist. But that would just be another lie. I got sucked in by the euphoria of greed and power. I felt omnipotent and it was the greatest feeling I've ever had. Of course, now that that veil of omnipotence has been ripped away, it doesn't feel anywhere near as good as April's anal beads did. So, as I stare at the computer screen writing this, what I can say is that I'm a man who ruined more lives than he helped. And how am I supposed to forgive myself for that?]
Due to these risks and other factors, period-to-period comparisons of our operating results may not be meaningful. You should not rely on our results for any one period as an indication of our future performance. In future periods, our operating results may fall below the expectations of public market analysts or investors. If this occurs, the market price of our common stock would likely decline. [The truest words in this whole fucking filing. But what it should have said was "invest at your peril, because you will be wiped out."]
Our stock price may be particularly volatile and could decline substantially.
The market price of our common stock could be subject to significant fluctuations and may decline. The market for technology stocks, particularly following an initial public offering, has been extremely volatile and frequently reaches levels that bear no relationship to the past or present operating performance of those companies. In addition, as an early stage company, small delays in customer bookings, installations or revenue could result in material variations in our quarterly results and quarter-to-quarter growth in the foreseeable future. This could result in greater volatility in our stock price. These fluctuations could also lead to costly class action litigation that could significantly harm our business and operating results. [I take full credit for inserting this paragraph when the wheels started coming off. The last sentence of which is a cover-your-ass masterpiece, a sure-fire litigation killer—as long as the fraud isn't uncovered—because no investor can claim, after reading this paragraph, that they weren't warned. I mean I'm practically forecasting the fucking shareholder lawsuits.
At that point I knew it was over. Gregg, buddy, I said to myself the day everything blew up, the day before we announced ShopTilDrop was going into bankruptcy, how'd you get yourself into this shit-storm? Where'd you go wrong?]
P.S. Realistically, there's no way I'm not going to jail—all I can do is cut a deal, manipulate the system for a shorter sentence. If I had any guts I'd leak this to the press myself—instead, I'm passing it on to you, giving you the chance to be the hero.
Oh, and Britt, should you choose to stay on the slippery slope, to shit-can these disclosures, I know where plenty of other bodies are buried. Regardless of whatever else you might think of me, when it comes to saving my ass, I'm one highly motivated motherfucker.
Copyright©2003 Steven J. McDermott