Did Sagent Technology Pull the Old 'Pump and Dump'?

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Did Sagent Technology Pull the Old "Pump and Dump"?
M. Reed - November 7, 2000

Event Summary

Sagent Technology, a provider of what they refer to as "Real-time e-Business Intelligence Solutions", has been hit with a class action complaint for violation of the Securities Exchange Act of 1934. According to allegations in the complaint, company officers misrepresented Sagent's 1999 and 2000 sales prospects to give them time to sell over $8 million of their own stock. The officers sold their stock at prices as high as $27.875, but after the true revenue projections were revealed, the stock dropped as low as $7-7/32, a decline of more than 70%. Both the Vice President of Sales and the Chief Financial Officer resigned after they received their $6 million in proceeds.

In addition, it is alleged that Sagent made the misstatements to give them time to renew their credit line, slated to expire in early 2000, because Sagent could not fund its operations from cash generated by business operations (the company was posting substantial losses). Sagent allegedly made statements that it would achieve Q1 results of $17.4 million in revenue and an EPS of $.04. In reality, they were suffering losses in both revenue and EPS declines.

In addition, Sagent made claims to being on the brink of closing their largest software deal ever (with yuSave). In reality, the requirements of this purported contract, which included embedding Sagent's technology in an OEM product, would have had to be completed in a two-week period in order to recognize the $3 million in revenue in the quarter stated by management. Sagent later blamed this misstatement on the fact that their public accountants did not allow that the contract qualified for revenue recognition in the first quarter.

To compound matters, the defendants have recently announced that Q3 revenue and EPS will fall "terribly short" of projections. To make things worse, in December 1999 Sagent acquired the data-cleansing vendor Qualitative Marketing Software by issuing approximately 2.5 million shares of Sagent common stock to the shareholders of QMSoft. There is no word as to whether the former QMSoft shareholders are planning legal action, but it is hard to imagine that they are not investigating their options.

Donaldson, Lufkin, and Jenrette Securities Corporation (DLJJ) is also named as a defendant since it was the lead underwriter of the April 14, 1999 IPO, and a marketmaker subsequent to the IPO.

Market Impact

This development will give competing vendors plenty of FUD (Fear, Uncertainty, and Doubt) to use with prospective customers. It is difficult to believe that a company evaluating business intelligence software would be willing to take a risk on Sagent at this time. Sagent's only hope is that customers will be willing to sit back and wait to see how Sagent responds to the allegations and how this whole class action suit plays out.

If the suit can be settled in such a way as to not completely offset the technical value of Sagent's analytical and data cleansing technologies, TEC predicts that Sagent will be acquired by one of its competitors (80% probability).

User Recommendations

We do not recommend purchasing Sagent's e-Business Solution at this time. Their stock is currently trading at less than $3 per share, and they are obviously undercapitalized. If a competitor purchases the company, there is no way to know what will happen to the existing Sagent products. The possibilities are continuance of development (unlikely), "stabilization", which means the new owner will support customers with the existing releases but will completely halt R&D, or a strong effort by the acquiring company to convince the customer to switch over to its own product(s).

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