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If the bizarre saga of the Internet incubator Yellowave were made into a movie, it might be called Hair Styling, High Tech -- and Hijinks? Launched a year ago to foster Israeli technology companies, Yellowave has been mired in a comedy of errors that has sent shares plummeting from a high of $24 in July, to $6.75 of late. The tale recently took a new twist when a federal judge issued a preliminary injunction against Prosper Abitbol, who claims control over the incubator, pending trial of a fraud lawsuit brought against him by Yellowave's founders.
The story begins in July, 1999, when entrepreneurs Ron Oren and Laura Ballegeer first acquired a controlling interest in a publicly held hair-salon franchisor called CutCo Industries. The two entrepreneurs sold off the salons, formed Yellowave, and merged it into the CutCo shell. Then they set out to find a high-tech niche they could fill. Oren cooked up the idea of running an incubator for Israeli tech entrepreneurs wishing to market their products in the U.S.
During a scouting trip to Israel, Oren met Abitbol, himself an Israeli entrepreneur with an interest in four companies that were developing technology related to the Internet, cable, and satellite broadcasting. Oren was impressed: According to a brief filed earlier this month, Abitbol claimed the companies had a host of signed deals and licenses. But what intrigued Oren most of all was the supposed involvement of 3Com Corp. CEO Eric Benhamou.
HONEST MISTAKE? Abitbol agreed to transfer the assets of the four companies to Yellowave in return for 75% ownership in the incubator. For tax purposes, the deal would take place through a merger with a second company called Newtech Broadwidth, which Abitbol's wife, Myriam, agreed to set up.
News of the impending deal and Benhamou's association with the incubator sent the stock soaring 2,000%. But just as the deal was about to close, say sources close to Yellowave, Oren and Ballegeer obtained information suggesting that three of the four Israeli companies didn't exist. To complicate matters, Abitbol's wife named the new entity Newtech Bandwidth (because "Broadwidth" was already taken) but neglected to inform Oren and Ballegeer, according to Manuel Klausner, the attorney for the Abitbols. "It was a mistake," Klausner says. Oren, Ballegeer, and their attorney did not return phone calls.
According to the filing, Oren and Ballegeer were alarmed when their bank informed them on Aug. 11 that the Abitbols were attempting to transfer Yellowave's funds to Israel. On Aug. 21, Oren and Ballegeer obtained a temporary restraining order against the Abitbols. The restraining order was upheld on Sept. 25 when a U.S. District Court judge issued the preliminary injunction pending trial.
FROZEN STOCK The judge said the evidence "tipped the scales" in favor of Oren and Ballegeer. But he ordered them to post a $2 million bond -- not an easy task for two entrepreneurs who have yet to make any money. Yellowave's stock has been frozen since Aug. 23, when the AMEX suspended trading and launched an investigation.
If not for the alleged involvement of the highly regarded Benhamou, this would be little more than a story about a promising incubator gone wrong. Sources close to the situation say Benhamou, a childhood friend of Abitbol, simply reviewed the business plan of one of the four Israeli companies. In return, Benhamou was given shares amounting to a 7.5% ownership of Yellowave. Benhamou denies being anything more than an informal consultant and has not been charged with any wrongdoing. He declined to comment pending review of the court documents, a 3Com spokesman says.
Abitbol plans to appeal the injunction, acording to his lawyer. "The charges of fraud are baseless," Klausner says. "We think the judge made a serious error." But regardless who wins, the string of alleged errors made before this case even made it to court could be enough to cripple Yellowave before it gets off the ground.
By Arlene Weintraub in Los Angeles Edited by Thane Peterson
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Copyright 2000, Bloomberg L.P.
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