Tiny Fringe Company Sees Frenzied Trading of Stock.

Toiling away at the fringes of public stock markets am dozens of L.A. companies whose stock prices am measured in pennies and whose business plans often contain a dollop of fancy.

One such company, eConnect Inc. of San Pedro, has become one of L.A.'s most actively traded stocks, despite a checkered past and a murky future.

EConnect has developed a Web-payment device that attaches to home computers. It can be used to swipe credit cards, in a way that's similar to a checkout-stand point-of-sale device.

The fact that eConnect's product isn't needed by anyone -- it is simply an overlay, at added cost, to current payment systems -- hasn't stopped the company from pursuing its dreams, in ways that test the boundaries of financial creativity.

EConnect regularly trades more than 10 million shares a week on the over-the-counter bulletin board, despite a stock price below 3 cents a share. Its high volume can be traced to its funding strategy.

The company sells large numbers of shares directly to key investors, at a steep discount to market prices. Each time these shares are unloaded onto the market, they exert a downward pressure on the stock price that is difficult to overcome.

"It's a double-edged sword," admits Chief Executive Tom Hughes.

Often referred to as "death spirals" due to their dilutive effects, the equity deals are funding mechanisms of last resort, common among penny-stock companies like eConnect.

At recent prices, eConnect stock is for "The investor who wants to take a risk' said company spokesman Manny Vavolizza. "The little guy who wants a shot at making it big."

The funding deals work a lot like revolving credit lines. When eConnect needs cash - which is often, because it has no revenue - it doles out stock to its backers. The price is discounted, typically 15 percent to market prices, and the investor keeps another 6 percent commission on each drawdown.

In the past couple of years, eConnect has raised at least $10 million in this way from two key investors, Affiance Equities Inc. of Coral Springs, Fla., and Alpha Venture Capital Inc., based in the Cook Islands in the South Pacific. It's also issued millions of shares to various consultants.

The number of eConnect shares outstanding swelled to 334 million recently from 132 million on March 31, 2000. Meanwhile, eConnect's share price has fallen to 2.8 cents, from $1.50. EConnect recently filed papers with the Securities and Exchange Commission that would allow Alpha Venture, Alliance Equities and others close to the company to release into the market 138 million shares they now hold.

Hughes says average investors can "absolutely" make money in eConnect stock. "As far as I'm concerned, people should hug themselves every day when they have found eConnect," Hughes said. He said the company plans to buy back many of its shares once revenue starts kicking in - signed orders will generate $500,000 over the next six months, he said.

But the company has struggled with its credibility. In March, 2000, the SEC sued eConnect and suspended trading in its stock, alleging that the company exaggerated its relationships with Palm Inc. and a brokerage firm. The misleading information allowed a stock promoter, who has since been fined $1.2 million, to tout the stock and illegally profit in its rise.

EConnect and Hughes settled their charges by agreeing not to commit securities fraud in the future. EConnect has also settled a breach-of-contract suit with its ex-chief executive, for $1 million, and reached a settlement in principal with shareholders who sued over the events of early 2000.

Recent postings to eConnect's Web site also raise questions.

After a reporter's inquiries, eConnect altered a number of references to its relationship with Verisign Inc., the company that hosts an extensive Web payment network.

In July, eConnect signed on as a Verisign customer, giving its eCashPad - the card-swipe device - access to Verisign's transaction network.

Subsequent postings on eConnect's Web site mentioned Verisign prominently: "Verisign has begun introductions of eConnect to banks ...," said one, posted Sept. 4. "Verisign is presently in discussions with major banks" to obtain lower transaction rates for eCashPad purchases, said another, on Aug. 29. An Aug. 21 posting indicated that merchants could easily add on the ability to process eCashPad transactions.

Verisign officials were asked to verify the accuracy of the statements. Cheryl Regan, a Verisign spokeswoman, would only say that she had contacted eConnect and pointed out problems with the postings.

In the revised postings, eConnect backs down from some of its biggest claims. It no longer claims Verisign is making introductions to banks or seeking out lower eCashPad rates. It's also clarified that some merchants will have to add on two more Verisign accounts in order to process eCashPad purchases.

Hughes maintains all the earlier statements were true, but eConnect wasn't authorized to release the information.

Investors are free to take him at his word. ButThe company lost $108 million in the fiscal year ended Dec. 31, 2000. Its liabilities exceed current assets by $13.5 million, and it needs another $20 million to survive the next 12 months.

Buried in eConnect's recent filing is this disclosure: if eConnect's stock price trends below 2 cents a share, it cannot "put" any more stock to its current cash provider, Alpha Venture Capital. With its phlegmatic balance sheet, checkered past and questionable prospects, eConnect may be running out of options.