SEC Investigating Possible Insider Trading at Travelzoo

Travelzoo, which came to be on the strength of dot-com promotional blitz that included stock giveaways and more recently became a rising star among e-commerce stocks, today said the Securities and Exchange Commission (SEC) is investigating stock market activity by some employees for possible insider trading violations.

The announcement of the SEC probe came in conjunction with Travelzoo issuing its fourth quarter earnings report.

Travelzoo shares were one of the biggest gainers among all publicly traded companies during the course of 2004. The shares began the year trading around US$9 per share and by the end of the year were trading near $110.

Complaints Filed

The run-up created a loaded situation, with short sellers waiting in the wings by the droves for what they hoped was the inevitable downfall of the stock.

Though Travelzoo, which aggregates travel deals from other Web sites and sends consumers to purchase at those other sites, had been growing revenues, many analysts felt its stock was overvalued. At one point late last year, all three Wall Street research firms that covered the stock rated it a “sell.”

When the dropoff didn’t happen, complaints began to be filed with the SEC by investors who had hoped to short the stock, the company’s CEO, Ralph Bartel, said in a conference call today. “I don’t think the inquiry is a big surprise,” Bartel said, adding that the SEC had an obligation to look into the complaints.

Bartel is apparently among the employees being investigated. An SEC spokesman declined to comment on the investigation or what prompted it. Travelzoo emphasized that to the best of its knowledge, the SEC is not questioning its bookkeeping or results.

Travelzoo said in a filing with the SEC that an internal investigation found none of its senior executives or board members reported purchasing shares during the period of “extreme stock price volatility” in question.

Buying High?

The inquiry appears aimed at determining whether Travelzoo employees or insiders purchased shares in order to prop up the stock price.

According to company figures, about 2.1 million Travelzoo shares are available for trade on the open market, but about 71 percent are held by short-sellers who expect the stock to drop in the near future.

Today, the shares plummeted more than 24 percent and are off close to 50 percent since their highs at the end of 2004. Analysts said the downfall was precipitated by fourth quarter results issued today that showed a profit that was three times higher than a year ago but fell short of expectations. The report showed quarterly sales also doubled to $10.5 million.

Whether the stock valuations are too high is one question, but analysts said the company has carved out a niche for itself in the hot online travel space. It now has some 300 listings on its Web site for travel agents, rental car firms, airlines and hotels from which it reaps advertising and referral revenue.

“Consumers are increasingly interested in sites that help them find the best deals, regardless of who they end up buying from,” Forrester Research analyst Carrie Johnson said.

Traffic to comparison sites of all types rose last year, she noted, but competition lurks in the form of portals such as Yahoo and search sites such as Google. Niche sites such as Travelzoo might fare better than general-purpose pure-plays, but the bigger sites will make a push for the same turf before long, she added.

No Free Lunch

Previously, the SEC had asked Travelzoo for more information on how it planned to raise funds to reimburse shareholders who held legacy stock from its former incorporation — when it gave shares away as promotional tools.

As many as 5 million shares were reportedly given away, but Travelzoo later said the majority were no longer valid because the recipients failed to re-register the shares when the company re-incorporated before going public.

That prompted at least one law firm to say it was looking into the company’s practices as well, with Connecticut-based Scott + Scott saying its clients had asked it to look into the company.