Mobile virtual network operator Xero Mobile has yet to launch, but the company already is facing an investigation of its business by the Securities and Exchange Commission.
The Los Angeles-based MVNO recently announced that it had been notified by a local office of the SEC that the agency “was conducting an informal inquiry relating to certain aspects of the company’s business.” Xero said it was not required to give the SEC any information, but the MVNO has opted to respond to the government agency.
Xero spokesman Richard Clayton described the SEC’s action as “not an abnormal request” and said that Xero has given the SEC the information it asked for.
“As we could quite easily volunteer the information, we believed that best thing to do was to cooperate fully,” said Clayton. “We’ve heard nothing back, which is actually a good sign.”
Although Xero has indicated it is “unaware of the reason for the request,” the London-based Sunday Times reported that the U.S. government wants to know what, exactly, Xero is telling investors and potential investors in order to raise enough capital to get its operations rolling.
Peter Lilley, chief executive officer of Xero, has estimated that it will take less than $200 million to launch Xero—compared to the $440 million in backing that MVNO Helio L.L.C. had at its launch.
Clayton said that the information request will not interfere with Xero’s plans to begin its pre-launch marketing this fall and to start offering handsets and service by January. Xero, which calls itself “both an advanced MVNO … and a media sales organization,” wants to target college students by giving away 2 million advanced handsets and selling an additional 3 million units at “notably competitive prices,” according to the company. The MVNO plans to offer an ad-supported wireless service without service contracts. Under the offering, Xero customers would receive several video ads on their handset each day, which would earn them free airtime.
Xero went public in April by going through a reverse merger, in which a company purchases a firm that is already publicly traded and replaces that company’s name and ticker symbol with its own—thereby going public without making an initial public offering. Xero is listed on the Over-the-Counter stock exchange’s pink sheets; stocks consistently trading at less than $1 are housed on the OTC. Xero’s stock began trading at about $1 per share in April, but by the start of last week was down to about 30 cents per share. By mid-week, the share price had plunged to about 10 cents per share as the news of the SEC investigation sank in, then the price bounced back to about 30 cents a share.
The MVNO has announced a multi-year, multimillion-dollar contract with international company Xius for its MVNO platform and also has become a member of the Wireless Alliance for recycling wireless equipment. Lilley indicated that customers who turn in their cellular phones for recycling will be able to get an airtime credit. Although the MVNO is months away from a service launch, it has already begun making appeals to advertisers, as well as announcing it would license its business model to other operators around the world.
Xero’s business model is similar to that of Gizmondo, a European gaming company that declared bankruptcy in February. Indeed, several former Gizmondo executives, including Lilley and Clayton, worked at Gizmondo. Gizmondo had tried using ads to offset the price of its $400 handheld gaming device, which included features such as text-messaging, e-mail and Global Positioning System capabilities. The device was introduced in Europe in March 2005, and had a very limited U.S. launch in October prior to the company going under.
Gizmondo’s troubles also involved several executives who resigned abruptly from the company amid news reports that they had criminal records. Carl Freer, Gizmondo’s former president and co-founder, resigned as well, but insisted that he had done nothing wrong; he has since moved to the United States and is an investor in Xero. Clayton said that Freer has no other connection to the company, and also denied any connection to former Gizmondo executive Bo Stefan Eriksson, who is awaiting trial in Los Angeles after a high-speed crash earlier this year in Malibu, Calif., of a million-dollar Ferrari Enzo.
Eriksson is a convicted felon, according to a series of stories in the Los Angeles Times, and a handgun belonging to Xero’s president, Roger Davis, allegedly was found at Eriksson’s home by police. Eriksson is charged with drunk driving, weapons possession and grand theft charges, according to the Times, as the Enzo and several other luxury cars found at Eriksson’s home allegedly belonged to British financial institutions. Eriksson pleaded not guilty to the charges.
Clayton said that public speculation had led to “guilt by association” for Xero, because of its executives’ connections to the same company that Eriksson once led.
“They’ve put two and two together and come up with 27,” he said. He described Davis as a crucial “figurehead and motivator” for Xero and added that “I stand behind Roger 100 percent, as does the rest of the company.”
