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Pirating accusations sink FAB Universal shares

NEW YORK (AP) -- Shares of FAB Universal sank 5 percent in morning trading after withering accusations that the business is based on pirating movies made in the U.S. for sale in China.

FAB Universal issued a statement Friday that denied "the misleading and inaccurate allegations" and said that it would be issuing a public statement to "refute these defamatory remarks and that it expected to be in a position to provide a response shortly."

On Thursday, Alfred Little, which is owned and operated by investor Jon Carnes for the purpose of publishing his investment opinions of publicly traded companies, particularly Chinese firms, posted a scathing report on FAB Universal.

Carnes said in his report that while the company claims to be a champion of copyright protection, its kiosks "are in reality loaded with very obviously pirated U.S. movies." He described sending staff to a Beijing store to purchase a U.S.-released movie, which ended up being done by copying it from a flash drive rather than downloading from a kiosk after multiple attempts at kiosks failed.

"The glitchy kiosks are one problem, but the fact that the movie could be so easily copied more than once (from the kiosk to a flash drive to a laptop) indicates that the movie files contains no Digital Rights Management copyright protection mechanism," the report stated. That's an indicator they are not being legally distributed, he said. Carnes provided additional clues he said point to piracy — including Chinese subtitles embedded on the film, a file creation date that preceded the movie's release on DVD, and a poor-quality video clip.

Another visit to the store for additional movies turned up similar issues, Carnes claimed.

Carnes also maintained that FAB has deployed only 10 percent of the kiosks it claims to operate, based on interviews with the kiosk manufacturers.

FAB Universal , which combined with Pittsburgh's Wizard Software last year, identifies itself as a digital media entertainment sales and distribution firm, which operates "intelligent media kiosks, retail stores and franchises" along with selling online.

"Based on the interviews and evidence that I collected, I conclude that FAB's business in China is a tiny fraction of what it claims in its SEC filings," Carnes wrote in a 21-page report. "FAB's actual profitability would be reduced even further if the company upgraded its pirated content to properly licensed content (assuming that is even possible)."

He also stated that FAB Universal Inc. "has potentially enormous undisclosed liabilities for guaranteeing minimum investment returns to franchisees and undisclosed potential dilution from common stock issuable to franchisees."

Company shares dropped 25 cents to $5. Shares closed Thursday at $5.25, up 63 percent since the start of the year.