Risk & Compliance

Cutting the Fat: Z Trim May Restate

The maker of a fat-reducing gel responds to the American Stock Exchange's criticism of its stock-option practices.
Sarah JohnsonAugust 24, 2007

Officials at Z Trim Holdings are contemplating whether they should restate company financials following a probe into its stock-option practices. The news comes at the end of a week filled with bad news for the Illinois company, which makes a gel used to reduce fat in foods.

Earlier this week, Z Trim announced that its CEO had resigned, its annual shareholders’ meeting was postponed, and the American Stock Exchange had provided the company with a noncompliance notice.

Z Trim’s problems were outlined for the company last Friday when it got a letter from Amex noting internal-control weaknesses, late and incomplete regulatory filings, and improper accounting for stock options. Then on Monday, CEO and director Gregory Halpern stepped down from the company he founded in the mid-1990s.

Z Trim, called Circle Group Holdings until last year, gave Halpern a three-month severance package and replaced him with Steve Cohen, who started at the company in 2002 as director of investor relations and was most recently president.

The company gave no reason for Halpern’s departure. Z Trim said that before it received Amex’s letter, it had hired a third-party consulting firm to audit its internal controls and procedures and updated some of its policies. Amex hasn’t started delisting procedures or suspended trading in Z Trim shares, according to the company.

In response to the deficiency letter, the company is also reviewing its records and public disclosures regarding stock options dating back to 2002.Cohen and CFO Alan Orlowsky — also fairly new to his job — will spend at least the next month putting together a “compliance plan” aimed at fixing its problems, according to Z Trim. Formerly the company’s audit-committee chairman, Orlowsky took over as finance chief in May.

According to the Amex staff, Z Trim violated its stock-option plans by granting 17 options at an exercise price lower than the fair-market value on the date of the grant. Further, the report cites two grants to Halpern totaling 1.6 million shares that should have had “an exercise price equal to the fair market value on the date of grant as opposed to 110 percent of fair market value as required by the Company’s stock incentive plans.”

The company rescinded Halpern’s outstanding stock options following his resignation.