Think Mr. Toad had a wild ride?

It's nothing compared with the jaw-clenching gyrations suffered by investors in Imergent ( IIG), a Utah-based software and services company. In the last two years, the stock seesawed from $15 to $4, had a run-up to $35 and then went back down to $18.

Making the ride even bumpier is the company's penchant for attracting lawsuits. At last count, it had been sued (or threatened with legal action) by the attorneys general of at least six states plus Australia.

Maybe it's the never-ending litigation, or maybe it's the company's unconventional business model, but Imergent has attracted the attention of short-sellers to such a remarkable degree that some investors and analysts believe naked shorting (essentially, selling short shares that don't exist) is at play. Indeed, nearly two-thirds of the company's float is held by short-sellers, making it one of the most heavily shorted stocks on a major exchange.

Neal Goldman, president of Goldman Capital and Imergent's largest shareholder, says, "Unless the regulators act, there is no way that companies can protect themselves from fraud perpetrated by short-sellers. These guys could be poster boys for fraudulent illegal short-selling and using the system to destroy a successful company."

Successful company? Billionaire entrepreneur Mark Cuban, until recently an Imergent short, doesn't see one here. "The bottom line is that the company doesn't deliver. Its happy customers are few and far between," he said.

Free Lunch

Indeed, Cuban and various state regulators claim that Imergent isn't a software company at all. Utah has sued the company twice, claiming that it should be registered as a seller of business opportunities. The first action was dropped, but the state filed a similar action again last year. Imergent, says CEO Donald Danks, has no intention of settling. "We are a software company and will prove it."

It's not hard to see why some people think Imergent sells business opportunities.

Potential customers are generally contacted by mail and invited to 90-minute seminars, usually at hotels, where they listen to a pitch and eat a free lunch. If they show interest, they're invited to a second seminar, where they can buy Imergent's software. The price varies, but a spokesman for the company said the basic charge is $2,500 for each Web site a customer builds and operates using Imergent's Web-based software tools.

Imergent's legal problems go beyond a regulatory issue, however. The state of Texas sued Imergent in 2005, alleging that customers fall victim to "deceptive" business practices: "Once they have bought these packages, they are basically left with worthless software which does not work and for which they are asked to pay still more money for more assistance which is of little or no value," the suit alleged.

Although Imergent has yet to actually lose a suit brought by a state, the bad publicity has been devastating. Shares were trading as high as $25 in early February 2005. After Abbott filed suit that month, they plunged, dipping below $4 in early November of that year.

Danks claims that many of the complaints were bogus, generated by the shorts to beat down the stock. However, that's tough to prove. "When a company blames anything on short-sellers, it's a sure sign to short the company," says Cuban, who did it once, and if the stock goes up, he'll short it again, he says.

The 2005 Texas suit was settled last year, with Imergent admitting no wrongdoing. As part of the settlement, Imergent agreed to establish a $400,000 fund used to reimburse disgruntled customers.

Despite the barrage of criticism, the stock has recovered. On Tuesday, shares jumped nearly 7% to close at $18.89 after the company announced that it had formed a new sales team, its ninth. Also boosting the stock was a sharp short-squeeze, says Dylan Wetherill, founder of

What expectations does Wall Street have for this stock? It's hard to know, since only one analyst who follows Imergent, Michael Shonstrom at Emerging Growth Equities, rates the stock a buy.

Even so, there is continuing institutional interest in the shares. Bear Stearns ( BSC) bought 441,731 shares worth about $7.76 million in the last reporting period of 2006, and total institutional positions increased by 1.2 million shares.

Yet there's no sign the shorts are ready to let go. Indeed, the put/call ratio of 1.18 is higher than it has been for most of the company's history, according to Joe Sunderman of Schaeffer's Investment Research.

Imergent CEO Danks says he plans to step up the pace of buybacks, while the board just declared a quarterly dividend of 10 cents a share. An acquisition also is possible. And perhaps most important of all, Danks & Co. are waging an aggressive and proactive campaign to convince state regulators that Imergent is clean.

Top of the SHO

You'd have to look hard to find a company hit harder by short-selling than Imergent. At one point, it would have taken an astonishing 60 days to cover those positions. That has fallen as volume strengthened, but overall short interest rose 28% in February to 65% of the float. Imergent has been on the threshold securities list of the American Stock Exchange for 112 consecutive trading days.

Keeping track of Imergent's shares takes more than a calculator. The company has about 12.3 million shares outstanding and a float of 10.6 million shares. Institutions own 9.1 million shares. Even if retail holdings were zero, the total number of long positions plus short positions is over 16 million, more than half again the float.

While that's not necessarily proof of naked shorting, Goldman and Brad Halvorsen, an analyst with NorthPointe Capital, a large holder of Imergent, say there's no other reasonable explanation. Various technical maneuvers can temporarily inflate the number of ghost shares, but at some point, all positions have to be covered.

That so many shares of Imergent have not been delivered is suspicious, they say, and is apparently the focus of an investigation by the NASD, which handles some regulatory matters for the Amex. The exchange refused to confirm the existence of the investigation, but three sources close to the company say it is under way.

Since January 2005, Regulation SHO has required stock exchanges to keep a "threshold list" of securities that have a sizable failure-to-deliver position.

Naked short-selling isn't necessarily illegal . Broker-dealers may sell imaginary shares to maintain liquidity in a stock that sees a sudden surge in demand. And it's not unheard of for a daisy chain of short investors to borrow, sell and reborrow shares of a stock so many times that the number of positions held is greater than the shares outstanding, says Darryl Duffie, professor of finance at the Stanford Graduate School of Business.

What is illegal, though, is knowingly creating a short position with a stock that a broker has no ability to deliver. While Regulation SHO was supposed to eliminate that practice, a glance at a list of threshold stocks compiled by shows that Imergent is far from the only stock that is apparently being raided by naked short-sellers.

As of last Monday, 16 stocks, including Imergent, have been on the list for 111 days or more, and 50 stocks have been on the list for 25 days or more.

Duffie says regulations forbidding illegal short-selling are adequate. But enforcement, he says, may well be another question.

The tug-of-war between Imergent's long and short investors, and the company's wrestling match with state regulators, are good reminders that not every story on Wall Street is transparent.

The company's stepped-up sales efforts and aggressive PR campaign may change Imergent's image, but for now, it still looks like bear bait.

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