The Inner Workings of InnerWorkings (Nasdaq:INWK)

The key figure in a software company selling stock has left a trail of unhappy investors.

In a road show continuing this week, Morgan Stanley hopes to persuade investors to part with $150 million for the follow-on stock offering of a company called InnerWorks. This Chicago-based company claims that its proprietary software is radically changing how American companies procure print jobs. In just the five months since their initial offering, InnerWorkings shares (ticker: INWK) have risen a radical 80%, with a recent print of 16.20.

But those reading the prospectus should also re-read the Dr. Seuss story about the Sneetches, who paid a huckster to change their plain bellies into star bellies, and vice versa. The chap ends up leaving town with all their money, while laughing: "They never will learn...You can't teach a Sneetch!"

You see, InnerWorkings goes to great lengths to obscure its ownership and control by a chap named Eric P. Lefkofsky who has a history of busting investors after promising to radically transform bricks-and-mortar industries. He seems to identify with Dr. Seuss's huckster: he called his last business Starbelly.com, a venture that rapidly went into bankruptcy and provoked fraud suits by investors alleging that Starbelly's software was never what Lefkofsky promised. The current InnerWorkings road show and stock-offering is, in part, aimed at cashing out much of Lefkofsky's stock while InnerWorkings shares teeter at stilted levels.

Eerily like Starbelly, there's less than meets the eye to the company's touted "PPM4" software, say some InnerWorkings ex-employees. In the weeks before Morgan Stanley's eagle-eyed due diligence team toured InnerWorkings for its August 2006 initial underwriting, workers stayed late padding the company's off-the-shelf FileMaker Pro database with an impressive-looking list of suppliers. Then they dummied up some screen-shots of the software for the inside cover of the prospectus. Citing the quiet period prior to its stock offering, the company declined to answer my questions.

Despite its Potemkin technology trappings, InnerWorkings is a glorified broker of print jobs. Like others of its ilk, it beats up on printers on behalf of corporate clients and splits any savings it extracts. Much of its sales growth has come through roll-up acquisitions of other print brokers. And a related-party transaction in the months before the IPO seems to have produced a big part of InnerWorkings' profits. Even so, the last-reported 12 months' profits amounted to a paltry $5.7 million. So the current stock market valuation of $700 million is 125-times those trailing profits.

That's a ridiculous valuation for a company in the mundane print brokerage business. And I suspect that fact isn't lost on the 37-year-old Lefkofsky who, with his wife and others, controls 35% of InnerWorkings shares via some holding companies. Unwilling to wait even until the Feb. 11 expiration of InnerWorkings's IPO lockup agreement, Lefkofsky and other insiders would unload 6.2 million shares in the follow-on offering that Morgan Stanley reportedly wants to price this week. That would net insiders $100 million.

InnerWorkings' prospectus makes only passing mention of Lefkofsky, with a sentence buried on page 54 describing him as someone "instrumental in the formation and development of our company" who served as a director until May 2006 and also as a consultant. When I asked InnerWorkings about him last week, a company spokesman said Lefkofsky's consulting had stopped back in June 2006.

So I thought it generous of Lefkofsky to be still laboring at InnerWorkings on Friday, while the firm's title-bearing leaders junketed on Morgan Stanley's road show. The InnerWorkings phone directory doesn't list Lefkofsky, but the company operator quickly put me through to his office, where a friendly-sounding lady told me he was running a meeting. He did not return repeated voice-mails and e-mails.

Ex-employees tell me that the company's disclosures hardly do justice to Lefkofsky's daily role at the company, where he has remained a foul-mouthed, coffee-chugging boss who micro-manages InnerWorkings by force of his strong personality and his group's 35% control position. On the other hand, it's easy to see why the company and its underwriters would want him to remain behind the curtain. He's left a trail of burned investors and fraud allegations. Just out of law school in 1994, Lefkofsky got the city of Columbus, Wisc., to back his takeover of a local clothing maker where he promised to create jobs making apparel branded by major-league sports teams. After laying off the workers, the firm sought bankruptcy protection, with its bankers alleging in a state suit that Lefkofsky applied the business's resources to starting his next venture, Starbelly.

Business-to-business procurement Websites were hot in 1999, and Starbelly.com held itself out as a marketplace where companies could arrange to put their logos on promotional items of clothing and hard goods like coffee mugs. Through some family connections, Lefkofsky and his partners attracted the eye of a Chicago-based promotional items vendor named Ha-Lo Industries. A due diligence investigation by Ernst & Young warned Ha-Lo that Starbelly's software was not as proprietary -- or even as functional -- as Starbelly claimed, according to Ha-Lo documents discovered in subsequent shareholder suits. The publicly-held Ha-Lo nevertheless bought Starbelly for $240 million in cash and stock in May 2000, saying that Starbelly's website would bring in $1 billion in revenues.

Lefkofsky and his Starbelly pals quickly assumed control of Ha-Lo, according to lawsuit records. But the software fizzled and the website was a flop. In scarcely a year, Ha-Lo wrote off Starbelly completely. It entered bankruptcy court in July 2001. Class action fraud suits against Lefkofsky and others were ultimately settled, but not before turning up vulgar, reckless Lefkofsky e-mails (one of which is reproduced verbatim below) that might bring shudders to any public investor entrusting her savings to his latest venture.

"Lets get funky. Lets announce everything. Lets be WILDLY positive in our forecasts," he told his Ha-Lo colleagues, even as that business was falling apart. "if we get wacked on the ride down -- who gives a sh*t. Is it going to worse than today? is our market cap going to fall to 200N, 100M who the f**k cares."
No wonder he's taken a low public profile since starting InnerWorkings with Richard A. Heise, Jr. -- another promoter hounded himself by the fraud suits of investors who said he never delivered his promised Internet software for managing executive benefit plans.

Numerous ex-employees of InnerWorkings told me that its vaunted software also doesn't work as claimed. A century ago, there was an investor named Mark Twain who lost a bundle investing in ersatz printing technologies. He said that history doesn't repeat itself, but sometimes it rhymes.