Have financiers torpedoed struggling small companies they were supposedly helping? Lawsuits raise some ugly accusations. Rodney Young thought he'd hit the big time. For months he had been casting about for cash to save his young telecom-services outfit, Eagletech Communications. Then in March 2000 he sent a team of executives to New York to meet a group of potential investors at Salomon Smith Barney. Young had a patent, but no sales, and yet here were five Salomon officers and a group of investors offering to buy convertible preferred shares from Eagletech for up to $6 million. "I thought these people wanted to help us," he says.

He was soon disabused of that notion. Immediately after the meeting at Salomon, Eagletech's share price began to sink. By November it was down from $14 to 75 cents, erasing $113 million in stock market value. That seemed extreme even for a company that had only $300,000 in cash and was burning $100,000 a month.

Young now claims the wave of selling was led by the very investors at Salomon's table. In a suit filed in Florida, where Eagletech is based, Young alleges that mighty Salomon, along with a group of conspirators, set him up for a fall with convertible-debenture financing, then shorted the common stock all the way down. Salomon has asked the court to throw out the complaint, claiming it did nothing to harm Eagletech.

Eagletech's suit is one of five similar actions. They are led by John O'Quinn, a rapacious plaintiff attorney in Houston who has conjured multimillion-dollar verdicts in breast implants and tobacco. Much of the legal legwork is being done by another Houston lawyer, James W. Christian. Each complaint has been filed on behalf of puny companies against well-heeled financiers who allegedly offered desperately needed capital and then profited by short-selling of shares--all in the thinly regulated world of Bulletin Board stocks. One plaintiff, a legal-research outfit known as Internet Law Library, says it has identified more than 100 companies damaged in convertible-securities schemes, resulting in billions of dollars in lost market value.

The kind of financing at issue, since discredited, goes by the telling name of "death spiral preferred." It worked like traditional convertible securities, except that the conversion price was a movable goalpost. The more the stock went down, the more shares the owner of the convert could claim on converting.