Investigations

Kandi Technologies Corp.: Where are the Cocos?

2011-05-03T04:08:16Z

Over the past two years, Kandi Technologies Corp. (Nasdaq: KNDI) has reported selling more than 3,700 of its Coco electric cars -- golf cart-like vehicles that are approved for street use and top out at around 30 miles an hour.

But a Sharesleuth investigation found that the Chinese company, which went public in the United States through a reverse merger, appears to have greatly overstated its sales figures.

Sharesleuth checked with Kandi's own electric-vehicle dealers and found none that could account for the sales volume the company has claimed in its Securities and Exchange Commission filings and earnings reports.

The co-owner of the most successful dealership, in Oklahoma City, Okla., said he sold roughly 350 of the Cocos, which resemble Smart Cars and have a suggested retail price of more than $13,000. The next biggest dealer sold fewer than 100.

Our survey of dealers, distributors and others familiar with Kandi's activities found that well under 1,000 people have purchased Cocos in the United States, the company's main market for the past three years.

The wide gulf between Kandi's claimed sales and actual dealer sales is significant because the Coco accounted for nearly 20 percent of the company's reported revenue for 2009 and 2010. It's also significant because the company raised $26.6 million in two private placements last year based partly on representations about the progress of its electric car business.

Sharesleuth's research turned up other inconsistencies that raise additional questions about Kandi's sales figures.

For example:

Kandi said it sold 2,110 Cocos in its very first year on the market, which would have ranked it among the top companies in the industry.
Although one of Kandi's investor-relations representatives said the company took orders for 1,200 orders Cocos in Oklahoma in 2009, state records show that only 328 buyers claimed tax credits for Coco purchases.
Kandi's most recent SEC filings contain lower 2009 sales numbers for the Coco and other vehicles than the company originally reported -- without any corresponding adjustments to revenue or earnings.

Kandi declined to answer a list of questions submitted by Sharesleuth.

HISTORY

Kandi, which has headquarters in Jinhua, China, went public in June 2007 through a reverse merger with Stone Mountain Resources Inc., a Nevada company that had been pursuing a gold-mining venture.

Kandi was one of 11 Chinese reverse-merger companies featured in an earlier Sharesleuth investigation about a network of promoters who played a hidden role in bringing those companies public and received millions of dollars worth of stock in return for their assistance.

The story showed that the promoters paid the legal fees, accounting fees, investor-relations expenses and listing expenses for four of the companies - Kandi, Telestone Technologies Corp. (Nasdaq: TSTC), Orsus Xelent Technologies Inc. (AMEX: ORS) and New Oriental Energy & Chemical Corp. (Pink Sheets: NOEC.PK), which recently was delisted from the Nasdaq.

Kandi and the other companies did not disclose those arrangements in their SEC filings.

As recently as November, Kandi's shares were trading for as much as $7.25, giving the company a market capitalization of nearly $160 million. The stock has been falling since then, and closed Tuesday at $2.73.

(Disclosure: Mark Cuban, majority owner of Sharesleuth.com LLC, has no position in the shares of Kandi. Chris Carey, editor of Sharesleuth.com, does not invest in individual stocks and has no position in any of the companies mentioned in this story, nor does co-author Justin McLachlan.)

Unlike other Chinese reverse-merger companies that are alleged to have inflated revenue and earnings, Kandi sells the bulk of its products in North America rather than China.

Kandi introduced the electric Coco in early 2009, and has been touting electric vehicles as its biggest prospect for growth. The company has marketed the Coco primarily in America because Chinese homes and parking facilities are not set up for plug-in recharging.

However, Kandi now is turning its focus to China, with a plan that relies on battery-replacement stations that quickly swap charged batteries for drained ones. It announced in July that it the Hangzhou Postal Service had placed an initial order for 60 Cocos. The company and its backers say that the battery-replacement stations, combined with new subsidies authorized by the Chinese government, could lead to the sale of thousands of Cocos annually.

Kandi announced earlier this year that it had received a purchase order for 1,000 Cocos from a little-known Italian company, Share s.r.l., which was established only last year. Share did not respond to a request for comment on that deal.

DEALERS REPORT LOW SALES

Kandi distributes its electric vehicles in the United States through two companies: Kandi USA Inc., in Rancho Cucamonga, Calif., and Solus International Corp., which has headquarters in the Seattle area.

According to SEC filings, Kandi USA is independent from Kandi Technologies. However, its president is Wangyuan Hu, the son of Kandi Technologies' chairman and chief executive, Xiaoming Hu.

Wangyuan Hu also was a vice president and director of Kandi Technologies. He resigned from the board in January and was no longer listed as an officer in the company's annual SEC filing.

Solus International's website includes a directory of Kandi dealers, searchable by city, state and zip code. We entered a variety of locations and found that the directory listed just nine Coco dealers nationwide.

We also looked elsewhere for Kandi dealers and found a handful of additional outlets that currently or previously marketed Cocos.

Sharesleuth reached out to all of them in attempt to verify Kandi's sales figures. Although the company reported selling Cocos by the thousands, most of the dealers we spoke to said they had sold few, if any, of the cars.

For example, a dealer in Florida called Riva Motorsports said it took several Cocos for demonstrators but hadn't sold any. A sales manager added that Riva doesn't plan to carry the line any longer.

Similarly, Prosser RV Rentals and Sales, in Milwaukee, appears to still be trying to unload its two demonstrators. Another dealer, Electrick Motorsports, in Northern California, does not advertise the Coco on its website or list any of the cars in its inventory of new or used vehicles.

The owner of a fourth dealership, in Houston, said he'd sold a very small number of Kandi's mini-cars, adding that the market for electric vehicles in the United States remains focused on brand names like Nissan's Leaf or the Chevrolet Volt.

A representative for two Arizona-based dealerships listed as Coco outlets said each had sold only a modest number of the vehicles, primarily to buyers who wanted to use them within golf-course communities.

The owner of a seventh dealership, also in Northern California, said its Coco sales had been light as well. He said the Coco wasn't suited to the roads in that area, which have speed limits higher than 35 miles per hour.

Another dealer, Rusty Wallis, operates Honda and Volkswagen outlets in the Dallas area. He signed up to be a Kandi dealer in 2008, just before the economy melted down. Despite the difficult conditions, his operation sold 30 to 40 Cocos.

"I still have a few left,'' Wallis said, adding that he is no longer actively promoting the vehicles.

Sharesleuth also found someone in Miami who was not on Kandi's official dealer list but had been advertising the Coco through videos on the Internet. Alex Gutierrez, who set up the site MiamiNEV.com, said his group got a shipment of 40 Cocos in 2009 to evaluate and sell.

Gutierrez said the vehicles were cheaply made, underpowered and loud. Although his group was able to move some of the Cocos, it left many of them in their shipping crates and liquidated them overseas.

Two companies identified as regional Kandi distributors in a March 2009 press release - Franklin Motorsport LLC of Miami and Engesser Eco Autos of Spearfish, S.D. -- are no longer promoting the Coco.

OKLAHOMA

Kandi was more successful in Oklahoma, where an unusually generous combination of state and federal tax credits in 2009 reduced the net cost of a Coco to less than $900.

Oklahoma offered a tax rebate equal to half the price of the vehicle, which in the case of a Coco priced at $10,599 worked out to nearly $5,300. The federal tax credit was an additional $4,435.

Kandi said in its annual SEC filing for 2009 that it sold 2,110 Cocos, with a little under half of that volume coming in the final quarter.

Robert Agriogianis, one of Kandi's investor-relations consultants, was quoted in the China Economic Review in March 2010 as saying that the company got 1,200 orders in Oklahoma alone in 2009.

But if Kandi sold that many vehicles in the state, there's no evidence of it.

Jake Conrady, manager and part owner of GKU Electric Vehicles LLC, told Sharesleuth that his company sold only 350 or so Cocos, nearly all of them in the second half of 2009.

The elimination of Oklahoma's tax credit -- and a reduction in the federal tax credit to 10 percent of the purchase price -- wiped out demand for electric vehicles after that, he said.

GKU sold only a handful of Cocos last year, and still has about 50 sitting in a warehouse, Conrady said.

Another dealership, Trinity Trikes, told an Oklahoma paper in October 2009 that it was selling about 10 Cocos a week, mostly to people who wanted to tow them behind their motor homes. It wound up selling just under 100 of the vehicles.

Sharesleuth found no mention of any other Oklahoma outlets in Kandi's promotional materials, in news stories or in directories of electric-vehicle dealers. And the Oklahoma Tax Commission records do not reflect any Coco sales by other dealers in the state.

Although it's possible that some people who bought Cocos did not apply for the $5,000-plus tax rebate available to them under that state's incentive program, it is highly unlikely that hundreds of people would have passed up that money.

A SALES LEADER?

Others in the electric-vehicle industry questioned Kandi's sales figures, both in Oklahoma and beyond.

The Oklahoma Tax Commission records show that the buyers of 4,492 electric vehicles applied for that state's tax credits. Of that total, 328 had purchased Cocos.

State records show that five other manufacturers outsold Kandi in Oklahoma, including Global Electric Motorcars LLC (GEM) and Tomberlin Automotive Group, two of the industry's biggest players.

GEM, a unit of Chrysler LLC, has sold 45,000 vehicles in 13 years, or an average of roughly 3,500 annually. Its totals include fleet sales to government agencies, universities, corporations and other fleet buyers -- a market that Kandi has not tapped.

Kandi's claim to have sold more than 1,600 Cocos in 2010 was particularly surprising to industry experts, given that demand for electric vehicles plunged after tax credits were reduced.

Zenn Motor Co., a publicly traded Canadian company, stopped making its electric cars last year because of disappointing sales. It had sold roughly 500 vehicles in the previous two years.

Wheego Electric Cars Inc., an Atlanta company that entered the market in September 2009, had sold 300 of its low-speed vehicles through the end of last year, said Michael McQuary, its chairman and chief executive.

About 100 of Wheego's sales were in Oklahoma, McQuary said.

"LSVs were a tougher sell in 2010 than 2009, because people knew full-speed vehicles were coming,'' he said.

It's possible that Kandi's distributors, Kandi USA and Solus International, purchased significantly more vehicles than their dealer network has been able to move. We asked Kandi to explain the discrepancy between the number of vehicles the company reported selling and the number the dealers reported selling. Kandi, through an attorney, said that responding to our questions could violate Regulation FD, an SEC rule covering selective disclosure of company information.

CONFLICTING NUMBERS

Kandi said in its annual SEC filing for 2009 that it sold 2,110 Cocos, nearly all of them in the United States. It reported selling an additional 1,618 Cocos last year.

But Sharesleuth noted that a chart in Kandi's annual SEC filing for 2010 -- comparing year-over-year sales figures for each of the company's product lines -- listed a lower total for Coco sales in 2009.

The chart said Kandi sold only 1,892 Cocos in 2009, or 10 percent fewer than the company originally reported.

	The year ended December 31
	2009				2008
	Unit		Revenue		Unit		Revenue
All-terrain Vehicles (ATVs)		6,194	$	3,021,352		6,022	$	4,981,792
Super-mini car (CoCo) (1)		2,110		8,508,451		2,125		9,140,919
Go-Kart		13,673		13,487,087		38,644		20,818,651
Mini Pick-up		1		4,365		25		45,974
Utility vehicles (UTVs)		3,509		8,478,679		2,759		4,741,704
Three-wheeled motorcycle (TT)		458		327,828		481		784,748
Total		25,945	$	33,827,762		50,056	$	40,513,788

	The year ended December 31
	2010				2009
	Unit		Revenue		Unit		Revenue
All-terrain Vehicles (ATVs)		5,868	$	3,716,893		5,433	$	3,020,271
Super-mini car (EV)		1,618		6,800,000		1,892		8,478,424
Go-Kart		28,366		25,434,803		13,618		11,556,921
Mini Pick-up		-		-		1		4,364
Utility vehicles (UTVs)		2,270		4,839,256		3,171		8,477,828
Three-wheeled motorcycle (TT)		917		2,089,348		1,133		2,289,954
Total		39,039	$	42,880,300		25,248	$	33,827,762

The prospectus for Kandi's December placement of $16.6 million in stock, at $5.50 a share, listed the higher sales numbers for 2009.

Kandi's latest annual filing lowered its reported sales of all-terrain vehicles in 2009 by more than 12 percent, to 5,433 units, and reduced its previously reported sales of utility vehicles by nearly 10 percent, to 3,171 units.

The same chart showed an upward revision in the number of three-wheeled motorcycles sold in 2009. Kandi more than doubled that figure, to 1,133 vehicles.

It's possible that some of the sales were originally put in the wrong categories. But even allowing for those types of corrections, the vehicle totals and the revenue totals do not track with the revisions.

All told, the chart in the 2010 filing showed that Kandi sold 25,248 vehicles in 2009, or 697 fewer than it initially reported. Despite that drop in unit sales, the company did not alter its original revenue figure of $33.8 million for the year.

Kandi's auditor for both its 2009 and 2010 annual filings was Albert Wong & Co., which is based in Hong Kong. Kandi hired the firm in mid-2009, after dismissing Weinberg & Co., of Boca Raton, Fla.

Weinberg & Co. said at the time of its dismissal that it had no disagreements with Kandi. The firm did not respond to questions from Sharesleuth.

The conflicting numbers in Kandi's annual filings were no aberration. Kandi's quarterly reports for the second and third quarters of 2010 also contained charts that included revised sales figures for 2009.

For example, Kandi initially reported selling 646 Cocos in the first half of 2009. But in the company's SEC filing for the second quarter of 2010, that figure was reduced by nearly 30 percent, to 474 Cocos.

	Six Months Ended June 30
	2009		2008
All-terrain Vehicles("ATV")		2,537		3,658
Super-mini car ("CoCo")		646		568
Go-Kart		2,940		24,906
Mini Pick-up		-		25
Utility vehicles ("UTVs")		1,558		962
Three-wheeled motorcycle ("TT")		283		1
Total		7,964		30,120

	Six Months Ended June 30
	2010				2009
	Unit		Sales		Unit		Sales
ATV		2,184	$	1,595,181		1,774	$	1,053,633
CoCo		1,377		5,810,682		474		1,704,025
GoKart		6,387		6,906,990		2,563		2,380,224
Utility vehicles ("UTVs")		1,052		2,301,724		1,458		3,671,762
Three-wheeled motorcycle ("TT")		678		1,551,647		336		677,812

Likewise, the totals in Kandi's third-quarter reports changed without explanation. In 2009, the company said it sold 1,141 Cocos through the first nine months of the year. In the 2010 report, that figure was lowered to 896.

	Nine Months Ended September 30
	2009		2008
All-terrain Vehicles("ATV")		3,098		5,636
Super-mini car ("CoCo")		1,141		1,344
Go-Kart		7,735		32,187
Mini Pick-up		-		25
Utility vehicles ("UTVs")		2,864		1819
Three-wheeled motorcycle ("TT")		388		1
Total		15,226		41,012

Nine Months Ended September 30

2010

2009

Unit

Sales

Unit

Sales

ATV

2,756

$

1,985,008

2,598

$

1,623,635

CoCo

1,592

6,635,008

896

3,563,550

GoKart

14,943

15,064,736

6,098

5,650,243

Utility vehicles ("UTVs")

1,397

2,970,300

2,582

6,468,654

Three-wheeled motorcycle ("TT")

862

1,982,811

896

1,803,603

Pick - up

-

-

1

4,364

UNEXPLAINED SURGE

We also noted that Kandi's financial report for the first half of 2010 reflected a second-quarter sales surge that the company mentioned in its earnings release but never fully explained.

The company's SEC filings show that its Coco sales shot from 372 in the first quarter of 2010 to 1,005 in the second quarter. They then dropped just as steeply as they'd risen, falling to 215 Cocos in the third quarter and 26 in the fourth quarter.

Last Nov. 15, Kandi announced its results for the first nine months of 2010. It said in its press release that the strong Coco sales in the second quarter were a key reason the company's revenue was up 50 percent. That same day, Kandi's shares hit their 52-week high of $7.25.

SEC filings show that on Nov. 17 and 18, Wangyuan Hu sold about 87,000 shares of his Kandi stock - more than half of his holdings - for a little over $500,000.

Two weeks later, CEO Xiaoming Hu sold 10,000 shares for $56,200, his first ever sale of Kandi shares.

UNDISCLOSED LITIGATION

Sharesleuth's investigation also turned up a lawsuit alleging that Kandi defrauded its original U.S. distributor and strong-armed that company out of its potentially lucrative contract.

Kandi's SEC filings never mentioned the suit, which sought more than $4 million in damages.

Kandi's original U.S. agent was a company called Seaseng Inc, headed by Cong Wang, a Chinese citizen living in California.

In 2006, Wang signed a deal that made Seaseng Inc. the exclusive distributor of Kandi products in the United States. According to a lawsuit that Wang filed against Kandi, Kandi USA, Xiaoming Hu, Wangyuan Hu and several other defendants, Kandi was to develop 10 new product lines a year, provide two-year service warranties and supply free replacement parts.

Kandi and Seaseng also agreed to swap shares in their respective companies, so that each would own a part of the other. According to the suit, Kandi promised to invest $300,000 in Seaseng but never did.

Wang said that, between June 2007 and November 2007, Kandi shipped 56 containers of its products to Seaseng, without the execution of any purchase orders or contracts.

That was just after Kandi had become a public company.

According to the suit, another 70 containers followed in December 2007. Seaseng had to use its own funds to pay the customs charges, duties and storage costs.

Around the same time, Kandi began negotiating a deal to acquire another U.S.-based company, SunL Group Inc. The suit said that Kandi's chief executive, Xiaoming Hu, wanted Wang to sell SunL a controlling interest in Seaseng, and to let SunL distribute Kandi products that were exclusively designed for Seaseng.

Wang said in the suit that Kandi used him to gain access to the U.S. market and then began looking for ways to get rid of him. He alleged that, while he was in a meeting with officials from Kandi and SunL in January 2008, Wangyuan Hu stole corporate documents, including Seaseng's business license, its customer lists and some blank stock certificates. Wang said the theft was captured on video.

Things only got worse from there. Wang says his family in China was threatened, sometimes by Xiaoming Hu. Wang also said that Kandi's chief executive caused criminal charges to be filed against him in China in January 2009, by claiming that Wang was a Kandi employee who had himself stolen corporate documents.

Kandi filed a lawsuit against Wang and Seaseng in California in February 2008, alleging fraud, conversion and other offenses. But the suit was never served on Seaseng and was later dismissed.

According to Wang's suit, Xiaoming Hu called Wang's father in China on Feb. 27, 2008 and threatened Wang's welfare. The next day, Hu called Wang and demanded that he sign a promissory note and settlement agreement.

Despite the ill will, Wang and Hu met on Feb. 28 and agreed to a settlement that called for Seaseng to pay for some of the Kandi vehicles it had received and to send some back to China. In addition, Wang agreed to relinquish any claim of ownership in Kandi, and Kandi agreed to relinquish any claim of ownership in Seaseng.

Wang said in his suit that Seaseng had received approximately $7 million worth of vehicles from Kandi. He said he made $436,000 in payments to Kandi in the three months after the companies negotiated their settlement.

But that truce didn't last long. Kandi filed another lawsuit against Wang and his company in July 2008, saying they had breached the agreement and a fiduciary duty to give Kandi control of Seaseng.

Kandi eventually dropped that suit as well.

In October 2008, the California Department of Motor Vehicles cancelled Seaseng's distributor license. Around the same time, according to Wang's lawsuit, Seaseng began hearing from people who had purchased Kandi vehicles and had complaints about "poor quality and performance, missing parts and defects."

Those unhappy customers wanted new parts, or refunds. According to the suit, Wang forwarded the complaints to Kandi, but the company refused to act on them. Eventually, Wang liquidated all of his remaining Kandi inventory to distributors in Mexico, "at heavy losses.''

But Wang's dealings with Kandi and its executives weren't quite over. He said in his suit that, in December 2008, Xioaming Hu sent his bodyguard to Seaseng with a warning -- that he'd made a deposit with someone to "take care of Mr. Wang."

Wang reported that visit to the local police.

In June 2009, Kandi filed another lawsuit against Wang, asking the court to enforce the settlement agreement and to make Wang pay for the balance of the Kandi vehicles that he had received.

Wang responded with his own suit, seeking damages from Kandi. That case was dismissed last year for lack of prosecution.

IMPORT / EXPORT TROUBLES

Sharesleuth also turned up another problem that Kandi never disclosed to shareholders.

In August 2008, the company proudly announced that its first shipment of 100 Cocos had reached the United States. Unlike the current version, those models were gasoline powered.

Kandi said it expected that shipments would "continue to build in succeeding months to meet anticipated strong customer demand," and Xiaoming Hu predicted that the company would sell 5,000 of the vehicles by the end of the year.

But Kandi soon hit a roadblock, one it never disclosed to investors: The cars were here illegally.

Federal law prohibits the importation of vehicles into the United States without specific regulatory approval from the Environmental Protection Agency.

The EPA found that Kandi's distributors, Kandi USA and Solus International, violated that law by importing crates of vehicles from China bearing EPA labels that said the contents met the agency's standards for ATVs.

When the U.S. Customs and Border Inspection Service inspected a shipment of 28 vehicles at the Port of Savannah in September 2008, it found that the contents were not ATVS, as described, but mini-cars not covered under the EPA certification.

In early 2009, Kandi USA and Solus International voluntarily disclosed to the EPA that they'd already brought a larger shipment of 70 Cocos into the country, under the same declarations.

Both Kandi USA and Solus settled the charges with the EPA in June 2009. Without admitting or denying any guilt, they each agreed to pay a fine of $40,000 and either destroy or export the illegal vehicles.

S. Paul Kelley, the man on the podium

2011-01-14T07:45:25Z

You won't find S. Paul Kelley's name in any Securities and Exchange Commission filings.

But the Canadian stock promoter pops up in photo after photo taken at the NASDAQ and American stock exchanges, usually smiling and surrounded by executives at Chinese companies that went public through reverse mergers.

A Sharesleuth investigation found that Kelley and several equally anonymous partners helped create a string of U.S.-listed Chinese companies, including Telestone Technologies Corp. (Nasdaq: TSTC) and Kandi Technologies Corp. (Nasdaq: KNDI).

Documents show that Kelley and his partners packaged the Chinese companies for reverse mergers with shell companies, paved the way for their listings on U.S. exchanges and promoted their stock afterward.

One of the partners even fronted the legal and accounting bills for some of the companies.

In return for their assistance, Kelley and the other participants in the venture got millions of shares of stock at low, pre-market prices. Their roles were not discussed in those companies' SEC filings, nor were their share deals disclosed.

The SEC has taken the position in previous enforcement actions that anyone who is compensated for acting as a finder or facilitator in a reverse-merger transaction must be registered as a broker/dealer (see cases here, here and here).

Sharesleuth could not find anyone who participated in Kelley's Chinese deals who met that requirement. In fact, one person who was involved in at least three of the reverse mergers was previously charged by the SEC with violating that rule.

A SECRET PARTNER

One of Kelley's partners was Jay Tien Chiang, a Canadian businessman who was found to have defrauded a computer company of nearly $10 million in the 1990s.

Chiang has spent more than 12 years trying to avoid the financial judgments against him. His personal bankruptcy case -- which includes allegations that he stashed a small fortune with family and friends before claiming insolvency -- ranks as one of the longest and most contentious in Canadian history.

Documents uncovered in case link Kelley and Chiang to a Hong Kong company called Winner International Group Ltd., which played a central role in the creation of Telestone, Kandi, New Oriental Energy & Chemical Corp. (Nasdaq: NOEC) and Orsus Xelenet Technologies Inc. (AMEX:ORS).

The documents show that Winner International may have reaped more than $20 million from those deals, without ever appearing on the radar screens of securities regulators or other investors.

The testimony and records assembled after the initial discovery by a private investigator offer a rare and revealing look into the often-opaque world of Chinese reverse mergers.

Sharesleuth stumbled onto the bankruptcy case while researching Kelley's activities. We went to Toronto and reviewed thousands of pages of documents, including copies of brokerage statements, emails, depositions and other testimony.

We then compared that information against SEC filings, corporation filings and other records to piece together additional elements of the reverse-merger network.

Although most of the Chinese companies that Kelley and his associates brought to the United States saw brief spikes in their share prices, nearly all have become long-term losers.

THE CREATIONS

Kelley has helped at least 11 Chinese companies go public through reverse mergers. They are:

Telestone (Nasdaq: TSTC). Telestone sells wireless communications equipment and network access packages, primarily to China's three main mobile phone companies. The Beijing-based company went public in 2004 by merging with a U.S. shell that had just reorganized in bankruptcy court.
Orsus Xelent (AMEX: ORS). The company, which also has headquarters in Beijing, manufactures and distributes cellular telephones. Kelley helped the company gain a U.S. listing in 2005.
New Oriental Energy (Nasdaq: NOEC). The company is based in Xinyang and makes fertilizer and chemical products. It went public in 2006.
Kandi (Nasdaq: KNDI). The company, which currently has headquarters in Jinhua, makes all-terrain vehicles and go carts, and is developing its own line of electric cars. Kandi became a public company in 2007.
China INSOnline (Pink Sheets: CHIO.PK). The Beijing-based company once operated a web portal offering information on insurance services. Kelley helped bring the company public in 2007. Its shares were delisted from the Nasdaq in November and now trade on the Pink Sheets.
China Auto Logistics Inc. (Nasdaq: CALI). The company, which has headquarters in Tianjin, imports and sells cars. It went public through a reverse merger in 2008.
China Infrastructure Investment Corp. (Nasdaq: CIIC). The company has headquarters in Zhengzhou and owns and operates a toll road called the Pinglin Expressway. Kelley helped it get a U.S. listing in 2008.
Guanwei Recycling Corp. (Nasdaq: GPRC). Guanwei is based in Fuqing City and recycles plastic waste from Europe into polyethylene for use by Chinese manufacturers. It went public through a reverse merger last year.
Winland Online Shipping Holdings Corp. (OTCBB: WLOL.OB). The Hong Kong company operates a fleet of oceangoing vessels and offers shipping and logistics services. It became a public company in 2008.
CH Lighting International Corp. (Pink Sheets: CHHN.PK). CH Lighting is based in Shangyu City and makes fluorescent bulbs, lamps and other lighting products. The company, which once traded on the Over-the-Counter market, became public in 2008.
Chisen Electric Corp. (OTCBB: CIEC.OB). The Changxing-based company makes batteries for electric bicycles, motorcycles and cars. It became a public company in 2008.

Sharesleuth has identified a handful of additional Chinese reverse-merger companies that have connections to some of the players in the deals listed above. We'll have more on them in part two of this story.

A FINANCIAL MIDDLEMAN

Although it's not apparent from SEC filings, Winner International was the key financial middleman in the reverse mergers that turned Telestone, Kandi, New Oriental Energy and Orsus Xelent into public companies traded.

Court documents say that Winner International paid the legal, accounting and other compliance expenses for those four companies, in advance of their reverse mergers and for as many as two years afterward.

Those outlays totaled $2 million to $3 million per company, and were never listed as specific financial obligations in the companies' SEC filings.

Kelley was vice president of Winner International from 2002 to 2009, and set up the U.S. brokerage accounts it used to sell much of the stock it received in the reverse-merger deals.

Winner said in a legal filing that it authorized Kelley or his employees to trade the shares on its behalf.

A financial summary prepared by a forensic accountant shows that at least $11.4 million in cash was transferred from those brokerage accounts, mostly to Winner International's bank account in Hong Kong.

Because of the lack of public disclosure surrounding the share allotments in the reverse mergers, it was nearly impossible for ordinary investors to know when the people who had created -- and touted -- the Chinese companies were cashing out.

FROZEN ASSETS

One of Winner International's U.S. brokerage accounts, at E*Trade Securities, was frozen last year by a Canadian judge who concluded that Chiang secretly controlled it. As of February, that account was worth an additional $9.4 million, much of it in the shares of Telestone, Kandi and New Oriental Energy.

Court records show that Winner International's bank account in Hong Kong was emptied in February and March of 2009, while Chiang's creditors were trying to get a court to enforce a freeze order there.

An admitted money launderer in Toronto testified that he had previously helped route money to Chiang from that account, at HSBC Bank, doing his best to ensure that the transfers went undocumented.

Kelley and Winner International were named as defendants in a California case related to the original judgment against Chiang. They weree alleged to have participated in the fraudulent conveyance of assets by helping him hide money.

The trustee overseeing Chiang's bankruptcy also has named Winner International as a defendant in that case, again claiming fraudulent conveyance.

A trial is scheduled for next week in Toronto to determine the true owner of Winner International's frozen E*Trade account. (editor's note: this trial has been reset for Feb. 22)

Sharesleuth is not alleging that any of the companies that Kelley and Chiang helped take public were complicit in any of the above financial transactions.

But we think that people who have made, or are considering, investments in those companies might want to know more about their behind-the-scenes partners. We also think the failure of those companies and their top executives to disclose the connections to Kelley, Chiang and Winner International, and the compensation they received, raises questions about their credibility on other corporate issues.

The Street.com reported last month that the SEC was investigating allegations that a network of American firms and individuals had teamed up with Chinese partners on fraud schemes that have cost investors billions of dollars.

The site said the SEC was particularly interested in stock promoters, investment bankers, auditors and law firms that have helped Chinese companies gain listings on U.S. exchanges and sell additional share to American investors.

(Disclosure: Mark Cuban, majority owner of Sharesleuth.com LLC, has no position in the shares of any of the companies mentioned in this report. Chris Carey, editor of Sharesleuth.com, does not invest in individual stocks and has no position in any of the companies mentioned, nor does Justin McLachlan, co-author of this story.)

A FAMILIAR PATTERN

With the exception of Telestone, whose stock shot to nearly $25 last year, the shares of most of the Chinese companies that Kelley has brought to the United States have followed roughly the same trajectory.

They started out on the Over-the-Counter market and then moved to the AMEX or Nasdaq, rising to a range of $5 to $10 a share before entering prolonged declines.

Despite the surging Chinese economy, six of the 11 companies that Kelley and his associates helped to bring public reported revenue declines - or, in one case, no revenue at all -- in their most recent quarterly financial filings.

Because the companies have rarely reached market capitalizations of more than $200 million, their activities have drawn little attention from securities analysts or others who might be inclined to dig more deeply into their structure or finances.

KELLEY

Kelley, who lives in the suburbs of Toronto, bills himself as a merchant banker and venture capitalist. He operates through MCC Group USA Inc. and a subsidiary, Asia First Financial Corp., both of which list headquarters in New York.

He previously worked for Medallion Capital Corp., an investor relations company headed by his father, Stafford Kelley.

In 2008, Stafford Kelley settled charges with the Ontario Securities Commission in connection with a stock-manipulation scheme involving a small minerals company called Hucamp Mines Ltd.

Regulators alleged that Stafford Kelley, who handled investor relations for Hucamp, traded in its stock to create the appearance of greater market activity, and made purchases that had the effect of boosting the company's share price. He was fined $10,000 and agreed to a five-year ban on securities trading and a 10-year ban on serving as an officer or director of a public company.

Old press releases show that Paul Kelley also handled investor relations for Hucamp at the time the manipulation scheme was playing out. He was not accused of any wrongdoing. But Hucamp's chief executive, a director and two other people faced charges along with Kelley's father. All agreed to settlements with the OSC that included trading bans, officer and director bans and fines.

Sharesleuth noted that one of Stafford Kelley's longtime associates, a Toronto accountant named Howard S. Barth, was appointed to the boards of directors of four of the Chinese reverse-merger companies -- New Oriental Energy, Orsus Xelent, China Auto Logistics and Guanwei Recycling.

JAY CHIANG

Chiang and his brother, Julius Chiang, operated Aamazing Technologies Corp., a California-based company that imported and distributed computer monitors.

In 1998, one of its main suppliers, Korea Data Systems Ltd., won a $9.7 million judgment against the Chiangs. The judge found that they not only failed to pay for monitors and parts, but engaged in fraud and breached their fiduciary duty.

Both Chiangs promptly filed for bankruptcy. Despite claiming to have no income or financial resources, Jay Chiang and his wife, Christina, continued to live a life of relative luxury, remaining in their 10,000-square-foot house in Richmond Hill, Ontario, driving expensive cars, taking international trips and sending their two sons to an expensive private school.

The Toronto Star, in its coverage, has referred to the couple as "mysteriously rich.'' Jay and Christina Chiang were sentenced to jail terms in 2007 for failing to heed a judge's order to answer specific questions about their finances. Jay Chiang served nearly eight months before an appeals court ordered him released.

A RELENTLESS ADVERSARY

Jay Chiang's main adversary is Lap Shun "John" Hui, a Chinese-born entrepreneur who was part owner of Korea Data Systems. Hui sold another of his companies, eMachines Inc., to Gateway Inc. for cash and stock valued at $290 million.

Hui, who lives in California, has spent several million dollars pursuing the Chiangs on behalf of Korea Data Systems (USA) Inc. The legal fight extends beyond the United States and Canada, to Hong Kong and at least two other foreign jurisdictions.

Hui has been supported in that effort by the bankruptcy trustee in the Canadian case, who is attempting to find and liquidate assets so that all of Chiangs creditors can be paid.

Hui's hunt for assets that he believes Chiang transferred to family and friends led to a private investigator's discovery of a shredded brokerage statement in Chiang's trash, which suggested he had access to Winner International's E*Trade account.

COMMON TIES

Additional documents turned over by Kelley, Winner International and others involved in the case revealed common ties among a number of U.S.-listed Chinese companies - links that are not apparent from their SEC filings.

Copies of emails and brokerage statements show that Kelley, Chiang and others played significant, undisclosed roles at the companies after they went public. They reviewed business plans and press releases, worked on financing with investment bankers and even bought and sold stock to help spur or sustain the public market (Look for more details on these activities in part two of our story).

The court documents connect Winner International to Telestone, Kandi, New Oriental Energy and Orsus Xelent. Shares of a fifth company, Winland Online Shipping, also wound up in one of Winner International's U.S. brokerage accounts.

Chiang's creditors presented trading records that suggest he bought that stock in the open market to bid up the price, the same day a partner's selling unexpectedly sent the company's shares plummeting.

SEC filings show that certain participants in the reverse mergers that created Telestone and New Oriental Energy also were involved in some of the later deals.

Ten of the 11 companies that Kelley is known to have helped bring public currently use the same investor relations firm, DGI Investor Relations Inc., which is based in New York and headed by Ken Donenfeld. The eleventh company, Telestone, recently switched to a different firm.

Donenfeld told Sharesleuth that he was not employed by Kelley or Kelley's firms. He said he typically is hired by companies after they go public.

Donenfeld forwarded Sharesleuth's questions to all 10 of the Chinese reverse-merger clients we asked about. Only one, Winland Online Shipping, responded.

RESPONSES

Winland said through an attorney that it had no relationship with Kelley, his affiliates or his associates, warning that "any statement or implication to the contrary may prove injurious to our client.''

However, the website for one of Kelley's companies lists Winland among its previous deals. In addition, court filings say that one of Kelley's associates in China helped engineer that company's reverse merger with a U.S shell.

Telestone responded through its investor relations firm, CCG Investor Relations. Like Winland Online Shipping, it did not answer any of our questions, but instead offered this statement:

"It is a matter of public record that in August 2004 Telestone Technologies Corporation completed a share exchange transaction with the stockholders of Success Million International Limited (SMI) by which SMI became our wholly-owned subsidiary and through which we conduct our business operations. On September 15, 2006, NASDAQ accepted Telestone Technologies for listing on the NASDAQ Stock Market and on January 30, 2007, the NASDAQ Stock Market approved Telestone's transfer to the NASDAQ Global Market. Since the consummation of the transaction with SMI, Telestone Technologies believes that it has complied fully with its obligations under the Securities Exchange Act and the rules and regulations of the Securities and Exchange Commission as well as its obligations as a listed company on the NASDAQ Stock Market. Telestone Technologies intends to continue to fully comply with its legal obligations and to act in the best interests of its shareholders."

Kelley did not respond to a list of questions submitted by Sharesleuth. Chiang's attorney said he was unable to provide any additional information or comment on his client's activities.

THE JOINT VENTURE

Kelley and Chiang began working together on Chinese reverse mergers in 2002.

According to testimony in his bankruptcy case, Chiang introduced Kelley to Ning "Jack" Tang, an old friend in Beijing who worked with Chinese companies that wanted to go public.

Tang created Medallion Capital Corp. China as a vehicle for participating in the reverse-merger venture.

According to the testimony, Chiang and Tang would find Chinese companies seeking to get their shares on U.S. exchanges, and Kelley would tell them what changes the companies needed to make to meet listing standards.

Kelley's MCC Group teamed with Winner International and Medallion Capital Corp. China on the reverse mergers that created Telestone, Kandi, New Oriental Energy and Orsus Xelent.

Court filings say MCC Group, Winner International and Medallion Capital Corp. China all were allowed to buy free-trading shares in the newly created companies at nominal prices.

The filings say Chiang and Tang negotiated the stock allocations for the participants in the reverse-merger deals.

One document submitted by Kelley's lawyer shows that Winner International alone received:

950,000 shares of Kandi, which peaked at $7.25 in April 2008
599,700 shares of New Oriental Energy, which spiked to $10.10 in October 2007
1.45 million shares of Orsus Xelent, which hit a high of $7.90 in October 2007.

The filing did not say how many Telestone shares went to Winner International, , or how many shares of any of the reverse-merger companies went to MCC Group and Medallion Capital Corp. China.

But a stock certificate elsewhere in the court documents shows that Winner International got at least list 200,000 Telestone shares, which would have made it one of the biggest investors in the company.

And a brokerage statement shows that Winner International's E*Trade account had 242,020 Telestone shares -- some of them purchased on the open market -- a few months before it was frozen. At Thursday's closing price of $8.67 a share, that stock would be worth $2 million.

MYSTERY SHARES

Like the SEC filings, the court documents in Canada do not explain exactly how MCC Group, Winner International and the other parties acquired stock in the Chinese reverse-merger companies.

But for the shares to be free trading and not subject to registration or a holding period, the participants would have had to obtain them from the shell company or its owners.

In the cases of Telestone and China INSOnline, it appears that MCC Group and other parties got millions of shares of stock in return for providing $50,000 in loans to a pair of shell companies just before the completion of their bankruptcy reorganizations, and for paying off some of their other debts.

Both reorganization plans stated that the shell companies intended to resurrect themselves through reverse mergers.

PHOTO OPPORTUNITIES

Kelley helped Telestone go public in 2004, through a reverse merger with a shell called Milestone Capital Inc., which had just shed debts and unwanted assets through bankruptcy. Its stock started out on the Over the Counter market.

When Telestone's stock moved to the AMEX in 2005, the redheaded, bespectacled Kelley was there. One photograph shows him shaking hands with Daqing Han, Telestone's chairman and chief executive, on the podium overlooking the trading floor.

When Telestone ascended to the Nasdaq Global Market in 2007, Kelley again joined in the celebration. He was pictured with Han and other company officials who came to New York to ring the bell that signals the beginning and end of trading each day.

Kelley also was photographed at bell-ringing ceremonies with executives from Kandi, China Auto Logistics and Guanwei Recycling.

A copy of Han's business card puts his U.S. address, and Telestone's U.S. address, at the same suite of offices that MCC Group originally listed as its New York headquarters.

Phone logs, emails and other documents filed in the Canadian court case show that Chiang and Han also were in touch with one another, and that Chiang corresponded with the chief executives of a few other Chinese reverse-merger companies.

TELESTONE

Sharesleuth reported last August on accounts receivables questions at Telestone.

The wireless communications company's stock rose more than 2,000 percent between March 2009 and January 2010, peaking at $24.94 a share. The surge was fueled partly by financial reports showing sharp increases in sales and earnings.

But as Sharesleuth pointed out in that story, Telestone had not collected most of that revenue. Its $95.2 million in accounts receivable at the end of 2009 equaled all of that year's sales, plus two-thirds of the previous year's sales.

Telestone's latest quarterly filing with the SEC shows that its receivables have continued to rise. They totaled $139.9 million, before adjustments for doubtful accounts, at the end of September.

NEW QUESTIONS

Telestone's shares fell more than 25 percent on Tuesday after an anonymous writer using the name "The Forensic Factor'' posted an analysis of the company's accounting and financial reporting practices on SeekingAlpha.com, an investment site.

Among other things, the article questioned Telestone's "failure to generate a penny of cumulative cash flow, despite claims of spectacular sales and earnings growth.''

The article also asserted that Telestone's revenue recognition and accounts receivables policies do not conform with generally accepted accounting principles. It noted that the company had gone through three chief financial officers in three years, and had changed auditors twice. And it pointed out that Telestone claimed to have developed cutting-edge wireless communications technology while spending less than $1 million a year on research and development.

Telestone has pointed out that nearly all of its receivables are owed by China's "Big Three'' wireless providers. It says that those partners have billions of dollars in revenue and assets, and are unlikely to default on their obligations.

Telestone reported $70.8 million in sales and $12.6 million in profits for the first nine months of 2010. It announced guidance of $129.4 million in revenue for the full year, which would translate to an 80 percent increase from 2009.

Telestone raised $18.5 million in capital in November, through a private placement at a discounted price of $12 a share. Its stock has fallen below $8 since then, which has reduced the company's market capitalization to just $80 million.

WINNER'S FINANCIAL DEALINGS

Court documents show that Winner International sent money to lawyers and auditors from its account at HSBC Bank in Hong Kong, as well as from at least one of its U.S. brokerage accounts.

One summary listed nearly $1 million in payments from HSBC Bank in Hong Kong to a handful of professional firms, including Anslow & Jaclin LLP, a law firm in Manalapan, N.J., and K&L Gates LLP, an international law firm with headquarters in Pittsburgh. The accountants that received payments included Moores Rowland (now Mazars CPA Ltd.), which is the current auditor for Telestone and the former auditor for Orsus Xelent; and Weinberg & Co., which was the auditor for Kandi and New Oriental Energy.

The court documents show that Winner International deposited nearly $1 million that came from a handful of individuals and funds that were later listed in SEC filings as private-placement investors in New Oriental Energy.

Those investors included MidSouth Investor Fund L.P. and Lake Street Fund L.P., both of which have participated in a number of Chinese reverse-merger deals.

It is unclear why the private-placement investors would have paid money to Winner International.

In addition, the transaction summary shows that Winner International received almost $85,000 from Richard N. Molinsky, a former senior vice president at D.H. Blair & Co., a defunct New York brokerage. He pleaded guilty to securities fraud and attempted enterprise corruption in 2002 in connection with that brokerage's boiler-room style activities (see this Sharesleuth story for more on Molinsky).

The transaction summary also shows a deposit of $50,000 into Winner International's Hong Kong bank account that came from an entity called the Kagel Family Trust.

David L. Kagel, a California attorney, has voting control over the shares held by the trust. The SEC brought charges against Kagel in the 1990s, alleging that he orchestrated a fraudulent scheme to take a company public through a reverse merger. A judge found that he prepared filings that contained false and misleading statements, committed "repeated and deliberate'' violations of federal securities law and he tried to conceal the violations after a specific inquiry by regulators.

The financial summary does not include any explanation for why Molinsky or the Kagel Family Trust provided money to Winner International. Neither appears in the SEC filings of any of the companies connected to Kelley.

MEI HUANG

Hong Kong corporation filings list a woman named Mei Huang as Winner International's sole director and shareholder. She has testified in Chiang's bankruptcy case that the assets in its bank and brokerage accounts are hers.

Documents in the bankruptcy case also identify her as an investor in Medallion Capital Corp. China. She was described as a businesswoman from Shenzhen.

Huang speaks almost no English. Hui -- Chiang's nemesis -- told Sharesleuth that when Huang was cross-examined last year, it was clear she had little knowledge of the U.S. stock market or Winner International's trading.

Court documents show that Huang declined to answer questions about the transfer of $2 million from the HSBC account in late 2008. That money wound up in the account of Wainwright Ventures Ltd., which was an investor in an earlier reverse-merger deal that involved Paul Kelley, Stafford Kelley and Winner International.

Court filings show that Wainwright Ventures has been paying the legal expenses for Winner International and Huang in the court proceedings in California.

Huang's sister, Min Huang, is listed as the sole director of Wainwright Ventures. However, SEC filings for a reverse merger that Kelley helped arrange in 2002 identified a British citizen, Allister Mathew Cunningham, as its control person.

LIYA WU

Another key player in the reverse-merger process is a woman named Liya Wu.

Wu worked for Kelley's MCC Group, and handled investor relations for many of the Chinese companies that he helped to bring public. She currently is vice president for marketing at one of his most recent creations, Guanwei Recycling. (See her discussing the company's activities in this video interview)

Wu testified in Chiang's bankruptcy case that she joined Medallion Capital Corp. China in 2002. She was its only employee, and her responsibilities included translating due diligence documents and drafting business plans.

Wu also prepared the articles of incorporation for Winner International. She testified that Mei Huang was the sole director and sole shareholder.

Wu moved to Canada in 2003 to work for Kelley's MCC Group. She said Tang took care of the China side of the reverse-merger business, identifying promising companies and signing contracts with them to provide the necessary assistance.

She testified that Kelley lined up securities lawyers and auditors, recruited market makers, and took care of other details in North America.

Wu testified that she viewed both Kelley and Chiang as her bosses. She said that she was paid by Kelley through MCC Group, and that he - not Huang -- gave her instructions about transferring money from Winner International's HSBC account.

BRIDGING THE CULTURAL GAP

Wu said Chiang served as a bridge between Kelley and Tang, who didn't speak much English.

Chiang had knowledge of Chinese culture and Chinese companies, and helped them understand how to qualify for public listings and comply with regulatory requirements.

Wu characterized Chiang as "the glue'' in the arrangement, and testified that without his assistance, Kelley and Tang probably wouldn't have been able to work together.

Court filings suggest that Tang also is known as Jing Yuan Tang. Documents show that, after Chiang filed for bankruptcy, someone by that name received more than $2.5 million in transfers from another hidden business that his creditors have uncovered. Jing Yuan Tang also is listed in the financial summary for Winner International as having provided money that was deposited into that company's Hong Kong bank account, and having received payments out of that account.

THE SHELL PROVIDERS

Sharesleuth noted that a number of the shell companies used in Kelley's reverse mergers had ties to people who previously were the subject of regulatory actions by the SEC or the Financial Industry Regulatory Authority.

Two of the shells - the ones that became Telestone and China INSOnline -- were provided by Focus Tech Investments Inc., a Houston company headed by Michael T. Fearnow.

The SEC brought charges against Focus Tech and Fearnow in 2000, alleging that they violated securities laws in previous reverse-merger deals by effecting securities transactions without being registered as a broker/dealer.

Fearnow is a former brokerage executive whose registration had been revoked years earlier by the National Association of Securities Dealers (now FINRA).

Fearnow settled the SEC case without admitting or denying guilt. He paid a $10,000 fine and agreed not to violate securities laws in the future.

Documents in Chiang's bankruptcy case show that Fearnow also was involved in the creation of Kandi.

Two other shell companies - the ones that became New Oriental Energy and Orsus Xelent -- were controlled by people with close ties to Byron R. Lerner, who settled fraud charges with the SEC in 2002.

The majority owner of the shell that became New Oriental Energy was James Tubbs. He and Lerner were the top two executives at Teltran International Group Ltd., which the SEC charged with materially overstating its revenue and earnings and disseminating misleading share price projections.

The majority shareholder of the shell that became Orsus Xelent was Lerner's son, Darrell Lerner. Tubbs, Darrell Lerner and Byron Lerner owned 95 percent of another shell that was used to create a third Chinese reverse-merger company, China Elite Information Co., at about the same time.

ARTHUR PORCARI

Fearnow's former brokerage partner, Arthur J. Porcari, has been one of Kandi's biggest boosters. He posts about Kandi almost every day on stock message boards, and recently uploaded to YouTube.com a set of videos showing his visit to the company's facilities in China and a test drive of one of its electric cars.

Last month, Porcari posted a glowing update on Kandi and its prospects on SeekingAlpha.com. Although a disclaimer noted that Porcari had a long position in Kandi's stock, it did not say that he was involved with the group that arranged its reverse merger.

Porcari has said in postings on Internet message boards that he has been a shareholder of Kandi since the day it went public, and also was an early investor in Telestone and New Oriental Energy.

Porcari and Fearnow both were fined and suspended by the NASD for violating insider-traiding and fair practice rules at their now-defunct firm, Porcari, Fearnow and Associates Inc.

The SEC also brought administrative proceedings against Porcari in 1994. It said that while he was working as a financial relations consultant for a public company, he sought to engineer a "short squeeze'' by making baseless predictions about its share price to brokers and urging them to make coordinated purchases of stock.

Porcari later was an online cheerleader for two other companies -- Net Command Tech Inc. and Host America Corp. -- whose stock rose sharply after they issued attention-getting press releases. The SEC halted trading in both companies' stock, citing the accuracy or adequacy of their public disclosures. When trading resumed, their shares plummeted in value, prompting investor lawsuits that each company settled for millions of dollars.

Sharesleuth determined that at least two other people connected to Host America - one of whom sold millions of dollars worth of stock after a false press release boosted the share price -- were involved with the Chinese reverse-merger network.

KANDI

Kandi is perhaps best known as a maker of go karts, three-wheeled motorcycles, utility trucks and other specialized vehicles. It also produces a low-speed, electric car known as the Coco.

Kandi is developing a new line of larger, faster electric cars. To help spur sales, it has announced plans to set up a network of battery-changing stations in partnership with a batter maker and State Grid Power Corp.

Kandi says the stations will allow electric-vehicle owners to quickly swap depleted batteries for fully charged ones, reducing the need for them to charge the vehicles themselves.

The company reported $28.6 million in revenue for the nine months that ended Sept. 30, up almost 50 percent from a year earlier. It had a loss of $709,326 for the period, versus a profit of $219,625.

Kandi sold $16.6 million in stock to several institutional buyers in a private placement last month. The price was $5.50 a share, which amounted to a nearly 18 percent discount from the closing price the day before the deal was announced.

Kandi's stock currently is trading for around $5.30 a share, giving the company a market valuation of roughly $125 million.

KELLEY'S TRACK RECORD

Kelley is listed in New York corporation filings as the chairman and chief executive of MCC Group, which bills itself as a "top US venture capital and management consulting firm." It says its mission is to help clients become publicly traded companies and gain access to North American capital markets.

The Flaherty Report, an investment newsletter, said in an article in April 2009 that Kelley, MCC Group and Asia First Financial had helped at least 10 Chinese companies gain listings on U.S. stock exchanges through reverse mergers.

The report said Kelley's organization "acts in some ways like an unregulated investment banker.'' It quoted Kelley as saying that although most Chinese companies that go public through reverse mergers end up bankrupt in just a few years, all of the ones that he had helped were still afloat.

While that may be technically true, many of Kelley's creations are faltering.

ORSUS XELENT

The stock of Orsus Xelent, which Kelley and Winner International helped take public in 2005, has gone from a high of around $7.90 in the fall of 2007 to 17 cents a share now.

Orsus Xelent reported $20 million in sales for the first nine months of 2010, down 70 percent from a year earlier. It posted a loss of $585,000, compared with a profit of $5.81 million in the corresponding period of 2009.

The company attributed the decline to the waning popularity of the non-3G cell phones it produces.

Like Telestone, Orsus Xelent has a mounting accounts-receivables issue. Its latest quarterly SEC filing shows that the company had $98.9 million in receivables as of Sept. 30, up from $81.1 million at the start of the year.

The company's quarterly filing said it was down to just $4,000 in cash at the end of September.

CHINA INFRASTRUCTURE INVESTMENT

China Infrastructure Investment, which operates a toll road in Henan province, peaked at $4.75 a share. Its stock currently trades for 67 cents.

The company reported revenue of $13.1 million for the first quarter of its new fiscal year, down roughly 4 percent from the corresponding period of 2009. Its earnings fell by almost half, to $1.51 million, because of higher operating expenses.

CHINA INSONLINE

The shares of China INSOnline reached a high of $6 in January 2008. They bottomed out at 2 cents a share last month, after the company was delisted from the Nasdaq. They now trade for around 7 cents.

China INSOnline reported revenues of $9.54 million for the 9 months that ended March 31, down from $13.0 million a year earlier. It said it had earnings of $4.2 million for the period, compared with $5.44 million.

However, SEC filings show that its business inexplicably went off a cliff in the first three months of 2010. The company reported just $670,232 in revenue, compared with $3.99 million a year earlier. It had a loss of $105,095, versus a profit of $2.19 million.

China INSOnline cited a decline in online advertising revenue and software development revenue for the steep drop in sales and earnings. The company said, without elaboration, that it was "temporarily unable'' to obtain purchase orders from certain customers during the quarter.

China INSOnline later said it would jettison those two businesses to focus on its insurance agency business. It reported no revenue, and a net loss of $2.39 million, for the three months that ended Sept. 30.

In November, the company announced that it had changed directions entirely, through a second reverse merger with a Chinese biodiesel producer.

CHINA AUTO LOGISTICS AND GUANWEI RECYCLING

Both China Auto Logistics and Guanwei Recycling have seen significant declines in their share prices over the past year.

China Auto Logistics, which went public in 2008, reached $6.25 last January, a few days after moving to the Nasdaq market. It now trades for less than half of that price.

China Auto Logistics reported sales of $176.4 million for the first nine months of 2010, compared with $143.1 million in the same period a year earlier. It said profits totaled $5.7 million, up from $4.41 million

Guanwei Recycling hit the market in December 2009, closing at $2.25 in its first day of trading. Its shares reached a high of $5.70 in mid-April after they moved to the Nasdaq. The company's stock now trades for around $3.40.

Guanwei Recycling reported revenue of $33.6 million for the first nine months of 2010, down 11 percent from a year earlier. However, the company said earnings rose to $7.69 million, an increase of more than 30 percent.

Guanwei Recycling also said that its sales for the three months that ended Sept. 30 were more than double its sales for the corresponding period of 2009.

NEW ORIENTAL ENERGY

New Oriental Energy peaked at $10.10 in October 2007. Its shares are currently trading for around $1.20.

The company reported $17 million in revenue for the six months that ended Sept. 30, up about 7 percent from a year earlier. But revenue for the final three months of that period was just $3.19 million, a drop of more than 50 percent.

New Oriental posted a loss of $3.32 million for the six months that ended Sept. 30, compared with a loss of $6.62 million during the same period in 2009.

The company was notified by the Nasdaq this summer that its shareholder equity was well below the $2.5 million level required to stay listed on the exchange.

New Oriental said in an SEC filing in September that two debt holders - which had not been identified in any previous filings -- had agreed to convert $1.44 million in debt to common stock to help the company meet Nasdaq's listing requirements.

Sharesleuth noted that both of those debt holders are entities that were involved in several of Kelley's other reverse-merger deals, including Telestone, China Infrastructure Investment and China INSOnline.

We'll cover all of the reverse mergers in more detail in part two of our story. We'll also take a closer look at how Kelley, Chiang and others interacted with those companies and their management.

Stay tuned.

Kristina Saar provided fact-checking services for this article

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Small Texas company promotes big South American oil venture

2010-06-28T11:26:35Z

Both of the oil companies that John F. Terwilliger ran before he became founder, chairman and chief executive of Houston American Energy Corp. (Nasdaq: HUSA) wound up in bankruptcy.

An oilfield services company headed by one of Houston American's directors, John P. Boylan, also went under, in part because he took hundreds of thousands of dollars in loans from the business without the knowledge or consent of his partners.

A third member of Houston American's five-person board, Edwin C. Broun III, was described in court documents last year as suffering from alcohol-related brain damage that could affect his ability to "process information and make sound decisions." The filing, submitted in his defense, characterized him as a recluse who slept all day, drank all night and hadn't opened his mail in two years.

A fourth Houston American director, Orrie Lee Tawes, is a longtime friend and financier of Terwilliger's, and was involved with Terwilliger's most recent bankrupt company, Moose Oil and Gas Co. As head of investment banking for Northeast Securities Inc., Tawes also helped raise $34 million for Xethanol Corp., a dubious biofuels company that was the subject of a previous Sharesleuth investigation.

Houston American's stock rose tenfold from July to April, climbing from less than $2 a share to more than $20. At its peak, the company had a market capitalization of nearly $633 million.

Although Houston American's stock has fallen since then, it still is trading for more than $12 a share.

A SPECTACULAR DEAL?

The gains are linked largely to Houston American's deal last October for a 25 percent interest in a Colombian oil prospect controlled by SK Energy Co., one of Asia's biggest producers, refiners and marketers.

Houston American said in an investor presentation and subsequent Securities and Exchange Commission filing that the prospect was estimated to hold anywhere from 1 billion to 4 billion barrels of "recoverable reserves."

The latter figure exceeds the official proved and probable reserves for all of Colombia, and stands as one of the most audacious claims by any of the energy companies operating in that country.

Houston American did not cite a consultant's report or any other independent study as the source of its estimate. Nor did the company offer any qualifiers, such as the percentage of those reserves it has a reasonable certainty of producing.

Houston American also said that the new Colombian prospect, known as CPO 4, was next to another field that is estimated to have 610 million barrels of recoverable oil.

But Ecopetrol, the state-controlled company that operates the field, called Apiay, told Sharesleuth that it had no knowledge of Houston American's figure. It added that it does not break down its reserves by individual site. (for more information on how oil companies typically report reserves, go here and here. The SEC also has rules for how publicly held companies calculate and value their reserves).

BIG CLAIMS

David G. Snow, who describes himself as an independent energy analyst, has suggested that Houston American's stake in the claimed reserves at the CPO 4 prospect could be worth as much as $269 a share.

That alone would value the company at more than $8 billion. Snow said in a report in February that Houston American's 12.5 percent stake in another undeveloped Colombian tract could be worth as much as $36 a share, adding $1.1 billion in market value.

Snow, president of Energy Equities Inc. in Wayne, N.J., has a history of making lofty claims about the reserves held by small energy and mining companies. He previously faced SEC charges in connection with favorable reports on a pair of Canadian companies that were later found to have engaged in fraud.

Houston American said in an SEC filing that its financial commitment to the SK Energy venture will total just $15 million over the next three years, with $10.2 million of that amount budgeted for 2010. It plans to spend $2 million this year on seismic work and drilling at the other new prospect, called Serrania.

In other words, the company is committed to spending less than $20 million on two projects that have helped add more than $300 million to its market capitalization.

To believe that Houston American is worth hundreds of millions of dollars - or even billions -- is to believe that an obscure company run by people with less-than-stellar track records made a truly spectacular deal, acquiring a lucrative prospect for a fraction of its true worth, from a partner rich enough to go it alone.

Houston American did not respond to a list of questions submitted by Sharesleuth.

(Editor's Note: Mark Cuban, the majority owner of Sharesleuth.com LLC, has a short position in Houston American's shares, Chris Carey, the editor of Sharesleuth, does not invest in individual stocks and has no position in Houston American's shares).

A SILENT PARTNER

Although Houston American executives have been talking up the CPO 4 prospect, their counterparts at SK Energy have said little about the site's potential. In a financial presentation in April, the South Korea-based company did not even list the 345,452-acre tract among its main exploration and development projects for 2010.

SK Energy is a multinational conglomerate with more than $28 billion in annual revenue. It has 10 oil and gas production fields around the world, as well as 23 exploration prospects, including blocks of land in Colombia, Peru, Brazil, the Ivory Coast, Madagascar, Kazakhstan, Vietnam and Australia.

According to Snow's report, Houston American acquired its stake in the CPO 4 prospect simply by cold-calling SK Energy and asking if it could invest in the venture

A second Houston-based oil company, Gulf United Energy Corp. (OTCBB: GLFE.OB) said in several recent SEC filings that it entered into a "tentative letter of intent'' with SK Energy last October for a 25 percent stake in the same prospect.

Gulf United said in its quarterly filing on April 14 that the deal was subject to the completion of a definitive agreement, which was being negotiated. That disclosure raises further questions about why SK Energy would be partnering with such small players on the Columbian venture if it held the sort of promise that Houston American and its supporters claim.

Don Wilson, Gulf United's president and chief executive, did not return several calls from Sharesleuth. SK Energy did not respond to a list of questions about the Colombian prospect, Houston American and Gulf United.

THE COMPANY

Houston American bills itself as an oil and gas exploration and production company. But it typically does not drill or operate any wells on its own. Instead, it uses its capital to buy into projects being developed by other energy companies.

Houston American had only three employees as of late March - Terwilliger, Chief Financial Officer James J. Jacobs and an assistant.

In addition to its share of the CPO 4 prospect (see red area of map for location) Houston American has interests in 30 producing oil and gas wells in the United States and Columbia, and has stakes ranging from 12.5 percent to 25 percent in several other undeveloped Colombian tracts.

Houston American's net production from Colombia, however, equates to full ownership of a single well yielding less than 650 barrels a day, based on statistics for the first quarter.

Houston American had $8.12 million in revenue for 2009, and $4.2 million for the first quarter of 2010, according to an SEC filing . Although it posted a loss of $669,448 last year, it turned a profit of $808,716 for the first three months of this year, thanks mainly to higher production and higher oil prices.

Houston American ended the first quarter with a little more than $12 million in cash, much of it raised through a December share placement. Columbia Wanger Asset Management L.P., a Chicago-based investment advisor that has backed several other oil companies operating in the same region as Houston American, was the biggest purchaser of shares.

STOCK PROMOTERS

Two investment newsletters have been touting Houston American's shares.

UndiscoveredEquities.com, run by former stockbroker Kevin T. McKnight, listed the company as one of its top 10 stock picks for both 2009 and 2010. A disclaimer on its site says that it has been paid by Houston American to provide investor relations services.

Another, more recent, addition is Maedel's Equity Market Analyst, written by Neil H. Maedel, who once worked as a trader on the Vancouver Stock Exchange and now bills himself as an international financier.

Sharesleuth noted that Maedel and Snow once issued similarly bullish claims about a small public company called Eden Energy Corp. (OTCBB: EDNE.OB), whose shares shot from $2 to just under $10 in the first nine months of 2005.

Maedel was director of corporate and investor communications at Eden, which claimed that the acreage it had assembled in Nevada held as many as 6 billion barrels of oil. Snow, in a separate report, put the figure as high as 24 billion barrels.

SEC filings show that after the stock began surging, the company's insiders and early investors sold, or filed to sell, more than $20 million of stock. Eden never produced a drop of oil in Nevada, and now is exploring elsewhere. Its shares are currently trading for around 10 cents.

Sharesleuth found that Maedel has close ties to many of the European and Canadian investors who profited the most from the sharp increase in Eden's share price.

We also noted a connection between Maedel and UndiscoveredEquities.com, which is based Boca Raton, Fla. Its list of top stock picks for the past two years included a little known company called Manas Petroleum Corp. (OTCBB: MNAP.OB), which previously employed Maedel as executive director and head of business development.

(watch Maedel discuss Manas Petroleum)

Like Houston American, Manas has paid UndiscoveredEquities.com for investor relations services. The Switzerland-based company's stock traded for more than $6 in the summer of 2007, but now is around 60 cents a share.

Manas and UndiscoveredEquities.com have claimed that the company's prospects, spread over five countries, hold the equivalent of more than 4 billion barrels of recoverable oil. However, a May SEC filing that required Manas to follow stricter definitions said it had no known reserves on any of its properties.

SEC filings show that Manas has, or had, at least 15 of the same shareholders as Eden.

Although Houston American's filings do not list Maedel or any of his European associates among its shareholders, we think that anyone considering an investment in the company might want to make note of its promoters' history and connections.

Neither Maedel nor McKnight responded to questions submitted by Sharesleuth.

WELLS FOR SALE

All of Houston American's producing wells in Colombia are controlled by Hupecol LLC, based in Beeville, Texas. It recently solicited bids for most of its holdings in Colombia. If it sells out, Houston American would get a cash windfall - one estimate puts the figure at $25 million to $50 million. However, it also would lose nearly 90 percent of its current revenue. The company says it could use its share of the proceeds to help pay for the development of the new fields.

The company has noted in investor presentations that it has no debt. Thus, it does not face the short-term financial pressures that many other small producers face, allowing it to be patient in its search for opportunities.

Houston American also has a high percentage of insider ownership. According to its latest proxy filing, Terwilliger holds 8.92 million shares, giving him a 28.4 percent stake in the company. Tawes, who once worked with Terwilliger at the investment firm of Oppenheimer & Co. in New York, has 3.4 million shares, equal to a 10.9 percent stake.

Broun has just over 1 million shares, or roughly 3 percent of the company. Houston American announced Friday that he had resigned from its board of directors, effectively immediately, citing personal and health reasons.

THE STOCK

Houston American's shares got a boost earlier this year because of the success that another oil company, Petrominerales Ltd. (TSX: PMG.TO), reported with three wells it drilled on a block of land adjoining the northern border of the CPO 4 prospect.

Those wells - the Candelilla-1, Candelilla-2 and Candelilla-3 - all have come on line since December, with initial production rates totaling 43,900 barrels a day. The combined output from those wells was averaging 31,500 barrels a day as of May 5, a rate that would translate to hundreds of millions in revenue on an annualized basis.

Houston American and the newsletter writers who have recommended the company's shares note that two of those wells are within three miles of the northeast border of the CPO 4 property.

But other people who are involved in the Colombian petroleum industry told Sharesleuth that the so-called "closology'' approach to locating oil is no guarantee of drilling success or well output.

Snow said in February that Houston American's interest in the CPO 4 block could be worth $67 a share to $269 a share. Those figures assume that the reserves indeed total 1 billion to 4 billion barrels, and that the oil is worth $20 to $25 a barrel in the ground - an estimate he attributed to the company. Snow's calculations also incorporate the 70 percent success rate of the wells that Houston American has participated in with Hupecol, even though Hupecol is not involved in CPO 4.

Although Petrominerales has completed three fairly prodigious wells on its adjoining prospect, known as Guatiquia, it still lists its total proven and probable reserves there at a modest 10.4 million barrels.

Snow said Houston American's stake in the undeveloped Serrania prospect could be worth $18 to $36 a share. He based that partly on the valuation of a neighboring parcel that produced a number of successful wells.

Snow told Sharesleuth that Houston American's management cooperated with him in the preparation of the report, but that the company did not compensate him for the work.

We spoke with several petroleum geologists who have worked in Colombia. One said it was entirely possible that Houston American could be sitting on a big find, given the previous discoveries in the region. But others who reviewed the investment letters said they contained more hype than substance.

Sharesleuth also talked to an executive of another oil company that operates in Colombia and bid on the CPO 4 prospect. He said his company did not see as much potential as Houston American and its partner do. He added that the geology of the area makes it unlikely that anyone will find a giant reservoir of oil there, like the ones that have produced billion-barrel fields elsewhere in the country.

The potential reserves that Houston American's promoters are citing for the CPO 4 prospect would dwarf its existing reserves. The company said in a recent SEC filing that it had roughly 308,000 barrels of proven, developed reserves in Colombia at the end of 2009 and just over 894,000 barrels of proven, but undeveloped reserves.

Those reserves represent its interest in the Hupecol properties, most of which are on the market.

RISE AND FALL

Houston American's shares reached a high of $20.36 on April 6, when oil prices were nearing their recent peak. But the next day, they fell nearly 30 percent, to $14.51, after investors took notice of two unfavorable articles that appeared on SeekingAlpha.com, an investment website.

Both raised questions about the valuation of Houston American and its Colombian prospects. One of them also looked into Terwilliger's actions at his previous company, Moose Oil, as it slid toward bankruptcy.

The two articles were submitted by anonymous contributors. One, headlined "Houston American Energy Priced for Perfection'' was posted April 5 by someone using the name Shareholders Unite. Another, titled "Houston American Energy Corp. Set Up for Collapse'' was posted April 7 by someone using the alias Shareholder Watchdog.

Sharesleuth began investigating Houston American in March, after noting the sharp rise in the company's shares and studying its SEC filings. We have had no contact with the writers of the other articles, and do not know their identities.

THE RESPONSE

Houston American responded to the Seeking Alpha postings with a press release, dismissing the assertions about the company as unsubstantiated and the questions about the integrity of its management as "scurrilous at best.''

"We have reviewed the Internet postings in question and believe they mischaracterize our company, our management team and the very nature of our operations,'' Terwilliger said in the statement.

Houston American did not respond to a request by Sharesleuth to elaborate on what information it believed was false or misleading.

Terwilliger noted in the press release that neither he nor Houston American's other officers and directors had sold any of their shares, even as the market value soared. But according to the proxy statement for the company's annual meeting, more than 8.6 million of Terwilliger's shares are pledged as collateral for some unidentified financial obligation.

That notation did not appear in previous proxy statements.

More than 3.1 million of Tawes' shares also were said to be pledged as collateral. That notation has appeared in three prior proxy filings, dating back to 2007.

The fact that those shares are locked up could be viewed as a positive for other Houston American investors, because the executives cannot readily sell them, giving management a long-term interest in the success of the company.

The exception would be if the stock was pledged as collateral for a margin loan, or some other type of loan that allows for the liquidation of shares if the price falls below a certain threshold.

COLOMBIA

Colombia has emerged as a hotspot for oil exploration in Latin America because of its pro-business political regime, its progress in combating anti-government guerillas, and its willingness to grant concessions to producers at attractive royalty rates.

Several companies have reported promising finds, leading to buyouts or big increases in their share prices. Petrominerales is the latest success story.

Its shares rose from $18 to $35 as its successes at Guatiquia mounted. In March, the company had a market value of nearly $3.5 billion. However, its stock has fallen more than 20 percent from that high.

The Colombian government last month increased its official figure for the proved oil reserves in the country to 2.05 billion barrels, up from 1.79 billion a year ago. When probable and possible reserves are included, the total rises to 3.1 billion barrels.

Ecopetrol, the biggest energy producer in Colombia, listed its proved oil reserves at 1.34 billion barrels at the end of 2009. It said its combined oil and natural gas reserves were equal to 1.88 billion barrels.

Pacific Rubiales Energy Corp., the second largest producer in Colombia, said in February that it had 280.6 million barrels of proved and probable reserves in that country.

Pacific Rubiales' 40 percent stake in the well-established Rubiales field accounted for much of that total. The company said that field had roughly 500 million barrels of proved, probable and possible reserves.

It said the original reservoir had 4.2 billion barrels, not all of which was physically or economically recoverable. That figure put it just beyond the upper end of Houston American's estimate for the CPO 4 prospect.

The Rubiales field is currently producing more than 120,000 barrels of oil day, and is targeted for expansion to 170,000 barrels.

SERRANIA

Houston American signed a partnership agreement for the Serrania prospect last June. Its deal with Shona Energy Co. of Houston gives it a 12.5 percent interest in the venture. Houston American agreed to pay 25 percent of the geologic and seismic costs in advance of drilling there.

Houston American said in an investor presentation that the Serrania prospect is adjacent to another field, called Ombu, that had an estimated 1.1 billion barrels of oil in place. It attributed that figure to Canacol Energy Ltd., a Canadian company with a 10 percent interest in Ombu.

Houston American also pointed out that Sinochem Corp., which owns the other 90 percent of the Ombu field, was told by its consultant last year that the property had 122 million barrels of potentially recoverable oil.

Maedel noted in his May newsletter that Sinochem bought its 90 percent interest in the Ombu field by acquiring Emerald Energy Plc for $836 million. That price, however, included other valuable assets, including Emerald's additional holdings in Colombia and exploration and production rights in Syria.

Snow's report asserted that the reservoir of oil below the Ombu field extended into the Serrania field, indicating that Houston American's shared prospect there could hold as many as 500 million to 1 billion barrels of oil.

The reports by Snow, Maedel and McKnight all create the impression that Houston American could be acquired at valuations similar to the other companies that have made big finds in Colombia.

MOOSE OIL

Terwilliger started Houston American in April 2001. At that time, he also headed Moose Oil, a small, privately held company that operated primarily in Texas and Oklahoma.

Moose filed for protection from creditors the following year, leading to charges by its bankruptcy trustee that Terwilliger and Tawes improperly shifted assets out of the company and used its cash to set up Houston American.

Moose listed roughly $238,000 in assets and $2.6 million in liabilities in the financial schedules it submitted with its bankruptcy petition.

According to court filings, Terwilliger used hundreds of thousands of dollars from Moose's bank accounts -- starting in February or March of 2001 -- to pay legal fees, accounting fees and other costs incurred in creating Houston American.

The complaint by Moose's bankruptcy trustee noted that agreements that were said have taken effect in April 2001 transferred certain oil and gas interests to Houston American for less than $250,000. The trustee alleged that Moose was insolvent, or nearly insolvent, at the time of the transfers, which would mean that the deals could be voided under federal bankruptcy law.

The complaint also said that, between October and December 2000, Terwilliger and Tawes provided roughly $649,000 in cash to Moose, and that those contributions were classified as loans.

In June 2001, Moose issued promissory notes for those debts to another of Terwilliger's companies, Marlin Data Research Inc., and to Tawes. According to court filings, the notes were secured by most, if not all, of Moose's remaining oil and gas holdings.

By December of that year, Moose had defaulted on the notes, and in early February 2002, the company turned over multiple oil and gas interests to Marlin Data Research and Tawes.

Moose filed for bankruptcy on April 9, 2002, the same day as a scheduled court hearing on a suit filed by property owners who claimed that the company had failed to pay them more than $300,000 in royalties.

The bankruptcy trustee presiding over Moose's estate accused Terwilliger of breaching his fiduciary duty, engaging in self dealing and transferring assets "with actual intent to hinder, delay or defraud creditors.''

Terwilliger settled the case with an agreement that called for him and Marlin Data Research to pay $100,000 to Moose's estate and for Marlin to return certain royalty assignments. A judge dismissed the trustee's case against Tawes, ruling that he wasn't a company insider and could not be held responsible for any diversion of assets.

The trustee also sought the return of more than $310,000 in payments that Moose made in the year before its bankruptcy filing to the law firm that set up Houston American, to American Express Corp., and to a handful of other parties. He argued that Moose was insolvent, or nearly insolvent, at the time the payments were made, and that most of the expenses were unrelated to its business.

One of the companies on that list was S.P. Hartzell Inc., headed by petroleum geologist Stephen P. Hartzell. He currently is a member of Houston American's board, and SEC filings show that he also was one of its early shareholders.

Court records show that the trustee settled with the law firm, American Express and several other defendants, recovering about half of the total amount sought from them.

BOYLAN

John Boylan, an accountant with a master of business administration degree, has been a Houston American director since 2006. He heads the board's audit and compensation committees.

Boylan previously was the chief executive of an oilfield services company called Birdwell Partners L.P., and for a time managed one of its units, Five Star Transportation L.P.

Five Star Transportation shut down in 2003 after falling behind on its bills and finding itself unable to keep up payments on a line of credit with a balance of roughly $1.25 million.

According to court filings, Boylan was ousted by Birdwell's other partners that year, after one of them discovered that between $350,000 and $400,000 was missing from the checking accounts of Five Star and a related business, American Pipe Inspection.

The court filings show that Boylan's partners forced him to resign, but decided not to seek criminal charges against him. Boylan never repaid the money, and Five Star defaulted on its line of credit.

When that lender went after the members of Birdwell Partners who had personally guaranteed the debt, Boylan declared bankruptcy. The lender fought his efforts to have the debt discharged, claiming among other things that he sought the line of credit with the intention of diverting some of the money.

According to court filings, another member of Birdwell Partners named Rick Lawrence testified that Boylan not only advanced himself money from Five Star, but also sent out $189,000 in checks in August 2003 without any money in the bank, and failed to remit $280,000 in employment and other taxes to the Internal Revenue Service.

Boylan said in his own filing that the loans were an accepted practice at the company as an alternative to profit distributions. He said that others at Birdwell were aware of them, and that the allegations of impropriety were part of a plan by Lawrence to force him out as chief executive.

However, an investigator for the court-appointed receiver in the case said his inquiry showed that Lawrence's account of the events was accurate.

Boylan listed $516,000 in debts to Five Star Transportation in his bankruptcy filing. They were described as shareholder loans.

After being removed from his position at Birdwell, Boylan worked as a manager or consultant for three different oil companies, all of which have filed for bankruptcy.

Houston American's SEC filings say that Boylan was a manager at Atasca Resources, another Houston-based oil and gas company, from 2003 through 2007. It filed for bankruptcy last year.

Boylan's resume on LinkedIn.com says he was a financial consultant for Saratoga Resources Inc. from December 2007 to February 2009. That company filed for bankruptcy on March 31, 2009. It successfully reorganized, however, and emerged from court protection last month.

Boyland's resume says he has been a financial consultant for Pisces Energy LLC since December 2008. Pisces filed for protection from creditors in September.

BROUN

Edwin Broun, better known as Ted, is part of a family that has been in the oil business in Texas for at least two generations. He worked for a number of major energy companies before striking out on his own.

Broun and a partner formed Sierra Mineral Development L.C. in 1994 to find and develop oil and gas properties. The company sold three of its natural gas fields in South Texas for $123 million in 2001 and dissolved a few years later.

SEC filings show that Broun has been a Houston American shareholder since 2001, and became a director in 2005.

In December 2008, Broun was charged with a misdemeanor criminal offense. The charges were unrelated to Houston American and were eventually dismissed, so we are not going to recount the details here.

But the description of Broun in a filing submitted in his defense included information that could be considered pertinent for Houston American investors.

The filing said that Broun suffered from cognitive difficulties - possibly alcohol dementia - as a result of years of heavy drinking. It said that, because of that drinking, he sometimes did not know what day of the week it was, or even whether it was day or night. It also said that he was estranged from family and friends, seldom left the house and relied on others to make appointments for him.

Houston American's board met 10 times last year, according to a recent SEC filing. Broun was the only one of the company's five directors who failed to attend at least 75 percent of those meetings.

TAWES

Orrie Tawes, who goes by his middle name, Lee, spent much of his career at Oppenheimer & Co. in New York, rising to director of equity research. Terwilliger also worked at Oppenheimer before launching his first energy company, Cambridge Oil Co., in the 1980s.

Tawes has been executive vice president and director of investment banking for Northeast Securities since 2004.

In addition to finding capital for Houston American, Tawes helped raise money for Xethanol Corp., a New York-based company that claimed it had technology to convert wood chips, grass clippings and other biomass to ethanol.

Xethanol's stock rose sevenfold, to a high of $16.18 a share, in the first four months of 2006. Sharesleuth published its investigation of the company in August of that year, calling into question its claims that its technology was commercially viable.

Within a year, Xethanol's shares were back where they started, at around $2. The company eventually abandoned its original strategy and switched to other pursuits, but ran short of money and filed for bankruptcy last November.

SEC filings show that nearly two dozen of the investors who bought shares in Xethanol's private placement in 2006 also participated in Houston American's $2.12 convertible note placement in May 2005.

Tawes joined Houston American's board of directors after that financing, along with Broun and Hartzell.

The notes were convertible to stock at $1 a share, the approximate market price at the time of the placement. Within four months, Houston American's stock was above $3, aided by announcements of well investments in Louisiana and Texas.

Houston American raised an additional $16.6 million the following year, in a share placement handled by Sanders Morris Harris Inc., a Houston-based investment firm. Houston American's current chief financial officer, James J. Jacobs, was an investment banker at Sanders Morris and worked on that placement.

A VOLATILE STOCK

Houston American's shares declined after the financing, in part because an institutional investor sold 1 million shares in a single day. But in the final three months of 2006, the stock more than tripled, topping $8.

At the time, the company's shares were being spotlighted by a number of stock-promotion services, including Stockguru.com, Talkingstocks.com, Stock Market Alerts LLC and Wall Street News Alert and Wall Street Capital Funding LLC.

Houston American's stock ended that year at $7.36 a share. By the end of 2007, the shares had drifted back to the $3 range, the price investors paid in the private placement. Houston American had another surge in 2008, climbing to $11.98 in early July with the help of rising oil prices and a gain on the sale of a successful Colombian field in which it held a minority stake.

Houston American collected $11.5 million for its 1.6 percent share of a Colombian prospect called Caracara, which was controlled by Hupecol and sold for $920 million.

A BIG BONUS

The company's board of directors awarded Terwilliger a bonus of $675,000, saying it was in recognition of that sale and the value it created for shareholders. An SEC filing shows that he also got stock awards and stock options that the company valued at nearly $750,000, bringing his total compensation for 2008 to $1.74 million.

Houston American had $10.6 million in revenue and $464,945 in profits that year. And although its shares traded above $8 a share from mid-June through August, they ended 2008 at $3.38.

Houston American's recent proxy filing listed Terwilliger's cash compensation last year at $315,000. That filing also recalculated his 2008 compensation to reflect the impact of the company's significantly higher stock price on option grants. The new total was $5.86 million.

In looking into Terwilliger's business history, we noted his previous role as chairman and president of Cambridge Oil Co., a Texas-based company that filed for bankruptcy in 1988 and was dismantled. Terwilliger's biographies in Houston American's SEC filings and on the company's website make no mention of that bankruptcy.

Cambridge sought protection after the partners in one of its ventures won a $1.6 million judgment in a suit that alleged the company breached a farmout and lease agreement and fraudulently withheld money owed under that agreement.

SNOW

Snow, the analyst who projected that Houston American's interest in the CPO 4 prospect could be worth hundreds of millions, or even billions, of dollars, has run into trouble before with his projections.

As Citronresearch.com reported in April, Snow once set a price target of $1,000 on the shares of Solv-Ex Corp., an oil sands company with operations in Alberta, Canada.

Solve-Ex had a market capitalization of more than $850 million before its collapse. Solv-Ex and two top executives were later hit with a civil action by the SEC, which alleged that they made fraudulent statements about the company's products and technology.

A federal judge ruled that the executives, John S. Rendall and Herbert M. Campbell, violated securities laws, and fined each of them $5,000. Solv-Ex's stock was delisted and the company filed for bankruptcy.

Snow himself settled SEC charges stemming from his promotion of Solv-Ex and a second company, Naxos Resources Ltd. The SEC alleged that Snow recommended those companies to his newsletter clients and other investors without disclosing that he had a position in their securities or stood to receive other economic benefits.

Snow settled with the agency without admitting or denying guilt and was ordered to pay a $15,000 fine.

The chief executive of Naxos Resources was barred for 10 years by securities regulators in British Colombia and Alberta, who found that he issued misleading press releases about the company's prospects and activities.

MCKNIGHT

McKnight's biography says he spent eight years as a retail broker, before moving into investment banking and financial public relations.

Regulatory records show that he started his career in 1995 at Stratton Oakmont Inc., a New York-based brokerage that was shut down by regulators in 1996. It later was found to have manipulated the public offerings of nearly three dozen companies.

McKnight also worked briefly in 1995 at Kensington Wells Inc., another brokerage that bilked investors through fraudulent sales practices. The National Association of Securities Dealers charged that its employees made baseless or improper price predictions about the shares of small, speculative companies, engaged in unauthorized trading, falsely guaranteed investors against losses and in some cases refused to execute customer orders to sell shares.

McKnight spent a few months in 1996 at a third corrupt brokerage, Meyers Pollock Robbins Inc. At least 40 people who were associated with that firm pleaded guilty to participating in various fraud schemes between 1992 and 1997.

McKnight was never charged civilly or criminally in connection with any of those firms' activities.

He did not respond to Sharesleuth's questions about his brokerage career.

MAEDEL

Maedel wrote investment newsletters from 1987 to 2001, first under the title The ProTrader and then Maedel's Mini-Cap Analyst. He resumed publishing last fall, using the name Maedel's Equity Market Analyst.

His first issue, in November, recommended the shares of Mexoro Minerals Ltd. (OTCBB: MXOM.OB). An SEC filing from the following month listed Maedel as the manager of Andean Invest Ltd., which owned 1.62 million Mexoro shares and was offering 1.55 million of them for sale through a registration statement filed by the company.

Maedel wrote about Houston American in his March issue, noting that he had added its shares to his portfolio in early January at $6.50. In that article, he also drew a connection to Mexoro, saying they shared the same favorable "fundamentals, technicals and market tone.''

Not long after the negative postings about Houston American appeared on Seeking Alpha, Maedel used his newsletter to issue a rebuttal.

Maedel acknowledged in his May issue that a correction in the company's share price had been overdue. But he questioned the motives and accuracy of the posters on Seeking Alpha, and added that any success with either the CPO 4 or Serrania prospects could send Houston American's stock sharply higher.

"All fingers will be crossed for an InterOil like performance,'' Maedel wrote, referring to another Houston-based company, InterOil Inc., which recently claimed to have discovered one of the biggest natural gas wells in the world. "If it happens it will not be the first Maedel's pick to go into the stratosphere and we hope it won't be the last.''

Maedel said in the article that he had previously rated InterOil (NYSE: IOC) a "buy,'' and added that he was introduced to Houston American's management by someone who had been involved with InterOil.

McKnight also has recommended InterOil, whose stock surged because of the reports of its big find, in Papua New Guinea.

InterOil has been the subject of several recent in-depth reports by iBusiness Reporting, another site that seeks to expose companies it believes are engaged in fraud or deception.

THE SWISS CONNECTION

Until last year, Maedel was an executive director of Manas Petroleum - the Switzerland-based company that currently is one of the featured stocks at UndiscoveredEquities.com.

An SEC filing from April showed that Clarion Finanz AG, headed by Swiss financier Carlo Civelli, held common stock or warrants equal to 1.02 million Manas shares, making it one of the company's 20 biggest investors at that time.

Clarion Finanz also is one of the biggest financial backers of InterOil. And it was among the Eden Energy investors whose shares were registered for resale just before the promotional campaign about the Nevada reserves lifted that company's share price.

The Investment Industry Regulatory Organization of Canada alleged last year that a brokerage firm in that country had been paying undisclosed commissions to Civelli for placing what appeared to be tens of millions of dollars of stock trades on behalf of seven banks in Switzerland and Liechtenstein.

Because of bank secrecy laws in those countries, it was impossible to determine whether the trades were made on behalf of the banks, or on behalf of investors who were customers of the banks.

In a separate case, the British Columbia Securities Commission issued a cease trade order on Manas' shares in 2007, then modified that to a partial ban in 2008. The revised order applied only to stock held by Clarion Finanz and six other offshore entities. Regulators said they could not determine the beneficial owners of the shares.

GM CAPITAL PARTNERS

SEC filings show that Maedel worked as a research consultant for a company called GM Capital Partners Ltd. from October 2003 to August 2004 . GM Capital Partners is domiciled in the British Virgin Islands. It had headquarters in Zurich, Switzerland and a satellite office in Port Coquitlam, British Columbia.

GM Capital and a number of other entities based in Switzerland and Liechtenstein were shareholders in Eden Energy. Many of those same entities later invested in Manas and Mexoro, the companies that Maedel is currently recommending.

The home page of GM Capital's website lists Manas and Mexoro as its "portfolio companies.''

Igor M. Olenicoff, a wealthy California real estate developer, filed a lawsuit in 2008 against GM Capital Partners, its managing director James Alexander Michie, British Columbia stock promoter Jason Sundar and others, alleging that they participated in a scheme to defraud him of millions of dollars held in overseas banks.

Sundar also was involved in the promotion of Eden Energy.

Olenicoff claimed, among other things, that his banker at Switzerland-based UBS, Bradley C. Birkenfeld, took kickbacks in return for investing Olenicoff's money without his knowledge in a handful of obscure penny stocks.

According to the suit, those companies were: Mexoro (OTCBB: MXOM.OB); Synthesis Energy Systems Inc. (Nasdaq: SYMX), of Houston; , Synova Healthcare Group Inc. (Pink Sheets: SNVHQ.PK); and VECTr Systems Inc. (Pink Sheets: VECT.PK), formerly known as Navitrak International Corp.

Mexoro recently changed its name to Pan American Goldfields Ltd. Its shares are trading for around 25 cents.

Olenicoff was caught up in the U.S. government's investigation of Americans suspected of evading income taxes by concealing money in foreign bank accounts. He pleaded guilty in December 2007 to a felony charge of filing a false tax return and failing to disclose foreign bank accounts.

He was sentenced to two years of probation and 120 hours of community service, after contending that he did not intend to defraud the government and was relying on the advice of bankers, lawyers and accountants. He also agreed to pay $52 million in back taxes.

Birkenfeld, who cooperated with authorities in their investigation of suspected tax evaders, also pleaded guilty and was sentenced to more than three years in prison.

According to Olenicoff's complaint, Swiss authorities are investigating GM Capital and Michie, who hails from British Columbia..

The Swiss Federal Banking Commission looked into allegations that the Zurich branch of GM Capital was operating as a securities dealer without the proper authorization, said Tobias Lux, a spokesman for that agency. Regulators found that those allegations were true, and also concluded that the Swiss arm of GM Capital was insolvent, he said.

The Zurich branch is currently in liquidation, Lux said.

Sharesleuth noted one more recent development regarding the companies mentioned in this story. In late May, a company called Petromanas Energy Inc. -- created through the transfer of Manas' Albanian petroleum assets -- raised $75 million through the sale of stock and warrants.

Quantum Partners Ltd., a private investment fund run by Soros Fund Management LLC, paid $29 million for 72.5 million of the units, which were priced at 40 cents each. The units consisted of a share of common stock and half of a warrant for an addtional share of common stock.

Soros Fund Management, founded by billionaire George Soros, is one of the biggest investors in InterOil.

Columbia Wanger Asset Management, the company that bought shares in Houston American via its December placement, also bought $26 million of Petromanas' units in last month's placement.

Manas holds 200 million shares of Petromanas, equal to a 32.4 percent stake. It has the right to acquire an additional 50 million shares, which if exercised would push its interest to 34.7 percent.

Sharesleuth will continue to follow Houston American and its promoters and report on what we find.

Rick Feldman and Dominique Donaho provided fact checking services for this story