Short Takes

Former Vicis Capital executive pleads guilty to conspiracy

2011-02-28T18:34:19Z

Christopher D. Phillips, former managing director of Vicis Capital LLC, has pleaded guilty to conspiracy to commit wire fraud in connection with a scheme to collect on medical receivables that he and others knew to be fraudulent.

The hedge fund executive, who also was on the board of directors of two small public companies that had purchased the receivables, was sentenced to two years of probation and fined $250,000.

Vicis had invested millions of dollars in both of the companies that bought the receivables -- Medical Solutions Management Inc. (Pink Sheets: MSMT.PK), and MDWerks Inc. (Pink Sheets: MDWK.PK).

The hedge fund's activities, and its possible involvement with the insurance-fraud scheme, were the subject of a Sharesleuth investigation last year.

Phillips was sentenced Wednesday in federal court in New Hampshire, where a grand jury began hearing evidence in the fraud case after a tipster there reported the scheme to authorities.

Phillips' plea agreement, the criminal information detailing the charges against him, and a statement of facts related to the scheme were filed under seal last January. They were made public for the first time last week, possibly because the government wanted to keep Phillip's cooperation with prosecutors a secret from co-conspirators and others involved with Vicis.

Seth R. Aframe, the assistant United States attorney who prosecuted Phillips, said he could not comment "on any other investigations that may be ongoing as a result of any information Mr. Phillips may have provided.''

Phillips faced a maximum of five years in prison.

His plea agreement contained boilerplate language that said if he provided "substantial assistance" to the government in the prosecution or investigation of others, prosecutors would file a motion advising the court of his help and requesting a sentence reduction.

According to court documents, Vicis invested more than $7.5 million in Medical Supply Management so that it could buy receivables from a California company called Deutsche Medical Services Inc. Those receivables were connected to insurance claims for medicine-laden skin creams supposedly given to workers compensation patients in that state.

Vicis also provided MDWerks with roughly $790,000 to purchase additional receivables.

The two companies, however, had a hard time collecting on the $8.3 million in receivables. Medical Solutions Management hired a New Hampshire medical claims company to bill insurance companies, and put MDWerks in charge of filtering out bad claims.

In July 2008, according to court documents, the president of the New Hampshire billing company, Janine Boudreau, told the then-chairman and chief executive of MDWerks, Howard Katz, there were problems with the Deutsche Medical receivables and that many of the claims were probably fraudulent. Among other things, they listed incorrect dates of service, billed for charges on services that had never been provided and even claimed an expense for skin cream purportedly dispensed to a dead person.

Court documents say the Katz met with Phillips in August 2008 to tell him about what he'd been told by Boudreau. At some point, Boudreau contacted the FBI and they opened an investigation.

At the agency's direction, Boudreau called Katz with a possible solution to their collections problem: they could backdate many of claims to obscure the problems with the dates of service. In late 2008, court documents say, Katz met with Philips at Vicis' offices to get him to agree with the plan and to pay Boudreau's expenses, which would ultimately amount to $260,000.

After that meeting, Phillips called Boudreau from New York and gave her the go ahead.

Eventually, the government says, Phillips wired Boudreau $260,000 for her expenses -- an "overt act in furtherance of the conspiracy" that prosecutors would have proven at trial.

Katz pleaded guilty to one count of health care fraud in connection with the Duetsche scheme in May. Court documents show he started cooperating with the FBI in late 2008, shortly after he was indicted. Federal prosecutors described Katz's assistance as "significant, useful, timely and reliable," For his help, received three years of probation and 24 consecutive weeks of weekend prison time in addition to a $25,000 fine.

Vicis, which began 2009 with nearly $5 billion under management, received a wave of redemption requests after its performance faltered. It announced last year that it was winding down its funds.

Its most recent summary of its holdings, filed with the SEC in November, listed less than $25 million in assets.

Chinese coal company's share placement produces interesting collection of investors

2010-09-13T08:04:52Z

The shares of SinoCoking Coal and Coke Chemical Industries Inc. (Nasdaq: SCOK) skyrocketed earlier this year, after the company went public through a reverse merger that included a private placement of common stock and warrants.

As Sharesleuth previously reported, SinoCoking's stock shot from $6.45 on Feb. 16 to a high of $53.70 on March 5. Although the price has plunged over the past week, the current price of around $8.60 still represents a decent premium for the private placement buyers, who paid $6 for a unit consisting of one common share and a warrant for half a common share.

Sharesleuth took a closer look at the registration statement covering the resale of those shares, and found that no fewer than eight people who participated in the placement have been the subject of Securities and Exchange Commission actions or criminal prosecutions.

The list includes at least four people who were directly or indirectly linked to stock-manipulation schemes. Several other investors were previously involved in a small cluster of U.S. companies whose placements were manipulated by a ring of boiler room brokerages in the 1990s.

Sharesleuth's investigation found that the investors in SinoCoking's private placement included:

Richard N. Molinsky, a former senior vice president at D.H. Blair & Co., who pleaded guilty to securities fraud and attempted enterprise corruption in 2002 in connection with that brokerage's boiler-room style activities. He received probation but paid $1.5 million in restitution. The SEC also barred him from association with any broker-dealer as a result of his criminal conviction.
Bryant D. Cragun, a former stockbroker who was an owner of two unlicensed, offshore brokerages that sold shares of obscure U.S.-listed companies to investors in Europe, Asia and other parts of the world. Regulatory agencies described those firms - Oxford International Management and PT Dolok Permai (which did business as International Asset Management) - as boiler rooms. Many of the people who bought shares through the firms lost all, or nearly all, of their investments. Cragun acknowledged to the Wall Street Journal in 2000 that the SEC spent five years investigating his activities but did not bring charges. SinoCoking's filings identified Cragun as president of Wilmark of Nevada Inc., which got 80,000 shares and 40,000 warrants in its placement.
R. Gordon Jones, an accountant who was barred by the SEC in 2001 for "intentionally, knowingly or recklessly'' violating professional standards in auditing the financial statements of Dynamic American Corp., which turned out to be fraud. Corporation filings show that Jones is treasurer of Wilmark of Nevada. Jones' former firm -- Jones, Jensen & Co. of Salt Lake City -- was the auditor for a number of the companies whose shares were sold to foreign investors by Cragun's offshore brokerages.
Kenneth A. Orr, who faced both civil and criminal charges in connection with a stock-promotion scheme in which brokers were paid kickbacks for selling shares of certain companies that were vehicles for fraud. The SEC alleged that Orr took payments to sell shares of two of the companies. Orr neither admitted nor denied the charges, but allowed the entry of a permanent injunction against him in 2002, prohibiting future violations of securities laws. He was ordered to pay $154,000 in disgorgement, penalties and interest. Orr also pleaded guilty to a criminal charge of conspiracy to launder money. He was sentenced to probation and fined $3,000.
Lawrence E. Kaplan, former president of G-V Capital Corp., which as a company pleaded guilty to criminal fraud charges in 2004 in connection with a broader manipulation scheme by several brokerages, including Walsh Manning Securities Inc. and J.B. Sutton Group LLC. In addition to his role at G-V Capital, Kaplan was a director of one of the companies whose shares were manipulated, and later joined the board of another. Kaplan also was indicted personally on fraud charges, but federal prosecutors dismissed their case against him in 2007.
Stewart R. Flink, former managing member of Crestview Capital Partners LLC, who was charged by the SEC with making fraudulent representations in connection with Crestview' investments in two other stock placements. The SEC alleged that Flink and Crestview falsely asserted that they had not shorted the shares of those companies in the 10 days preceding the offerings. Flink and Crestview settled the charges in 2007, with Flink paying a $120,000 civil penalty and Crestview paying $432,519 in disgorgement, penalties and interest. Flink's new fund, Next View Capital LP, got 150,000 shares and 75,000 shares and warrants in SinoCoking's placement.
Shaye Hirsch, the former compliance officer for Pond Securities Corp., who is currently fighting SEC charges related to a scheme in which an investor engaged two of the firm's traders in the manipulative short selling of shares in Sedona Corp., a company in which the investor held convertible notes. Although the SEC did not implicate Hirsch in the manipulation scheme, it said he was aware of the traders' dealings in the stock and failed to adequately supervise them. Thomas Badian, who headed the investment firm that shorted Sedona's shares, was charged with fraud by the SEC, and was indicted on criminal charges. The traders, who had dual registrations with Pond and the now-defunct Refco Securities, also were charged by the SEC. Hirsch and Pond recently settled related charges with the Financial Industry Regulatory Authority, agreeing to jointly pay a $100,000 fine.

Two investment banking firms, Rodman & Renshaw LLC and Madison Williams and Co., placed the shares for SinoCoking. They raised $44 million for the company, which operates coal mines and coking plants in China's Henan Province.

Sharesleuth is not alleging any wrongdoing by SinoCoking, its placement agents or the people who bought shares in the offerings. However, we think that people who are considering an investment in the company might be interested in the backgrounds of some of the other stockholders.

(Disclosure: No one associated with Sharesleuth.com has any position, short or long, in SinoCoking's stock.)

THE PLACEMENT

According to SEC filings, SinoCoking issued 5 million shares and 2.87 million warrants to U.S. investors and its placement agents. It issued 2.34 million shares and 1.17 million warrants to non-U.S. investors. All of the warrants sold to investors are exercisable at $12 a share.

At the current market price, the investors in those deals would be showing paper gains of roughly $18 million.

SinoCoking's shares closed Friday at $10.26, off nearly $5 for the week, giving the company a market capitalization of $214.1 million. At its peak, in March, the company had a market cap of more than $750 million.

SinoCoking's registration statement shows that the investors with SEC histories got at least 581,001 shares and warrants, or nearly 7.5 percent of the total sold to U.S. buyers. In some cases, the investors bought shares in their own names; in others, they bought shares on behalf of funds they manage.

Molinsky, for example, bought 10,000 shares and 5,000 warrants in his own name; Kaplan personally bought 25,000 shares and 12,500 warrants.

Hirsch bought a total of 28,001 shares and warrants through Brio Capital LP, a New York-based company where he is managing partner. Orr purchased 4,000 shares and 2,000 warrants through an entity called Triumph Small Cap Fund Inc., in Woodbury, N.Y.

SinoCoking's filings did not disclose the regulatory or criminal pasts of any of the private placement investors. Sharesleuth used addresses listed in the filings to make the connections, by cross referencing them with corporation filings, court filings, old SEC filings and other records.

MORE INVESTORS WITH REGULATORY PASTS

Another SinoCoking investor with a regulatory record is Gregory A. Bied, who in January settled SEC charges alleging violations of short-selling rules. According to the SEC's summary of the charges, one investment fund controlled by Bied and a partner shorted shares of two public companies just before another of their funds bought shares in follow-on offerings. The SEC said the fund that shorted the stock used some shares from the other fund's placement purchase to cover its positions. One of the funds cited in the case, Del Rey Management LP, got 25,000 SinoCoking shares and 12,500 warrants.

Bied, his partner and their other fund, AGB Partners LLC, agreed to pay $61,365 in disgorgement, penalties and interest.

High Capital Funding LLC, headed by Frank E. Hart, got 8,000 SinoCoking shares and 4,000 warrants in the placement. The SEC brought charges against Hart in 1994, alleging that he caused account holders at savings and loans that were converting to stockholder-owned institutions to claim that they were buying shares for themselves when, in fact, Hart and another of his companies, Generation Capital Associates, were acquiring the stock.

Hart and Generation Capital settled the charges without admitting or denying guilt, and paid more than $620,000 in disgorgement and interest.

THE SHAREHOLDER LIST

SinoCoking's registration statement covers roughly 160 shareholders, including 45 individual Chinese investors. The list also includes Rodman & Renshaw, Madison Williams, and about 15 people who work at those firms or have close relatives who do.

The registration statement did not identify which firm was responsible for placing shares with specific investors. Madison Williams said in a response to questions from Sharesleuth that its focus was on marketing the private placement to institutional investors.

Rodman & Renshaw did not respond to our questions. However, we noted that the registration statement for shares sold in another private placement handled by that firm also included Cragun's company, Wilmark of Nevada, and at least a dozen other SinoCoking investors.

SinoCoking did not comment on Sharesleuth's findings.

THE COMPANY

SinoCoking, based in Pingdingshan, China, owns coal mines, washing facilities and coking plants in Henan Province. It went public on Feb. 5 through a reverse merger with Ableauctions.com, a British Columbia-based company whose shares traded on the Over-the-Counter Market.

SinoCoking's stock moved to the Nasdaq market two weeks later. At the time, the company was projecting that its revenue for the 12 months ending June 30 would reach $69.4 million, and that its net income would be in the neighborhood of $19.3 million.

SinoCoking has not yet reported its full year results. According to the most recent version of its registration statement, it had $41.4 million in revenue for the nine months that ended March 31, but posted a loss of $25.6 million, reflecting a change in the value of the warrants it issued in its financing.

SinoCoking also disclosed last month that all coal mining operations in Pingdingshan had been shut down by government order on June 22, after an explosion at another company's mine killed 47 miners. The company said the mining moratorium would have a significant impact on its financial performance.

Nevertheless, SinoCoking reported preliminary revenue of $58 million for the year ended June 30, and preliminary earnings of $16 million.

The company announced Friday that it had signed a deal to buy as much as 3 million tons of coal a year from another Chinese producer. It said the supply agreement would allow it to operate its washing and coking facilities at full capacity, and would add as much as $146 million in annual revenue and $7 million in annual profits.

THE PLACEMENT AGENTS

Rodman & Renshaw has been one of the most active investment banks in the Chinese reverse merger market, helping to arrange financing at the time of the transactions, as well as secondary offerings afterward.

SinoCoking's filings listed Rodman & Renshaw with 54,000 warrants exercisable at $6 a share. Eight of its employees were listed as holding individual stakes ranging from 2,000 warrants to 20,870 warrants, for a total of more than 50,000 warrants exercisable at $6 each.

Madison Williams is a relative newcomer to such deals. It was spun off from Sanders Morris Harris Group Inc. in late 2009.

SinoCoking's filings list Madison Williams as holding 52,000 warrants exercisable at $6 a share and 46,865 warrants exercisable at $12. In addition, another entity called the MW Equity Pool LLC is listed as holding another 148,298 warrants, with an average exercise price of a little over $8.

Individuals and funds with ties to Sanders Morris Harris were listed as holding an additional 137,500 shares and warrants.

SinoCoking's filings show that Don A. Sanders, the vice chairman of Sanders Morris Harris, and Ben T. Morris, the chief executive, were among the investors who got shares in the private placement.

BOILER ROOM TIES

When looking into the histories of the private placement participants, Sharesleuth discovered that Kaplan, Orr and several others listed in SinoCoking's filings previously invested alongside one another in the companies that G-V Capital and Walsh Manning used in their frauds, which ran from 1995 to 1998.

Prosecutors said Frank J. Skelly and Craig Gross, the principals of Walsh Manning, orchecstrated a pump-and-dump scheme that artificially inflated the shares of at least four companies: Brake Headquarters Inc., Multimedia Games Inc., American Healthchoice Inc., and Jenna Lane Inc. Skelly and Gross were convicted of securities fraud and other charges in October 2004, and got matching 57-month prison terms.

Kaplan's company, G-V Capital, handled stock or debt placements for all four companies, and he got shares in each of them. Walsh Manning arranged additional placements for some of the companies.

SEC filings show that, in each placement, a large block of shares went to an entity secretly controlled by Kenneth S. Greene, a former principal at Stratton Oakmont Inc., one of the most notorious boiler room brokerages of the 1990s. The SEC had barred Greene from the securities business in 1994 and ordered him to pay a $100,000 fine in connection with Stratton Oakmont's activities.

Greene was convicted on criminal charges in the Walsh Manning case. He cooperated with authorities and was sentenced to 15 months in prison.

Prosecutors said the architects of the scheme arranged for their brokerages to gain a hidden majority interest in the companies by purchasing shares at below market prices from the private placement investors, who in some cases had agreed in advance to flip their stock. The transactions gave the boiler rooms control over the availability of shares, making it easier for them to manipulate the price.

Orr was one of the participants in the G-V Capital and Walsh Manning placements, buying shares in Brake Headquarters and Multimedia Games.

The filings show that another participant in SinoCoking's private placement - a New York real estate and venture capital investor named Michael Miller - got shares in all four of the companies that figured into the manipulation case.

A third SinoCoking investor, Ronald I. Heller, participated in the Multimedia Games and American Healthchoice placements. At the time, he was an investment banker at M.H. Meyerson & Co., a brokerage firm whose initial public offering was handled by Stratton Oakmont, and whose shares were being touted by Walsh Manning. M.H. Meyerson also was an investor in some of the placements.

OTHER INVESTORS

SinoCoking's filings also show that several employees of Maxim Group LLC, another investment banking firm that has been active in the Chinese reverse-merger market, bought shares in the private placement.

A team of Maxim investment bankers headed by Ramnarain "Joe" Jaigobind moved to Rodman & Renshaw in June 2008.

SinoCoking's registration statement showed that two of Flink's former associates at Crestview also participated in the placement, buying more than 70,000 shares and warrants for themselves or funds they represent.

Sharesleuth will keep following SinoCoking and its placement agents and report on what we find.

Houston American presses bet in Colombia

2010-08-26T22:04:54Z

Houston American Energy Corp. -- the subject of a recent Sharesleuth.com investigation - is boosting its stake in a Colombian oil prospect that it claims has 1 billion to 4 billion barrels of recoverable oil.

Houston American (AMEX: HUSA) said in a Securities and Exchange Commission filing that it agreed to take an additional 12.5 percent interest in the prospect, known as CPO-4, from SK Energy Group Ltd. of South Korea. That would give it 37.5 percent of the venture.

Another small, publicly traded company, Gulf United Energy Inc. (OTCBB: GLFE.OB), also announced a deal with SK Energy for a 12.5 percent stake in the Colombian venture.

The transfers would cut SK Energy's interest in the CPO-4 prospect to 50 percent, from 75 percent.

As Sharesleuth previously reported, the numbers at the upper end of Houston American's reserve estimate for the 345,452-acre prospect exceed the official proved and probable reserves for all of Colombia. SK Energy has never offered its own estimate of the site's potential.

ASSET SALE

Houston American also disclosed last week that Hupecol LLC, the majority owner of its 24 producing wells in Colombia, had agreed to sell most of them, along with the surrounding acreage, for roughly $281 million.

Houston American said it would get 12.5 percent of the proceeds, minus commissions and other expenses. Although the sales would likely bring the company a windfall of more than $30 million, they also would take away its share of the output from 19 wells, which account for the bulk of its revenue.

Houston American's stock closed Thursday at $8.75, giving the company a market capitalization of $272 million.

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

CPO-4 DEAL

Houston American and Gulf United did not put dollar values on their new 12.5 percent interests in the CP0-4 prospect. But it is clear from their respective SEC filings (here and here) that neither agreement required the buyer to pay SK Energy a substantial premium for its stake.

That strikes us as unusual, given that Houston American's backers have said that the reserves under the land could send the company's revenue and market capitalization into the billions of dollars.

Both of the farmout deals are scheduled to be completed by Oct. 29.

Houston American said that its agreement called for it to pay its proportionate share of future operating costs at the site, as well as 12.5 percent of certain past costs and 25 percent of all seismic expenses incurred between June 18, 2009 and July 19, 2012.

Gulf United's deal carried the same terms. Gulf United added that, in return for Houston American waiving its right of first refusal on the interest in CPO-4 that Gulf United is acquiring, it agreed to pay Houston American 12.5 percent of its past costs and 25 percent of its seismic costs through July 31.Houston American said in its quarterly SEC filing that the expansion of its interest would add around $1 million to its spending at CPO-4 this year. The company said that, as of June 30, its projected acquisition and drilling budget for the remainder of 2010 would be $8.16 million.

GULF UNITED

Gulf United, which has headquarters in Houston, is a development-stage company that has been acquiring interests in oil and gas properties.

SEC filings show that it had just $92,219 in cash at the end of its most recent quarter, but subsequently received an additional $550,000 through the issuance of a promissory note. The company said it would have to raise more money to pay for its end of the CPO-4 venture, as well as several other partnership agreements.

Houston American acquired its initial 25 percent stake in the Colombian prospect in October 2009. At about that same time, Gulf United signed a letter of intent with SK Energy to acquire its own stake in the venture.

Houston American's public comments late last year and early this year about the property's potential contributed to a sharp rise in its stock, which went from around $4 a share in November to a high of $20.36 on April 6.

Gulf United's deal for a piece of the same prospect has produced no such gains for its stock. The company's shares closed Thursday at 18 cents, down more than 30 percent from the day the acquisition was announced.

Gulf United has more than 233 million shares outstanding. At the current price, it has a market capitalization of $42 million.

EARNINGS AND BONUSES

Houston American announced last week that it turned a profit of $990,134 in the second quarter, on revenue of $7.63 million. That compares with earnings of $112,107 and revenue of $1.13 million in the same period last year.

Houston American attributed the increase to higher energy prices and higher production at the existing oil wells in Columbia, which it owns in partnership with Hupecol.

Houston American earnings said its general and administrative expenses were up $1.76 million from the same period last year, reflecting $637,500 in bonuses for executives and $1 million in expenses for options the company granted to its directors during the quarter.

Houston American also noted that it increased the base salaries of its executives by 10 percent, effective June 15. SEC filings show that John F. Terwilliger Jr., chairman and chief executive, had a base salary of $315,000 in 2009.

Terwilliger got a $675,000 bonus in 2008, after the sale of some other Hupecol-Houston American wells in Colombia. He also got stock awards and options that brought his total compensation to $1.74 million. The company later revised the figure to $5.86 million, to reflect the increase in its share price.

SEC investigating Mesa Energy Holdings

2010-08-19T13:46:02Z

Mesa Energy Holdings Inc., which was the subject of a Sharesleuth story in April, is facing a formal Securities and Exchange Commission investigation.

Mesa (OTCBB: MSEH.OB) said in a public filing that the SEC appears to be investigating whether the company or its predecessor, Mesquite Mining Inc., was involved in any improper sales of unregistered securities.

The Dallas-based company said the SEC also is examining whether Mesquite made any false or misleading statements

Sharesleuth's story called attention to an unusual deal in which Mesa - which was already listed on the Pink Sheets - did a reverse merger with Mesquite Mining, a publicly held shell company.

That transaction put 14 million virtually free shares of Mesa into the hands of four investors from the Mesquite Mining side of the transaction.

Mesa's stock rose from 50 cents a share to a high of $3.50, aided by an extensive and expensive promotional campaign. The company also recruited several high-profile individuals, including former New York Gov. George Pataki, to serve on a newly created advisory board.

Later SEC filings showed that the four entities that got large blocks of Mesa stock through the reverse merger sold or transferred at least 6 million of their shares during or after the price surge.

One of the four entities was Gottbetter Capital Group Inc., headed by New York lawyer Adam S. Gottbetter, whose firms have provided securities work and investment banking to Mesa. Another was Marlifran Investments LLC, a New Jersey company that Sharesleuth linked to Samuel DelPresto, a former stockbroker and convicted felon who was barred from the securities industry for his role in a fraud and manipulation scheme that cost investors more than $100 million.

Mesa said it was cooperating with the SEC, and that it was confident that "no improper sales of unregistered securities were made by current officers, directors or employees of the Company or its subsidiaries.''

Chinese company has growing receivables issues

2010-08-12T02:11:59Z

Telestone Technologies Corp. (Nasdaq: TSTC) doubled its sales last year, with nearly all of the gains coming from the three big players in China's burgeoning wireless communications market.

The Beijing-based company, which provides equipment and services to mobile telecommunications providers, reported revenue of $71.9 million and earnings of $12.5 million. It is projecting additional gains this year, with sales rising to $129.4 million and profits jumping to $22.9 million.

But Sharesleuth's review of Telestone's SEC filings shows that the company ended 2009 with $95.2 million in accounts receivable, before adjustments for doubtful payments. That equates to all of its revenue for last year, plus more than two-thirds of its revenue from the previous year.

At the end of this year's first quarter -- a period in which Telestone reported $11.1 million in revenue - the company's accounts receivable still stood at $96.6 million, indicating that it made relatively little progress in collecting on its outstanding bills.

Telestone said in its financially summary that its "Days Sales Outstanding," the average number of days it takes to collect revenue after a sale, stood at 673 days. That's the highest such figure Sharesleuth has ever seen, and was up sharply from the 358 days the company listed at the end of 2009.

Put another way, nearly all of Telestone's reported growth and earnings -- which fueled a 20-fold increase in its stock price between March 2009 and January of this year -- was linked to revenue that the company had not yet collected and might have continued difficulty collecting.

Telestone's stock closed Wednesday at $13.52, giving it a market capitalization of $142.6 million. The company is scheduled to announce its quarterly results after the markets close on Thursday, and that report is likely to include an update on its accounts receivable collections.

(Update: Telestone reported revenue of $16.6 million for the second quarter. It said its accounts receivable, before allowances for doubtful accounts, rose to $107.1 million, while its Days Sales Outstanding fell to 483 days).

Telestone's large backlog of receivables is significant for investors because companies that are unable to convert sales to cash in a timely manner often must fund their operations by taking on debt, which cuts into earnings, or selling additional shares, which dilutes existing shareholders.

Sharesleuth also noted that the SEC filings for Telestone's three main customers show that Telestone's characterization of its accounts receivable situation does not necessarily square with the numbers and narratives in its customers' financial reports.

Sharesleuth is not alleging any wrongdoing by Telestone. But we think that investors who are considering the company because of its sharp increase in sales and earnings and its attractive profit margins might want to know more about the underlying numbers.

(Disclosure: No one affiliated with Sharesleuth.com has any position, short or long, in Telestone's shares)

CUSTOMERS

Telestone says that its three main customers - China Mobile Ltd., China Unicom (Hong Kong) Ltd. and China Telecom Corp. -- are large, healthy companies that are unlikely to default on their obligations. It noted, however, that it has little bargaining power over those companies, and thus must enter into agreements with them on less favorable terms than it can negotiate with other customers.

That power dynamic, Telestone says, is one reason for the backlog of accounts receivables. The company also said in its SEC filings that consolidation, restructuring and rapid growth in the Chinese telecommunications industry is contributing to the delay in payments.

In response to questions submitted by Sharesleuth, Telestone also noted that the nature of its business is an additional complication because the branch offices of the Big 3 wireless companies are responsible for approving projects and making payments - not the corporate headquarters.

"For Telestone to get paid after our project is completed and approved, Big 3 Provincial offices "apply" for funds to pay for LAN (local area network) installation from Corporate,'' Telestone said in a written reply to Sharesleuth's questions. "This is not as quick a process as we would like to see as it adds several months to the actual payment of the invoice. Though we invoice the local offices quickly and accordingly, by the time their communication with corporate HQ is complete, several months have passed.''

CHINA MOBILE

China Mobile - Telestone's biggest customer over the past two years - said in its annual report with the SEC that it had no accounts payable extending beyond 12 months, or 365 days. China Mobile provided $32.6 million of Telestone's revenue last year and $16.7 million in 2008.

China Mobile said that more than three-quarters of its payables to suppliers and other parties were due within one month, and that more than 90 percent were due within three months.

The company also said this: "All of the accounts payable are expected to be settled within one year or are repayable on demand.'' Thus, China Mobile's filing suggests that Telestone already should have been paid for much of its 2009 work and all of the 2008 work.

China Mobile has billions of dollars of cash on its balance sheet, indicating that the ability to pay suppliers is not a problem.

Sharesleuth sent China Mobile a list of questions about its accounts payable and Telestone's accounts receivable. Although the company's investor relations manager responded to our email, he did not answer the questions.

CHINA UNICOM

Telestone got almost as much revenue from China Unicom in the past two years as it did from China Mobile.

Together, the wireless companies accounted for roughly 90 percent of Telestone's sales for that period.According to Telestone, China Unicom accounted for $32.7 million of its revenue in 2009, and $15 million in 2008.

China Unicom said in its annual filing with the SEC that roughly 87 percent of its accounts payable at the end of 2009 were due within six months, and that an additional 4.5 percent were due in six months to a year. It said the remaining 8.5 percent were due in more than a year.

The filing showed that those percentages were little changed from the previous year, indicating that even as China Unicom grew, the time horizons for its payments to contractors, equipment suppliers and telecommunications product vendors did not slip.

China Unicom did not respond to a list of questions submitted by Sharesleuth.

Neither China Unicom nor China Mobile reported any delinquencies in their accounts payables.

NEW EXECUTIVES

Telestone has made three key executive appoints in recent months. The company announced on May 12 that it had appointed Xiaoli Yu as its new chief financial officer. She replaced Hong Li, who the company said stepped down for personal reasons.

In the same press release, Telestone announced that Vicente Liu had joined the company as vice president of finance. The company said he previously worked for Oppenheimer & Co.'s investment banking division and was China representative for Cowen & Co.'s Asian investment banking unit.

Telestone said at the start of June that Guobin Pan, a 10-year company veteran, had been promoted to president. Daqing Han, chairman and chief executive, noted that Pan's extensive relationships with Chinese wireless carriers and his management oversight and marketing efforts contributed significantly to Telestone's revenue growth over the past year.

SEC filings show that Telestone had $10 million in cash at the end of the first quarter, down from $11.2 at the start of the year. The company had $5.85 million in debt, more than half of which was secured by receivables, and has noted that it could tap additional credit if necessary.

Telestone filed a shelf registration in March covering the potential sale of as much as $150 million in new stock or other securities.

FIRST U.S. NETWORK DEAL

Telestone announced Monday that it had received its first local access network contract in the United States, for a wireless communications system at a Houston hospital. It said in a press release that the project would be worth $2 million and would be completed by the end of the year.

But the head of Teleston's American partner told Sharesleuth that some information in the release might have been lost in translation.

The initial phase of the contract - the only part that has been formally approved -- is worth roughly $200,000 in equipment sales for Telestone, said David Ballard, owner of Quell corp., which specializes in cellular coverage systems for hospitals, government buildings and other properties.

That first phase should be finished by the end of December, Ballard said. The additional phases of the project would bring Telestone the remaining $1.8 million in sales, but that work will not materialize until next year, he said.

A RIVAL'S RECEIVABLES

Telestone is not alone in having large receivables balances with China Mobile, China Unicom and China Telecom.

China GrenTech Corp. (Nasdaq: GRRF), one of Telestone's competitors in the Chinese wireless communications market, said in its latest annual filing with the SEC that it also had a large backlog of outstanding bills with those three companies and their local affiliates.

China GrenTech had $234.8 million in revenue last year, up more than 60 percent from the previous year. The company said it had $197.8 million in gross receivables and $130.7 million in net receivables. It noted that it typically sells some of its receivables to Chinese banks to help maintain its cash flow.

China GrenTech said its receivables turnover was averaging 292 days at the end of 2009, down from 469 days at the end of 2008. The company said $113.4 million of its gross receivables had been outstanding for less than a year. It said $34 million had been outstanding for one to two years, $34.7 million had been outstanding for two to three years, and $15.7 million had been outstanding for more than three years.

The company said $91 million of its receivables had come due under the terms of its contracts with customers, but had remained unpaid.

Unlike Telestone, China GrenTech's stock has lost ground over the past year, and is currently trading for a little over $2 a share.

Another of Telestone's competitors, Comba Telecom Systems Holdings Ltd. (Pink Sheets: COBJF.PK), said its accounts receivable turnover was 139 days at the end of last year, compared with 171 days at the end of 2008.

Telestone attributed the varying collection periods to differing business models.

"We have a longer accounts receivable turnover period than our main competitors due to our revenue generated from a higher mix of system integration products,'' said Wanchang "Winnie" Hong, an assistant to Telestone's chief financial officer, in an email response to our questions. "Our main competitors are more focused on equipment sales, which tend to have shorter receivable turnover periods."

TELESTONE'S REVENUE MIX

Telestone's revenue for 2009 consisted of $30.2 million in equipment sales and $41.7 million from service agreements, primarily the creation of local area networks in office buildings to provide wireless access for computers, cell phones and PDAs. Its $71.9 million in total sales was more than double the $35.3 million it reported for 2008.

Telestone's net income -- $12.5 million - was up 78 percent from the previous year.

The company's annual filing with the SEC showed that its receivables at Dec. 31 were up nearly 50 percent from the end of 2008, when the balance was $62.1 million.

Telestone noted in its earnings release for 2009 that it had made progress on the accounts receivable front, cutting its days sales outstanding to 358 days, from 553 days at the end of 2008. However, its average for the first quarter of 2010 represented a sharp reversal.

Telestone's gross receivables at the end of last year did not include $6.17 million in allowances for doubtful accounts - a figure that was up slightly from $5.78 million in allowances at the end of 2008.

In an investor presentation in February, Telestone provided a snapshot of one of its contracts, a wireless communications system for an office building in China's Anhui province. It broke down the payment terms as follows: 10 percent at the start of the contract, 60 percent at six months, 20 percent at nine months and 10 percent at 24 months, which marks the end of the company's warranty period.

That summary suggests that Telestone should receive at least 70 percent of the revenue owed under such contracts within six months, and should have 90 percent of the total within nine months.

Telestone said in its annual SEC filing that most of its receivables had a credit period of six to nine months. It added that roughlly 10 percent of the value of each service contract is not payable until the 24-month warranty period expires.

QUARTERLY FLUCTUATIONS

Although Telestone had just $11.1 million in revenue for the first quarter, it nevertheless told investors to expect more than $129 million in revenue for all of 2010. SEC filings show that for the past three years, Telestone has booked roughly half of its annual revenue in the final quarter of each year.

SEC filings show that the company reported $38.9 million in revenue for the first nine months of 2009, and finished the year with $71.9 million. Similarly, it had $20.9 million in revenue through the first three quarters of 2008, and ended that year with $35.3 million.

Former head of Florida company becomes first person sentenced in insurance fraud case

2010-05-07T16:14:33Z

The former chairman and chief executive of MDwerks Inc. (OTCBB: MDWK.OB), a company featured in a recent Sharesleuth investigation, has pleaded guilty to one count of health care fraud in connection with the processing of falsified insurance receivables.

Recently unsealed court documents show that the executive, Howard B. Katz, has been cooperating with authorities in a broader investigation into the receivables transactions.

That cooperation began in December 2008, shortly after he was charged. In court filings, federal prosecutors described Katz's assistance as "significant, useful, timely and reliable.''

Kurtz was sentenced to three years of probation. He was ordered to spend weekends in prison for 24 consecutive weeks, and also must pay a $25,000 fine.

A federal grand jury in New Hampshire has been hearing evidence in the fraud case, which revolves around falsified receivables for benefits covered by workers' compensation plans. The investigation involves two public companies - MDwerks, of Deerfield Beach, Fla., and Medical Solutions Management Inc. (Pink Sheets: MSMT.PK), of Marlborough, Mass.

Vicis Capital LLC, a New York-based hedge fund operator, was the biggest source of capital for both companies, providing more than $30 million in debt and equity financing.

Sharesleuth previously reported that federal authorities have been scrutinizing what role, if any, certain Vicis employees played in the insurance scheme.

Vicis has contended that the company and its employees were not, and are not, being investigated. It declined, through its attorney, to comment on Katz's case, saying that the matter does not involve the hedge fund.

Katz's charging documents say that MDwerks got $6.8 million in March 2008 from an unidentified hedge fund, which Sharesleuth determined was Vicis. It used the money to buy insurance claims from a factoring company in California.

MDwerks also handled other receivables that Medial Solutions Management had purchased from that California company, Deutsche Medical Inc.

According to the court documents, MDwerks hired a billing agency in New Hampshire to help process the claims. In the summer of 2008, the billing agency discovered problems with the documentation. Among other things, it found that some of the receivables listed incorrect dates of service, and that others covered services that had never been provided. Some of the receivables even covered charges for skin creams that were purportedly dispensed to a person who was dead.

The documents say Katz knew, by September 15, 2008, that the receivables were largely fraudulent, but that he still caused MDWerks to seek payment from insurers and other benefit providers. They say he also devised fraudulent methods to allow MDWerks to continue collecting on the claims, and that he paid the billing agency nearly $147,000 to cover the expenses related to the alteration of the receivables.

Katz was charged under a sealed information, similar to an indictment, on Dec. 10, 2008. He signed a plea agreement four days later. He remained MDWerks' chairman and chief executive, however, until February 2009.

Two Vicis employees, founding partner Shad L. Stastney and managing director Christopher D. Phillips, were on MDWerks' board of directors. Stastney resigned from MDWerks' board in September 2009; Phillips quit two months later.

Stastney also had been a member of Medical Solutions Management's board.

Vicis, which has seen a sharp drop in its assets under management, announced earlier this year that it was winding down its funds.

Howard Katz Court Documents

Surge in Chinese coal company's shares produces quick gain for private placement investors

2010-03-11T14:53:13Z

A surge in the shares of SinoCoking Coal and Coke Chemical Industries Inc. (Nasdaq: SCOK) has produced a small fortune - on paper at least - for a group of unidentified investors who bought stock in an offshore placement last month.

SinoCoking's stock rose tenfold after the little-known Chinese company went public Feb. 5 through a reverse merger with Ableauctions.com Inc., based in Burnaby, British Columbia.

SinoCoking's shares peaked at $53.70 on Friday. They gained nearly $22 last week alone, with the only news being the groundbreaking on a $70 million coking facility in Henan Province.

SinoCoking's stock closed at $34.09 on Wednesday, giving the company a market capitalization of more than $500 million.

SHARE PLACEMENT

On the same day that SinoCoking completed its reverse merger with Ableauctions.com, it raised $7 million through a placement of shares and warrants to what it called 34 "high net-worth investors.'' Those investors got 1.18 million shares at $6 each, plus warrants to buy 590,446 additional shares at $12 each.

At Wednesday's closing price, the shares were worth $33.1 million more than the investors paid for them, and the warrants could have been exercised at a profit of $13 million.

The shares were issued under a so-called Regulation S exemption, which covers stock sold to non-U.S. buyers. They cannot be resold in the United States until certain holding conditions are met.

Sharesleuth asked SincoCoking over the weekend whether it could offer any explanation for the sharp rise in its stock. The company did not respond, but issued a press release on Monday saying it was unaware of any "recent or pending material announcements or recent or pending corporate developments that would account for the unusual trading activity in our stock."

Roughly 1.25 million shares have traded hands since March 4 - when the company's stock jumped more than $11, topping $40. SinoCoking said in a recent SEC filing that it had 14.7 million shares outstanding as of Feb. 16.

It is unclear how many of those shares are in the public float, or whether the surge in the company's stock is simply the result of an increasing number of investors pursuing a relatively small number of shares.

(Disclosure: No one associated with Sharesleuth.com has any position, short or long, in SinoCoking.)

THE COMPANY

SinoCoking, which has headquarters in the city of Pingdingshan, supplies coal and coke to power plants, steel mills, factories and other end users. It produces coal from its own mines, and buys some from third parties.

SinoCoking said in a recent financial presentation that it needs $65 million in "incremental capital'' to complete its new coking facility. It is pursuing another share placement, using U.S. investment bankers and soliciting U.S. investors.

The company had $51.4 million in revenue in the 12 months that ended June 30, according to an SEC filing related to the reverse merger. That was down from $58.6 million in the same period a year earlier.

The company said it had net income of $17 million for the 12 months that ended June 30, off 4 percent from a year earlier.

In a recent financial presentation, it projected sales of $69.4 million and earnings of $19.3 million this year. That estimated profit margin would far exceed the actual margins of virtually every publicly traded coal producer.

ABLEAUCTIONS.COM

SinoCoking's merger partner, Ableauctions.com, was a money-losing company that specialized in liquidating merchandise through auctions and closeout stores. It also dabbled in collectibles, and more recently moved into real estate lending and development.

Ableauction, reported revenues of $1.44 million and a loss of $1.12 million for the nine months that ended Sept. 30, 2009. It had sales of $2.81 million and a loss of $2.77 million in 2008.

Ableauctions was controlled by Abdul Ladha, a Vancouver-area entrepreneur and philanthropist.

The company completed a 1-for-20 reverse split just prior to the merger with SinoCoking, which left its original shareholders with a roughly 3 percent stake in the combined entity.

THE NEW CEO

Ladha resigned as president and chief executive at the time of the deal. He was succeeded by Jianhua Lv, who is described in SEC filings as being 41 years old and having more than 20 years of experience in the coal and coking industries.

The SEC filings also say that he has a bachelor's degree from Henan University in Chinese, a master's degree from Henan University in economics and a master of law degree from Central Party School.

Sharesleuth asked SinoCoking how Lv was able to work in the coal and coking industries while pursuing those academic degrees. The company did not respond.

Money and property seized from Who's Your Daddy executives

2009-11-24T17:02:54Z

Another Who's Your Daddy Inc. executive has been caught up in a criminal drug trafficking case in San Diego.

Court documents filed since our original story show that, in March, agents seized a 32-foot powerboat valued at more than $100,000 from Dan Fleyshman, one of Who's Your Daddy's founders and the current director of sponsorship.

The seizures preceded a slew of federal drug indictments that included Edon Moyal, Fleyshman's co-founder at Who's Your Daddy (OTCBB: WYDI.OB).

Fleyshman is not a defendant in the case and has not been charged with any crimes. He told Sharesleuth that although the government seized the boat, it wasn't actually his.

"I didn't own the boat so it wasn't seized from me, nor was anything else since I'm not a part of the case," he said in an email.

Fleyshman said the boat had at one point belonged to a luxury store that he owned in downtown San Diego. He said it was purchased by one of the defendants in the drug trafficking case, which is why the government took it. However, the most current registration records for the boat still list Fleyschman's store as the owner.

The U.S. Attorney's office said it couldn't comment on a pending case.

The government disclosed the seizure after prosecutors filed a bill of particulars for all of the items and cash that were taken as part of the investigation. In all, agents seized more than $500,000 worth of cash, cars and jewelry from people connected to the case. That includes some $40,000 in cash seized from Moyal, and a little more than $4,000 seized from Fleyshman, whose name was misspelled in the court documents.

Moyal was executive vice president of marketing and brand development at the time of his arrest. He, along with a handful of others, was charged with conspiracy to distribute marijuana and possession of marijuana with intent to distribute. According to court documents, agents conducting surveillance spotted Moyal handling boxes of marijuana that were later shipped from San Diego to Maryland.

Although Who's Your Daddy said in a Securities and Exchange Commission filing in April that Moyal had resigned as an officer and director, it did not disclose his arrest or his federal indictment.

The case drew national attention when an undercover operation that was supposed to be a final bust went awry last spring and several defendants led police on high speed chase across San Diego freeways, throwing fistfuls of cash out their windows as they went.

Moyal and Fleyshman, both under 30, had been hailed in Entrepreneur and other publications for developing the Who's Your Daddy line of clothing, energy drinks and other products, and for taking their company public at such a young age.

]]> Edon Moyal / Dan Fleyschman Money and Property Seizures

Rockwell Medical Technologies has close ties to financier facing SEC charges

2009-11-03T10:35:38Z

The Securities and Exchange Commission recently brought charges against financier Michael J. Xirinachs, alleging that he helped a Florida company called Universal Express Inc. dump billions of unregistered shares on the market in 2006 and 2007.

The SEC said Xirinachs, though two investment companies, bought more than 15 billion unregistered shares from Universal Express at a discount to the market price, then sold them to the public, generating $17.5 million in proceeds. According to the complaint, he routed $11 million of that money to Universal Express as payment.

Sharesleuth noted that one of those same investment companies entered into a consulting agreement last November with Rockwell Medical Technologies Inc. (Nasdaq: RMTI), which sells dialysis concentrates and solutions to healthcare providers.

Rockwell Medical's shares doubled in the 15 days that followed that agreement, and doubled again in the first seven months of this year. The warrants that Xirinach's company, Emerald Asset Advisors LLC, received as the sole compensation for its consulting services are currently worth $1.9 million more than their exercise price.

The consulting agreement called for Emerald Asset Advisors to introduce the company to potential licensing partners, acquisition candidates, securities analysts, stock brokers and institutional investors.

The timing of the contract and the surge in Rockwell Medical's shares could be a coincidence. But a Sharesleuth investigation found that Xirinach has a long history with Rockwell Medical, dating back to the mid-1990s, when he was an executive with D.H. Blair & Co., a brokerage that defrauded investors by manipulating stock prices and engaging in high-pressure "boiler room'' sales tactics.

THE COMPANY

Rockwell Medical bills itself as a fully integrated biopharmaceutical company. Its products target end-stage renal disease, chronic kidney disease and iron deficiency anemia. It recently completed Phase 2 clinical trials of a new drug, Soluble Ferric Pyrophosphate, for delivering water-soluble iron into the bloodstream during dialysis treatment.

Rockwell Medical employs about 250 people, according to SEC filings, and has manufacturing and warehousing facilities in Wixom, Mich.; Grapevine, Tex., and Greer, S.C. The company, which is based in Wixom, reported $25.8 million in revenue for the first half of 2009, up 4.9 percent from a year ago. It posted a loss of $3.4 million for the first half, compared with a loss of $2.3 million a year earlier.

Rockwell Medical's shares got a boost this summer when the company was added to the Russell 2000, an index of small capitalization stocks. Rockwell Medical completed a directed offering of shares and warrants last month that netted $20.5 million in new capital. It placed the securities with a group of institutional investors led by Deerfield Management Co., a New York-based hedge fund that focuses on healthcare businesses.

Rockwell Medical's shares peaked at $9.39 on Aug. 7. They closed Monday at $6.84, giving the company a market value of $116.5 million.

(Disclosure: Mark Cuban, the majority member of Sharesleuth.com LLC, has no investment position in Rockwell Medical; Chris Carey, editor of Sharesleuth, does not trade in individual stocks and has no investment position in Rockwell Medical.)

Unlike some of the companies that Sharesleuth has written about, Rockwell Medical is clearly a real business, with growing revenue and a potentially valuable new product. For those reasons, we think that investors might want to ask why the company has maintained its relationship with Xirinachs, who figured into another SEC case in 2003 and also was sued for investment fraud last year in connection with a failed venture involving Emerald Asset Advisors.

Sharesleuth submitted written questions to Rockwell Medical's public-relations and investor-relations representatives last month about the consulting contract and Xirinachs' activities on behalf of the company. We received no reply.

EARLY INVOLVEMENT

Rockwell Medical's initial SEC filings in 1997 identified Xirinachs as one of its three founders, and said he held 24.9 percent of its stock. Proxy filings show that he also served on the company's board of directors until 1999.

Later filings show that Xirinachs or his then-wife, Patricia Xirinachs, maintained at least a 7 percent stake in the company until at least January 2006. On June 22 of that year, Rockwell sold Emerald Asset Advisors an additional 111,895 shares of stock for $500,000, or $4.47 a share, a discount of more than 30 percent from that day's closing price.

According to the SEC's complaint, Michael Xirinachs is the sole owner and manager of Emerald Asset Advisors, which is based in Melville, N.Y.

Xirinachs' attorney, Ira L. Sorkin, declined to discuss the SEC's allegations, except to say that his client denies guilt.

"We intend to defend against the charges,'' he said.

THE CONSULTING DEAL

On Nov. 5, 2008, Emerald Asset Advisors signed a one-year consulting contract with Rockwell Medical. It got warrants to buy 300,000 of the company's shares at $1.99 each, a slight discount to that day's closing price. Between Nov. 5 and Nov. 12, when Rockwell Medical made a presentation at an investment event in New York, its stock slipped to $1.50 -- a five-year low.

The next day, the company announced earnings for the third quarter of 2008, and its share price began rebounding on a sharp increase in volume.

Rockwell Medical reported that its revenue for that quarter rose 22 percent from a year earlier, to $13.5 million, and that revenue for the first nine months rose at a similar rate, to $38.1 million. However, the company said its losses also widened, to $2.5 million for the quarter and $4.8 million for the nine months.

From Nov. 13 through Nov. 20, more than 2.1 million shares of Rockwell Medical's stock traded hands -- eight times the average daily volume in the months leading up to the surge. By Nov. 18, the company's stock was up to $3.14 a share. Two days later, it closed at $4.54, after climbing as high as $4.79.

Rockwell Medical's shares posted those gains at the same time that the Dow Jones Industrial Average and other market indexes were plunging. Between Nov. 18 and Nov. 20, the Dow fell more than 10 percent.

On Nov. 21, Rockwell Medical amended its consulting agreement with Emerald Asset Advisors. It extended the contract by a year, and granted Xirinachs' firm two more sets of warrants - 200,000 exercisable at $4.54 a share and 200,000 exercisable at $7 a share.

The original tranche of 300,000 warrants becomes exercisable Thursday.

Sharesleuth also noted that, last Nov. 19, Rockwell Medical's board of directors awarded 100,000 shares of restricted stock and 170,000 options to Robert L. Chioini, the company's chairman and chief executive. The board also granted 50,000 restricted shares and 80,000 options to Thomas E. Klema, executive vice president and chief financial officer.

The options and restricted shares vest over three years. At current market prices, Chioni's award would be worth $1.3 million.

FRAUDULENT BROKERAGE FIRMS

When Xirinachs got involved with Rockwell Medical, he was senior vice president for investments at D.H. Blair. The New York-based brokerage shut down under regulatory pressure in 1998. A grand jury later issued a 173-count indictment against the firm and 15 of its executives and brokers. D.H. Blair, along with its chairman and two vice chairman, entered guilty pleas in 2002, agreeing to pay $21 million in restitution.

Xirinachs was not among those charged.

In July 1997, Rockwell Medical enlisted another New York brokerage, Maidstone Financial Inc., as underwriter for an initial public offering that was to raise as much as $7.24 million. Before they could complete that deal, the National Association of Securities Dealers brought charges against Maidstone and its top executives, alleging that they defrauded investors of millions of dollars on similar offerings.

Rockwell Medical then turned to two other firms, Mason Hill & Co. and J.W. Barclay & Co. They raised roughly $7.5 million for the company through the sale of shares and warrants.

In 2002, however, then-New York Attorney General Eliot Spitzer announced the indictment of Mason Hill and five of its employees, alleging that they defrauded investors by manipulating the share prices of at least six public companies, including Rockwell Medical. And in 2003, the SEC brought civil charges against J.W. Barclay and eight of its employees, saying they either defrauded investors and failed to halt the wrongful acts.

UNIVERSAL EXPRESS

Xirinachs and Emerald Asset Advisors are among 13 individuals and companies charged by the SEC in connection with the unusual stock activity at Universal Express, a Florida company that offered point-to-point luggage shipping and other transportation and logistics services.

Richard A. Altomare, Universal Express' chief executive, has claimed in press releases, blog postings and YouTube videos that the mysterious flood of shares that sank the company's stock price to a fraction of a penny was the work of hedge funds and other unknown parties that were engaged in "naked shorting.''

The SEC concluded that the company itself had issued billions of unregistered shares. It brought fraud charges in 2004 against Universal Express, Altomare and five other defendants. The agency alleged that Universal Express relied on illegal stock sales to survive, and that Altomare used company funds for lavish personal expenses, including private jet flights, luxury hotel stays and jewelry.

The SEC won a $21.9 million judgment against Universal Express and Altomare in 2007.

According to SEC's new complaint, Xirinachs and Emerald Asset Advisors entered into a deal with Universal Express in February 2006, under which they would buy its stock at a discount to the market price in exchange for cash.

The complaint says that, between February 2006 and June 2007, Emerald Asset Advisors bought 6.37 billion shares from Universal Express, deposited them into a brokerage account, then sold most of them on the public market, netting $11 million. Emerald Asset Advisors sent $7.9 million to Universal Express to pay for the shares.

The SEC said more than 6 billion of the shares that were offered and sold were not covered by any registration statement.

According to the complaint, Xirinachs opened a second brokerage account in September 2006 in the name of North Atlantic Resources Ltd., an offshore company domiciled in St. Vincent and the Grenadines. According to the SEC, Xirinachs acted as investment advisor for North Atlantic and had authority to buy and sell shares.

Between November 2006 and June 2007, North Atlantic Resources bought 9.2 billion shares from Universal Express, plus 350 million shares from Emerald Asset Advisors. It sold roughly 9.5 billion shares to the public for $6.48 million, and sent $3 million of the proceeds to Universal Express.

The SEC said Xirinachs received 10 percent of the profits on North Atlantic's trades. It said none of the 9.5 billion shares were covered by registration statements.

ANOTHER SEC CASE

Xirinachs figured into another SEC case in 2003. The agency brought fraud charges against Park South Securities LLC and Todd M. Eberhard, its majority owner. According to the complaint, Eberhard misappropriated money from customers and falsified account statements to conceal his activities.

The SEC also said in court filings that Eberhard had improperly transferred $1.75 million in customer money to a purported hedge fund called Stone House Capital Partners LP, which listed Xirinachs as one of its two general partners. Xirinachs was a registered representative at Park South at the time, and worked with Eberhard at an office in Melville, N.Y.

Eberhard, who appeared frequently on financial-related television programs, was indicted on criminal charges in 2004 in connection with his activities and pleaded guilty in 2005. He acknowledged that he looted customer accounts, traded excessively and inappropriately to generate extra commission income and forged account statements and other documents. Eberhard was sentenced to more than 13 years in prison.

The trustee assigned to liquidate Park South reclaimed the $1.75 million in customer money held by Stone House. Xirinachs was not charged with any wrongdoing.

CIVIL SUITS

In September 2008, an investor sued Xirinachs, Emerald Asset Advisors and several other defendants, alleging fraud in a failed deal to buy a cigarette-distribution business called Tobacco Holdings Inc. The investor provided $325,000 in financing, and said in the complaint that the defendants repeatedly misrepresented their progress on the acquisition, diverted the money for other purposes and failed to repay it after the deal fell through.

Xirinachs, Emerald Asset Advisors and the other defendants settled the case last October, agreeing to pay $468,308, plus another $102,000 for legal fees and expenses.

The president of Tobacco Holdings was later indicted on charges of trafficking in contraband cigarettes, conspiracy, wire fraud and money laundering. Federal prosecutors alleged that Carlo J. Nappi, also known as Carl Nappi, had devised a scheme to ship cigarettes from New York to Michigan without paying applicable sales taxes.

The same investor filed a second suit in November 2008, alleging fraud and misrepresentation in the solicitation of funds for the development of a purported television series for HBO. Xirinachs was one of four defendants, although he was not named in the most serious counts. Another of the defendants settled the debt for roughly $61,000. The case against Xirinachs and other defendants remains open.

Is notorious brokerage boss Harold Gallison back in the penny stock game?

2009-10-14T04:01:29Z

Has Kyle Rowe, the barred brokerage executive behind Going Public LLC, reunited with his former boss, convicted felon Harold "B.J." Gallison?

Securities and Exchange Commission filings for three of Going Public's clients show that big blocks of their stock went to a company called Carmel Valley Corp.

Public records show that Gallison -- who pleaded guilty in 2003 to conspiracy to commit securities fraud and was sentenced to five years in prison -- once was Carmel Valley's registered agent.

They also show that the company operated from a house in Las Vegas that was owned by another of Gallison's companies, La Jolla Capital Holding Corp.

David K. Rushing, the person now listed in SEC filings as president of Carmel Valley, is the brother of one of Gallison's longtime associates.

David Rushing also is an officer of a second company that has physical and financial ties to Gallison's offshore stock exchange, called GISBeX.

Going Public, based in San Diego, Calif., helps clients gain listings on stock exchanges through stock offerings or reverse mergers.

MILLIONS OF SHARES

SEC filings show that Carmel Valley got 4.54 million shares of Omni Ventures Inc. (OTCBB:OMVE.OB) and 3.02 million shares of LIG Assets Inc. in connection with Going Public's work for those companies.

The filings did not describe what services Carmel Valley performed in return for those shares, which amounted to just under 5 percent of each company's stock.

A filing for a third company not mentioned in Sharesleuth's previous reports on Rowe shows that Carmel Valley got 1.8 million shares of its stock, or nearly 3 percent of the total outstanding. That company is American Real Estate Assets Inc., of San Diego.

Omni Ventures' stock, which traded earlier this year for more than $1 a share, is now at 44 cents, giving the company a market value of $45.2 million.

At that price, the stake issued to Carmel Valley has a market value of nearly $2 million.

Omni Ventures reported in its latest quarterly SEC filing that it had no revenue for the nine months that ended June 30, and that it finished the period with just $9,353 in cash.

The SEC has not yet authorized trading in the shares of LIG Assets and American Real Estate Assets, the other companies that issued shares to Carmel Valley through their deals with Going Public.

FAMILY TIES

David Rushing is the brother of Robin M. Rushing, one of Gallison's key lieutenants at La Jolla Capital Corp., a San Diego-area brokerage that had frequent run-ins with regulators.

The National Association of Securities Dealers (now the Financial Industry Regulatory Authority) barred La Jolla Capital and Gallison from the penny stock business in 1997. La Jolla Capital's successor, Pacific Cortez Securities Inc., shut down under regulatory pressure in 1999.

Rowe also worked at La Jolla Capital, and later ran another brokerage called Salomon Grey Financial Corp., which was implicated in at least two fraud schemes.

Rowe was permanently barred by the National Association of Securities Dealers in 2006, and also was barred by the SEC (pdf).

As Sharesleuth previously reported, he legally changed his name earlier this year to Marvin K. Rowe II, a move that obscured his regulatory past.

GALLISON'S CRIMINAL HISTORY

Gallison was indicted in 2000 in connection with a "pump-and-dump'' scheme facilitated by Pacific Cortez. He pleaded guilty in 2003 to conspiracy to commit securities fraud and was sentenced to five years in prison.

At the time, prosecutor Steve Davis said he believed that Gallison was still involved in securities schemes, using other people as proxies. Davis told the San Diego Union-Tribune that Gallison had been contemptuous of regulators' efforts to halt his activities, and predicted that Gallison might continue to operate GISBeX from prison.

"'I think he is scheming right now ... I don't think he will be a changed person,' Davis said. "We will see him again."

Gallison was released from custody in 2006.

When Sharesleuth first asked Going Public whether Marvin K. Rowe II was in fact Kyle Browning Rowe, we heard back from Irving M. Einhorn, an attorney who once headed the SEC's regional office in Los Angeles.

After leaving the agency, Einhorn represented Gallison and Robin Rushing in SEC and NASD disciplinary proceedings.

When we asked Einhorn in April whether Gallison had any involvement with Going Public, he responded: "You don't have that.'' Einhorn did not respond to our follow-up questions late last month.

AN OFFSHORE BROKERAGE

GISBeX - short for Global Internet Stock Brokerage Exchange - is based in Costa Rica. It purports to be an electronic exchange that deals in all types of stocks and bonds, including certain types of restricted securities sold by U.S. companies to offshore investors.

Davis, the San Diego prosecutor, told KYC News in 2005 that his office had established that Gallison owned GISBex through a private trust controlled by his family.

Gallison's father, Harold Gallison Sr., told the San Diego Reader that same year that his son was not running GISBex. However, he identified Robin Rushing as a key operative at the brokerage.

Sharesleuth found documents that also link David Rushing to GISBeX. He has signed SEC filings in recent years as assistant secretary of Sandias Azucaradas CR S.A., another Costa Rican business.

Sandias Azucaradas has shared a mailing address with GISBeX in San Jose, Costa Rica. Its website was created and registered by the same company that created GISBeX's site, and those of a handful of GISBeX affiliates, including Evalesco Trading and Moneyline Brokers.

And, for a time at least, GISBex instructed clients who want to open accounts by wire transfer to send their money to a Panamanian branch of HSBC Bank, for credit to Sandias Azucaradas.

Sharesleuth recently obtained a letter that Sandias Azucaradas sent to a securities transfer agent in connection with shares it owned in another public company. The letter was signed by Robin Rushing, as managing director.

SEC filings show that Sandias Azucaradas owned large blocks of stock in several companies with ties to Regis M. Possino, a two-time felon and disbarred lawyer. ((see previous Sharesleuth stories here and here.

ARISA CAPITAL

The registration statements filed with the SEC by LIG Assets and American Real Estate Assets show that an entity called Arisa Capital Inc. also got big blocks of their stock. Nevada corporation filings list Cynthia A. Taylor as Arisa's president.

Taylor also is an officer of Corporate Capital Formation Inc., a Las Vegas company that has served as registered agent for 175 businesses, including Carmel Valley Corp. and four others with current or historic ties to David Rushing, Robin Rushing or Gallison.

The president of Corporate Capital Formation is Roger G. Coleman Sr., a former securities transfer agent who pleaded guilty in two different fraud-related criminal cases in 1989 and 1990.

A check of the other companies for which Corporate Capital Formation serves or has served as registered agent turned up at least six connected to Robert M. Bryson, another financial felon.

Bryson served 18 months in prison in the 1980s after pleading guilty in a securities fraud case. According to stories in San Diego, he had close ties to people at La Jolla Capital and Pacific Cortez.

Corporate Capital Formation once was a subsidiary of Triad Industries Inc., a publicly traded company headed by Bryson's daughter. Coleman was a director of Triad.

According to SEC filings, Corporate Capital Formation was spun off into an independent entity in 2006.

Xethanol Corp. founder creates new public company

2009-09-17T23:05:57Z

Some of the key people behind Xethanol Corp. have resurfaced with a new public company - Waste2Energy Holdings Inc. - which gained a listing on the Over-the-Counter market through a reverse merger.

Christopher d'Arnaud-Taylor, who was Xethanol's chairman and chief executive, also headed Waste2Energy (OTCBB: WTEZE.OB). He stepped down last week, in keeping with the terms of the merger agreement.

Although d'Arnaud-Taylor resigned as chairman and chief executive, he remains Waste2Energy's biggest shareholder. He will continue to serve on its board of directors, and according to Securities and Exchange Commission Filings, he also got a $300,000-a-year consulting agreement with the company.

PRIOR INVESTIGATION

Xethanol was the subject of a Sharesleuth investigation in 2006. The company replaced d'Arnaud-Taylor as chief executive a few weeks later. Taylor told Sharesleuth that, despite the presence of other Xethanol alumni at Waste2Energy, he created the company without their involvement in early 2007.

According to a recent SEC filing, d'Arnaud-Taylor, his wife and a limited liability company he controls hold 6 million Waste2Energy shares, plus warrants to buy an additional 4 million shares exercisable at 50 cents a share.

Waste2Energy's stock closed Thursday at $1.11 a share. That gave the company a market value of more than $55 million. According to the SEC filing covering the reverse merger, officers and directors control 44 percent of the company's shares.

REVERSE MERGER AND PRIVATE PLACEMENT

Waste2Energy Holdings was formed through the merger of Waste2Energy Inc. and Maven Media Holdings Inc., a public shell company in Chula Vista, Calif. The deal was consummated on May 29, with shareholders of Waste2Energy getting 46 million shares of the combined company.

In the past three months, Waste2Energy has raised $2.5 million through a series of private placements, according to SEC filings. In return for the money, it issued $2.5 million in notes paying 10 percent a year in interest, plus 2.5 million shares of its stock. The company has not identified any of the investors.

Waste2Energy's SEC filing on the reverse merger noted Taylor's ties to Xethanol, including his role as a defendant in a securities class-action suit that the company settled for $2.8 million.

"Appropriate disclosure concerning any XNL issues was included in the 8-K filed with the SEC and will be included in other filings as appropriate,'' Taylor told Sharesleuth in an email response to our questions. "However, there is no other connection with XNL that should be made.''

GAS FROM GARBAGE

Waste2Energy says it has a system for converting garbage and other solid waste into burnable gases. Its main subsidiary is pursuing deals to build cogeneration plants at industrial facilities and other locations to turn those wastes into "renewable green power.''

Xethanol claimed it had a process for turning wood chips, grass clippings and other plant material into ethanol. But the company never produced any commercial quantities of ethanol using the technology and eventually abandoned that business. It is now known as Global Energy Holdings Group Inc. (AMEX: GNH). The company's shares, which topped $16 in early 2006, now trade for less than 20 cents.

SCOTTISH PLANT

Waste2Energy is involved in the construction of a waste-to-energy plant in Dumfries, Scotland, for a British company, Ascot Environmental Ltd. According to an SEC filing at the time of the merger, the waste-to-energy side of the business had revenue of $2.68 million for the nine months that ended Dec. 31, primarily from work on the Scottish plant. It reported a net loss of $4.01 million for that period.

The Scottish plant, known as the Dargavel Energy from Waste Facility (pdf), is in the final commissioning stages, and should be processing waste soon, Taylor said. Waste2Energy's strategy, he said, is to capitalize on that project by selling other units to customers around the world.

"To support this roll-out, W2e has organized a design and fulfillment team in Scotland located in close proximity to the Dargavel site and forged a strategic alliance with a Scottish manufacturing company with a leadership position in thermal engineering processes.''

XETHANOL ALUMNI

Two other key players at Xethanol - Franz A. Skryanz and Jeffrey Langberg -- also have been involved in Waste2Energy.

Skryanz was secretary and treasury of Waste2Energy before it merged with Maven Media Holdings. SEC filings show that he got 500,000 shares in the combined company. Skryanz was an officer and director of Xethanol.

Taylor said Skryanz is no longer an officer or director of Waste2Energy and is retiring.

Waste2Energy said in its SEC filing on the reverse merger that an entity called SilverFox LLC has provided services to the company under two consulting contracts. Other SEC documents have listed Langberg as SilverFox's managing member. Langberg was a Xethanol director and was one of its investment bankers.

SilverFox got 300,000 shares of Waste2Energy stock under the first consulting contract, which was awarded in May 2008 and called for the firm to find potential investors in the company. According to the SEC filing on the reverse merger, the deal also included warrants to buy 300,000 more shares at 75 cents each.

SilverFox got a new contract in November that calls for it to identify and screen potential buyers for Waste2Energy's plants. According to the merger filing, that agreement provides for a finder's fee of 10 percent of the purchase price for each sale it brings in.

Taylor told Sharesleuth that SilverFox LLC is "a tad more'' than just Langberg, and that Langberg is no long managing member.

Waste2Energy's latest SEC filings list the company's headquarters at the same New York City address used by Xethanol. The telephone number also is the same as Xethanol's old number. Xethanol had originally leased that office space from Langberg.

The company is set to move to a new headquarters in Greenville, S.C.

A ROCKY START

Last July, Waste2Energy was sued by the former owner of EnerWaste International Corp., which it had acquired the previous year for $5 million. Thomas L. Dutcher alleged that Waste2Energy had defaulted on the payments for the business, whose "Batch Oxidization System" technology is at the core of its current activities.

Waste2Energy countersued, saying that Dutcher misled the company about the state of EnerWaste's finances and business. EnerWaste's European affiliate, based in Iceland, went bankrupt late last year because of the collapse of that country's economic system.

The two parties settled their differences in April, just before Waste2Energy arranged its reverse merger with Maven Media Holdings.

Stock promoter Irving Kott, a frequent target of regulators, has died in Canada

2009-09-09T02:32:05Z

Irving Kott, a Canadian financier and stock promoter with long history of civil and criminal violations, has died at age 78.

Kott's obituary appeared Aug 24 in a Montreal newspaper, but his passing drew no further media attention. In a sense, he was as invisible in death as he was in life - a life in which he played pivotal behind-the-scenes roles at numerous public companies and brokerage firms.

Kott pleaded guilty in 2004 to two felony charges related to his undisclosed ownership interest in J. B. Oxford Holdings Inc., a brokerage based in Beverly Hills, Calif. J.B. Oxford, whose employees pushed several stocks linked to Kott and his associates, had contended that he was merely a consultant.

The original grand jury indictment alleged, among other things, that Kott used his influence at J.B. Oxford to reap millions in profits on the sale of shares in which he or his associates had an interest. While working at J.B. Oxford, Kott lived in a mansion once occupied by actor Cary Grant.

In his plea, Kott acknowledged that he provided much of the $6.5 million that a Swiss firm loaned to the brokerage in 1994 and 1995 to keep it alive. The Swiss firm and its owner got notes that were convertible to a majority stake in the brokerage (formerly known as Reynolds Kendrick Stratton Inc.). In addition, Kott acknowledged that he provided funds for another investor who bought more than 5 percent of the brokerage's shares in 1994. Neither Kott, the investors or the brokerage disclosed his role in those transactions, which could have been considered material information because of Kott's past.

Kott was sentenced to five years' probation rather than prison time, in part because of claims that both he and his wife were in ill health. He was ordered to pay $1 million in fines and charitable contributions.

J.B. Oxford had earlier agreed to pay $2 million to settle the Justice Department's probe into possible fraud by Kott and others involved with the brokerage.

Kott also figured into the Securities and Exchange Commission's investigation into the sharp rise in the stock of Mamma.com in the spring of 2004. Over a two-day period, the small Montreal-based Internet company' stock shot from $4.10 a share to a high of $15.68. It peaked the following month at $17.49.

Mamma.com later disclosed in regulatory filings that the SEC was not only looking into the unusual activity surrounding the company's shares, but also was probing whether a certain individual - known to be Kott - and "people acting jointly or in concert with him may have had a significant influence on the company in the past as a result of undisclosed shareholdings."

Mamma.com changed its name in June 2007 to Copernic Inc. (Nasdaq: CNIC). Three months later, Copernic announced that the SEC had ended the investigation and that the agency's staff was not recommending enforcement action.

Kott's history of run-ins with securities regulators spanned at least four decades. In 1976, he pleaded guilty in Ontario to conspiring to defraud the public through the distribution of shares in a mining company. He was fined $500,000, which at the time ranked as the biggest personal penalty in Canadian history.

In 1979, he was convicted in Ontario in connection with another manipulation scheme and was sentenced to four years in prison. That conviction, however, was overturned on appeal.

In the 1980s, Dutch authorities identified Kott as the person behind a boiler-room style brokerage in Amsterdam called First Commerce Securities. That operation sold shares in obscure Canadian- and American-listed companies to foreign investors.

Authorities said in 1987 that First Commerce might have taken more than $400 million from investors, an amount equal to nearly $800 million in today's dollars. Kott was never charged in connection with the case; he agreed to pay a fine of roughly $4 million in 1990 to settle the probe into his activities.

Letters reveal hidden holders of Pure Play Music stock

2009-09-01T02:16:53Z

Last summer, a group of closely connected companies managed to turn a $291,000 loan to Pure Play Music Ltd. (Pink Sheets: PPML.PK) into stock that soon had a market value of more than $70 million.

But exactly who got the shares was a bit of a mystery -- until now. Sharesleuth has obtained copies of letters that eight entities sent to Pure Play's transfer agent, asking to have restrictions on the stock lifted so that they could be freely sold.

The largest number of shares, 4.5 million, went to Cohiba Partners Inc., a Santa Monica, Calif., company with ties to Regis M. Possino, a two-time felon and disbarred attorney who has provided financing to numerous penny stock companies.

Cohiba was the company that provided the original loan to Pure Play's predecessor - Latin Television Inc. - when it faced a severe cash shortage in 2007.

Sharesleuth previously wrote about Pure Play in June, detailing its ties to Possino and noting that the company retired its $291,000 debt by issuing 29.1 million shares to Cohiba and its assignees at a price of 1 cent a share.

The letters to the transfer agent show that many of the other entities that got blocks of that stock have ties to Possino, too.

Colin Nix, president of Cohiba, also signed as an agent of October Funds, which got 3.7 million Pure Play shares. Both Cohiba and October Funds listed their address as an office suite in Santa Monica that is shared with Possino's companies.

Corporation records list Nix as the president of a third entity, European American Investments Ltd., which got 3.4 million of the Pure Play shares. It also uses the Santa Monica address.

But the letter that European American wrote to the transfer agent on July 18, 2008, was signed by Charles McGuirk - a convicted felon and longtime associate of Possino. McGuirk, who was listed as European American's president, was sentenced to 18 months in prison in the 1990s after pleading guilty to mail fraud and tax fraud in connection with an embezzlement scheme at an insurance company.

Shearson Foundation, a Panamanian company, got 3.95 million Pure Play shares. Henry Ward signed its letter as managing director.

Nevada corporation filings also list Ward as a director of Quantum Companies Inc. McGuirk is that company's secretary and treasurer, and its most recent SEC filing listed its headquarters as the office suite in Santa Monica.

Other SEC filings show that Shearson Foundation has invested alongside Cohiba, European American and October Funds in two other public companies, Ensurapet Inc. (Pink Sheets: EPTI.PK) and Who's Your Daddy Inc. (OTCBB: WYDI.OB).

(See a previous Sharesleuth story on Who's Your Daddy here)

After a law firm signed off on the removal of the stock restrictions, trading in Pure Play's shares surged, as did the company's share price. On Aug. 4, 2008, for instance, the daily volume totaled 402,900 shares, and the stock closed at $2, up from $1.11.

More than 1 million shares traded hands over the next six months, at prices ranging from $1.90 to $2.50. Pure Play's stock price plunged in late February, and has been declining since.
The company's shares were trading at 50 cents when our first story appeared in late June, and now trade for around 10 cents.

The letters to Pure Play's transfer agent showed that 3.7 million shares from the debt conversion deal went to Donna Properties LLC, which listed an address in Panama. In 2001, investigators for the Nasdaq exchange identified Donna Properties as a "client'' of one of Possino's companies, Corporate Financial Enterprise Inc.

Their report said Donna Properties might have participated in his effort to secretly invest in -- and influence -- a publicly traded brokerage firm called Global Capital Securities Corp. Nasdaq delisted that company because of concerns about its ties to numerous people with criminal or regulatory pasts.

Two other companies that received Pure Play stock, Sandias Azucaradas CR SA and Vanilla Sky SA, listed the same Spokane, Wash., address. They got 3.6 million and 2.22 million shares, respectively.

The letter sent by Sandias Azucaradas was signed by Robin Rushing, who was identified as its managing director. She once worked for La Jolla Capital Corp., a Southern California brokerage that frequently ran afoul of regulators, and was a key aide to its chief executive, Harold "B.J." Gallison. He was sentenced to prison for his role in a securities fraud facilitated by La Jolla Capital's successor, Pacific Cortez Securities. He was released in 2006.

The last block of Pure Play stock, 3.95 million shares, went to Stock Certificate Transfer Service Foundation. It listed the same address in Panama as Donna Properties.

]]> Pure Play 144 Letters

Son of China Fire chairman gives up $30 million in stock

2009-07-09T20:31:37Z

When China Fire and Security Group Inc. (Nasdaq: CFSG) went public through a reverse merger in October 2006, Chairman Gangjin Li's teen-aged son was listed as the beneficial owner of roughly 10 percent of its shares.

This week, a Securities and Exchange Commission filing reported that the son had relinquished his interest in that stock, which has a current market value of more than $30 million.

According to the filing, Gangjin Li now has sole voting power over the 2.67 million shares, giving him control of 57 percent of China Fire's common stock. The filing offered no explanation for the transfer, the latest in a series of disclosures about the ownership of large blocks of shares issued when China Fire merged into a public shell called UniPro Financial Services Inc.

Michael Thieu, a China Fire spokesman, said Gangjin Li originally gave the shares to his son, Ang Li, to provide for his future. But the son is about to turn 18 and will no longer be a minor, and his parents are concerned about what might happen if he gains access to that wealth, Thieu said.

As a precaution, they decided to reverse the gift and use a different vehicle, such as a trust, he said.

"This transaction is internal to the Li family,'' he said. "It has no impact on the company's business operations or financials.''

Sharesleuth reported last year that the person listed as the beneficial owner of another 2.58 million China Fire shares was the sister-in-law of the company's chief executive officer, Brian Lin - a fact not disclosed in any of its SEC filings.

The sister-in-law, who operates natural food stores in Canada and California, was listed as the sole shareholder of a British Virgin Islands entity that sold millions of dollars worth of China Fire stock at the end of 2007.

After our story appeared , China Fire issued a press release and SEC filing clarifying the actual owners of the shares held by various British Virgin Islands entities. It said some of the people - including the sister-in-law -- who had been listed as beneficial owners were in fact nominees standing in for other people.

The new SEC filing says that Gangjin Li gifted the 2.67 million shares to his son in August 2006. It said that last Thursday, Ang Li's mother and legal guardian, Chunfeng Gao, " irrevocably disclaimed and renounced any and all legal and beneficial interest" in the shares on behalf of her son.

Ang Li is a student. He and his mother live in North Vancouver, British Columbia. When Sharesleuth asked him last year how he came to be listed as the owner of a big block of China Fire shares, he said he had seen the documents but was unaware of the details.

Although the reversal of the share gift puts more stock directly into Gangjin Li's hands, that could be seen as a positive for the company and for other investors, said Thieu, a former securities analyst.

"From my view, it actually will provide more stability,'' he said.

China Fire's stock closed Friday at $11.98 a share.

Short Takes

Former Vicis Capital executive pleads guilty to conspiracy

Chinese coal company's share placement produces interesting collection of investors

Houston American presses bet in Colombia

More disclosure questions at China Fire & Security Group

SEC investigating Mesa Energy Holdings

Chinese company has growing receivables issues

Former head of Florida company becomes first person sentenced in insurance fraud case

Surge in Chinese coal company's shares produces quick gain for private placement investors

Money and property seized from Who's Your Daddy executives

Rockwell Medical Technologies has close ties to financier facing SEC charges

Is notorious brokerage boss Harold Gallison back in the penny stock game?

Xethanol Corp. founder creates new public company

Stock promoter Irving Kott, a frequent target of regulators, has died in Canada

Letters reveal hidden holders of Pure Play Music stock

Son of China Fire chairman gives up $30 million in stock