Sharesleuth.com

China Fire & Security Group Inc.

2008-03-11T01:52:08Z

Huiwen Liu is part owner of a natural food store in the Vancouver suburbs. The business has only a few employees and is sandwiched between a sex shop and a clinic for drug addicts.

According to Securities and Exchange Commission filings, Liu also is sole shareholder of an offshore investment company that got 10.1 percent of China Fire & Security Group Inc. (Nasdaq: CFSG) when it went public through a reverse merger in 2006.

That offshore company, Worldtime Investment Advisors Ltd., notified the SEC on Dec. 4 that it planned to sell 600,000 of its 2.58 million China Fire shares, for estimated proceeds of $9.6 million.

The business address listed for Liu in Worldtime’s initial disclosure form corresponded to her food store. The unlikely scenario of a shop owner in Canada holding more than $30 million of stock in a little-known Chinese manufacturer, through an investment company in the British Virgin Islands, was just one of the reasons that Sharesleuth decided to take a closer look. The quintupling of China Fire & Security’s share price in the 12 months following the reverse merger also got our attention. So did the company’s murky ownership and the mounting casualties among other “hot” Chinese stocks that have gained listings on U.S. exchanges through reverse mergers.

Sharesleuth’s investigation turned up questions about transparency and disclosure at China Fire, which has headquarters in Beijing and makes fire detection and protection systems for steel mills, oil refineries and other industrial customers. For starters, we found that Huiwen Liu is the sister-in-law of China Fire’s chief executive officer, Bin “Brian’’ Lin – a fact not mentioned in any SEC filing.

Sharesleuth also found that China Fire’s merger partner, UniPro Financial Services Inc., was one of three shells packaged by the same group of American financiers and middlemen, some of whom have previously been connected to stock manipulation schemes. Given that information, investors thinking about buying shares of China Fire might want to seek more information on the true identity of its major shareholders.

]]> Lin told Sharesleuth that his sister-in-law was simply a nominee for other owners who live in China and didn’t want to register their names. But SEC filings don’t reflect that. They state clearly that Liu is the beneficial owner of the shares, via Worldtime, and declare that Liu knows of no one else with the right to proceeds from their sale.

Three more British Virgin Islands entities that got blocks of stock when China Fire merged into UniPro in October 2006 have reported plans to sell 1.5 million shares. They projected their proceeds at $19.8 million. China Fire’s SEC filings have not identified the people behind those entities, or explained how they originally acquired their stakes, each of which fell below the 5 percent threshold that triggers more detailed disclosure.

Based on China Fire’s account of the reverse merger deal, those shareholders would have been Lin’s fellow owners of the fire-protection business. Lin said he helped arrange the stock sales at the suggestion of China Fire’s investment bankers, who wanted to get more shares into public circulation so that institutional buyers could take positions in the company. That may be true. But the effect was that certain unidentified parties appear to have sold tens of millions of dollars in stock at the same time that China Fire’s executives were issuing consistently positive statements about the company’s prospects.

Lin said no one associated with China Fire knowingly violated any SEC rules or engaged in any impropriety. He said that he had not received any money from the share sales, nor had China Fire’s chairman, Gangjin Li, or members of their families. He added that the money from Worldtime’s stock sales were still in that company’s bank account.

Lin said China Fire’s lawyers told the company it did not have to disclose Huiwen Liu’s relationship in its filings because she was not an immediate blood relative, such as a father, mother or child. However, the attorney who represented China Fire in the reverse merger deal told Sharesleuth that he gave no such advice.

China Fire’s stock rose from $3.25 a share the day of the reverse merger to a high of $18.10 on Nov. 1, 2007. At its peak, the company had a market value of nearly $500 million. The company’s stock closed at $8.76 a share, off $1.56, on Monday.

Sharesleuth also discovered that the sole American on China Fire’s board of directors, Gene Michael Bennett, does not have the law degree that he claimed. And contrary to what China Fire said in its press release announcing his appointment, he is not a Certified Public Accountant and has not been licensed as one in the United States for many years. Bennett heads China Fire’s audit committee, which is responsible for overseeing financial reporting, internal controls and transactions between the company and its officers, directors and affiliates.

Sharesleuth turned up the American reverse-merger network in the course of another investigation, the results of which we will publish in the coming months. We decided to post this story first because at least two brokerages have issued buy recommendations on China Fire’s stock and we think that anyone considering an investment in the company might benefit from the additional information.

Disclosure: Mark Cuban, the majority member of Sharesleuth.com LLC, has a short position in the shares of China Fire. Chris Carey, editor of Sharesleuth.com, does not invest in individual stocks and has no position in China Fire.

THE REVERSE MERGER

In September 2005, a U.S.-based investor group bought a majority stake in UniPro, which had headquarters in Boca Raton, Fla., and was listed on the Over the Counter market. The UniPro consultant who arranged that deal had done prison time for conspiracy and wire fraud. John F. LaSala, a partner in now-defunct Sheffield Securities Inc., pleaded guilty in 1990 to participating in the manipulation of penny stocks. His two co-owners in the brokerage also pleaded guilty.

Martin A. Sumichrast headed the investor group that bought into UniPro. He is the former chief financial officer of Czech Industries Inc., a company whose $15 million public offering in 1995 was used as a fraud vehicle by Stratton Oakmont Inc., a boiler-room brokerage that shut down under regulatory pressure.

Stratton Oakmont’s owners wound up in prison. So did some of their friends who got allotments of Czech Industries stock or received them through a purported “bridge loan’’ deal just before the offering. They admitted holding the shares for Stratton Oakmont and another boiler room, which resold them for big profits after manipulating the price.

Sumichrast was not charged with any wrongdoing.

Sharesleuth’s investigation found that Sumichrast also has numerous ties to associates of Irving Kott, a Canadian stock promoter and financier with two convictions for fraud.

Sumichrast’s investor group bought controlling stakes in three public shells. Two did mergers with Chinese companies, and the third is seeking a Chinese partner. Testimony in a California court case alleged that some of those same investors manipulated the shares of another company, Recom Managed Systems Inc, now called Signalife Inc. (AMEX: SGN).

Sumichrast did not respond to written questions from Sharesleuth and told us Monday that he had no comment.

THE NETWORK

The members of the investment group doing the reverse-merger deals include:

Sumichrast, a partner in several investment and consulting companies based in Charlotte, N.C. He previously was chairman and chief executive of Global Capital Partners Inc., a brokerage firm that was the corporate successor to Czech Industries.
Ralph O. Olson, Sumichrast’s partner in the investment and consulting companies. He is a former investment banker for Global Capital and was vice president of one of its brokerage subsidiaries in Englewood, Colo.
Raul C. Silvestre Jr., an attorney in Westlake Village, Calif., and president of Castle Bison Inc., an investment company. He previously was secretary and treasurer of Recom Managed Systems.
John Scardino, a real estate developer based in Westlake Village. He shares office space with Silvestre.
Ariel Coro, manager of Menlo Venture Partners LLC, an investment company in Agoura Hills, Calif.

Our investigation found that either LaSala or his wife, Alicia M. LaSala, was a shareholder in three of the four shell companies that have done deals with Sumichrast.

The first of those shells, Tele-Optics Inc. of Boca Raton, did a reverse merger with an American company, Velocity Asset Management Inc. (AMEX: JVI) in 2004. UniPro was next, followed by International Imaging Systems Corp. of Fort Lauderdale, Fla. It was transformed into China Bio Energy Holding Group Co. (OTCBB: CBEH.OB).

Sumichrast’s investment group bought control of another shell, Forme Capital Inc. (FOCP.OB), in September.

COMMON FORMULA

The reverse mergers with the Chinese companies followed a common formula. First, a group led by Sumichrast bought an interest in the public shell. Then, the shell merged with a privately held Chinese partner, in a transaction that included a sale of shares and warrants to one or more outside parties.

A New York-based hedge fund, Vision Capital Advisors LLC, was the biggest private-placement buyer in the China Fire deal, and the only buyer in the China Bio Energy deal.

Vision Capital teamed up with Sumichrast, Olson and Silvestre last month to buy a controlling interest in yet another shell company, Southern Sauce Co. (SSAU.OB) of Morriston, Fla. Vision Capital’s investment was made by Vision Opportunity China Fund Ltd. (AIM: VOC.L), which trades on the London Stock Exchange’s AIM market

More than 150 Chinese companies have gained listings on U.S. exchanges through reverse-mergers. Many of their owners ended up holding shares through British Virgin Islands intermediaries because of Chinese government restrictions on foreign investment. However, our review of SEC filings for dozens of those deals showed that the companies usually made clear whether the people listed as officers or directors of the intermediaries were nominees or the actual owners of the shares.

CHINA FIRE

Unlike some of the companies that Sharesleuth has investigated, China Fire is an established business with substantial revenue and several sizable customers. Its main operating subsidiary is Sureland Industrial Fire Safety Ltd, whose products range from basic heat and flame detectors to complete fire prevention and suppression systems.

According to China Fire’s website, Gangjin Li and Brian Lin founded Sureland in 1995. Li is now chairman of China Fire’s board of directors and the company’s biggest shareholder.

China Fire bills itself as the leader in the Chinese fire protection business. However, it holds less than 5 percent of the overall market there. And the company’s most recent quarterly financial report to the SEC shows that just three customers accounted for 42.6 percent of its revenue.

According to China Fire’s marketing materials, it has supplied systems to many of China’s biggest state-owned industries. The company announced Nov. 26 that it had won a $31 million contract to provide an automated fire-protection system for a giant new steel mill being built east of Beijing. It said it expected to recognize that revenue in 2008.

China Fire’s growth has been one of its biggest selling points with investors. China Fire announced preliminary financial results for 2007 last month, saying it expects to report $46.3 million in revenue, an increase of more than 42 percent from 2006. It expects net income of $16.8 million, up 141 percent. China Fire projected that revenue would reach $66.6 million this year, and that net income would be at least $22.3 million.

Lin says he hopes to build the company into a $1 billion a year business. He said China Fire is well positioned to capitalize on its home country’s surging economy, and also sees opportunities in India, which is going through a similar industrial boom. In addition to supplying protection systems for new factories, the company expects to help existing Chinese factories retrofit their operations to meet more stringent fire codes and safety standards. China Fire says it helped draft new regulations covering Chinese iron and steel facilities, and that the standards incorporated in them could give it an edge in that market.

Although China Fire’s quarterly financial filings with the SEC are unaudited, the company says they are in accordance with generally accepted accounting principles (GAAP). We noted that China Fire’s reported operating margins were nearly double the margins of the biggest players in the global fire-protection industry, including United Technology Corp. and Tyco International Ltd. China Fire has said in investor presentations that its strong margins stemmed partly from its focus on higher-end, proprietary products. SEC filings show that China Fire’s spending on research and development – the source of those proprietary products -- fell by 13 percent in 2006, to $1.27 million. It dropped 32 percent in the first nine months of 2007, to $457,126.

BRIAN LIN

Lin became China Fire’s chief executive in October 2006. He is a Canadian citizen with a master’s degree in electrical engineering from the University of Toronto. Lin is no stranger to public companies and their reporting requirements, having worked as an executive for a succession of them over the past decade.

In addition to his role as CEO of China Fire, he is a director of two other U.S.-listed Chinese companies: e-Future Information Technology Inc. (Nasdaq: EFUT) and Wuhan General Group Inc. (OTCBB: WUHN.OB).

Lin previously was vice president of China operations for PacificNet Inc. (Nasdaq: PACT). He joined PacificNet when it acquired a 51 percent interest in Beijing Linkhead Technologies in early 2004. Lin was one of the founders of Linkhead, a telecom services company specializing in hardware and software for interactive voice response systems.

PacificNet’s shares soared in the fall of 2004, after it reported record revenues aided by Linkhead and other acquisitions, and then announced several big new contracts. Its stock rose from $2.57 on Oct. 8, 2004 to a peak of $12.30 on Dec. 8, 2004.

PacificNet’s shares began a long decline after that, and fell below $2 a share on Monday. The company disclosed last year that its independent accounting firm had withdrawn its certification of the company’s 2003, 2004 and 2005 results, citing concerns about the possible backdating of stock options. PacifcNet has classified Linkhead as a discontinued operation, and says the subsidiary is largely inactive.

Before launching Linkhead in 1999, Lin worked as a research and development director in China for UTStarcom Inc. (Nasdaq: UTSI). He also has worked for several technology companies in the United States, living for a time in the Dallas area. Sharesleuth turned up a 1996 Texas corporation filing for a company called Acce Investment (U.S.) Inc. The filing listed four officers: Brian Lin; Zhong “Kevin” Lin, Gangjin Li and Sharon Yao.

Kevin Lin is Brian Lin’s brother, and is married to Huiwen Liu. Sharon Yao is married to Brian Lin. According to old media reports, Acce Investment once owned 60 percent of Linkhead. China Fire’s SEC filings did not mention Gangjin Li’s ownership in Linkhead or his prior business dealings with the Lin family.

Lin said China Fire's management has been relying on its investment bankers and other partners for advice on making the transition to a U.S.-listed company.

"We're business professionals,'' he said. "In terms of capital markets, we don't really know too much.''

MARTIN SUMICHRAST

Sumichrast is an officer or partner in four companies that figure into this story. They are: Lomond International Inc., Jaybelle Inc., Stallion Ventures LLC and Crown Reef Holdings Inc.

Sumichrast’s previous company, Global Capital Partners, surrendered its brokerage license in 2002. Its stock had been delisted from the Nasdaq market, partly because of its sub-$1 stock price and partly because of the exchange’s concerns about some of the people involved with the company. Global Capital had received financing from a partner who later admitted getting the cash from a company controlled by Regis Possino, a disbarred lawyer in California with convictions for drug dealing and fraud.

Sharesleuth turned up a series of connections between Sumichrast and close associates of Irving Kott, who has been a frequent target of regulatory and law enforcement agencies. Kott pleaded guilty in 2004 to concealing his ownership in J.B. Oxford Holdings Inc., a brokerage in Beverly Hills., Calif. That company cleared trades for Stratton Oakmont, Monroe Parker Securities Inc., Biltmore Securities Inc. and several other firms that were shut down by regulators or closed under pressure.

According to the indictment against Kott, two of his close associates got allotments of shares in the Czech Industries offering and seven other offerings and flipped them into the inflated market created by Stratton Oakmont and the other boiler rooms. Between them, they reaped more than $2.4 million in instant, virtually risk-free profits. The indictment said that Kott received a share of the profits. The other two men were not charged; the counts against Kott were dropped as part of his plea bargain.

Czech Industries was originally in the hotel business. It shifted to the securities industry in late 1996, and began buying up small brokerages in Europe and the United States. It changed its name to Eastbrokers International Inc., and then to Global Capital Partners.

In July 2001, Global Capital appointed J.B. Oxford’s former chief executive, Stephen M. Rubenstein, as its chief operating officer. The following month, it signed a financial consulting agreement with Intasys Corp., a Montreal company with ties to Kott.

In early 2002, an Intasys director named Sam Luft led a financial restructuring of Global Capital and became chairman of its board.

In 2003, Sumichrast and Richard MacLellan, another longtime Kott associate, became partners in a company called Vitasave.com, Nevada corporation records show. MacLellan is president of EBC Corp. in Monaco. He was one of the investors who got shares in the Czech Industries offering and other Stratton Oakmont deals and sold them for a fast profit. He has admitted in California court proceedings involving J.B. Oxford that he acted as a front for Kott in some financial transactions.

In 2004, Sumichrast made his first investment in a shell company, Tele-Optics. His partner in the deal was Harold Wine, a Kott associate who’d been a shareholder in J.B. Oxford and an officer and director of other companies linked to Kott. Sumichrast bought his shares through Lomond International, the same company involved in the UniPro deal.

THE UNIPRO-CHINA FIRE DEAL

In 2005, Lomond International acted as agent for a group that bought 4.55 million shares of UniPro’s stock for $400,000, giving them a majority stake in the company. Jaybelle Holdings, another of Sumichrast’s companies, got 1.97 million of the shares.

UniPro issued 100,000 shares to John LaSala’s company, LaSala & Associates, as a consulting fee.

That same year, Brian Lin met Anthony J. Sarkis, an investment banker with Maxim Group LLC of New York. According to Lin, Sarkis was touring China in search of reverse merger candidates. He suggested that such a deal could help the fire-safety business, then known as Sureland Industrial, raise capital for expansion.

Sarkis later became director of investment banking at another firm, H.C. Wainwright & Co., which also has been arranging reverse mergers between Chinese companies and U.S. shells.

Lin told Sharesleuth that Sarkis paired China Fire with UniPro.

As a preliminary step toward the merger, a newly formed British Virgin Islands company called China Fire Protection Group Ltd. agreed in July 2006 to acquire all of the capital stock of Sureland. Lin said that move was designed to convert the shareholders of Sureland into shareholders of the new entity. SEC filings show that Lin signed the purchase agreement for China Fire Protection. Gangjin Li signed as the legal representative for one of the five companies that held stakes in Sureland.

UniPro also restructured prior to the reverse merger, reducing its shares outstanding with a 5-for-1 reverse split.

On Oct. 27, 2006, China Fire Protection combined with UniPro in return for preferred stock that could be converted to 22.8 million common shares. The combined company was renamed China Fire and Security.

Sumichrast’s group came away from the deal with 910,000 shares, or a little less than 5 percent of the company. At the current market price, the stake that the group originally acquired for $400,000 would be worth roughly $8 million.

John LaSala received 10,000 shares in China Fire, SEC filings show. He filed to sell those shares in December 2006. Allen Weinstein, another Sheffield Securities owner who pleaded guilty to conspiracy in the manipulation case, also got 10,000 shares.

THE CHINESE SHAREHOLDERS

SEC filing list seven recipients of the preferred shares that were issued in the reverse merger.

Those shareholders were:

Li Brothers Holdings Inc., described as a British Virgin Islands corporation controlled by China Fire’s chairman, Gangjin Li.
Vyle Investments Inc., another British Virgin Islands corporation. China Fire’s SEC filings say that Brian Lin owns 30 percent of Vyle. The initial filing also listed his wife as secretary and director.
China Honor Investment Ltd., a British Virgin Islands corporation. The sole shareholder was listed as Ang Li, the son of Gangjin Li. He was described as a student in Vancouver.
Worldtime Investment Advisors, the British Virgin Islands corporation controlled by Brian Lin’s sister-in-law, Huiwen Liu, who sometimes uses the first name Wendy.
Linkworld Venture Inc.
Fustar Technology Inc.
China Tide Investment Inc.

The SEC filings provided no additional information on Linkworld, Fustar or China Tide. Lin said those three entities were incorporated in the British Virgin Islands and hold stock for some of the original Chinese investors.

Linkworld said in December that it intended to sell 700,000 China Fire shares for an estimated $8.4 million. Lin acknowledged that the person who signed Linkworld’s SEC filing was a nominee rather than an actual shareholder.

Our comparison of the handwriting on the filings for Worldtime and Linkworld showed that they were filled out by the same people. And although Worldtime and Linkworld said in those filings that they had no relationship with China Fire or its officers and directors, the documents for both of them listed the same address -- China Fire’s administrative, sales and marketing office in Beijing.

When we asked Lin about that, he said China Fire prepared the SEC filings for Worldtime and Linkworld because of language barriers. He said the company put its address on the filings so that any return correspondence would come to people who could read and write English.

CONFLICTING NUMBERS?

Sharesleuth noted that the ownership interests for the five entities listed in SEC filings as the original Sureland shareholders did not correlate with the ownership interests listed for the seven entities that got China Fire shares in the reverse merger.

For instance, SEC filings regarding Sureland show that the investment company for which Gangjin Li signed as legal representative had a 32 percent stake. Immediately after the reverse merger, Li reported holding a 50 percent stake in China Fire, and a British Virgin Islands entity headed by his son, Ang Li, reported holding a separate 10.4 percent stake.

Brian Lin was not listed as the representative of any of the Sureland shareholders, but reported owning 936,498 shares and options, or 3.6 percent of the shares outstanding after the deal.

Two other entities were listed as holding stakes of 40 percent and 22.7 percent, respectively, in Sureland. The names of the people who signed as representatives for those entities appear nowhere in China Fire’s later SEC filings.

Lin said that one of those signatories, Shuangrui Zhao, is Gangjin Li’s uncle. He said the other, Zengliang Feng, is an early investor in Sureland and a longtime friend of Li.

Lin said Feng was among the investors who sold shares through Worldtime.

Lin said the ownership percentages attributed to the Sureland shareholders in the initial restructuring agreement were not precise. He said some individuals had smaller stakes than indicated, and that others had stock spread among more than one of the listed holders. Lin said the breakdown for the seven entities that got shares in the reverse merger were the actual figures.

“Before we went public, we really wanted to make sure the numbers were correct,’’ he said.

No outsiders acquired shares through the restructuring of Sureland, he added.

WORLDTIME INVESTMENT ADVISORS

Worldtime said in the SEC filing disclosing its initial China Fire stake that it was a “holding company for strategic business operations and activities,” and that Liu was self-employed and “engaged in various business matters.’’

That filing listed an administrative address for Worldtime in the British Virgin Islands. It was the same as the administrative address used by Vyle Investments, the holding company through which Brian Lin owns his China Fire shares. One of Worldtime’s filings was signed by Brian Lin, as secretary, under his given name, Bin Lin.

The address listed for Liu in the SEC filings led Sharesleuth to a store in Richmond, British Columbia, that has operated under the names Organic and Nature House Inc. and Yogi House Inc. We visited the business in January and asked for Liu. The manager told us Liu and her husband were in California, running another store.

We thought it curious that Brian Lin’s sister-in-law would have received nearly three times as much stock in China Fire as Lin himself, who is described on the company’s website as co-founder of Sureland and as an early stage investor in the business.

So we went to California to ask how that happened. When we visited the store that Huiwen Liu and Kevin Lin run in Arcadia, the mystery deepened. Kevin Lin told us that his wife had no financial interest in the stock owned by the Worldtime, and that neither he nor his wife was ever an investor in China Fire or Sureland.

“I wish,’’ he said. “We’d be rich.’’

Kevin Lin said he didn’t know how his wife wound up being listed as Worldtime’s sole shareholder and director, or who actually owned its stock. But he acknowledged that his brother may have played a role.

State corporation records list Kevin Lin as the president of the Yogi House business in California. They list Brian Lin as the registered agent, again under his given name, Bin Lin.

Sharesleuth also asked Ang Li, the 17-year-old son of China Fire’s chairman, how he came to be listed as the sole shareholder of a British Virgin Islands entity that holds nearly 2.67 million shares of the company’s stock.

He said that although he had seen the documents, he was unaware of the details.

“I don’t actually know,’’ he said. “I’m not really involved.’’

COMMON ADDRESSES

Worldtime’s SEC filing covering the sale of 600,000 China Fire shares listed its address as B-25 TYG Center in Beijing. Linkworld Venture used the same address a few days later, when it filed to sell 700,000 shares.

Those addresses refer to the 25^th floor of Tower B at an office complex referred to in English as TYG Center. China Fire has half of the 25^th floor of that building, which is home to its administrative, sales and marketing offices.

The first of two filings by Fustar Technology listed its address as B-2503 TYG Center. Fustar disclosed plans in December to sell all 729,600 of its China Fire shares for an estimated $7.67 million.

Sharesleuth hired a reporter in China to check out the addresses. The reporter found no trace of Worldtime, Linkworld or Fustar at TYG Center -- no signs or other identification on office doors, no names on mailboxes and no mentions in building directories.

Suite B-2503, the address that Fustar used, was occupied by another company that said it had no connection to Fustar or China Fire.

Lin said the address on Fustar’s SEC form must have been a typographical error. He said the person who signed the filing, Luhe Gu, was one of Sureland’s original employees and investors. He left the company in 2006.

Our reporter who visited the 25^th floor of Tower B at TYG Center found that China Fire indeed occupied Suite 2508. The company also had suites 2501, 2502 and 2509, as evidenced by the Sureland logos etched into their glass entry doors.

Worldtime and Linkworld sold their shares through Roth Capital Partners LLC, a brokerage based in Newport Beach, Calif., that is a market maker for China Fire’s stock.

Fustar sold its shares through Brean Murray, Carret & Co., a New York brokerage that also is one of China Fire’s market makers. Brean issued a buy recommendation on the stock in November, with a target price of $19 a share.

China Tide’s stock was to be sold through a Merrill Lynch office in City of Industry, Calif.

THE PRIVATE PLACEMENT

On the day the reverse merger was completed, China Fire sold 1.54 million shares in a private placement for $3.25 a share. The buyers got warrants to purchase 615,442 additional shares at an average price of $4.23 a share.

Some of the investors got the right to buy a further 923,077 shares, also at $3.25, in the weeks that followed. Those shares came with 369,230 warrants, exercisable at an average price of $4.23.

The agent for the private placement was H.C. Wainwright, the same firm that originally paired China Fire with UniPro.

Vision Capital Advisors took more than half of the overall placement. It got 1.35 million shares and 553,848 warrants, which amounted to a 6.9 percent stake in China Fire. Two other hedge funds took smaller stakes, totaling 861,552 shares.

The remaining investors in the private placement all had connections to China Fire or H.C. Wainwright.

A buyer called Great Gain International Ltd. took 387,874 shares and warrants, representing a 1.5 percent stake in China Fire. SEC filings identified the person with the power over those shares as Zhonglin Dai.

What they didn’t say was that Dai is general manager of Brian Lin’s old company, Linkhead Technologies. Dai told Sharesleuth that he set up Great Gain International and personally owns all of the shares. He said Lin and Li had no involvement with that company.

Another investor who got 86,155 shares and warrants in the private placement is an 86-year-old women in Florida. We found that she is the grandmother of Michael S. Messinger, chief operating officer of H.C. Wainwright.

Although investing in a Chinese reverse-merger deal might not be suitable for many investors that age, Messinger told Sharesleuth that his grandmother had a high net worth and wasn’t putting much of her money at risk.

“It was an opportunity to take a shot on a company that we believed in,’’ Messinger said.

At the stock’s peak last fall, those shares and warrants would have been worth more than $1.5 million. Messinger would not say how many shares his grandmother had sold, but did say she still owns some.

H.C. Wainwright and its employees got warrants to buy 184,626 shares at $3.25 as its placement fee. Messinger was listed in China Fire’s SEC filings as the person having power over the 81,702 warrants that went to the firm itself.

He said he thought that the family relationship with his grandmother was disclosed by the company, but we could find no evidence of that.

Vision Capital cashed out within 13 months of its initial investment in China Fire. It said in an SEC filing in mid-November that it had sold all of its shares and warrants. The hedge fund had filed no previous forms disclosing changes in its holdings. Vision Capital declined to comment.

China Fire’s stock climbed more sharply in the second half of last year, after its listing moved to the Nasdaq market from the Over-the-Counter market. Our analysis of SEC filings shows that that nearly all of the company’s outstanding warrants were exercised in the third quarter. Its share price in that period ranged from $6.70 to $12.25.

China Fire’s stock rose from $14 a share to $18 a share in the last week of October, on heavier-than-usual volume. The only press releases that the company issued in that time were an announcement about a new $2.9 million contract with a Chinese steel producer and an announcement about presentations at several investment conferences.

The stock peaked on Nov. 1. The sales form for Worldtime was prepared at the end of that month. By our calculations, the individuals and investment firms that got stock in China Fire’s reverse merger and private placement have sold or declared their intention to sell at least 4.4 million shares, representing roughly one out of every six shares issued.

Lin said in an email to Sharesleuth that short sellers who target China Fire should be careful, because of the strength of the company and the many big deals the company has in the works.

We will continue to investigate and update this story

Justin McLachlan, Lila Buckley and James McNair contributed information for this story.

SaarResearch.com provided fact checking services

Xethanol Corp. update

2008-01-14T23:39:56Z

Xethanol Corp. is trying to unload a former pharmaceutical plant in Georgia that had been the centerpiece of its plan to turn wood chips, paper pulp and other organic waste into ethanol.

The Augusta Chronicle reported last week that Xethanol (AMEX: XNL) told workers who have been tending the property that it was for sale. When Xethanol and a joint venture partner bought the idled plant in August 2006, they said it would be retrofitted to produce 50 million gallons of ethanol a year, and would employ as many as 100 people.

In the wake of the news, the Chronicle’s business editor wrote this column, which we thought our readers might be interested in seeing.

We believe the information that Sharesleuth uncovers about companies like Xethanol is important not only to investors, but to the communities those companies involve in their ventures. They, too, must assess the risks.

Xethanol reported in a Securities and Exchange Commission filing in November that it had sold its mothballed ethanol plant in Hopkinton, Iowa for $500,000. It once billed that plant as its “research and development testbed.’’

The company also disclosed that it had sold 47 acres of undeveloped land in Blairstown, Iowa, the home of its only operating ethanol plant. And Xethanol said that it was talking to a potential buyer for its property in Spring Hope, N.C. The company had said it would convert the former fiberboard plant there into a facility that would produce 35 million gallons of ethanol a year.

Orthopedic Development Corp. update

2007-06-20T00:23:58Z

Orthopedic Development Corp.’s president said in an affidavit in a federal court case in North Carolina that he had never engaged in business in that state, had not gone there to recruit a sales executive or “otherwise traveled there.’’

But Sharesleuth.com, which posted an investigative report on ODC on June 8, has copies of e-mails that appear to disprove those assertions.

James Doulgeris, who heads ODC, submitted the affidavit last week in connection with a motion to dismiss the case in North Carolina or halt it pending the outcome of a related case in Florida. The suit in North Carolina was brought by Dan Grayson, who was hired in November as vice president of sales for ODC's spine stabilization product and was fired in May.

The e-mails exchanged last summer between Doulgeris and Grayson include messages from Doulgeris that provide details of his travels to North Carolina for business meetings. Those details include flight numbers and times, and the names and locations of the hotels in which he stayed.

The e-mails show that Doulgeris traveled from Tampa to Charlotte last July 6, with marketing materials and instrument samples for Grayson, who at the time ran his own medical device distributorship.

Grayson became a distributor for ODC’s spine-stabilization product, called TruFUSE, the following week.

]]> Grayson later became vice president of sales for the ODC subsidiary that markets TruFuse. He was fired in May after raising questions internally about TruFUSE and some of the claims the Clearwater-based company was making about the product.

Grayson sued, claiming ODC breached his contract and fraudulently induced him to enter the contract by making false claims about its product and its business activities.

ODC filed its own suit in state court in Florida, claiming that Grayson and an investor named Terje Gronlie acted together to disparage the company. Among other things, the suit alleged that Grayson breached his fiduciary duty to ODC and that Gronlie was behind a series of e-mails sent to officers, directors and others with ties to the company.

Grayson said Tuesday he questioned the central claims in Doulgeris' affidavit. "I don’t see how Doulgeris can say, under oath, that he has never been to North Carolina, or had business there, when he signed my distributorship on July 11, 2006, to sell TruFUSE,’’ he told Sharesleuth.

Doulgeris said Tuesday that his statements in the affidavit referred specifically to whether he went to North Carolina regarding Grayson’s employment by the company.

“My response was truthful, accurate and supportable,’’ he said in an e-mail.

ODC has sued Grayson in state court in Florida, claiming that he and an investor named Terje Gronlie acted together to disparage the company. The suit alleged the Gronlie was behind a series of e-mails sent from anonymous accounts to officers, directors and others with ties to the company

The correspondence between Doulgeris and Grayson shows that Doulgeris went to North Carolina twice in August 2006. On one of those trips, he and Grayson met with representatives of another company that now distributes TruFUSE.

The affidavit said Grayson's suit did not specify where Doulgeris was when he allegedly made the false claims to Grayson. The affidavit noted, however, that the statements supposedly were made while the company was recruiting Grayson to run its TruFUSE subsidiary, called MinSURG Corp.

Doulgeris said that happened outside of North Carolina. "Since I have never traveled to North Carolina to recruit Grayson, or otherwise traveled there for that matter, such statements would have been made prior to Grayson entering into the employment agreement, which occurred when Grayson visited MinSURG’s office in Florida,’’ he said in the affidavit.

Grayson told Sharesleuth he did not go to Florida until Oct. 12, when he met with ODC’s board of directors as one of the final steps in the hiring process.

The e-mails show that he and Doulgeris had already discussed title, compensation and other details by the end of September 2006. In one message, regarding the efforts to fill the sales position, Doulgeris wrote: “Dan, I am sold. No one else comes close.’’

ODC says its new spinal implant procedure, which uses cadaver bones inserted in vertebrae, can reduce or eliminate pain for many of the millions who suffer from chronic back problems.

But former insiders have told Sharesleuth that ODC has encountered design and performance problems with TruFUSE. They added that documents given to investors in an $8 million stock placement overstated the number of patients who have been treated using the procedure, and may have overstated the results.

Submitting a knowingly false affidavit in U.S. District Court can be grounds for perjury charges.

Orthopedic Development Corp.

2007-06-09T00:02:50Z

by Christopher Carey

Orthopedic Development Corp. says its new spinal implant procedure can reduce or eliminate pain for many of the millions who suffer from chronic back problems.

The approach is simple and potentially lucrative. ODC’s system uses small pieces of specially shaped cadaver bone to help stabilize the spine. The Clearwater, Fla.-based company says in its promotional material that its TruFUSE procedure gives patients a middle option between physical therapy and major fusion surgery.

It even says its minimally invasive procedure can be performed on an outpatient basis, saving money and time. But former insiders tell Sharesleuth that ODC has encountered design and performance problems with TruFUSE. They add that documents given to investors in a recent stock placement overstated the number of patients who have been treated using the procedure, and may have overstated the results.

“I believe the company misled investors to raise money to market a product whose function and benefits had not been validated through clinical studies,’’ said Dan Grayson, who was in charge of TruFUSE sales from early November until early May.

Because the TruFUSE procedure relies on human body parts instead of mechanical devices, the Food and Drug Administration does not require clinical trials or regulatory approval. That means the company is responsible for ensuring that the treatment works.

As with any medical device that requires surgery, understanding the risks and monitoring the results is critical to the health and safety of the patients.

Sharesleuth examined some of the documents given to patients and investors and found contradictions in the company’s story. We thought it was important to disseminate this information so that patients considering this operation would have more information available to them, as would people considering making an investment in the company.

(Disclosure: No one at Sharesleuth, including majority member Mark Cuban, has any financial interest or business relationship with ODC or anyone mentioned in this report.)

]]>

THE PRODUCT

ODC sold $8 million in preferred stock through a private placement that focused mainly on the promise and potential of TruFUSE.

The procedure was patented by Dr. David A. Petersen, a Tampa Bay area surgeon. He is ODC’s chief medical officer, as well as its biggest shareholder.

In the TruFUSE surgery, small fasteners made from cadaver bone are implanted into holes drilled into the facet joints of the vertebrae. The hope is that the graft will promote fusion between joints in problem areas, reducing or eliminating pain.

The company maintains that its procedure is less invasive than other treatment options, which translates to shorter hospital stays and faster recovery times.

ODC said in its private placement memorandum that more than 200 patients were treated using TruFUSE between March and September 2006. It said the surgeries produced “uniformly positive outcomes with no material complications.’’

Sharesleuth has seen a company document that lists all of the TruFUSE procedures by date. It shows that when ODC was claiming that more than 200 patients had received the TruFuse surgery, the internal count was no more than 83.

It also shows that when ODC claimed 500 patients, in a February supplement to the private placement memorandum, the maximum number on the list was 342.

Patient names and other identifying information were removed from the list viewed by Sharesleuth.

The discrepancy in the numbers suggests that either the company’s records are incomplete – a problem in the event of a safety alert – or that the figures in the private placement memorandum are inaccurate.

Vito Santoro, who was vice president of business operations before resigning last month, told Sharesleuth that ODC’s figures for the number of patients treated with TruFuse were more of a “best guess’’ than a hard count.

“They probably were not as accurate as they could have been,’’ Santoro said, noting that the company had trouble getting a full list of patients from doctors and distributors.

ODC markets TruFUSE through a subsidiary called minSURG Corp.

PATIENTS

Despite ODC’s earlier statements, some patients who underwent the TruFUSE procedure have experienced problems. The list includes one person who had appeared at a presentation for potential investors as an example of a successful outcome.

Because of medical privacy laws, the identities of most of the TruFUSE recipients are off limits to Sharesleuth. However, Sharesleuth saw correspondence that discussed the above patient’s situation, identifying him by first name only.

Sharesleuth asked doctors at university medical centers about TruFUSE. Most would not speak on the record, citing unfamiliarity with the product and the surgical technique. But all said they would not consider using any new procedure on their own patients unless it had been the subject of a peer-reviewed report that demonstrated its merits.

Sharesleuth could find no such report for TruFUSE.

Dr. Michael Mac Millan, an associate professor and chief of spine surgery at the University of Florida's College of Medicine, said an investigation of the risks and benefits should precede the marketing of almost any new product.

“I think that a clinical product that has not been evaluated under the auspices of an institutional review board of a university or hospital would fall outside the norm of good clinical practice,’’ he said.

Dr. Jurgen Harms, an internationally known spine specialist in Carlsbad, Germany, said he would require biomechanical testing results, surgical results and clinical studies.

“Without biomechanical test and clinical outcome studies, I don’t see a chance to use this product clinically,’’ he said in an e-mail response to questions from Sharesleuth.

Harms added that ODC’s approach to fusion through minimally invasive surgery was nevertheless interesting.

THE OFFERING

ODC is not a public company. It sold 4 million shares of preferred stock at $2 a share in its private placement. The stock was available only to accredited investors – those who met certain income or asset guidelines -- and the minimum investment was $100,000.

ODC said in the placement memorandum that its goal was to establish TruFUSE as the treatment of choice for minimally invasive spine surgery. The company said it planned to increase awareness of the procedure among doctors, hospitals, patients and insurers, expand its marketing and sales and take the product national.

ODC cited a report that said the market for orthopedic spinal products and procedures was expected to grow from $3.65 billion in 2003 to $5.75 billion by the end of last year.

ODC’s placement memorandum said that company had 14.2 million common shares outstanding prior to the sale, including 760,000 options granted to outside directors.

Even after the sale, Petersen and Doulgeris controlled a majority of the company’s shares.

The private placement was managed by GunnAllen Financial Inc., a Tampa-based brokerage that received $800,000 in fees from the proceeds.

ODC executives declined to respond to written questions from Sharesleuth, saying through an attorney that they first wanted to know the identities of the people providing information about the company.

ODC also warned Sharesleuth not to publish information contained in the private placement memorandum, saying that it was a confidential document. However, a copy has been entered as evidence in a court case, making it a public record.

Petersen referred questions to Doulgeris, who said in an email last week that he could not respond because of the pending litigation.

GunnAllen also declined to reply to a list of questions submitted by Sharesleuth.

David H. Jarvis, GunnAllen’s general counsel, cited a policy of not commenting on litigation involving the company. He said that policy would also extend to clients of the company.

E-MAIL CAMPAIGN

Starting in February, ODC’s officers, directors and advisory board members began receiving e-mails sent from accounts with fictitious names, raising questions about the contents of the placement memorandum. Some of the messages also went to GunnAllen.

The e-mails challenged some of the statements that ODC made in the memorandum, including the credentials and track records of its management. They also alleged that ODC was overstating the number of TruFUSE procedures and that it had no scientific basis for the claims it was making about pain relief, recovery times or failure rates.

Printed copies of the e-mails have been entered into evidence in a lawsuit filed in state court in Florida.

Those documents show that Roger L. Overby, senior vice president for investment banking at GunnAllen, responded to one of the messages from the anonymous emailer.

Overby said that GunnAllen performs “extensive due diligence” on a company and its founders and senior management before taking them on as a client. The company’s dealings with ODC, he said, were no exception.

“We believe Dave Petersen and Jim Doulgeris, co-founders and executives of the company, have done a good job of managing an early stage fast growing company in a competitive marketplace,’’ Overby wrote.

ODC responded to the emails by hiring a private investigator to determine their source.

ODC also asked a special committee of its board of directors to review the allegations. The company said in a notice that was posted briefly on its Web site that those directors concluded the charges were without merit.

Last month, four top managers left the company. Grayson said that he and another employee were fired and that two others resigned. The names of all four have disappeared from the contact list on the company’s Web site.

The shakeup at ODC also has inspired at least three lawsuits – one by Grayson, one by the company and one by an investor in the private placement.

PRIVATE PLACEMENT MEMORANDUM

Sharesleuth has reviewed ODC’s private placement memorandum, as well as a supplement issued a few months later. We noted that ODC did not mention any clinical trials of the TruFuse procedure, or any other broad-based, long-term study of its effectiveness.

We wondered how the company could claim, without such a study, that doctors had performed the procedure on several hundred patients without a material complication.

We also wondered what sort of review the company conducted that led it to state in the supplement in February that the failure rate for the TruFuse procedure after a reported 500 patients was “plus or minus 5 percent of cases.’’

Sharesleuth noted that the “Use of Proceeds’’ section of the placement memorandum did not contain line items for medical studies or research and development. It did, however, envision ODC buying back as much as $2.025 million in shares from existing holders.

We found that the original private placement memorandum did not contain certain information about the prior business activities of James Doulgeris, ODC’s president and chief executive, and Peter M. Sontag, chairman of the board of directors.

For example, the bankruptcy trustee for a now-closed California hospital has sued Doulgeris and his former company in connection with their management of the facility while it was trying to reorganize through Chapter 11 proceedings. The suit alleges breach of fiduciary duty and negligence and seeks repayment of more than $1 million in fees.

ODC disclosed that information in a supplement that was distributed in February, after the company received the first of the anonymous emails.

AN INVESTIGATION

The investigation that followed those emails created a climate of suspicion at ODC, which had been a small, close-knit company, said Santoro, who had worked there since its inception in 2003.

“I think the company culture changed,” he said. “They were looking under every rock because of what was going on. It seemed like everyone became suspect. It wasn’t conducive to a career anymore.’’

ODC and minSURG also lost their vice president of sales, chief technical officer and business development manager.

Grayson was fired May 8 after raising questions internally about TruFUSE. He sued, claiming that the company breached his employment contract and fraudulently induced him to enter in that agreement.

Grayson’s complaint alleged that ODC and minSURG had no clinical data or internal study to support the claim that TruFUSE had been used on more than 200 patients between March and September 2006, with no reported problems.

His suit also said ODC and minSURG had no clinical data to support claims that TruFUSE provided “immediate pain relief” and that most patients recovered in three months of less.

Grayson’s suit added said that, up to the time of his firing, ODC had no Good Manufacturing Practice program, as required by the FDA.

Grayson, who has specialized in orthopedic medical sales for nine years, said in an interview last month that he was compelled to take his concerns public through the lawsuit because they had gone unheeded by other company executives.

“As an officer of the company, I had a fiduciary duty to investors, patients, surgeons and hospitals,’’ Grayson said. “It was my job, as the face of the company with regard to sales, to make sure that we were marketing a product that would benefit all those groups.’’

DAN GRAYSON

Grayson ran his own orthopedic-device distributorship before joining ODC last November, at a base salary of $200,000 a year. He said he was drawn to the company because he believed TruFUSE held substantial promise.

He still believes that product could prove beneficial to patients, provided that it is redesigned and subjected to clinical studies before it is reintroduced to the market.

Grayson said in the suit that soon after he was recruited to ODC, he became aware of graft design and graft tolerance concerns that could lead to post-operative problems for patients.

According to the suit, Doulgeris said BayCare Health System, a nine-hospital group in the Tampa Bay area, was conducting a cost and outcome study of the TruFUSE procedure, and that ODC was compiling information from surgeons elsewhere.

The BayCare study did not go forward because of BayCare’s concerns about certain elements of the program, including a potential conflict of interest on the part of one of the doctors that ODC chose to supervise it.

A brochure that ODC circulated to doctors, patients and others last year contained a question-and-answer section that also addressed the issue of clinical studies. ODC said BayCare was conducting a study.

The company said that papers on cadaver testing and engineering testing also were in the works.

“Because waiting times for publication are so long, there is no published material available specifically for TruFUSE,’’ it said in the brochure. “Five articles are being prepared by the University of South Florida biomechanical engineering department, our development partner for TruFUSE. One is complete and is awaiting publication.’’

Grayson said in his suit that he also learned that the company had no clinical study or company data to support claims about the number of procedures performed, the success rate, the average recovery time or other benefits.

Grayson said he repeatedly approached Doulgeris with concerns about the TruFUSE procedure and design, and about the potential liability the company could face by making claims that were not supported by clinical studies.

MEDICARE QUESTIONS

Grayson claimed in his suit that between 40 percent and 50 percent of the patients receiving the TruFUSE procedure were covered under Medicare, and that doctors were billing Medicare under an insurance code that applies to fusion treatments.

The suit suggested that if the implanted pieces of cadaver bone routinely come loose or pull out entirely and the vertebrae do not fuse, then ODC could become subject to claims of Medicare fraud.

ODC says in its marketing materials that the risks of serious complications with the TruFUSE procedure are low. It says that because the technique is minimally destructive to the vertebrae joint, there is little danger of compromising the integrity of the bone or causing nerve damage.

ODC has noted, however, that the grafts can work their way loose, or can break if subjected to excessive stress in the first few weeks after the surgery. Both of those outcomes could mean a return of pain for the patient, and could require new grafts or the removal of the grafts and treatment using a different method.

ANOTHER SUIT

ODC has filed a suit of its own in state court in Florida, claiming that Grayson and an investor named Terje Gronlie acted together to disparage the company. The suit alleged the Gronlie was behind the email campaign.

ODC said in its complaint that the messages contained numerous false statements that held the company and its executives in a false light and could hurt its sales efforts and interfere with its business relationships.

Gronlie was the biggest purchaser of stock in the private placement. ODC also alleges that he violated the terms of the placement agreement by buying stock on behalf of others who might not have met the investment criteria.

The complaint listed a third defendant, Kent Grasley, a purported freelance journalist in Hillsborough County, Fla. The filing alleged that he helped Gronlie route the emails through anonymous channels so that they could not be traced to the authors.

Sharesleuth could find no one by that name in Hillsborough County or anywhere else in the United States.

Gronlie has filed a suit of his own against the company and its executive.

COUNTING THE PROCEDURES

ODC said in its supplement to the private placement memorandum in February that more than 500 patients had been treated using the TruFUSE procedure.

Grayson told Sharesleuth that he and other employees who saw the supplement before it was distributed were concerned that the number was too high.

“It raised a red flag for us,” he said.

They decided to rewrite that section and submit it to Doulgeris. The warning was disregarded, Grayson said, and the letter went out with the original number.

ODC even referred in its second supplement to the placement memorandum to a “review” of the first 500 TruFUSE cases. It said that the review had prompted the company to increase its estimate of expected failures, to “plus or minus 5 percent of cases.’’

“With an anticipated continuing growth rate, we believe that our present clinical success rate is not reasonably sustainable and that surgeon expectations should be properly realigned,’’ it said.

Although the failure to achieve fusion through such a procedure generally would not have serious health consequences for the patient, the emotional toll could be devastating, Mac Millan said.

“It’s psychologically disastrous to be told that your treatment didn’t work and has to be redone,” he said.

THE CHIEF EXECUTIVE

None of ODC’s outside directors have expertise in the medical or medical-device fields.

Doulgeris’ biography in the placement memorandum said he had “spent 22 years of his 30 career in executive management, primarily as president, CEO and director of for-profit, non-profit, public and private companies in the hospital, ancillary provider, medical device and healthcare services sector.”

Florida corporation records show that he has been an officer or director in a dozen companies in that state since the early 1990s. He was involved in the creation of nearly all of those companies, most of which have been dissolved.

One venture that ended badly was Healthcare Resource Specialists Inc, a Tampa company that was created in 2002 to provide crisis management to troubled companies in the healthcare industry.

The company was hired in January 2003 to provide interim management at Granada Hills Community Hospital, a facility in California’s San Fernando Valley that was reorganizing in bankruptcy court.

Doulgeris became chief executive, and someone from Health Resource’s parent company, Bay Management Group LLC of Tampa, was appointed chief financial officer. According to legal filings, Doulgeris told the hospital’s board that its finances were stabilizing and that the facility could survive. But just after the Fourth of July holiday in 2003, the board learned that the management company had neglected to remit payroll taxes.

It fired Healthcare Resource and converted the hospital’s bankruptcy to a liquidation. The trustee sorting through the financial wreckage alleged that Doulgeris, Health Resource and Bay Management contributed to the collapse.

The trustee's suit alleges that Doulgeris and the hospital’s chief financial officer acted in their own self-interest by paying $1.2 million in management fees while neglecting $1 million in payroll taxes and $5 million in bills, according to an account last year in Modern Healthcare, a trade publication. The trustee also noted that Doulgeris and the company misrepresented their experience and abilities when seeking the assignment.

Doulgeris remains a defendant in the suit, which cites breach of fiduciary duty and negligence and seeks the repayment of the fees.

Doulgeris’ biography in the placement memo makes no mention EarthFirst Technologies Inc. (OTCBB: EFTI), a company outside the healthcare industry. His name appeared as the contact person on press releases issued in 2000 by EarthFirst, which was pursuing technologies for the production of alternative fuel and the treatment and remediation of solid waste.

EarthFirst’s chairman and biggest shareholder is John D. Stanton. His biography in SEC filings describes him as a turnaround specialist for financially distressed companies.

Florida corporation filings show that Stanton also was a director of Healthcare Resource Specialists and Bay Management Group, the companies involved in the California hospital case.

BOARD OF DIRECTORS

ODC’s private placement memorandum did not mention that Sontag was formerly president of 800 Travel Systems Inc., a public company that ran an Internet and telephone travel agency. It filed for bankruptcy in March 2002 and its assets were sold.

Sontag had stepped down as chief executive in September 2001 but remained chairman of 800 Travel's board until two days before its bankruptcy filing.

Court documents list Gary H. Baker, another current ODC director, as the trustee who oversaw the liquidation.

Sontag is a Tampa Bay-area entrepreneur whose activities have primarily focused on the travel industry. He currently is a director of World Air Holdings Inc. (Pink Sheets: WLDA), the parent company of World Airways.

Sontag also is founder and president of Fast Lane Travel Inc., which offers luxury package tours for Porsche enthusiasts that include a visit to the automaker’s factory and driving on Germany’s Autobahn.

Baker is the registered agent for Fast Lane Travel, according to Florida corporation filings.

Prior to the private placement, ODC had five directors – Doulgeris, Petersen, Sontag, Baker and Richard T. Welch.

ODC said in the placement memorandum that it paid its independent directors an annual fee of $60,000 a year, plus $2,000 for each board meeting. Directors get $6,000 for each committee membership, with the exception of the chairperson, who gets $12,000.

The company said it had accrued director’s fees of $389,000, payable partly in cash and partly in stock at $2 a share. It said it planned to use some of the money from the private placement to pay the cash portion of the fees.

Welch previously was chief financial officer of Vision Twenty One Inc., a publicly traded eye-care company based in Largo, Fla. He was a defendant in multiple shareholder lawsuits filed against the company after its stock collapsed in 1998.

The suits were later consolidated into a single case, whose central claim was that the company’s executives issued false and misleading statements about Vision Twenty One’s acquisition of another eye-care company, Block Vision Inc., and about its final performance afterward.

The suit alleged that Vision Twenty One touted synergies that did not exist, and failed to disclose problems with Block in a timely manner.

Vision Twenty One announced record results for the first two quarters of 1998, then posted a surprise loss in the third quarter. The company also said revenue for the earlier quarters was overstated.

It put Block up for sale, saying the divestiture would add to earnings and improve profit margins. Welch left the company in late 1999.

Vision Twenty One’s revenue declined significantly in 2000 and 2001 and the company never recovered. It settled the shareholder litigation, agreeing to pay $2.5 million to shareholders and their attorneys.

The company defaulted on its bank debt in 2002 and its assets were sold.

Welch’s biography in ODC’s private placement memorandum makes no mention of the shareholder litigation or the company’s liquidation. It simply states that Welch played a key role in Vision Twenty One’s acquisition efforts, “with over 40 acquisitions in 14 months adding $200 million in revenues.’’

Welch and Sontag both were directors of another small public company, Coast Dental Services Inc. of Tampa. The dental management company angered minority shareholders in 2003 when its majority owners – members of the founding family – announced a plan to take the company private by buying in the stock of minority shareholders.

The first proposed price was $3.25 a share. The offer later was lifted to $3.75, and then $4.50 a share, which was still very near the market price.

According to SEC filings, Coast Dental appointed Welch and Sontag as a two-person special committee of the board to analyze the self-tender offer. They were to be paid fees of $45,000 each, beyond their ordinary director pay.

Welch and Sontag’s committee rejected the first two offers as inadequate, but approved the $4.50 a share buyback price. Most of Coast Dental’s minority shareholders refused to tender their shares, and the buyback was shelved.

Coast Dental then spurned two outside bidders who were offering to buy the entire company, one at a price of $7.50 a share.

Coast Dental ultimately completed the privatization in 2005, with minority shareholders receiving $9.25 a share.

A NEW ADDITION

ODC’s private placement memorandum said the company’s board would be expanded to seven members from five. The preferred shareholders would initially elect one of the new directors, and GunnAllen would choose the other.

The preferred shareholders would get control over both of those seats in two years.

GunnAllen chose H. Jay Hill, currently executive vice president for corporate development at VillageEDOCS Inc. (OTCBB: VEDO). That company provides online data delivery, management and storage.

Its stock is thinly traded, and closed Friday at 7 cents a share.

Hill has prior ties to Overby, the GunnAllen executive who played a key role in ODC’s private placement

The New York Stock Exchange disciplined Overby in 2003. It charged that he engaged in outside business activities without the consent of the brokerages that employed him, solicited investments in outside businesses without disclosing his involvement in those businesses, and failed to disclose that involvement to his employers.

Overby consented to the charges without admitting or denying guilt and was barred by the exchange for nine months.

The NYSE’s report on the case said that, in 1996, while employed by Merrill Lynch & Co., Overby engaged in business activities with a privately held medical technology corporation without Merrill Lynch’s knowledge or approval.

In 1996 and 1999, Overby entered into consulting agreements with that company, again without the knowledge or approval of his brokerage employers. According to the report, his compensation included $290,000 in cash, plus stock options.

The NYSE said that, in 1997, while working for Prudential Securities Inc., Overby helped the medical technology company arrange a partnership agreement with another company whose shared traded on the Over-The-Counter market.

In 1999, the medical products company was acquired by its partner, and Overby became a shareholder representative within the combined business, again without the knowledge or approval of his employer.

The NYSE report did not identify the medical technology company. But the dates of the transactions it described coincide with deals between Unitron Medical Communications Inc., which was based in the Tampa Bay area, and Sabratek Corp. of Skokie, Ill.

Unitron Medical’s president at the time of the merger was H. Jay Hill.

Sabratek’s SEC filings show that Overby wound up with 34,333 Sabratek shares through the merger, while Hill had 16,451. Sabratek’s stock was trading in the vicinity of $20 a share at the time of the transaction.

Within three months, however, Sabratek’s stock had declined by nearly 90 percent. The formerly high-flying medical equipment company announced a surprise drop in earnings, failed to file its quarter report to the SEC on time and parted ways with its founder and chief executive, K. Shan Padda.

Sabratek filed for bankruptcy in December 1999. Its Unitron Medical subsidiary, which did business under the name Moon Communications, also sought Chapter 11 protection.

The SEC filed accounting fraud charges in September 2001 against Padda and three other Sabratek executives, alleging that they engaged in a scheme to overstate the company’s sales and earnings.

The SEC said the fraud occurred before the Unitron merger. The charges covered the company’s annual report for 1998 and quarterly reports through the first quarter of 1999.

All four defendants settled with the SEC without admitting or denying guilt. They agreed to pay penalties and disgorge money they had received in bonuses or other compensation.

As is often the case when Sharesleuth investigates, we find additional information that could have a material impact on the decision making of consumers or investors. We hope that this report provides valuable insight for those who will consider doing business with the companies and individuals involved.

Susan Drury provided fact-checking services for this article.