Cool Mara Riot, Part Two: Securities-fraud case against South Florida group reverberates through additional companies

By Chris Carey

Jim McNair and Kevin O’Connor contributed to this report

When financier Barry C. Honig was waging a proxy fight for control of the company that became Riot Blockchain Inc. (Nasdaq: RIOT), he demanded that it return excess capital to shareholders through a special dividend.

But once Honig and his allies took over, they did exactly the opposite. The Colorado-based company, then known as Bioptix Inc., raised an additional $7 million last spring through two private placements. Honig, his business partners and other associates bought nearly all of the stock, warrants and convertible notes sold in those deals, which were priced at a 30 percent discount to the market.

By the second week of October, they had turned those securities into 4.7 million common shares. That stock, combined with earlier purchases, gave them nearly two-thirds of the company, on a fully diluted basis.

Only then did Riot Blockchain pay the special dividend, distributing $1 per share or share equivalent, or a little less than $10 million. And in the six weeks that followed, the company’s stock price nearly tripled, as deals with two bitcoin-related businesses in which Honig and his associates had undisclosed stakes attracted investors who were seeking cryptocurrency plays. When Riot Blockchain’s stock hit $24 on the day after Thanksgiving, the shares issued through the April placement were worth more than $100 million.

A Securities and Exchange Commission filing from April shows that Honig sold nearly all of his Riot Blockchain shares in October and November, collecting more than $17 million. He failed to promptly report those sales, as required under SEC rules for non-passive investors who own 5 percent or more of a company’s stock.

Our investigation found that three Honig associates – his brother, Jonathan Honig, and longtime partners Mark E. Groussman and John R. Stetson – likely sold more than $20 million of Riot Blockchain stock from October to January. Its shares peaked at $46.20 in December, then came crashing back to earth. They now trade for less than $4. The company is dangerously low on cash and the SEC is conducting a formal investigation.

Riot Blockchain stock sales chart

As Sharesleuth reported in July, it appears that the group’s activities at Riot Blockchain, PolarityTE Inc. (Nasdaq: PTE, formerly Nasdaq: COOL) and Marathon Patent Group Inc. (Nasdaq; MARA) were part of a broader web of questionable dealings.

On Sept. 7, the SEC brought fraud charges against Barry Honig, Groussman, Stetson and 17 others individuals and entities, including John R. O’Rourke III, another longtime associate who was chairman and chief executive of Riot Blockchain.

The SEC alleged that the defendants participated in so-called “pump and dump” schemes at three other companies:

– BioZone Pharmaceuticals Inc., now Cocrystal Pharma Inc. (Nasdaq: COCP)

MGT Capital Investments Inc. (OTC: MGTI)

Mabvax Therapeutics Holdings Inc. (OTC: MBVX)

According to the SEC’s complaint, those schemes generated more than $27 million.

Stetson was, until Sept. 7, executive vice president and chief investment officer of PolarityTE, a Utah-based biotech company whose predecessor was headed by Honig.  Our investigation found that the Honig group’s actions at PolarityTE and before that, Majesco Entertainment Inc., mirrored their moves at Riot Blockchain, right down to private placement-and-special dividend maneuver.

The SEC also brought charges against Dr. Phillip Frost, the billionaire chairman and chief executive of Opko Health Inc. (Nasdaq: OPK), and against Opko itself. It alleged that Frost and Opko were part of an undisclosed “control group” at BioZone and Mabvax, and that they either participated in the group’s wrongful activities or aided and abetted them.

Our analysis of SEC filings showed that Honig and Frost sold more than $20 million of their PolarityTE stock between February 2017 and February 2018, with most of those sales coming in the second half of last year.

Once again, Honig failed to promptly report his sales, as required under SEC rules.

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Cool Mara Riot: The big money, bitcoin-biotech daisy chain

By Chris Carey

Jim McNair contributed to this report

(First of two parts)

Three companies whose stock made big moves last year are linked by undisclosed relationships that raise numerous red flags about the deals that helped attract investors, boost share prices and enrich certain players.

A Sharesleuth investigation found that financier Barry C. Honig and a handful of associates sold at least $70 million of stock in those companies — PolarityTE Inc. (Nasdaq: COOL), Marathon Patent Group Inc. (Nasdaq: MARA), and Riot Blockchain Inc. (Nasdaq: RIOT) –- as their share prices rose by triple digits, then tumbled from those highs.

The companies, by comparison, had less than $1 million in combined revenue in fiscal 2017, and $180 million in losses. Our investigation found that surges in their share prices were aided by a daisy chain of deals involving Honig and a recurring cast of business partners and investors. They included John R. Stetson, PolarityTE’s executive vice president and chief investment officer; John R. O’Rourke III, Riot Blockchain’s chairman and chief executive, and Mark E. Groussman, who once headed Marathon Patent’s predecessor and was a large shareholder in all three companies.

Our investigation found that Honig personally sold at least $30 million of stock in PolarityTE and Riot Blockchain from late August to mid-December without reporting those sales, as required under Securities and Exchange Commission rules for non-passive investors who own 5 percent or more of a company’s shares.

We found that Honig and his associates stood to receive more than $40 million in new shares through the acquisition of two bitcoin companies in which they had undisclosed stakes. The largest of those deals was cancelled late last month.

Our analysis of SEC filings and other documents found that:

– Honig and his associates were among the biggest investors in Riot Blockchain, Marathon Patent AND two new bitcoin companies they agreed to acquire for stock initially valued at $197 million. Those deals were struck on consecutive days in early November. Honig’s network was to get more than half of the shares to be issued for the bitcoin companies, which had little, if any, revenue and modest assets. Their presence on both sides of the deals was not disclosed at the time, and has not been fully explained since.

–  A limited partnership headed by O’Rourke provided $5.3 million in financing to Marathon Patent in August and September, in return for convertible notes and warrants. It wound up with the equivalent of 11.8 million shares, which soared in value after Marathon Patent said it was getting into the cryptocurrency game by merging with one of the bitcoin companies, Global Bit Ventures Inc. The closing of that deal was delayed repeatedly, and Marathon Patent announced on June 28 that it had decided to walk away. Our analysis suggests that Revere already had sold at least 3.6 million of its shares, some during last November’s surge. We estimate that the proceeds were around $13.9 million (see calculations here). The rest of the stock would be worth $6.7 million at the current market price, although it’s possible that some of those shares have been sold as well. SEC filings show that more than 8 million of the 11.8 million shares — or nearly 40 percent of Marathon Patent’s total outstanding — have been issued to Revere or other unknown parties. Revere has not filed a Form 13D or Form 13G reporting ownership of those securities, nor has anyone else.

– Honig and a limited liability company managed by Stetson provided cash to Global Bit Ventures in September, in return for convertible notes. That was less than six weeks before Marathon Patent finalized the merger agreement. A later SEC filing showed that the notes somehow found their way to a second limited liability company, managed by O’Rourke. That entity also had preferred stock in Global Bit Ventures, and stood to receive 20.5 million of the 70 million shares that were to be issued to the bitcoin company’s investors. Its stake would have been worth $17.5 million at the current market price.

– Honig, Groussman and another longtime associate, Michael H. Brauser, were shareholders in Kairos Global Technology Inc., the bitcoin miner that Riot Blockchain bought on Nov. 1 for roughly $12 million. Kairos’ owners exchanged their 1.75 million shares of common stock for 1.75 million shares of Riot Blockchain’s convertible preferred stock valued at $6.80 a share. Honig, Groussman, Brauser and two other large Riot Blockchain shareholders owned more than 50 percent of Kairos. Riot Blockchain did not disclose that cross-ownership at the time of the deal. We found that Honig, Groussman and the other investors had purchased their Kairos stock just a day or two before the acquisition. A financial statement in a January SEC filing showed that Kairos sold 750,000 shares for 10 cents a share on Oct. 30 and 1 million shares for $3.10 on Oct. 31.

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Pretenders and Ghosts: Stealth promotion network exploits financial sites to tout stocks

By Chris Carey

Kevin O’Connor, Jim McNair and Russell Carrollo contributed to this report

 

Meet George Ronan.  Again and again and again.

The George Ronan who talked up a succession of small public companies at SeekingAlpha.com described himself as a university lecturer in the United Kingdom with an interest in technology stocks.

George Ronan I

The George Ronan whose articles appear on MarketExclusive.com – as well as Gurufocus.com — is billed as an author, journalist and public speaker who focuses mainly on health care stocks.

George Ronan II

A third George Ronan, with no bio but a decidedly different headshot, was briefly among the contributors to Benzinga.com.

George Ronan IIIAll three are fictitious. A Sharesleuth investigation found that they are part of a small army of writers, both real and imaginary, who have systematically posted hundreds of bullish analysis pieces about the same small companies across numerous investment sites.

Just as certain individuals and organizations circulated false or misleading political stories in an effort to sway the 2016 presidential election, internet-savvy promoters are using fake writers, planted articles and even illusory “news” sites to surreptitiously tout stocks. The purported analysis pieces by the multiple George Ronans are a prime example. Sharesleuth turned up more than 140 articles with that byline, on seven different sites.

Most of the original Ronan’s 11 articles at Seeking Alpha called attention to companies that were created or bankrolled by Barry C. Honig, a South Florida financier who figures into at least two Securities and Exchange Commission investigations. So did six of the seven Ronan articles on four other sites, including Investing.com and Trefis.com.

RONAN AS ROADMAP

Using the Ronan stories as markers, we found more than 60 other writers who have systematically promoted companies connected to Honig and his associates, including longtime business partner Michael H. Brauser and billionaire entrepreneur Dr. Phillip Frost, chairman and chief executive of Opko Health Inc. (Nasdaq: OPK).

Sharesleuth determined that the majority of those writers also were fake — part of an elaborate, long-running effort to spark interest in obscure public companies by creating bullish stories that were posted and reposted across the internet.

The stealth promotion network includes a handful of real people who have touted the same stocks with such regularity that it is impossible to view their posts as a coincidence. All told, we turned up nearly 600 bullish articles about Honig-related companies that fit the pattern of stealth promotional pieces.

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Beyond public view, a recidivist fraudster nears a reckoning day

The fraud and conspiracy case against recidivist fraudster Regis L. Possino and 10 others charged in connection with a multimillion-dollar “pump-and-dump” scheme appears to be nearing an end — in almost total secrecy.

Most of the documents filed in Possino’s case over the past two years were sealed by the judge, at the request of federal prosecutors or Possino’s attorney. But the docket shows that on Monday, prosecutors filed sentencing exhibits and a proposed restitution order.

That suggests that Possino — featured in several Sharesleuth stories — has agreed to a plea deal or is close to one. Filings in a separate action showed that he already forfeited his house in Pacific Palisades, Calif., which was to be sold for a minimum of $2.5 million.

The U.S. Attorney’s office in Los Angeles alleged in 2013 that Possino and his associates collected at least $18 million through “pump-and-dump” schemes involving three public companies.

The indictment said they manipulated the share prices of the companies, issued false press releases to generate investor interest, then dumped their own stock on an unsuspecting public. The companies used as vehicles were Sports Endurance Inc. (OTC: SENZ), FrogAds Inc. (formerly OTC: FROG), and Empire Post Media Inc. (OTC: EMPM).

A spokesman for the U.S. Attorney’s office in Los Angeles told Sharesleuth last year that he did not expect any of the cases against the defendants to come to trial.

A grand jury originally indicted 15 people, four of whom had appeared in previous Sharesleuth investigations. It alleged that they participated in two overlapping stock-manipulation rings that netted more than $30 million.

The defendants included Possino, who has convictions for drug dealing and fraud; Sherman Mazur, a onetime real estate mogul with a prior fraud conviction; and Edon Moyal, the former chief executive of a publicly traded energy-drink company called Who’s Your Daddy Inc. (formerly OTC:WYDY).  While at that company, he was charged with aiding drug traffickers and later was sentenced to 18 months in prison.

The FBI said in its press release about the indictments in the pump-and-dump case that its investigation included a series of wiretaps that resulted in the interception of more than 60,000 phone calls and 24,000 text messages.

However, after questions arose about representations the FBI made to a judge to win approval for the wiretaps, the Justice Department withdrew the wiretaps as evidence and dropped the charges against Possino, Mazur and all other defendants in one of the cases.

That left 11 defendants in the case that survived. It is unclear why so many documents in that case have been sealed, or what information the prosecution and defense and trying to protect.

None of the unindicted co-conspirators mentioned in the original indictments have been charged in the nearly four years since the case was made public, nor has anyone else.

Court documents show that seven defendants besides Possino have agreed to plea deals and been sentenced. Prosecutors dismissed charges against two other defendants, saying the loss of the wiretaps would make it hard to win convictions.

The 11th and final defendant, Ivano Angelastri, remains a fugitive.

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SEC expands fraud case to include Lenco Mobile, subject of a prior Sharesleuth investigation

The Securities and Exchange Commission has quietly expanded its fraud case against financier Izak Zirk De Maison, adding seven more people as codefendants and identifying five more stocks he used in his schemes.

According to the SEC’s amended complaint, one of the companies that De Maison used as a fraud vehicle was Lenco Mobile Inc. (formerly Pink Sheets: LNCM), which was the subject of a Sharesleuth investigation in early 2010.

Lenco Mobile gained a stock market listing through a reverse merger with a shell company controlled by De Maison, known at the time as Zirk Engelbrecht. Our investigation focused on the issuance of millions of Lenco Mobile shares to questionable individuals, including recidivist securities offender Michael W. Crow.

The SEC said in its amended complaint that De Maison and his alter egos sold at least $6.2 million of Lenco Mobile shares directly to investors in private transactions. The SEC said he also paid commissions to stockbrokers to induce them to sell additional shares to clients.

The SEC said De Maison and other defendants inflated the share prices of Lenco Mobile and the other companies before dumping their shares on unsuspecting investors.

The Justice Department brought a parallel criminal case last year against De Maison and Stephen J. Wilshinsky, an ex-stock broker. Like the SEC, it later expanded its allegations to include violations related to Lenco Mobile and other stocks.

De Maison pleaded guilty in April to seven counts, including securities fraud and wire fraud. His sentencing is set for December. Wilshinsky also has pleaded guilty.

A document in the criminal case alleged that the fraud schemes De Maison orchestrated at Lenco Mobile, Casablancas Mining Ltd. (Pink Sheets: CUAU) and the other companies caused investors to buy more than $54 million in shares and suffer $27 million in losses.

The SEC did not publicize its amended complaint, which was filed in June. It added a number of stock brokers, former stock brokers and stock promoters as defendants.

The latest defendants in the case are:

–Gregory Goldstein, former owner of a California-based brokerage called Marquis Financial Sevices Inc.

–Talman Harris, a former stock broker who worked for a several firms during the period covered by the complaint

–William Scholander, another former stock broker who worked alongside Harris at those same firms.

–Jack Tagliaferro, also a former stocker broker.

–Victor Alfaya, who worked for a New York-based stock promotion service called Small Cap Resource Corp.

–Kona Jones Barbera, who also worked for Small Cap Resource and later set up a second firm called Quantum Financial Investments

– Justin Esposito, an employee of Small Cap Resource and Quantum Financial.

Another of the defendants in the original SEC case, a previously barred broker and recidivist securities offender named Justin Cope, was charged criminally in September in connection with the scheme.

The SEC said all of the brokers and promoters were involved in either the sale or manipulation of shares in the companies used in the fraud schemes.

Tagliaferro agreed last week to settle the charges against him. Although he neither admitted nor denied guilt, the judgment requires him to disgorge the profits he collected from his activities, and pay a civil penalty.

Harris and Scholander were barred from the brokerage industry last year in connection with a separate case. The Financial Industry Regulatory Authority found that Harris and Scholander had recommended shares of a Chinese reverse-merger company, Deer Consumer Products Inc. (Pink Sheets: DEER) without disclosing that they had received $350,000 from the company, purportedly for consulting services.

The SEC brought fraud charges in September against Benjamin Wey, one of the architects of the Deer Consumer Products deal. It alleged that he concealed his ownership stake in that company, manipulated the stock price and then dumped his shares.

MULTIPLE SCHEMES, SIMILAR METHODS

The SEC said in its amended complaint that De Maison was involved in fraudulent “pump-and-dump” schemes involving six stocks from 2008 to 2014. In addition to Lenco Mobile and Casablancas Mining, those companies were Kensington Leasing Ltd.  (formerly Pink Sheets: KNSL);  Wikifamilies Inc. (formerly Pink Sheets: WFAM);  Gepco Ltd. (formerly Pink Sheets: GEPC) and Lustros Inc. (Pink Sheets: LSTS).

Wikifamilies and Gepco were successors to Kensington Leasing. In other words, De Maison and his associates used a single company for three separate schemes.

The SEC said that De Maison caused each of the companies listed in the complaint to issue tens of millions of shares of stock to himself and his nominees, including his wife, former beauty queen Angelique De Maison.

It said he disposed of those shares through two types of illegal distributions. According to the SEC, De Maison used unregistered individuals – including people who had been barred from the brokerage industry for previous transgressions – to sell shares to investors in purported private placements.

It said De Maison also induced registered representatives at brokerage firms to buy shares in the companies for their clients’ accounts for the purpose of matching those trades with his public share sales.

The SEC said that De Maison and some of the other defendants manipulated the shares prices and trading volumes of the companies to create the appearance of genuine investor interest.

According to court filings, Cope received more than $6 million for his efforts in helping De Maison move stock.

The SEC said Goldstein and his nominees got $2.3 million for the Lenco scheme alone.  It said that Wilshinsky got more than $1.2 million, while Harris and Scholander got more than  $1 million.

SHARESLEUTH’S LENCO MOBILE INVESTIGATION

Neither the SEC’s original complaint nor its amended complaint makes any mention of Lenco Mobile’s involvement with Michael Crow, who previously was ordered to pay more than $7 million in penalties in connection with an earlier case.

Our investigation found that Lenco Mobile bought at least two companies linked to Crow, paying for the acquisitions with millions of shares of stock.

Crow had filed for personal bankruptcy in early 2010, listing debts of more than $11 million. The trustee in the case later brought fraudulent conveyance proceedings against Crow and a number of entities he created, alleging among other things that he used some of them to sell Lenco Mobile shares without disclosing the income.

The SEC brought another case against Crow last year, alleging that he and a co-defendant made false and misleading statements while raising $3.9 million for a dubious gold-mining venture in South America.

Our Lenco Mobile story also noted De Maison’s ties to Thomas Ronk, a former broker who runs Buyins.net, a web site that purports to identify stocks poised for big increases because of developments that are likely to trigger so-called “short squeezes.’’

Our investigation found that Ronk was connected to a privately held company that Lenco Mobile acquired for millions of shares of stock.

A transcript of a court hearing in De Maison’s criminal case shows that Ronk paid some of De Maison’s initial legal fees. It also shows that Ronk offered to help cover the expenses for De Maison’s proposed stay at a halfway house in Ohio, as an alternative to jailing him while he awaited trial.

A prosecutor representing the Justice Department at the hearing said the government had objected to the arrangement, adding that Ronk “was involved in the conspiracy.’’

The prosecutor noted that Ronk had been a senior executive at Casablancas Mining, one of the companies used in De Maison’s schemes. The prosecutor added that Ronk had received money and other things of value from De Maison, “either directly or indirectly, for purposes of doing things like touting the stock….”

Ronk has not been charged in either the civil or criminal case.

Trick Play: Memorabilia company peddled Patriots, Seahawks gear with forged player autographs

 

Seahawksball2

Just days after the Seattle Seahawks and New England Patriots claimed their spots in Super Bowl XLIX, a memorabilia company called The Highland Mint contacted customers with a tantalizing list of autographed collectibles.

Highland — best known in sports circles as the maker of the commemorative coin used for the game’s opening toss — said it was selling a limited number of Patriots and Seahawks items, including official Super Bowl XLIX footballs and mini-helmets signed by star quarterbacks Russell Wilson and Tom Brady.

The pieces on the company’s list ranged in price from $399 to $2,500 and had a combined retail value of more than $300,000. Highland said each would be shipped with a certificate affirming their authenticity.

But a Sharesleuth investigation found that all, or nearly all, of the items were fakes. What’s more, we found that the Melbourne, Fla.-based company has marketed virtually identical merchandise before previous Super Bowls, dating back to at least 2011.

After becoming suspicious about this year’s items, Sharesleuth contacted representatives for Wilson and Brady, who confirmed that the players had no part in their creation. We also sent the evidence to the NFL’s headquarters, but got no response.

The special collectibles were not advertised on Highland’s web site, which features a wide range of legitimate, NFL-authorized merchandise. Instead, a list with descriptions and pictures was offered to customers who previously had expressed interest in such items.

Although forgeries are a perpetual problem in the memorabilia business, experts said it was highly unusual for an established, league-approved vendor to be dealing in them.

It is unclear how many of the questionable Super Bowl-related items Highland actually sold. But if it managed to move most of the inventory it advertised for the past five games, the proceeds could be in the neighborhood of $1 million.

“ZERO CHANCE” OF AUTHENTICITY

Scott Mahlum, a Seattle-area memorabilia dealer who has an exclusive signing agreement with Wilson, said there was “zero chance” that the Seahawks quarterback autographed the footballs, jerseys, helmets and photos on Highland’s list.

“There’s no way that Russell Wilson sat down and signed 16 team helmets for anybody else,’’ Mahlum said, referring to one set of items on Highland’s list, priced at $1,995 each.

Mahlum’s company, Mill Creek Sports, also represents Seahawks running back Marshawn Lynch, who purportedly signed dozens of the pieces that Highland was selling.

Jeff Rosenberg’s company, TRISTAR Productions Inc., has handled all of Brady’s  authorized memorabilia signings since 2001. Rosenberg said TRISTAR was not the source of the items that Highland was selling.  They included nearly 100 autographed 8×10 photos of the Patriots quarterback, offered in frames with souvenir coins. The sets were priced at $399 each, meaning they had a total retail value of nearly $40,000.

A SINGLE SUPPLIER

Mahlum confronted Highland about the items last week and was told that it had procured them from another Florida company called Who’s Who Productions Inc.

Who’s Who says on its web site that it obtains autographs through private signings, and through the use of crews that stake out sporting events hoping to get athletes to add their names to balls, jerseys and other gear. Who’s Who noted on its site that it usually sells its memorabilia at fan events during Super Bowl week, in the cities hosting the game.

This year’s game was in Glendale, Ariz., a suburb of Phoenix. The Patriots defeated the Seahawks, 28-24, in what ranks as one of the best games in Super Bowl history.

Michael A. Goldfarb, president of Who’s Who in Tamarac, Fla.,, did not respond to our questions.

Mahlum said he found it hard to believe that Highland did not question the legitimacy of the Super Bowl-related memorabilia, given that the supplier had no direct ties to the players who were said to have signed the items.

Highland once had an outside party confirm the authenticity of its autographed merchandise. But in recent years, customers have received certificates signed by the company’s president and owner, Michael E. Kott.

He did not respond to our questions.

Patshelmet4

 

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Kandi Technologies Group Inc.: Where are the Go-Karts?

When the global economy collapsed in the fall of 2008, the sharp drop in consumer spending threw the power sports industry into a steep decline. Sales of motorcycles, go-karts and all-terrain vehicles each plunged by 30 percent or more, causing many dealerships to shut their doors and forcing some manufacturers to do the same.

But if the numbers in its Securities and Exchange Commission filings are to be believed, Kandi Technologies Group Inc. (Nasdaq: KNDI) not only bucked the trend but seized a much bigger share of the international go-kart market.

Kandi said in those filings that it sold more than 177,000 go-karts in its past six fiscal years, collecting $147 million in revenue. That represented nearly half of the Chinese company’s reported sales, at a time in which it was struggling to establish itself as a maker of low-speed electric cars, first in the United States and then at home.

But a Sharesleuth investigation found that fewer than one-fifth of those karts were delivered to Kandi’s U.S. distributors and other major U.S. customers. Industry experts told us the import total was far too low for Kandi’s 177,000 sales figure to be accurate, given that the United States represents the vast majority of all international kart sales.

Those experts, who included some of Kandi’s competitors, added that Kandi’s reported unit sales were impossibly high relative to the overall size of the market and the share held by other manufacturers.

The numbers suggest that Kandi has been greatly overstating its sales of go-karts and other power sports products — just as it did with its early electric-vehicle sales in the United States. We believe that Kandi’s apparent exaggeration of its go-kart sales casts doubt on all of its financial reporting, including the triple-digit revenue gains it recently announced for the third quarter and first nine months of 2014.

Kandi already is the subject of a formal SEC investigation. That probe appears to be linked to a fraud case the agency brought in May against a promoter who helped the company go public via a reverse merger in 2007. However, we believe the SEC might also be looking into Kandi’s reported sales, earnings and other public disclosures.

DISCREPANCIES BETWEEN SALES AND SHIPMENTS

Shipping data compiled by ImportGenius.com show that from 2008 through 2013, only about 30,000 Kandi go-karts were delivered to its U.S. distributors and other big buyers. The records, which originated with the Customs and Border Protection service, raise the question of where the remaining karts could have gone.

Even allowing for shipments to additional U.S. buyers who sold the vehicles under the Kandi name or their own brand names, there is no good explanation for the huge discrepancy. Kandi told us that the other 147,000 go-karts “were sold to domestic trading companies and manufacturers for distribution and resale.’’

SEC filings show that most of Kandi’s go-kart and ATV sales in 2012 and 2013 went to a pair of Chinese companies that purportedly resold them to customers in North America, Europe and other parts of the world. But our investigation found no sign of either company – or obvious affiliates – on any of the business-to-business sites that link Chinese manufacturers and distributors to global buyers.

Nor did ImportGenius’ database show any shipments to the United States from those companies, Jinhua Baoxiang Import & Export Co. Ltd. and Zhejiang Jin Li Ma Trading Co. Ltd.

When we asked Kandi how Jinhua Baoxiang and Zhejiang Jin Li Ma marketed the karts they purchased, it said: “These companies are our intermediate brokers, they cannot share with us their sales channels.’’

Our search of ImportGenius’ Customs data did not turn up any large shipments of Kandi karts from other Chinese companies that might have bought them from Jinhua Baoxiang or Zhejiang Jin Li Ma.

Industry experts told us there’s no way that all the karts reportedly sold to Jinhua Baoxiang and Zhejiang Jin Li Ma could have found their way to buyers in Europe, Australia, Latin America and other non-U.S. markets.

Indeed, our search found few dealers in those parts of the world that even advertise Kandi’s products.

The go-karts that cannot easily be accounted for represent tens of millions of dollars of Kandi’s reported revenue, as well as a healthy portion of the operating profits the company reported from 2008 through 2013.

Kandi’s shares closed Tuesday at $14.24, giving the company a market capitalization of almost $660 million. The company’s stock reached a high of $22.49 in July.

(Disclosure: Mark Cuban, majority owner of Sharesleuth.com LLC, has a short position in Kandi’s shares. Chris Carey, editor of Sharesleuth, does not invest in individual stocks and has no position in any company mentioned in this story.)

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Kandi Technologies Group Inc.: The return of the cyber shills

Last June, shares of Kandi Technologies Group Inc. (Nasdaq: KNDI) doubled in the space of a week, spurred on by a mysterious network of social-media touters who later deleted their posts or shut down their accounts entirely.

Kandi’s stock went on another big run this summer, and the cyber shills were back with a vengeance. Sharesleuth turned up more than 40 related accounts at StockTwits.com that have touted the Chinese vehicle maker and certain other companies. We found more than 100 accounts at Yahoo.com’s finance site that promoted the same set of stocks.

Kandi’s shares jumped from $14 in early July to a record $22.49 on July 22, aided by a steady stream of positive press releases, as well as a flood of bullish posts on StockTwits and other investment-related message boards.

Sharesleuth’s investigation found that:

  • Most, if not all, of the suspect StockTwits accounts that touted Kandi listed false names for the purported posters. Many of the profile shots used with the accounts were lifted from free photo sites, dating sites, news sites and other sources.

Raymond35 3

  • A stock promoter with a criminal past has been one of the most prolific posters on the Kandi boards at StockTwits, Yahoo.com’s Finance site and InvestorsHub.com. The suspect accounts at StockTwits and Yahoo duplicated some of his posts.
  • The coordinated posting ended abruptly in late August, just before Kandi announced it was selling $71 million in stock to undisclosed investors, at a 10 percent discount to the market price. The touting last year also preceded a share placement.
  • After Sharesleuth tried to contact the posters via StockTwits, most of them quickly changed their account names, logos and other profile information.

In the six weeks after the suspect accounts stopped posting about Kandi, the company’s share price fell by nearly a third, and daily trading volume declined as well. But on Monday (Oct. 6), the touters resumed their efforts. They reappeared just minutes before Kandi’s stock went on a sudden tear, rising from $13.50 to more than $15 in roughly two hours.

The touters posted more than 70 messages on StockTwits and Yahoo between 11:30 a.m. and 4 p.m., using nearly 20 different aliases. They continued posting into the evening and early the next morning (Oct. 7) (To see screen captures, click here and here)

MULTIPLE ACCOUNTS, MULTIPLE IDENTITIES

The so-called sock puppet accounts at StockTwits have generated roughly 4,000 messages since May — nearly all of them focused on the same 15 or so companies. Sharesleuth’s investigation found that many of the posts also showed up on the message boards at Yahoo.com’s Finance site, some under corresponding account names and some under different ones. We reviewed two years of postings on Yahoo’s Kandi board and various other boards and identified at least 120 accounts that have been used to systematically tout the same set of companies as the StockTwits posters.

Those accounts are responsible for more than 35,000 posts since the start of 2012.

ANOTHER RED FLAG

The existence of the touting operation is another red flag for investors who might be eyeing Kandi, which is based in Jinhua and makes electric cars, go-karts, all-terrain vehicles and other products.

Sharesleuth previously has raised questions about the accuracy of Kandi’s sales figures, particularly its claim to have sold thousands of electric cars in the United States. We also exposed the hidden role a Canadian stock promoter named S. Paul Kelley played in the reverse mergers that brought Kandi and 10 other Chinese companies public.

In May, the SEC brought fraud charges against Kelley and four other defendants, alleging that they concealed their ownership stakes in two of the reverse-merger companies – China Auto Logistics Inc. (Nasdaq: CALI) and Guanwei Recycling Corp. (Nasdaq: GPRC). The SEC said they artificially inflated those companies’ share prices through manipulative trading, then made millions of dollars by dumping their stock in public and private sales.

Kelley and another defendant, Roger D. Lockhart, quickly settled the charges by agreeing to pay more than $9.3 million in disgorgement, penalties and interest.

The SEC also alleged in its complaint that Lockhart and two other defendants engaged in a scheme to manipulate Kandi’s stock price in the fall of 2009. The SEC said Kandi’s chief executive, Xiaoming Hu, agreed that the company would provide 350,000 shares to pay for the effort. It said one of the defendants, George Tazbaz, later provided that same number of shares to stock promoters.

Kandi disclosed in March that the Securities and Exchange Commission was investigating the company and had subpoenaed certain documents. It said in its latest quarterly financial report, on Aug. 11, that the probe was still active.

Kandi’s stock closed Monday at $14.50. That gives the company a market capitalization of roughly $670 million, down from a peak of $940 million.

(Mark Cuban, majority owner of Sharesleuth.com LLC, has recently taken a short position in Kandi’s shares. Chris Carey, editor of Sharesleuth, does not invest in individual stocks and has no position in Kandi.)

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Telestone Technologies revisited: SEC letters reveal doubts about revenues and receivables

Recently released letters between the Securities and Exchange Commission and Telestone Technologies Corp. (Pink Sheets: TSTC) show that regulators have significant concerns about the Chinese wireless communication company’s reported revenues.

The letters show that the SEC’s corporation finance division began questioning Telestone in September 2012 about its sales contracts with customers and its soaring accounts receivable. Telestone’s balance sheet at the end of that month listed its receivables at $276.3 million, before adjustments for doubtful accounts. That equaled three-fourths of the revenue it reported for 2009, 2010, 2011 and the first nine months of 2012.

The SEC asked Telestone to explain why it was so certain those receivables would be paid, given that its average collection time was rising, along with the amount owed. Last summer, after months of unsatisfactory answers, the SEC ordered Telestone to provide a schedule of all receivables originated between Jan. 1, 2009 and Sept. 30, 2012.

It said that schedule was to include:

  • The name of the customer
  • The date the final contract was signed
  • The amount due under the contract
  • The receivable created upon signing
  • The contractual terms for payment
  • The amounts and dates of payments

Telestone – which has been the subject of several previous Sharesleuth stories (see here here and here) did not provide the information, citing non-disclosure agreements. Instead, it simply submitted a list of receivables by geographic territory, with no additional details .

In November, the SEC told Telestone that unless it could show that the contracts and payments were solid, it should change its revenue-recognition method, restate its 2011 financials and announce that its results from prior years should no longer be relied upon.

Telestone did neither. So in February, the corporation finance division told Telestone it was ending its review and would take further action “consistent with our obligations under the federal securities laws.” That included posting the letters.

TIES TO MANIPULATION RING

Telestone was one of 11 Chinese companies that stock promoter S. Paul Kelley helped to bring public through reverse mergers with U.S.-listed shell companies.

The SEC brought fraud charges last month against Kelley and four others in connection with two of those deals. It said in its complaint that Kelley and the others concealed the large ownership stakes they received in Guanwei Recycling Corp. (Nasdaq: GPRC) and China Auto Logistics Inc. (Nasdaq: CALI), artificially inflated share prices through manipulative trading, then reaped millions by selling much of their stock.

Kelley already has settled the case, agreeing to pay more than $6.2 million in disgorgement, penalties and interest.

A third company Kelley helped to bring public, Kandi Technologies Group Inc. (Nasdaq: KNDI) disclosed earlier this year that it was the subject of an SEC investigation.

(Mark Cuban, majority owner of Sharesleuth.com LLC, has no position, short or long, in any of the companies mentioned in this story. Chris Carey, editor of Sharesleuth, does not invest in individual stocks and has no position in any of the companies mentioned.)

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Guanwei Recycling Corp. and Kandi Technologies Group Inc.: The Rui Wang Connection

A Chinese businessman who figures into a fraud case involving Guanwei Recycling Corp. (Nasdaq: GPRC) also has an intriguing connection to Kandi Technologies Group Inc. (Nasdaq: KNDI), whose shares were allegedly manipulated by the same group.

Securities and Exchange Commission filings show that the man, Rui Wang, is a member of Guanwei Recycling’s board of directors and was a consultant to Kandi.

The SEC brought charges last month against stock promoter S. Paul Kelley and four associates, saying they engaged in illegal schemes to bring Gaunwei Recycling and China Auto Logistics Inc. (Nasdaq: CALI) public in the United States.  The SEC said in its complaint that they concealed large ownership stakes they received through reverse-merger transactions, artificially inflated share prices through manipulative trading, then reaped millions by selling stock on the open market and in private transactions.

Kelley also helped Kandi go public, through a similarly structured reverse-merger deal that put large blocks of stock in the hands of undisclosed parties. He and another defendant, Roger D. Lockhart, already have settled the charges against them, agreeing to pay a combined $9.3 million in disgorgement, penalties and interest.

Guanwei Recycling and China Auto Logistics emphasized that they have not been accused of wrongdoing. But the SEC complaint, along with our additional research, raises further questions about their involvement in the Kelley group’s schemes.

For example:

–  The complaint said Kelley had “de facto control” over Chenxin International Ltd., which paid the U.S. legal, accounting, listing and investor-relations expenses for Guanwei Recycling, a plastics processor based in Fuqing.  Guanwei Recycling, however, has always said in its SEC filings that Chenxin International was controlled by Wang. The company described him as a longtime friend of its chairman and chief executive, Chen Min.

– The complaint said Lockhart and another defendant met with Kandi’s chief executive, Xiaoming Hu, in September 2009 and agreed to pay promoters to tout the company, and to boost its stock price through manipulative trading. Hu allegedly agreed that Kandi would provide an additional 350,000 shares to pay for the program. SEC filings show that a few weeks later, Kandi awarded a business-development contract to Wang and another man. They were to be paid with options to buy 350,000 shares of Kandi’s stock.

– The complaint said Kelley controlled Sino Peace Ltd., which covered the U.S. expenses for China Auto Logistics, a vehicle importer with headquarters in Tianjin. The complaint said Kelley also controlled another company, Easy Fame Asia Ltd. Sharesleuth previously reported that Easy Fame Asia got an unexplained distribution of stock in 2011 from an entity that held millions of shares for China Auto Logistics’ chief executive, Tong Shiping, and his wife, Cheng Weihong, also a senior executive and board member.

The timing of Kandi’s contract with Wang, and the number of shares involved, could be a coincidence. But given the charges against Kelly and his associates — and Kelley’s link to Wang at Guanwei Recycling — the deal might deserve additional regulatory scrutiny.

(Mark Cuban, majority owner of Sharesleuth.com LLC, has no position, short or long, in any of the companies mentioned in this story. Chris Carey, editor of Sharesleuth.com, does not invest in individual stocks and has no position in any of the companies.)

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