Lawyers for Goldman’s Toure seek dismissal of SEC charges, citing recent Supreme Court ruling




In June, the Supreme Court dramatically altered the securities-law
landscape by ruling that only cases involving the actual sales of securities
within the United States can be persued in U.S. Courts. So, lawyers for 
Fabrice Toure, a Goldman Sachs employee caught up in a fraud case
involving an ill-fated collateralized debt obligation deal, asked for a
dismissal because SEC lawyers forgot to allege that any sales of securities
took place in the United States.

 

It should be easy
enough to amend the complaint, says CNBC — but maybe not as easy to prove,
since most of the investors in the deal were foreign. Still, CNBC predicted
that the court would find that at least some of the sales occurred on U.S. soil
“To rule otherwise would deprive foreign buyers of the protections of US
securities laws, which would undermine the US’s position as one of the safer
places in the world to invest.”


SEC investigating Vision Capital

Vision Capital Advisors LLC, a New York-based hedge fund manager that has figured into several Sharesleuth stories (here and here), said Wednesday that the Securities and Exchange Commission is investigating its activities. 

The announcement followed a report by Reuters that the SEC issued subpoenas this summer to several investment firms that have done business with Vision. The company’s funds have invested hundreds of millions of dollars in small public companies, including a number of Chinese businesses that have gone public through reverse mergers with U.S.-listed shells.

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

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

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

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

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

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

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

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

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

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


THE PLACEMENT

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

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

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

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

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

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

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

MORE INVESTORS WITH REGULATORY PASTS

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

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

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

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

THE SHAREHOLDER LIST

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

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

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

SinoCoking did not comment on Sharesleuth’s findings.

THE COMPANY

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

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

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

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

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

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

THE PLACEMENT AGENTS

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

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

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

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

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

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

BOILER ROOM TIES

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

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

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

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

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

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

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

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

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

OTHER INVESTORS

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

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

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

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

Houston American presses bet in Colombia

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

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

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

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

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

ASSET SALE

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

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

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

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

CPO-4 DEAL

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

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

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

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

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

GULF UNITED

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

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

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

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

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

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

EARNINGS AND BONUSES

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

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

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

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

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

More disclosure questions at China Fire & Security Group

A recent Securities and Exchange Commission filing by the chief executive of China Fire & Security Group Inc. (Nasdaq: CFSG) has raised additional questions about disclosure by the company and its major shareholders.

Vyle Investment Inc., an entity headed by China Fire’s chief executive, Brian Lin, said in the filing that it transferred 1.83 million shares of its China Fire stock — worth nearly $27 million at the time — to two other parties, who in turn surrendered their 70 percent interest in Vyle.

Those shareholders were different than the ones that China Fire had previously listed as having an ownership interest in Vyle, which held a 9.2 percent stake in the company.

In addition, China Fire has never publicly announced the death of Gangjin Li, who was its founder, former chairman and biggest single shareholder. He
stepped down as chairman and CEO on March 30, citing ill health. According to a Chinese-language article posted on an industry news site, he died less than two weeks later at age 48. China Fire confirmed Li’s death to Sharesleuth.

An SEC filing earlier this year reported that Li had sole or joint ownership of more than 15.7 million China Fire shares, representing 57 percent of the total outstanding. It is unclear what became, or will become, of those holdings in the wake of his death. That could be significant for other investors if Li’s heirs decide to liquidate some or all of his shares.

China Fire said in response to written questions from Sharesleuth that stock-ownership filings by Lin, Li and another company executive were in compliance with SEC rules. It said other individuals and entities we asked about were not subject to disclosure requirements.

China Fire manufactures fire safety equipment and designs and installs detection and suppression systems for steel mills, power plants and other customers. The Beijing-based company’s shares closed Thursday at $7.18, giving it a market capitalization of $198.1 million.

China Fire’s stock has fallen by more than 50 percent since mid-May.

A HISTORY OF DISCLOSURE QUESTIONS

In March 2008, Sharesleuth published an investigation showing that some of the people listed as the beneficial owners of tens of millions of dollars worth of China Fire stock appeared to be fronts for the real holders. The company responded by releasing a revised list of the people it said held the true interests in those shares.

China Fire said at the time that Brian Lin held a 30 percent of the ownership interest in Vyle but had 100 percent of the voting power. The company said that a woman named Hui Bai, described as a “distant family member” but not a close relative of Lin’s, owned the other 70 percent.

China Fire’s annual filing with the SEC in March 2009 again said that Lin held a 30 percent ownership stake and 100 percent voting stake in Vyle, which is domiciled in the British Virgin Islands. But it listed Weishe Zhang, China Fire’s current chief technology officer, as having a 20 percent interest in Vyle. It did not identify the holder of the remaining 50 percent interest.

The most recent filing regarding the transfer of shares still listed Lin with a 30 percent interest in Vyle and Zhang with a 20 percent interest. It said that Famous Link Group Ltd. owned the remaining 50 percent.

China Fire did not identify the person or persons who control Famous Link. But SEC filings for two other Chinese companies listed on U.S. exchanges identify Ying Yueqin as having sole voting power for Famous Link Group, which like Vyle is incorporated in the British Virgin Islands.

Yueqin is Brian Lin’s brother-in-law. China Fire told Sharesleuth that because Yueqin is not a member of Lin’s immediate family and does not share a household with him, it was not required to disclose the relationship in its SEC filings.

EARLIER APPEARANCE

Yueqin once was listed as the beneficial owner of 1.32 million China Fire shares held by Linkworld Venture Inc., yet another British Virgin Islands-based entity. China Fire said in the March 2008 press release intended to clarify ownership that the real holder of Linkworld’s shares was Zhao Shuangrui. It described Shuangrui as an early-stage investor in China Fire, and as the uncle of Gangjin Li.

Similarly, Brain Lin’s sister-in-law, Huiwen Liu, was originally listed as the beneficial owner of 2.58 million China Fire shares held by Worldtime Investment Advisors Ltd. (the family ties were not mentioned in that instance, either). Prior to the company’s disclosure of the true owner of those shares, Worldtime filed to sell stock with a market value of roughly $9.6 million.

China Fire also insisted in March 2008 that Gangjin Li’s son, Ang Li, was the beneficial owner of 2.67 million shares held by an entity called China Honour Investment Ltd. The son, who at the time was a teenager living in Canada, told Sharesleuth he did not know how he came to own the stock.

Last year, China Fire said in a filing that Ang Li had signed that stock, then worth $30 million, back to his father for no financial consideration.

OWNERSHIP CHANGES

China Fire told Sharesleuth that Zhang and Famous Link acquired their stakes in Vyle in January 2009. That transaction, which would have involved a holder of more than 5 percent of the company’s shares divesting that interest, was not disclosed in any SEC filing.

China Fire said Zhang properly disclosed his stock holdings in an SEC filing in March 2009. However, Zhang’s filing made no mention of his involvement with Vyle or his partnership with Lin and Famous Link. China Fire noted that it disclosed Zhang’s ties to Vyle in its annual report that same month.

China Fire explained its lack of disclosure regarding Gangjin Li by saying that he “had not been active” at the company since 2007, and only briefly resumed his role as chief executive in early 2010. China Fire added that, after Li’s health worsened and he stepped down as both chairman and CEO, he submitted an SEC filing showing that he had transferred of all of his holdings to the LGJ Family Trust.

“At the time of his death, Mr. Li was no longer a shareholder, director, or executive member of the company” China Fire said. “As such, the Board of Directors determined that it was not necessary to submit further filings with the SEC.”

But the filing that China Fire cited did not explicitly state that Li transferred all of his shares to the LGJ Trust. In fact, it showed that he had beneficial ownership and sole voting power over more than 15.7 million shares, and that the LGJ Trust had beneficial ownership and voting power over just 9.05 million of them.

To further confuse matters, the trustee for the LGJ Trust last month submitted an amendment to the original filing, withdrawing the trustee, LGJ Trust and another entity from that original filing, stating that none of them had any obligation to make disclosures through 13D or 13G filings.

The filing listed the holdings for all three entities at zero shares.

SEC investigating Mesa Energy Holdings

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

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

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

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

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

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

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

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

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

Chinese company has growing receivables issues

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

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

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

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

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

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

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

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

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

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

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

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

CUSTOMERS

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

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

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

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

CHINA MOBILE

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

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

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

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

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

CHINA UNICOM

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

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

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

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

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

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

NEW  EXECUTIVES

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

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

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

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

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

FIRST U.S. NETWORK DEAL

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

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

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

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

A RIVAL’S RECEIVABLES

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

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

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

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

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

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

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

Telestone attributed the varying collection periods to
differing business models. 

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

TELESTONE’S
REVENUE MIX

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

Telestone’s net income — $12.5 million – was up 78 percent
from the previous year.

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

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

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

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

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

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

QUARTERLY
FLUCTUATIONS

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

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

Small Texas company promotes big South American oil venture


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

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

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

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

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

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

A SPECTACULAR DEAL?

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

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

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

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

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

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

BIG CLAIMS

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

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

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

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

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

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

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

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

A SILENT PARTNER

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

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

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

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

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

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

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THE COMPANY

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

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

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

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

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

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

STOCK PROMOTERS

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

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

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

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

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

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

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

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

(watch Maedel discuss Manas Petroleum)

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

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

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

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

Neither Maedel nor McKnight responded to questions submitted by Sharesleuth.

WELLS FOR SALE

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

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

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

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

THE STOCK 

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

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

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

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

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

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

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

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

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

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

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

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

RISE AND FALL

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

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

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

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

THE RESPONSE

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

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

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

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

That notation did not appear in previous proxy statements.

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

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

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

COLOMBIA

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

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

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

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

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

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

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

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

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

SERRANIA

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

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

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

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

 

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

 

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

 

MOOSE OIL

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

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

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

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

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

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

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

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

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

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

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

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

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

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

BOYLAN

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

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

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

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

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

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

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

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

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

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

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

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

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

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

BROUN

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

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

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

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

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

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

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

TAWES

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

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

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

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

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

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

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

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

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

A VOLATILE STOCK 

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

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

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

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

A BIG BONUS

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

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

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

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

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

SNOW

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

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

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

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

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

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

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

MCKNIGHT

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

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

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

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

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

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

MAEDEL

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

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

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

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

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

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

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

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

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

THE SWISS CONNECTION

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

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

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

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

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

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

GM CAPITAL PARTNERS

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

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

The home page of GM Capital’s website lists Manas and Mexoro as its “portfolio companies.”

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

Sundar also was involved in the promotion of Eden Energy.

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

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

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

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

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

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

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

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

The Zurich branch is currently in liquidation, Lux said.

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

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

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

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

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

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Howard Katz Court Documents

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Energy company’s stock surges, then falls, as promoters tout and large shareholders sell

Mesa Energy Inc. was already a publicly traded company when it did a reverse merger with a second one, a shell that began life as Mesquite Mining Inc.

The unusual deal last August moved Dallas-based Mesa from the Pink Sheets to the Over the Counter Market and brought it the financing it needed to buy a promising natural gas prospect in western New York, Chief Executive Randy M. Griffin said.

It also put 14 million cheap – and free trading — shares of the combined company, Mesa Energy Holdings Inc. (OTCBB: MSEH.OB) into the hands of four stockholders from the Mesquite Mining side of the transaction. A Sharesleuth investigation found that one of them was a limited partnership linked to a convicted felon — an ex-stockbroker barred from the securities industry for his role in a fraud and manipulation scheme that cost investors more than $100 million.

That ex-broker, Samuel DelPresto, has close ties to Adam S. Gottbetter, the New York lawyer and investment banker whose firms have handled securities work for Mesa and arranged its private placement financing. DelPresto and Gottbetter also have longstanding ties to Corporate Evolutions Inc., Mesa’s investor relations consultant.

SEC filings show that one of Gottbetter’s own companies was among the four entities that came away from Mesa’s reverse merger with 3.5 million shares each. Collectively, their holdings represented a 36 percent stake in the company. Based on ownership figures in a new filing last week, those four entities have sold at least 6 million of their shares.

Mesa’s stock rose sevenfold between Dec. 14, when the first shares trading on the Over the Counter market, and March 23, when they reached their high of $3.50. At that price, the company had a market capitalization of $140 million.

809 percent profits in 8 months.jpeg

For the past month, Mesa’s trading volume has averaged well over 1 million shares a day, thanks in part to web sites (see examples here and here) and printed brochures that have been touting the company and its prospects.

Mesa also sought to boost its visibility and credibility by appointing former New York Gov. George E. Pataki as chairperson of its recently established advisory board.

Sharesleuth noted that the efforts to promote Mesa’s stock involve several individuals or firms that have previously appeared in our investigations.

The latest version of one of the brochures, produced by newsletter publisher Jarret B. Wollstein, notes that they were created and distributed at a cost of more than $700,000, using money provided by an unidentified Mesa shareholder.

Mesa put out a press release April 9 saying that it had not approved, authorized, endorsed or financed any of the independent reports about the company. Its stock ended last week at $1.40, down from $2.67 at the start of the month.

(Disclosure: No one associated with Sharesleuth.com has any position, short or long, in any of the stocks mentioned in this story.)

DelPresto, Gottbetter and Corporate Evolutions have worked together in the creation, financing or promotion of other small public companies that had notable surges in their stock prices, followed by sharp declines.

Two examples are Kentucky USA Energy Inc. (OTCBB: KYUS.OB) and Charys Holding Company Inc. Charys’ shares rose from a low of 21 cents in 2005 to a high of $10.75 in 2006, before the company sank under the weight of numerous acquisitions and went bankrupt.

Sharesleuth found that Mesa’s reverse-merger deal was almost a carbon copy of the one that Kentucky USA used to go public in 2008.  The shell companies used in both transactions had the same attorney and the same auditor. Each sold an identical amount of stock, at an identical price, to investors that wound up owning a substantial stake in the combined company for a minimal amount of money.

Kentucky USA’s stock more than doubled in the month following the completion of its reverse merger. It then fell almost as swiftly, and has continued on a long, steady decline.

Gottbetter is a prominent player in the world of reverse mergers and PIPE (private investment in public equity) financing. Barron’s reported last year that federal prosecutors in New York were investigating whether Gottbetter and an associate manipulated the shares of another of his reverse-merger clients, Alternative Energy Sources Inc. (Pink Sheets: AENS.PK). That ethanol company went public in 2006 and ceased operations in the summer of 2008.

Gottbetter denied the allegations, calling the story a “hatchet job” in a written reply to that publication.

 

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