Two convicted of stock fraud in Florida

Nathan B. Montgomery, the head of a company featured in an earlier Sharesleuth story on Mesa Energy Holdings Inc.(OTCBB: MSEH.OB) and a defendant in a civil securities case brought by the SEC, was convicted Jan. 31 in the Southern District of Florida in a criminal stock pump and dump scheme.

Montgomery was found guilty of conspiring to commit securities and wire fraud. The Justice Department said in a news release that Montgomery and business partner Frank Cushen — also convicted Wednesday –, tried to manipulate the stock price of CO2 Tech (Pink Sheets:CTTD.PK), a company they controlled, by issuing misleading press releases. One, for example, claimed the CO2 Tech had a business relationship with Boeing to reduce pollution from airplanes.
“CO2 Tech never had any business or relationship with Boeing,” the DOJ said.

The DOJ said Montgomery and Cushen coordinated trades of CO2 Tech stock to give the appearance of investor interest, and dumped their shares through trading desks at companies known as Red Sea and Sentry Global. Curshen controlled Red Sea, a Costa Rican company, according to the DOJ, and used it to launder the proceeds of the CO2 Tech pump and dump scheme through investment accounts in the United States and Canada.
At sentencing, Curshen faces a sentence of up to 65 years in prison. He was convicted of conspiracy to defraud, two counts of mail fraud and conspiracy to launder money.  Montgomery faces a sentence of up to five years in prison.  Both are scheduled to be sentenced in Florida on May 11, 2012.

Kerrisdale issues report on ChinaCast Education Corp.

Kerrisdale Capital Management says in a new report that it has found evidence that the main operating subsidiary of ChinaCast Education Corp. — a company regarded as “the one shining beacon within a sea of scams,” according the report — is overstating revenue and profit.

Kerrisdale says the company is reporting significantly more revenue to the Securities and Exchange Commssion than it is to the Chinese government. Kerrisdale said that it also uncovered evidence indicating that ChinaCast has been diverting company assets through acquisitions. In one case, says the report — which is based on public documents from the Shanghai Stock Exchange — the company reported buying other companies for more than what the seller actually received. The difference, says Kerrisdale, was pocketed by a middleman company that acted as a conduit for the acquisition. In another case, the sale price was simply overstated.

Medical company sues investor Vicis over billing scheme

Medical Solutions Management Inc. has sued Vicis Capital LLC claiming the hedge fund forced it into a medical billing scheme that attracted the attention of the FBI and resulted in two indictments and two guilty pleas.

Medical Solutions Management (Pink Sheets; MSMT.PK) alleged in the suit that its unwitting participation in the scheme destroyed the value of the company. It also claimed that several million dollars generated by medical receivables it purchased were diverted from another Vicis-controlled company MDWerks Inc. (Pink Sheets: MDWK.PK).

According to the lawsuit, Vicis — the subject of an earlier Sharesleuth investigation — steadily gained control of Medical Solutions Management (Pink Sheets: MSMT.PK) after it invested money to help the medical equipment company go public through a reverse merger. Medical Solutions Management said Vicis brought in Lowell Fisher, another defendant in the suit, as chief executive. The hedge fund also placed one of its founding partners, Shadron Stastney, on the board

Then, Medical Solutions Management said in court documents, Vicis arranged for the company to buy more than $12 million in receivables at a steep discount from a California company called Deutsche Medical Services. Those receivables were connected to insurance claims for medicine-laden skin creams supposedly given to workers compensation patients in that state. According to the suit, Medical Solutions Management had no time for due diligence on the receivables, and had trouble collecting them.

“Dissatisfied with the collection rate by MSMI, Vicis Capital ordered that collection responsibilities be transferred to another Vicis Fund-controlled company, defendant MDWerks,” the company says in its complaint. But MDWerks had trouble collecting, too, and Vicis then turned to a third company that specialized in medical billing, Global Healthcare Recovery.

But, according to court documents in the criminal case against Vicis’ managing director, Christopher D. Phillips, the president of the Global Healthcare Recovery told the then-chief executive of MDWerks, Howard Katz, that there were problems with the Deutsche Medical receivables and that many of the claims were probably fraudulent. Among other things, they listed incorrect dates of service, billed for charges on services that had never been provided and even claimed an expense for skin cream purportedly dispensed to a dead person. At some point, Boudreau contacted the FBI, which eventually led to Katz and Phillips being indicted for scheming to doctor the bad receivables so they could still be collected. Both men pleaded guilty.

(read Sharesleuth’s earlier story on Phillip’s and Katz’s guilty pleas)

Medical Solutions Management also named Phillips, Katz and MDWerks as defendants. It alleged in its suit that Katz diverted some of the money that MDWerks collected from the receivables to an offshore bank account.

In its complaint, Medical Solutions Management says that when Phillips found out about the FBI’s investigation in 2009, he sent a letter to Fisher, Medical Solutions Managment’s Vicis-installed CEO, that said:

it has come to our attention that the Federal Bureau of Investigation is currently investigating whether certain workers compensation claims being made and/or processed by MDWerks, Inc. and Medical Solutions Management, Inc. are fraudulent. It is our understanding that these claims may have been acquired from, or are somehow related to, Deutsche Medical Services, Inc. An investigation by the FBI is a very serious matter and we hope that Medical Solutions Management treats it as such. As a director and representatives of a large shareholder of Medical Solutions Management, Inc., we strongly urge you to conduct an internal investigation into this matter and to seek the advice of counsel as to what steps Medical Solutions Management should take so that the company and its directors and employees do not engage in any wrong-doing.

Fisher resigned a week later, along with Stastney, the Vicis founding partner on Medical Solutions Management’s board. In announcing Fisher’s resignation, Medical Solutions disclosed the investigation. The company says after the disclosures and the departures of its top executives, its stock plunged 70 percent to $.01 a share, and has never recovered.

Vicis, which once managed $5 billion, later announced it was dissolving.

SEC moves against Longtop Technologies for failing to file accurate reports

The SEC has filed an administrative proceeding against Chinese company Longtop Financial Technologies, Ltd. (PInk Sheets: LGFTY:PK), saying the company had failed to file its financial report for the year ended March 31, and that its reports for 2008, 2009 and 2010 could no longer be relied upon.

According to the Wall Street Journal, the trouble started for Longtop in May when Deloitte Touche Tohmatsu resigned as its auditor after the company resisted its attempts to verify its bank balances. The New York Stock Exchange delisted Longtop in August and the company has been trading in the over-the-counter market since.
The government is also seeking access to Deloitte’s records on Longtop through a separate lawsuit, according to the WSJ, but the firm is resisting, saying it’s not been given permission by Chinese regulators to release any information.
The SEC’s move, if successful, could get Longtop kicked out of U.S. financial markets altogether and is the latest in a string of bad regulatory news for Chinese companies trading in the United States. In June, the SEC issued a warning against Chinese companies that have gone public in the U.S. through reverse mergers and has already suspended trading in dozens of such firms.

Penny stock promoter gets DeepCapture.com shutdown

A Canadian judge has ordered DeepCapture.com, a U.S.-based “anti-naked shorting” web site, off the Internet after a penny stock promoter accused the site of defamation.

Altaf Nazerali, a penny-stock promoter in Victoria, British Columbia, claimed in a lawsuit that the site, edited by former Columbia Journalism Review columnist Mark Mitchell, falsely portrayed him as “a criminal, arms dealer, drug dealer, terrorist, Baud artist, gangster, mobster, member of the mafia, dishonest, dangerous and not to be trusted” in a recent story.
The defendants in the case also included Patrick Byrne, the chief executive of Overstock.com (Nasdaq: OSTK), and High Plains Investments LLC, a fund that Byrne controls. Nazerali alleged in his suit that Byrne owns Deep Capture LLC, the company behind DeepCapture.com).
Nazerali filed suit in Canada on Oct. 19 and an injunction was issued the same day, according to The Province. Nazerali also named Google Inc., as a defendant, for indexing and linking to the site, as well as GoDaddy.com, the site’s registrar.
Deepcapture.com’s content has been offline since the injunction was issued.
While DeepCapture.com is registered to a proxy, on an archived version of the site Byrne lists himself as a Deep Capture reporter and the source of its funding. The site described itself as “a new approach to journalism” and claimed that “that powerful actors have been able to influence or take control of not just the regulators, but also law enforcement, elected officials, national media, and the intellectual establishment. It is our mission to expose this ‘deep capture.’”
It’s unclear if an injunction was also issued against Google, named in the suit because it indexed and linked deepcapture.com. Searches on Google.com for “Altaf Nazerali” and “Ali Nazerali” still returns links to Deep Capture’s story.
On an investor’s forum, a post attributed to Byrne said: “Gosh, I go off-line for a few days of R&R and look what happens. It looks like Ali Nazerali wants to go a few rounds. Happy to oblige.”

‘Corporate investigator’ issues scathing report on Telestone Technologies

Jadeorstone.com, which bills itself as a “corporate investigator aimed at Chinese companies traded overseas” issued a report on Telestone Technologies Corp., a Beijing telecommunications company whose financial reporting and history were the subject of previous Sharesleuth reports.

Jadeorstone’s report on Telestone (Nasdaq: TSTC) alleged that:
  • The company’s production capacity is roughly 75 percent below the figure listed in its official statements
  • Telestone’s core wireless communications technology – WFDS 1 – is simplistic and easily duplicated.
  • There are egregious gaps between Telestone’s reported revenue and income in its Securities and Exchange Commission filings and those in its local
    Chinese tax filings.
The author of Jadeorstone’s report, which comes in at over 30 pages and is replete with photos of Telestone’s sometimes empty offices and production facilities, remained anonymous. Jadeorstone said its findings “were attained from on-site visits to all of the company’s main facilities and interviews with company’s employees, among other sources.” Read the full report.

SEC issues warning about reverse mergers

The Securities and Exchange Commission says investors should be “especially careful” given the potential risks of investing in companies that have gone public through reverse mergers, either because they may be undercapitalized or haven’t faced enough scrutiny from regulators. The agency issued an investor bulletin that described problems with some of those companies, including a number of Chinese businesses that used reverse mergers to get listings on U.S. exchanges.  ”The S.E.C. has suspended the trading in the shares of at least a dozen such companies,” says Dealbook. ” Some companies, the agency says, file questionable documents, while others file nothing at all for periods of time. Sometimes the risk comes from companies that have been using small accounting firms that cannot handle the workload of auditing a large businesses…”

Can defense attorneys be too zealous?

Robert Khuzami, director of the enforcement division at the Securities and Exchange Commission, talked in a recent speech about some of the ways he thinks defense attorneys cross the line into obstruction. “Mr. Khuzami’s comments sound like a directive for attorneys to exercise greater care in how they interact with the S.E.C.,” says Dealbook. But, contrast that with the government’s attempt to prosecute a GlaxoSmithKline lawyer for obstruction over the way she represented the company. The judge wouldn’t even let the case go to the jury, and acquitted her on the spot.

Whistleblower rules set to be finalized soon

The specifics of a new program that rewards whistleblowers for reporting corporate wrongdoing to the Securities and Exchange Commission are taking shape. But for the SEC “it looks to be ‘damned if you do, damned if you don’t,’” says Peter J. Henning in the New York Times. The agency has faced criticism from all sides, he says, and won’t likely be able to please everyone. Most interesting, though, will be how it handles the rules’ most outspoken critics: corporate America.