Customs records contradict Kandi Technologies Corp.’s electric-vehicle sales claims

Customs records do not support Kandi Technologies Corp.’s (Nasdaq: KNDI) claim that it sold thousands of electric cars in the United States, a Sharesleuth investigation found.

The records, which originated with the Department of Homeland Security, reinforce our earlier findings that Kandi greatly exaggerated the sales of those vehicles.

The Chinese company has said in Securities and Exchange Commission filings that it sold more than 4,600 of its mini cars from 2009 through 2011. For most of that period, the United States was the main market for the vehicles.

But a database containing detailed cargo information for vessels delivering goods to U.S. ports shows that fewer than 1,100 of Kandi’s cars were ever shipped here.

The database was created by ImportGenius.com, an Arizona company that helps businesses find sales prospects, evaluate suppliers and monitor rivals. It contains more than 79 million records drawn from the bills of lading for all ocean-freight imports.

Sharesleuth’s investigation turned up a number of discrepancies between Kandi’s reported sales of its low-speed, battery-powered cars and the actual deliveries of those vehicles to American ports.

For example:

– Kandi said in an SEC filing and an earnings release that it sold 1,141 cars in the United States in the first nine months of 2009. But the Customs records show that only 203 were delivered to American ports in that period. They also show that just 143 additional vehicles were delivered in the last three months of that year.

– Kandi said in an earnings release in 2010 that one of the main contributors to its revenue and income growth was a “strong second quarter contribution from U.S. sales of the super mini Kandi Coco.” Kandi previously had reported selling 1,005 electric-powered Cocos in that quarter, primarily in the United States. But Import Genius’ database shows that just 156 of the cars were delivered to American ports that year.

– Kandi disclosed in its annual SEC filing last year that only 658 of the 1,618 cars that it reported selling in 2010 were actually electric, and that the rest were gasoline-powered. That unexplained revision means it would have been mathematically impossible for Kandi to have sold 1,005 electric cars in the second quarter of that year, as it claimed.

The above examples suggest that the gains in electric-car sales that Kandi reported during pivotal periods in 2009 and 2010 were illusory. The company’s public statements regarding those sales contributed to spikes in its stock price and trading volume, and allowed certain parties to sell shares at peak levels.

Kandi, through its U.S. law firm, declined to comment on the discrepancies.

Kandi has said that because it sells its vehicles to middlemen who export them to the United States, Europe and other markets, it has no specific knowledge of where those products end up. Nevertheless, the company expressly stated in its SEC filings and earnings releases that the bulk of its car sales in 2009 and 2010 were “U.S. sales.”

The Customs data shows that although Kandi reported selling around 2,000 electric cars in the United States in the first nine months of 2009 and the second quarter of 2010, only about 500 were delivered to American ports in those years..

 

mini2Kandi said in an SEC filing that it sold 1,077 cars in 2011. It did not specifically say that those sales were in the United States. But with the exception of a purported order from Italy that has yet to materialize, it did not report any large sales elsewhere in the world.

Our analysis of the records in Import Genius’ database showed that 290 of Kandi’s mini cars were delivered to American ports in 2011.

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Small Companies, Big Questions: Chinese toll road and shipping companies take North American investors on strange trips

(Part three of a three-part series)

To U.S. investors, buying a piece of a toll road company in one of China’s fastest-growing provinces might have seemed like a pretty safe bet.

But the twists and turns at China Infrastructure Investment Ltd. (Pink Sheets: CIIC) have taken the company from the Nasdaq to the Pink Sheets and wiped out much of its market capitalization, which once topped $400 million.

A Sharesleuth investigation found that certain undisclosed parties profited handsomely  from the reverse merger that brought the company public, by buying 21.9 million shares from the former chief executive of the U.S. shell it combined with.

Securities and Exchange Commission filings show that the ex-CEO, Fred L. Hall, sold the stock for $72,500 just days after the reverse merger, in February 2008.

The sale price translates to less than 0.4 cents a share. At the time, the company’s stock was trading on the open market for more than $4.

Whoever got Hall’s stock appears to have resold much of it during periodic surges in trading volume in 2009 and 2010. Based on China Infrastructure Investment’s share prices in those periods, it’s possible that the seller or sellers could have collected $20 million or more.

Our investigation also found that the holding company that owned a majority stake in China Infrastructure Investment at the time it went public might have ended up with some of Hall’s stock.

SEC filings show that the holding company boosted its stake by more than 13 million shares over a two-year period, without disclosing any changes in its ownership, as required under federal securities law.

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Small Companies, Big Questions: Who really owned the shell company that became Kandi Technologies Corp.?

(Part two of a three-part series)

A few weeks after Kandi Technologies Corp. (Nasdaq: KNDI) went public by merging  with a moribund mining company, one of its promoters wrote that 4 million of the shares not held by insiders went “almost exclusively into sophisticated Chinese hands.”

That would have been news to anyone who scrutinized the Securities and Exchange Commission filings on the deal.

Those documents did not mention any sort of transaction that could have transferred so much stock from the Canadian investors who originally owned the mining company, Stone Mountain Resources Inc.

But a Sharesleuth investigation turned up major discrepancies in the share reporting by Kandi and Stone Mountain, which might explain how undisclosed parties came away from the 2007 deal with one-fourth or more of the Chinese vehicle maker’s stock .

Those shares later could have been sold on the open market for tens of millions of dollars.

As we reported in the first part of this series, the SEC filings on the deal said that the chief executive of Stone Mountain got as many as 3 million Kandi shares, or 15 percent of the total outstanding after the merger. Within nine months, however, he no longer was listed among Kandi’s largest shareholders, even though he never reported any stock sales or other changes in his ownership, as required under U.S. securities laws.

In addition, three people who were listed in earlier SEC filings as holding 1.25 million shares of Stone Mountain shares told Sharesleuth they never were investors. Three more told us they weren’t sure whether they owned the 1.15 million shares in their names. They added that they never heard about the merger and never got any Kandi shares.

Thus, an additional 12 percent of Kandi’s shares inexplicably wound up in the hands of other parties, who never were identified in the filings related to the merger. That raises the question of who really owned Stone Mountain, and who wound up with the 8 million Kandi shares issued to its investors.

When Kandi’s shares began trading in July 2007, the stock purportedly issued to Dodge and the other shell owners had a market value of roughly $20 million. Within three months, that value had doubled.

When Kandi’s shares reached a high of $7.25 in April 2008, the stock issued to the Stone Mountain holders would have been worth $60 million.

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Small Companies, Big Questions: Who secretly got millions of shares of stock in Chinese reverse-merger companies?

(Part one of a three-part series)

In the spring of 2005, a publicly held dating business called Universal Flirts Inc. gave up on love and did a reverse merger with a Chinese cell phone maker.

According to Securities and Exchange Commission filings, founder Darrell C. Lerner walked away with a 26 percent stake in the Chinese company, Orsus Xelent Technologies Inc. (formerly AMEX: ORS, now Pink Sheets: ORSX). By 2007, Lerner no longer was listed among its top stockholders, even though he never reported selling any of his 7.7 million shares and could not have liquidated large amounts on the open market because of a lack of trading volume.

When Orsus Xelent’s stock surged in the fall of that year — on a wave of publicity about big phone orders that never materialized — whoever held those shares might have been able to sell them for $20 million or more.

A Sharesleuth investigation found similar discrepancies in the reported share ownership of six other Chinese companies that a low-profile promoter named S. Paul Kelley helped to bring public in the United States between 2005 and 2009.

Our analysis of SEC filings found that tens of millions of shares allocated to the chief executives of the shell companies used in those mergers essentially disappeared – sold or transferred to other parties with little or no disclosure. Under U.S. securities laws, anyone owning 5 percent or more of a company’s stock must report significant changes in their holdings within 10 days of the transaction.

Based on share prices and trading volumes, we calculated that the people who wound up with the missing shares in the other six Chinese companies might have sold them for upwards of $50 million.

That total includes:

  • Shares of New Oriental Energy & Chemical Corp. (Formerly Nasdq: NOEC; now Pink Sheets: NOEC) that could have been sold for $8 million when that company’s stock price and trading volume were at their highest levels.
  • Shares of Kandi Technologies Corp. (Nasdaq: KNDI ) that could have been sold for $12 million to $18 million.
  • Shares of China Infrastructure Investment Corp. (Formerly Nasdaq: CIIC; now Pink Sheets: CIIC) that might have brought $20 million or more, depending on when and how they were sold.

Our analysis of SEC filings found that the people behind the shell companies used in the mergers used stock splits and other maneuvers to put millions of additional shares into the hands of unknown parties.

We believe the recipients of those shares could have sold them for a further $80 million.

In other words, the architects of the reverse mergers and their associates might have reaped $150 million from the deals — and possibly much more.

It appears that the SEC employees who review proxy filings and other submissions for compliance with disclosure rules did not notice the discrepancies in the reported share ownership at Orsus Xelent, Kandi and the other Chinese companies.

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Former Rockwell Medical executive alleges SEC violations

The former head of drug development at Rockwell Medical Technologies Inc. (Nasdaq: RMTI) says the company and its chief executive knowingly issued false and misleading press releases and violated other securities laws.

Dr. Richard C. Yocum, who was fired from Rockwell Medical in September, alleged in a wrongful termination suit that he was ousted because he repeatedly complained to its chairman and CEO, Robert L. Chioini, about violations of Securities Exchange Commission and Food and Drug Administration rules.

Rockwell Medical, a Michigan-based company that makes and distributes dialysis products, was the subject of an earlier Sharesleuth story.

Yocum said in his suit that press releases the company put out in 2010 and 2011 made it appear that the clinical trials for a new product called Soluble Ferric Pyrophosphate (SFP) were going better than they actually were.

Yocum was Rockwell Medical’s vice president of drug development and medical affairs, and had primary responsibility for the SFP development program.

He said in his suit that Chioini not only ignored his concerns about the trials but caused Rockwell Medical to issue press releases that included statements directly contradicting what Yocum had told him.

Yocum also said that, based on the nature of questions he received from analysts or investors, it appeared that Rockwell Medical engaged in selective disclosure regarding details of those trials.

Because Yocum was fired from his job, which had a base salary of $298,000 a year, he could be viewed as having a grudge against Rockwell Medical. But his allegations are not the only red flags at the company.

Yocum’s successor, Dr. Annamaria Kausz, recently left Rockwell Medical after just seven months, adding to the turnover in its clinical-development program. The company provided no explanation for that departure in the press release it issued April 19 to announce the hiring of her replacement. In fact, it didn’t even mention her or say that she had resigned.

Sharesleuth also noted that Rockwell Medical took the unusual step last November of extending the life of 400,000 warrants it had issued in the fall of 2008 to a consultant who was later found to have participated in a massive fraud scheme at another public company.

That consultant, Michael J. Xirinachs, was one of Rockwell Medical’s co-founders.

The federal judge hearing the SEC’s civil case against Xirinachs and his company, Emerald Asset Advisors LLC, last week ordered them to pay as much as $10 million in disgorgement, interest and fines.

The 400,000 unexercised warrants gained more than $900,000 in value after Rockwell Medical pushed back the expiration date by six months, to May 4.

Rockwell Medical’s decision to grant Xirinachs and Emerald Asset Advisors the extension  – for no additional consideration – sets up the possibility that they could use the additional profits to help offset the SEC judgment.

Rockwell Medical did not respond to a list of questions submitted to its investor-relations representative. In court filings, the company has denied Yocum’s allegations and has asked the judge to dismiss the case.

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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.

SEC charges Heart Tronics Inc., formerly Signalife Inc., alleging “brazen series of frauds”

The Securities and Exchange Commission has brought fraud chargesagainst Heart Tronics Inc. (Pink Sheets: HRTT.PK), its co-chief executives and the husband of its majority shareholder, alleging that the company falsified sales, issued misleading press releases and committed numerous other violations.

The company, previously known as Signalife Inc. and Recom Management Systems Inc., was featured in a Sharesleuth investigation in 2008. That story presented evidence suggesting that Mitchell J. Stein, a California attorney, secretly controlled the company, and that it had engaged in market manipulation with the help of consultants who got millions of dollars in stock.
The SEC said in its complaint that Stein did indeed control the company, even though he was not listed as an officer or director. The agency also alleged that he used a collection of trusts to sell at least $5.8 million in stock owned by his wife, Tracey Hampton-Stein, without publicly disclosing those sales.
The company’s shares formerly traded on the American Stock Exchange.
Another of the defendants in the SEC case is Willie Gault, a former professional football player and Olympic gold medalist. Gault was co-chief executive of Heart Tronics, which purported to make heart-monitoring devices that could detect irregularities and help prevent heart attacks.
The Justice Department, meanwhile, announced that Stein was arrested at Los Angeles International Airport over the weekend in connection with what it described as a “multi-million dollar market manipulation fraud scheme.” Those charges include mail fraud, wire fraud, securities fraud, money laundering and conspiracy to obstruct justice.
The SEC’s complaint alleged that Stein and an associate, Martin B. Carter, engaged in an elaborate scheme to fool investors — and even the company’s executives — into believing that it had legitimate orders for millions of dollars worth of the heart monitoring devices.
Those schemes included creating fictitious companies, with fax numbers that went to Carter’s house, and even sending Carter to Japan to mail a letter from one of the companies so it would appear that the company was actually based in that country, as Stein had claimed.
The SEC also alleged that Stein caused the company to pay $600,000 in cash and $1.47 million in stock to Carter under a sham consulting contract. According to the complaint, Carter kicked back most of that cash and most of the proceeds from the sale of those shares to Stein.
Earlier this year, the California Attorney General’s office filed a complaint against Stein, allegeing that he and others participated in an unrelated scheme to deceive desperate homeowners into paying thousands of dollars each to join dubious class-action suits against mortgage lenders.
According to the complaint, the lawyers and telemarketers involved in the scheme led the homeowners to believe that the suits would halt foreclosures on their homes, reduce their loan balances, bring them financial settlements and possibly eliminate their mortgages entirely.

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.