Judges weighing appeal by billionaire John Paul DeJoria and recidivist Howard Appel

A federal appeals panel is mulling whether billionaire John Paul DeJoria, recidivist securities fraudster Howard M. Appel and two other defendants should have to pay $21.4 million in damages arising from the looting and bankruptcy of a Texas company.

Three judges from the U.S. Court of Appeals for the 5th Circuit heard oral arguments in the case last month.

A jury found in July 2017 that Matthew J. Cohen, the former chief executive of Latitude Solutions Inc. (formerly OTC: LATI), and DeJoria, a director and large shareholder, breached their fiduciary duty to the wastewater-treatment company.

The jurors also found that DeJoria, Appel and Ernest A. Bartlett III, one of Appel’s longtime associates, aided and abetted Cohen’s breach of fiduciary duty.

The suit was brought in U.S. District Court in Fort Worth, Texas by the bankruptcy trustee overseeing Latitude Solutions’ estate. The five-day trial and the resulting eight-figure verdict got little, if any, mainstream media attention, despite DeJoria’s celebrity status as the co-founder of the John Paul Mitchell hair-care company and the Patron Tequila empire.

DeJoria, Appel and Bartlett were the subjects of an earlier Sharesleuth investigation involving questionable activities at another small public company, Virtual Piggy Inc., now Rego Payment Architectures Inc. (OTC: RPMT).

The Justice Department brought fraud charges against Appel last year, alleging that he manipulated the shares of Virtual Piggy and another penny-stock company, Red Mountain Resources Inc. (formerly OTC: RDMP).

Appel pleaded guilty to a single count of conspiracy to commit securities fraud and was sentenced in December to five years in prison. He is incarcerated in Maryland.

The Securities and Exchange Commission brought a parallel civil case, alleging manipulation at those two companies and a third, Rio Bravo Oil Corp. (OTC: RIOB).

Appel consented to the entry of a judgment in September 2018 that permanently enjoined him from future violations of federal securities laws, including making false statements and manipulating share prices.

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Beyond public view, a recidivist fraudster nears a reckoning day

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The latest defendants in the case are:

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

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

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

–Jack Tagliaferro, also a former stocker broker.

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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



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

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

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

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

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

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

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

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


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

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

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

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


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

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

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

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

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

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

He did not respond to our questions.



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

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

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

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

Sharesleuth’s investigation found that:

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

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

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

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


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

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


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

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

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

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

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

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

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

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

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

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

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

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

It said that schedule was to include:

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

For example:

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

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

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

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

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

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SEC brings fraud charges against promoters of China Auto Logistics and Guanwei Recycling; also alleges manipulation of Kandi Technologies Group stock

The Securities and Exchange Commission brought fraud charges against S. Paul Kelley, a stock promoter who orchestrated a series of reverse mergers between Chinese companies and U.S.-listed shells.

The SEC said in its complaint that Kelley and certain associates secretly acquired control of the shell companies used in two of the reverse mergers, concealed their holdings in the post-merger companies, manipulated the share prices and then sold millions of dollars of stock at inflated prices.

The two companies that were used as vehicles for the schemes are China Auto Logistics Inc. (Nasdaq: CALI), an automobile importer based in Tiajin, and Guanwei Recycling Corp. (Nasdaq: GPRC), a plastics recycler in Fuqing.

The SEC said some of the defendants also engaged in a scheme to artificially inflate the share price and trading volume for a third Chinese company that Kelley helped bring public – Kandi Technologies Group Inc. (Nasdaq: KNDI).

The SEC’s complaint implicated Kandi’s chairman and chief executive officer, Xiaoming Hu, in that scheme, which began in late 2009. It said he provided 350,000 shares of stock to two of the defendants, who agreed to pay stock promoters to tout Kandi and to orchestrate a manipulation campaign to lift the shares to a predetermined price.

Over the next few months, Kandi’s stock quadrupled, and volume also soared.


Kelley’s activities were the subject of Sharesleuth investigations in 2011 and 2012 (see stories here, here, here and here).

Kelley, a Canadian who lives in the suburbs of Toronto, agreed to settle the charges related to China Auto Logistics and Guanwei Recycling and will pay more than $6 million in disgorgement, penalties and interest.

The SEC said that a second defendant, a former stockbroker from Arkansas named Roger D. Lockhart, also agreed to a settlement that calls for him to pay more than $3 million.

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SEC probe of Kandi Technologies has risen to a formal investigation

The Securities and Exchange Commission is conducting a formal investigation of Kandi Technologies Corp. (Nasdaq: KNDI), a Chinese company that has been the subject of several Sharesleuth stories.

Kandi did not mention the investigation in the press release it issued last week to announce its fourth-quarter and full-year earnings. Instead, it disclosed the probe in its annual SEC filing, in the middle of a long list of potential risk factors.

Kandi offered no details on the nature of the investigation, which began in November. It said only that it was furnishing documents and other information to the SEC’s regional office in Denver.

“As indicated in the subpoena, the investigation is a fact-finding inquiry and does not mean that the Company or anyone has broken the law,’’ Kandi said in the filing. “The Company has cooperated, and is cooperating fully, with the SEC in this matter and will continue to supply the SEC with whatever additional information and material that is requested.”

The fact that the SEC has issued a subpoena indicates that the probe has moved beyond the informal stage and now is classified as a formal investigation; According to a guide on the SEC’s website, its enforcement attorneys cannot issue subpoenas unless the commission authorizes a formal investigation.

A formal order of investigation allows the SEC’s enforcement staff to compel testimony from officers, directors and employees, as well as third parties, such as suppliers, customers and other business partners.

Kandi noted in the annual filing that it does not anticipate a negative result. But it also said it could provide no assurance “that any final resolution of this investigation will not have a material and adverse effect on the Company’s financial condition and results of operations.”


Kandi’s stock jumped more than $4 last Monday, to a record closing price of $21.41, after the company put out its earnings release. Kandi said revenue for the fourth-quarter was up more than 90 percent from the same period a year earlier, primarily because of a surge in electric vehicle sales tied to a Zipcar-like rental program in China.

Kandi said revenue for the full year rose 46 percent, to $94.5 million. But the company posted a net loss of $21.1 million, largely because of changes in the fair value of warrants issued in connection with share placements.

Kandi’s stock has given back most of the post-earnings gain, in part because the company announced the sale of 606,000 additional shares, priced at $18.24. The deal generated $11 million in proceeds, before fees and expenses.

Kandi’s stock closed Thursday at $15.70, giving the company a market capitalization of roughly $630 million. However, its shares moved sharply higher in early trading Friday, reaching a peak of $17.48.


A Sharesleuth investigation in 2011 raised questions about Kandi’s claim that it sold more than 3,700 of its electric vehicles in the United States the previous two years.

Our survey of dealers, distributors and others familiar with Kandi’s activities found that fewer than 1,000 Americans had purchased the company’s low-speed, golf cart-like vehicles in that period.

The wide discrepancy between the figures was significant because electric-vehicle sales accounted for roughly 20 percent of Kandi’s reported revenue for 2009 and 2010. In addition, Kandi raised more than $26 million through share placements that relied partly on representations about the progress of the car business.

Kandi said at the time that it stood by its sales numbers. But it later disclosed in a footnote in its 2012 annual report that more than half of the cars it sold in 2010 were actually gas-powered rather than electric.

That revelation meant that Kandi’s electric-vehicle sales dropped significantly from 2009. It also meant that it would have been impossible for the company to have sold 1,005 electric cars in the second quarter of 2010 — as it claimed in its earnings release for that period —  because the total number that it sold for the entire year was just 658.

Sharesleuth reported last year that U.S. customs records also contradicted the sales claims that Kandi made in its quarterly and annual SEC filings.

Kandi reported selling more than 4,600 electric cars from 2009 through 2011, primarily in the United States. But customs records showed that fewer than 1,200 Kandi-branded cars came through American ports in that time.


Sharesleuth also has reported extensively on certain elements of the reverse-merger transaction that gave Kandi a listing on the U.S. markets in 2007.

We found that a little-known Canadian named S. Paul Kelley and several equally anonymous partners helped package Kandi and other Chinese companies for reverse mergers, prepare them for U.S. listings and promote them afterward.

In some cases, the people behind the deals fronted the legal, accounting and investor-relations expenses for the companies.

In return for their assistance, Kelley and the other participants in the venture got millions of shares of stock at low, pre-market prices. Their roles were not discussed in the companies’ SEC filings, nor were the share deals disclosed.

Sharesleuth also found that millions of shares that purportedly went to the top officers of the shell companies used in the reverse-merger deals appear to have been transferred to other parties, with little or no disclosure.


Kandi’s latest annual filing contained another unusual note related to the 2007 reverse merger.

Kandi said it was unilaterally canceling an $841,251 debt it owed to a former shareholder that had covered certain expenses related to the merger and the company’s U.S. market listing.

Kandi said that the shareholder, Ever Lotts Investment Ltd., had provided the funding under an oral agreement and had never requested repayment. Kandi said it recently tried to contact Ever Lotts regarding the debt, but was unable to do so.

Kandi said that given the amount time that had elapsed since the money was advanced – and the inaction by Ever Lotts — any future claim for repayment would likely be barred by the statute of limitations.


When Sharesleuth went looking for Ever Lotts, we found its name in a January SEC filing related to another U.S.-listed Chinese company.

According to the filing, Ever Lotts purchased roughly 850,000 shares of China Recycling Energy Corp. (Nasdaq: CREG) from another entity that ranked among that company’s biggest shareholders.

The filing said that Ever Lotts paid $1.28 million, or $1.50 a share, to Great Essential Investments Ltd. under an agreement that was signed on Sept. 20.

The filing also said that a second entity, Keen Merit Investments Ltd., bought 2 million shares of China Recycling Energy from Great Essential Investments for $1.50 a share.

Sharesleuth’s previous investigation into Kandi and 10 other Chinese reverse-merger companies that were packaged and promoted by the same group of players found that Keen Merit was among the parties that received stock through those deals.

SEC filings show that Keen Merit got shares in at least three of those companies – Telestone Technologies Corp. (Nasdaq: TSTC), New Oriental Energy & Chemical Corp. (formerly Nasdaq: NOEC) and China INSOnline Corp. (formerly Nasdaq: CHIO).

Kandi’s inability to make contact with Ever Lotts is puzzling given that Kandi’s U.S. law firm, McKenna Long & Aldridge LLP, also represents China Recycling Energy and presumably could have asked that company for help.

The lawyer at the firm who usually represents Kandi did not respond to a request for comment.

China Recycling Energy’s stock has risen sharply since Ever Lotts and Keen Merit entered into their share purchase agreements. If the two are still holding their stock, they are ahead nearly $8 million on their original $4.3 million investment.

People behind Twitter suit have history of questionable dealings

The principals of two financial firms that sued Twitter Inc. for $124 million in damages have a history of dealings with questionable companies and questionable partners.

Continental Advisors SA and Precedo Capital Group Inc. say Twitter thwarted their efforts last year to line up investors for a fund that would have acquired illiquid, restricted stock from the social-media company’s employees, contractors and other early shareholders.

Twitter is poised for an initial public offering that could value the company at more than $11 billion. Continental Advisors and Precedo Capital alleged in their suit that Twitter never intended to allow the private share deals to go forward. Instead, they claim, Twitter wanted to use the process to help determine a price for the IPO.


Continental Advisors, which is domiciled in Luxembourg, is headed by Andreea Porcelli and Mark Porcelli, a husband-and-wife team who previously worked as stock brokers in the United States.

Sharesleuth is very familiar with the couple’s prior activities. Andreea Porcelli once was a director of AccuPoll Holding Corp., a publicly traded company that marketed touch-screen voting machines. SEC filings show that its financial backers included the children and business associates of financial felon Sherman Mazur.

Continental Advisors also was the placement agent for AccuPoll for a series of convertible preferred stock sold in 2005.

Before that, she was a director of Junum Inc., another public company that had ties to Mazur and a second convicted felon, Regis M. Possino.  In addition, Continental Advisors was a placement agent for Material Technologies Inc. (later known as Matech Corp.), which had links to one or both of those men.

Shares of AccuPoll, Junum and Material Technologies were marketed to foreign investors in the late 1990s and early 2000s by unlicensed boiler-room style brokerages operating from Europe, Asia and other offshore locations. People who bought shares in the companies through those operations lost nearly all of their money.

Mazur and Possino both served prison time for fraud in the 1990s. They were indicted again last year in connection with an alleged securities “pump-and-dump’’ network that took more than $31 million from investors around the world.

The indictment identified Mazur and Possino as the ringleaders of two intertwined fraud rings.

The court documents did not mention Accupoll, which morphed into Rudy Nutrition Inc. in 2008 and was used as the vehicle for another pump-and-dump scheme that the SEC said netted more than $11 million in illicit profits.

Sharesleuth’s research also found that Andreea Porcelli was sued in 2009 by a stock promoter named Timothy T. Page, who has been the subject of at least two SEC regulatory proceedings.

Page alleged in the complaint that Porcelli sold 2.7 million shares of another company’s stock to foreign investors as part of placement agreement, but failed to forward the proceeds. Page alleged that Continental Advisors was to be the escrow agent for the share transactions.

According to the suit, the shares were originally owned by Canturio Funds LLC, an entity linked to Martin T. Cantu. The SEC brought charges against Page and Cantu in 2009 in connection with a fraud scheme involving shares of a company called ConnectAJet.com Inc., which purported to have developed a real-time, online booking system for private jets.

The SEC said that no such system existed, and that ConnectAJet was part of a pump-and-dump scheme. Page and Cantu were found liable for securities violations and were ordered to pay nearly $3.8 million in disgorgement, penalties and interest.

Cantu also was indicted on criminal charges in connection with the ConnectAJet scheme.

The SEC also brought separate charges against Page in 2009 in connection with the unregistered sale of shares in two other companies. He settled without admitting or denying guilt, and agreed to a bar on virtually all activities involving penny stocks.

The judge hearing Page’s suit against Porcelli dismissed it without prejudice, on jurisdictional grounds. Porcelli had argued that since she and her husband lived in Italy rather than the United States, the U.S. District Court in California was the wrong venue.


Precedo Capital was incorporated in Delaware and operates from Arizona. Its managing partner, Timothy D. Moran, also is a former stock broker.

According to a Financial Industry Regulatory Authority document, Moran was terminated by FSC Securities Corp. in 2011 for referring clients to an unapproved investment fund without prior approval.

FINRA suspended Moran’s registration earlier this month for failing to comply with an arbitration award or failing to respond to the agency’s questions regarding that award.

FINRA also is investigating Moran’s activities in raising money for the investment fund, which turned out to be a fraud. According to the allegations in the FINRA document, Moran’s customers invested nearly $1.7 million in the investment fund. It says he failed to disclose that he had personally provided $150,000 to the fund or that he had received more than $200,000 in compensation for obtaining additional capital.

FINRA also alleged that Moran provided false information to its representatives. Although the regulatory authority did not identify the investment fund, other documents show that it was Hampton Capital Markets LLC.

The operator of the fund, Thomas L. Hampton, was hit with criminal charges last year in connection with the fund’s collapse. He pleaded guilty in April to a single count of fraud, admitting that he concealed millions in losses He was sentenced to 30 months in prison.

The Arizona Corporation Commission also brought proceedings against Moran, Hampton and Hampton Capital, alleging that they were offering or selling unregistered securities and were engaged in fraud in connection with the placement of those securities.


Continental Advisors and Precedo Capital filed their suit against Twitter in federal court in New York. They said in their complaint that they had teamed up with GSV Capital Corp. (Nasdaq: GSVC) to market a fund that would be called @GSV Fund LLP and would hold only Twitter stock.

GSV Capital is a California company that acquired a portfolio of pre-IPO shares in sought after Internet companies, including Twitter, Facebook Inc. (Nasdaq: FB) and Groupon Inc. (Nasdaq: GRPN). According to the suit, Twitter had authorized GSV Capital to facilitate a secondary market for its nontrading shares.

Continental Advisors and Precedo Capital said that they had found people willing to buy the equivalent of $278 million in Twitter stock through the @GSV Fund. They alleged that the failure of Twitter and GSV to go forward with the transactions cost them millions in expenses, commissions and other potential gains.

Twitter was quoted in news reports as saying that it had no dealings with Continental Advisors or Precedo Capital.