A jury in Florida has found Mitchell J. Stein guilty on all 14 counts related to a multimillion-dollar  manipulation scheme involving shares of Heart Tronics Inc. (Pink Sheets: HRTT), formerly known as Signalife Inc.

Signalife was featured in a Sharesleuth investigation in 2008. That story presented evidence that Stein, a lawyer who split his time between Florida and California, secretly controlled the company. It also suggested that Stein and others had engaged in market manipulation with the help of consultants who got millions of dollars in stock.

Stein was arrested in December 2011 under an indictment charging him with securities fraud, mail fraud, money laundering, conspiracy to commit mail fraud and wire fraud, and conspiracy to obstruct justice.

The Securities and Exchange Commission also filed a civil case against Stein, the company and its co-chief executives, alleging that they falsified sales, issued misleading press releases and committed numerous other violations. That case is pending.

Prosecutors in the criminal case alleged that from mid-2005 to mid-2010, Stein and others perpetrated a scheme to defraud investors by:

–artificially inflating the price and demand for Signalife’s stock.

–concealing their ownership and trading of Signalife’s stock.

–misappropriating Signalife’s assets.

–testifying falsely to the SEC to conceal their conduct.

During part of that period, Signalife was known by yet another name, Recom Managed Systems Inc.

According to SEC filings, the company’s biggest shareholder was an entity called ARC Finance Group LLC. Those filings listed Stein’s wife, Tracey Hampton-Stein as the managing member.

Federal prosecutors alleged in their case against Mitchell Stein that he deposited millions of shares of Signalife stock owned by ARC Finance into a number of purportedly blind trusts. They said he secretly retained discretion over the trusts, however, and caused them to sell more than $5 million in stock.

Prosecutors also alleged that Stein and others falsified documents to create the appearance the Signalife had received bona fide orders for its main product, an external heart-monitoring device. Between 2006 and 2008, the company announced millions of dollars worth of sales that never materialized.

In addition, they said Stein and others misappropriated assets by causing Signalife to enter into sham agreements with consultants that were paid in cash or stock. According to the indictment, one person who performed no consulting services got $680,000 in cash and several million shares of stock.

That person then gave $1.5 million to Stein, an amount that represented most of the original cash payment, plus proceeds from the sale of stock.

Stein is scheduled to be sentenced in early August.

Houston American Energy Corp. (AMEX: HUSA) has given up its interest in a Colombian oil property that it once claimed held as many as 4 billion barrels of reserves.

Houston American said in a Securities and Exchange Commission filing that it transferred its 37.5 percent stake in the CPO-4 prospect to its partner, SK Innovation Co. Ltd., of Korea.

Houston American – which was the subject of a Sharesleuth investigation in 2010 — did not receive any payment. But it added that the move released it from any claims for past, present or future capital calls related to the joint operating agreement with SK Innovation.

Houston American, SK Energy and a third partner, Gulf United Energy Corp. (Pink Sheets: GLFE), have drilled three wells on the Colombian property. All three were unsuccessful, and were plugged and abandoned.

Houston American’s shares traded for more than $20 as recently as July 2011, just before drilling began on the initial well. The company’s stock closed Tuesday at 21 cents.

Houston American had said in SEC filings and investor presentations that the CPO-4 prospect, in Colombia’s Llanos Basin, was estimated to hold anywhere from 1 billion to 4 billion barrels of recoverable reserves.

It announced in late 2011 that it encountered “strong shows of hydrocarbons” at the first well, Tamandua #1. But it later said that the well was being abandoned, in part because of damage to the formation during the drilling process.

Houston American said last April that it had received three subpoenas from the SEC as part of a formal investigation into the company. It has since disclosed that the investigation appears to be focused on claims about the resource potential of the CPO-4 prospect.

Houston American said in the announcing regarding the relinquishment of its interest in CP0-4 that it still had roughly $10 million to finance exploration activities elsewhere in Colombia.

Houston American has a 12.5 percent stake in a prospect known as Serrania. One of its partners there is Canacol Energy Ltd. (TSX Venture Exchange: CNE). Canacol acquired a 37.5 percent interest when it absorbed Shona Energy Co. last year.

The other partner at Serrania is Hupecol Operating Company LLC. Houston American has been involved with Hupecol on several earlier projects that were more successful than CPO-4.

Houston American has said that it expects the first well to be drilled at Serrania this year.

A federal judge has issued a tentative ruling in favor of Rockwell Medical Inc. (Nasdaq: RMTI) in a wrongful-termination suit brought by its former head of drug development, who was fired in September 2011..

Dr. Richard C. Yocum said in his suit that he was fired because he repeatedly complained to Chief Executive Officer Robert L. Chioini about possible violations of Securities and Exchange Commission and Food and Drug Administration rules.

The judge hearing the case did not rule on whether Rockwell Medical had, in fact, committed any violations. Instead, he considered the more narrow issue of whether the company was within its legal rights to fire Yocum.

Rockwell Medical, which makes and distributes dialysis products, is based in Wixom, Mich. The company had argued that Michigan is an “employment at will’’ state, which means that businesses can fire workers for any reason, or no reason. One of the exceptions to that rule is if an employee is fired in retaliation for reporting improper activity, either to management or outside bodies, such as regulatory agencies.

Yocum worked from his home in California, which also is an employment at will state. The law there does not require a worker to report improper activity to an outside agency to qualify for whistleblower protection.

The judge, Gonzalo P. Curiel, said in his tentative ruling that there was an “absence of evidence’’ linking Yocum’s firing to any protected activity. Curiel also said he was prepared to rule against Yocum on his claim that the firing constituted the intentional infliction of emotional distress. Rockwell Medical had noted in court filings that Yocum was soon hired by another medical company, at a higher annual salary.

Finally, Curiel said that Yocum had not presented evidence demonstrating that Rockwell Medical owed him any unpaid wages. According to the court docket, the judge is preparing a final written order in the case.

Curiel still must issue a written order reaffirming Rockwell Medical’s request for summary judgment for the ruling to become official.

Yocum’s suit against Rockwell Medical was the subject of a Sharesleuth story last year.

Yocum said in his complaint 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 the questions he received from analysts or investors, it appears that Rockwell Medical engaged in selective disclosure regarding details of those trials.

Among other things, Yocum alleged that Rockwell Medical:

–falsely claimed that the results of its earlier Phase IIb studies of SFP were positive, despite the fact that they failed to demonstrate that the treatment was effective.

–falsely claimed that the Phase IIb trials produced clear dosing data.

–falsely claimed that the company had an agreement with the FDA on the design of its Phase III clinical trials.

– announced an unrealistic date for bringing SFP to market, disregarding Yocum’s much longer timetable.

Rockwell Medical announced in February that one of its clinical trials for SFP showed that regular use reduced the need for erythropoietin stimulating agents (ESAs) by as much as 37 percent. The company has said that such a reduction could mean big savings for dialysis providers and their patients.

Rockwell Medical expects to announce the results of its other trials later this year. Those are intended to show that SFP is safe and effective.

A former financial consultant to Rockwell Medical Inc. (Nasdaq: RMTI) has been implicated in a second securities fraud case, this one involving an alleged pump-and-dump ring that netted at least $13 million.

The consultant, Michael J. Xirinachs, was not one of the nine people charged in the case, nor was he identified by name in the court documents.

But Sharesleuth’s review of the federal indictment unsealed last week found that another of the alleged participants in the scheme — “Unindicted Co-Conspirator 2” — was identified as a hedge fund manager who controlled Emerald Asset Advisors LLC, based in Cold Spring Harbor, N.Y.

Xirinachs is the sole manager and shareholder of Emerald Asset Advisors. He also is one of the co-founders of Rockwell Medical, a Michigan-based company that makes and distributes dialysis products.

The indictment alleges that Xirinachs worked with some of the defendants to artificially boost the stock price of a company called Genmed Holding Corp. (OTCBB: GENM), so that they could profit by dumping their shares on unsuspecting investors.  It says that during the promotion and manipulation campaign, campaign, Xirinachs sold at least 2.2 million shares of Genmed stock he got from the defendants.

It also says that he and some of the defendants bought shares on the open market in advance of the campaign, to create the appearance of investor demand.

PREVIOUS CASE

The Securities and Exchange Commission previously brought charges against Xirinachs and Emerald Asset Advisors in connection with their role in a massive fraud scheme involving a now-defunct company called Universal Express Inc. (formerly OTCBB: USXP).

A federal judge found Xirinachs and Emerald Asset Advisors liable for selling billions of unregistered shares of Univeral Express. They were ordered last year to pay more than $10 million in disgorgement, interest and fines. Another person charged in the Universal Express case, a stock promoter named Tarun Mendiratta, was among those indicted last week.

Xirinachs’ alleged involvement in the Genmed case came after his contract with Rockwell Medical had expired, but while he was still holding warrants equal to more than 3 percent of the company’s common stock.

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

XIRINACHS AND ROCKWELL MEDICAL

Xirinachs, a former stock broker and investment banker, helped bring Rockwell Medical public in 1997. At that time, he owned more than 15 percent of its shares. He also had a consulting contract that paid him $300,000 the first year and $240,000 the second year.

Rockwell Medical signed Xirinachs and Emerald Asset Advisors to another consulting contract in November 2008. Its stock more than doubled in the 15 days following the signing of the agreement, which called for Emerald Asset Advisors to introduce the company to licensing partners, acquisition candidates, analysts, brokers and institutional investors. Rockwell Medical’s shares surged at a time when the overall stock market was slumping because of the global financial crisis.

Emerald Asset Advisors got 700,000 warrants as compensation, exercisable at prices ranging from $1.99 to $ 7 a share. Sharesleuth calculated last year that those warrants likely were exercised at a profit of somewhere between $2.5 million and $3.2 million.

Continue reading →

A federal grand jury has indicted 15 people, including three who were spotlighted in Sharesleuth investigations, alleging that they participated in a series of “pump-and-dump” schemes that netted more than $30 million.

The defendants include Regis Possino, a disbarred lawyer with 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 Who’s Your Daddy Inc., a publicly traded energy-drink company. He is currently awaiting sentencing in an unrelated criminal case.

The FBI said in a press release 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.

Who’s Your Daddy was the subject of a Sharesleuth story three years ago. Entities connected with Possino provided early funding  in exchange for notes that could be converted to large amounts of stock.

Who’s Your Daddy now is called Fitt Highway Products Inc. (OTCBB: FHWY).

Companies tied to Possino and another of the defendants, Grover Henry Colin Nix, also provided to financing to Pure Play Music Ltd. (Pink Sheets: PPML) and got millions of shares of stock. Sharesleuth detailed those connections in a pair of stories in 2009.

The indictments unsealed this week allege that Possino, Mazur, Moyal and Nix were part of two networks that fraudulently inflated the share prices of small public companies before dumping their holdings on unsuspecting investors.

The indictments said the participants in the schemes acquired a large percentage of the shares in those companies, distributed those shares to nominees to conceal their ownership, boosted the share prices though manipulative trading and misleading press releases, then sold the shares.

Authorities said the schemes defrauded more than 20,000 investors in the United States and other countries.

The indictments (see details here and here ) identified five public companies whose shares were manipulated. They were:

–Sport Endurance Inc. (OTCBB: SENZ)

–GenMed Holding Corp. (OTCBB: GENM)

–BioStem U.S. Corp. (OTCBB: HAIR)

–FrogAds Inc., previously known as Imobilis Inc. (Pink Sheets: FROG)

–Empire Post Media Inc. (Pink Sheets: EMPM)

It appears from certain details in the court documents — such as the reported proceeds from the schemes involving those five stocks and the overall profits of the purported “pump-and-dump’’ network — that even more public companies were involved.

The indictments against Possino, Mazur, Moyal, Nix and the other defendants were issued last year, as part of ongoing investigations being conducted by the FBI and the Internal Revenue Service’s criminal division.

The indictments were unsealed Wednesday after 14 of the 15 people charged in the cases were arrested. The other, who authorities said operated from Switzerland and Dubai, remains at large.

Possino, Moyal, Nix and a stock promoter named Mark Harris were charged in both indictments. Mazur was charged in one. Those documents identified Possino and Mazur as the leaders of the schemes.

The other people who were indicted include Julian Spitari, the chief executive officer of FrogAds, and Dwight Brunoehler, the chief executive of Biostem. The FBI said four of the defendants allegedly participated in the schemes while on pretrial release in other criminal cases.

That group included Moyal, who was convicted last year of conspiracy to distribute marijuana. The new indictments allege that Moyal used another of his companies, 8 Sounds Inc., to pay promoters for touting the stocks used in the manipulation schemes. They say he also received a cut of the proceeds.

Another of the defendants, Tarun Mendiratta, pleaded guilty in 2009 to conspiracy and tax evasion charges in connection with a fraud scheme at a public company called American Fire Retardant Corp. According to the indictment, Mendiratta boasted of grossing more than $75 million from stock-manipulation schemes over the past decade.

The Justice Department has asked that Possino be held without bond, adding that he has considerable assets overseas and is a flight risk.

Rockwell Medical Inc. (Nasdaq: RMTI) has filed a countersuit against its former chief medical officer, alleging that he overstated his qualifications, breached a confidentiality agreement and made false and defamatory statements about the company to third parties.

Rockwell Medical brought its action against Dr. Richard C. Yocum in state court in Michigan, which it is based. It is seeking a restraining order, as well as injunctive relief and financial damages.

Rockwell Medical fired Yocum from his job as vice president of drug development and medical affairs in September 2011. As Sharesleuth previously reported, Yocum alleged in a wrongful-termination suit that he was ousted because he repeatedly complained to Robert L. Chioini, the company’s chairman and chief executive, about violations of Securities and Exchange Commission and Food and Drug Administration rules.

Among other things, Yocum alleged that certain press releases issued in 2010 and 2011 made it appear that clinical trials for a new product called Soluble Ferric Pyrophosphate were going better than they actually were.

Rockwell Medical makes and distributes dialysis products. It is conducting Phase III clinical trials of SFP, which is used to deliver water-soluble iron into the bloodstream during dialysis treatment. The iron helps combat anemia, a common side effect in patients with end-stage renal disease.

Rockwell Medical is hoping that the trials prove SFP is not only safe for patients, but effective in treating their underlying conditions. It says the product is aimed at a market worth $600 million a year in the United States and $1 billion a year globally.

Yocum alleged in his suit that Rockwell Medical:

–falsely claimed that the results of its earlier Phase IIb studies of SFP were positive, despite the fact that they failed to demonstrate that the treatment was effective.

– falsely claimed that the Phase IIb trials produced clear dosing data.

– falsely claimed that the company had an agreement with the FDA on the design of its Phase III clinical trials.

– proceeded with those trials despite unresolved differences with the FDA, without correcting its public statements and informing investors of those differences.

– announced an unrealistic date for bringing SFP to market, disregarding Yocum’s much longer timetable.

– failed to modify its Phase III trials to account for changes in FDA product labeling for erythropoiesis-stimulating agents, which are used to treat anemia and would likely be taken by all of the participants in the trials.

Rockwell Medical alleged in its filing last week that Yocum withheld vital information from management in early 2010 regarding the SFP program. It said that the “deliberate and negligent omission of data’’ was not discovered until  months later, after considerable expense to the company.

Rockwell Medical also alleged that, at the time he was hired, Yocum made false and misleading representations about his experience and successes in dealing with the FDA on clinical programs.

In addition, Rockwell Medical  said that he performed his duties in a fraudulent and incompetent manner. It said an investigation found that Yocum – who was based in San Diego rather than at company headquarters – did “little or no work, evading work and conducting private activities throughout each and every work day.’’

Finally, it said that in the final months of his employment, Yocum made false and defamatory statements about the company and its SFP program to third parties and investors, revealing confidential information.

Sharesleuth’s story on Yocum’s allegations was based entirely on his lawsuit and the company’s SEC filings.

Rockwell Medical said Yocum’s statements have harmed its reputation, hindered its business relationships and hurt its stock price, reducing its market capitalization by $50 million.

Rockwell Medical noted that soon after Yocum was fired, he began working for another pharmaceutical company, making significantly more in compensation and benefits than he received in his former job.

Houston American Corp. (AMEX: HUSA) says the Securities and Exchange Commission’s investigation into the company appears to be focused on disclosures about the potential of its CPO-4 prospect in Colombia in late 2009 and early 2010.

Houston American, which was the subject of a Sharesleuth story in the summer of 2010, provided additional details of the investigation in a new SEC filing covering the sale of $10 million in stock.

Houston American said in the filing that it had provided the SEC with information supporting its disclosures about the resource potential of the CPO-4 prospect. It said it would be discussing that material with the SEC this month.

Houston American’s stock has fallen from a high of $20.36 a share in April 2010 to its current price of 63 cents. The first two wells that the company and its partners drilled on the CPO-4 prospect produced no oil.

The third is more than half way to its targeted depth.

Houston American said in an investor presentation and a related SEC filing in November 2009 that the CPO-4 prospect was estimated to hold anywhere from 1 billion barrels to 4 billion barrels of “recoverable reserves.’’

As Sharesleuth noted in our original story, the higher figure exceeded the official proved and probable reserves for all of Colombia.

Houston American said in its latest filing that the SEC began an informal inquiry into the company in October 2010, which turned into a formal investigation on March 1, 2011. It  said it received a subpoena from the agency in February of this year.

Houston American publicly disclosed the investigation in April, saying it had received subpoenas calling for the testimony of its chief executive officer, John F. Terrwilliger; its chief financial officer, John J. Jacobs, and for the delivery of certain documents.

Last year, Sharesleuth.com published a story questioning whether Kandi Technologies Corp. (NASDAQ: KNDI) had truly sold more than 3,700 of its electric cars, as it reported in Securities and Exchange Commission filings.

Among other things, we wondered how Kandi managed to sell 1,618 of those vehicles in 2010, given that the United States was its main market, and that the federal government and some state governments had significantly reduced tax credits for buyers.

Kandi, a Chinese company that also makes go karts and all-terrain vehicles, said in a letter to shareholders after our story appeared that it stood by its sales numbers.

But the company’s latest annual filing with the SEC raises further questions. In a footnote to a chart detailing unit sales by product, Kandi said that 960 of the 1,618 mini-cars it reported selling in 2010 were, in fact, gas-powered rather than electric.

The distinction is notable because Kandi says its electric cars are one of the main drivers of its growth, and the breakdown in its latest annual report shows that sales of those vehicles actually plunged in 2010.

The company reported selling 1,892 electric vehicles in 2009, including nearly 1,000 in the final quarter of that year.

Kandi did not mention in its 2010 earning releases or quarterly SEC filings that the majority of the vehicles it was selling that year were conventional gas-powered models.

In announcing Kandi’s earnings for the first three months of 2010, Chairman Xiaoming Hu said that sales in the quarter had risen for its “COCO EV,’’ a clear reference to the company’s electric vehicles.

Kinda reported selling 372 Cocos in that quarter, up from 169 a year earlier. The Coco is a golf-cart like vehicle, approved for street use, with a top speed of around 35 miles an hour.

The release for the second quarter of 2010 said this: “The company reported that the top contributor to the revenue gains in the period was its all electric COCO LSV, with sales of 1,005 units, primarily in the U.S., generating $4,131,674 in revenues.’’

Kandi said in the release that it sold 1,377 mini cars in the first half of 2010, compared with 474 a year earlier. It said that revenue for the period was up 80 percent, and that profits were up 435 percent.

Given that Kandi reported selling just 241 mini cars in the second half of 2010, it is clear that most of the gas-powered units would have been sold in the first half of that year — at the time that the company was reporting higher electric vehicle sales.

And given that the company said in its latest annual filing that it sold only 658 electric mini-cars for all of 2010, it would have been impossible for the company to have sold 1,005 in the second quarter, as the earnings release for that period asserted.

Houston American Energy Corp. (AMEX: HUSA) has disclosed that it is the subject of formal investigation by the Securities and Exchange Commission.

Houston America, which was the subject of an earlier Sharesleuth investigation, said it had received three subpoenas from the SEC since February. The subpoenas called for testimony by the company’s chief executive officer, John F. Terwilliger and its chief financial officer, John J. Jacobs, as well as the delivery of certain documents.

Houston America said the SEC’s probe began as an informal inquiry in October 2010. The company said it was disclosing the investigation after determining that certain third parties had become aware of it.

Houston American also announced that the company and its partners were abandoning their initial well on a new Colombian oil prospect known as CPO-4. It had previously said that although the well, the Tamandua No.1, showed possible signs of oil or natural gas, the formation had become damaged during the drilling process.

Houston American said the partners in the well had reached the conclusion that continued investment in testing and completion of the well was inadvisable. It said the drilling rig would be moved to the next exploration site at CPO-4, with a start date for that well scheduled for May or June.

Houston American has a 37.5 percent interest in CPO-4, which is controlled by a Korean energy company called SK Innovation. Houston American has claimed in SEC filings that the prospect in Colombia’s Llanos Basin is estimated to hold anywhere from 1 billion to 4 billion barrels of “recoverable reserves.’’

Houston American’s stock fell by more than 40 percent after it announced the news about the unsuccessful well and the SEC investigation.

(Disclaimer: 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. )

Houston American said it was uncertain of the scope of the SEC’s probe.

“The Company has cooperated fully, and is committed to continuing to cooperate fully, with the SEC in this matter,’’ it said in its release. “It is now possible at this time to preduct the timing our outcome of the SEC investigation, including whether or when any proceedings might be initiated, when these matters might be resolved or what, if any, penalties or other remedies would have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.”

Houston American said the SEC began a nonpublic informal inquiry into activities involving the company in October 2010. It said the SEC ordered nonpublic formal investigation in March 2011.
Houston American said it received a copy of that order for a formal investigation in February of this year, in connection with the first subpoena from the agency.