Connections between hedge fund and PIPE placement agent are deeper than they appear

The connections between Vicis Capital LLC and Midtown Partners & Co. — two firms featured in an earlier Sharesleuth investigation – go well beyond the list of small public companies they provided with more than $150 million in financing.

Sharesleuth has learned that key executives at both the New York hedge fund and the Tampa, Fla.-based investment bank have past ties to a man named Bryan J. Zwan, who once appeared on the Forbes 400 list of richest Americans.

Zwan is the founder and chairman of Digital Lightwave Inc., which settled fraud charges with the Securities and Exchange Commission in 2000. He also is a prominent member and financial backer of the Church of Scientology.

Documents show that:

– Vicis’ three founders – John D. Succo, Shad L. Stastney and Sky M. Lucas – were partners with Zwan in a predecessor fund, Victus Capital LLC, from 2001 until 2005.

– Midtown Partners’ chief executive, its research director and two senior vice presidents previously worked for H.C. Wainwright & Co., a New York investment bank that Zwan controls.

– Christopher D. Phillips, who headed Midtown Partners’ parent company from 2004 to 2008, also worked for Zwan. He had been a director of Zwan’s family foundation, and was chief financial officer of several other Zwan-controlled entities, including two that bankrolled Digital Lightwave.

Phillips jumped to Vicis in February 2008, as managing director. He said in a legal affidavit last year that he oversaw its operations. Vicis listed $2 billion in assets under management in its latest quarterly filing with the SEC, down from $2.6 billion just three months earlier and $5 billion at the start of 2009.

The PIPEs Report, a trade publication, reported last month that Vicis was winding down its funds after being inundated with redemption requests from investors. It also said that Phillips had left Vicis. 

Vicis now is down to between $1 billion and $1.5 billion in assets, according to sources in the hedge fund industry.

Midtown Partners and H.C. Wainwright both have been among the most active U.S. firms in raising money for companies through so-called PIPE (Private Investment in Public Equity) deals.

Midtown Partners tied for sixth in the number of transactions completed last year, with 15 deals worth $70 million. It tied for fourth in 2008 and tied for fifth in 2007. H.C. Wainwright ranked fourth in total transactions in 2005 and third in 2004.

Sharesleuth previously reported that federal authorities are investigating whether Phillips and another Vicis executive played any role in an insurance-fraud scheme that involved two of its portfolio companies, Medical Solutions Management Inc. (Pink Sheets: MSMT.PK) and MDwerks Inc. (OTCBB: MDWK.OB). The investigation has focused attention on the unusually close relationship between Vicis and Midtown Partners, which acted as middleman in arranging tens of millions in equity and debt financing for 20 or so penny stock companies.

Some of those transactions generated short-term gains that may have boosted Vicis’ reported returns and increased profit payouts to the fund’s managers. The deals also produced millions in placement fees, stock and warrants for Midtown Partners. The shares of most of those companies have declined markedly, however, leaving Vicis and its investors with little to show for the money.  Even the holdings that still show gains are illiquid, and any profits may exist only on paper.

Phillips resigned from the board of directors of three of Vicis’ portfolio companies in January.

Sharesleuth is not alleging any wrongdoing by Zwan, or suggesting that he had any role in the activities that led to the insurance-fraud investigation. Zwan’s lawyers said that neither he nor H.C. Wainwright have ever had any involvement with Vicis or Midtown Partners, either as owners or investors. They added that Zwan has not spoken with the principals at Vicis in roughly five years.

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Surge in Chinese coal company’s shares produces quick gain for private placement investors

A surge in the shares of SinoCoking Coal and Coke Chemical Industries Inc. (Nasdaq: SCOK) has produced a small fortune – on paper at least – for a group of unidentified investors who bought stock in an offshore placement last month.

SinoCoking’s stock rose tenfold after the little-known Chinese company went public Feb. 5 through a reverse merger with Inc., based in Burnaby, British Columbia. 
SinoCoking’s shares peaked at $53.70 on Friday. They gained nearly $22 last week alone, with the only news being the groundbreaking on a $70 million coking facility in Henan Province. 
SinoCoking’s stock closed at $34.09 on Wednesday, giving the company a market capitalization of more than $500 million.
On the same day that SinoCoking completed its reverse merger with, it raised $7 million through a placement of shares and warrants to what it called 34 “high net-worth investors.” Those investors got 1.18 million shares at $6 each, plus warrants to buy 590,446 additional shares at $12 each.
At Wednesday’s closing price, the shares were worth $33.1 million more than the investors paid for them, and the warrants could have been exercised at a profit of $13 million.
The shares were issued under a so-called Regulation S exemption, which covers stock sold to non-U.S. buyers. They cannot be resold in the United States until certain holding conditions are met.
Sharesleuth asked SincoCoking over the weekend whether it could offer any explanation for the sharp rise in its stock. The company did not respond, but issued a press release on Monday saying it was unaware of any “recent or pending material announcements or recent or pending corporate developments that would account for the unusual trading activity in our stock.”
Roughly 1.25 million shares have traded hands since March 4 – when the company’s stock jumped more than $11, topping $40.
SinoCoking said in a recent SEC filing that it had 14.7 million shares outstanding as of Feb. 16.
It is unclear how many of those shares are in the public float, or whether the surge in the company’s stock is simply the result of an increasing number of investors pursuing a relatively small number of shares.
(Disclosure: No one associated with has any position, short or long, in SinoCoking.)
SinoCoking, which has headquarters in the city of Pingdingshan, supplies coal and coke to power plants, steel mills, factories and other end users. It produces coal from its own mines, and buys some from third parties.
SinoCoking said in a recent financial presentation that it needs $65 million in “incremental capital” to complete its new coking facility. It is pursuing another share placement, using U.S. investment bankers and soliciting U.S. investors.
The company had $51.4 million in revenue in the 12 months that ended June 30, according to an SEC filing related to the reverse merger. That was down from $58.6 million in the same period a year earlier.
The company said it had net income of $17 million for the 12 months that ended June 30, off 4 percent from a year earlier.
In a recent financial presentation, it projected sales of $69.4 million and earnings of $19.3 million this year. That estimated profit margin would far exceed the actual margins of virtually every publicly traded coal producer.
SinoCoking’s merger partner,, was a money-losing company that specialized in liquidating merchandise through auctions and closeout stores. It also dabbled in collectibles, and more recently moved into real estate lending and development. 
Ableauction, reported revenues of $1.44 million and a loss of $1.12 million for the nine months that ended Sept. 30, 2009. It had sales of $2.81 million and a loss of $2.77 million in 2008.
Ableauctions was controlled by Abdul Ladha, a Vancouver-area entrepreneur and philanthropist.
The company completed a 1-for-20 reverse split just prior to the merger with SinoCoking, which left its original shareholders with a roughly 3 percent stake in the combined entity.
Ladha resigned as president and chief executive at the time of the deal. He was succeeded by Jianhua Lv, who is described in SEC filings as being 41 years old and having more than 20 years of experience in the coal and coking industries.
The SEC filings also say that he has a bachelor’s degree from Henan University in Chinese, a master’s degree from Henan University in economics and a master of law degree from Central Party School.
Sharesleuth asked SinoCoking how Lv was able to work in the coal and coking industries while pursuing those academic degrees. The company did not respond.