Mesa Energy Inc. was already a publicly traded company when it did a reverse merger with a second one, a shell that began life as Mesquite Mining Inc.
The unusual deal last August moved Dallas-based Mesa from the Pink Sheets to the Over the Counter Market and brought it the financing it needed to buy a promising natural gas prospect in western New York, Chief Executive Randy M. Griffin said.
It also put 14 million cheap – and free trading — shares of the combined company, Mesa Energy Holdings Inc. (OTCBB: MSEH.OB) into the hands of four stockholders from the Mesquite Mining side of the transaction. A Sharesleuth investigation found that one of them was a limited partnership linked to a convicted felon — an ex-stockbroker barred from the securities industry for his role in a fraud and manipulation scheme that cost investors more than $100 million.
That ex-broker, Samuel DelPresto, has close ties to Adam S. Gottbetter, the New York lawyer and investment banker whose firms have handled securities work for Mesa and arranged its private placement financing. DelPresto and Gottbetter also have longstanding ties to Corporate Evolutions Inc., Mesa’s investor relations consultant.
SEC filings show that one of Gottbetter’s own companies was among the four entities that came away from Mesa’s reverse merger with 3.5 million shares each. Collectively, their holdings represented a 36 percent stake in the company. Based on ownership figures in a new filing last week, those four entities have sold at least 6 million of their shares.
Mesa’s stock rose sevenfold between Dec. 14, when the first shares trading on the Over the Counter market, and March 23, when they reached their high of $3.50. At that price, the company had a market capitalization of $140 million.
For the past month, Mesa’s trading volume has averaged well over 1 million shares a day, thanks in part to web sites (see examples here and here) and printed brochures that have been touting the company and its prospects.
Mesa also sought to boost its visibility and credibility by appointing former New York Gov. George E. Pataki as chairperson of its recently established advisory board.
Sharesleuth noted that the efforts to promote Mesa’s stock involve several individuals or firms that have previously appeared in our investigations.
The latest version of one of the brochures, produced by newsletter publisher Jarret B. Wollstein, notes that they were created and distributed at a cost of more than $700,000, using money provided by an unidentified Mesa shareholder.
Mesa put out a press release April 9 saying that it had not approved, authorized, endorsed or financed any of the independent reports about the company. Its stock ended last week at $1.40, down from $2.67 at the start of the month.
(Disclosure: No one associated with Sharesleuth.com has any position, short or long, in any of the stocks mentioned in this story.)
DelPresto, Gottbetter and Corporate Evolutions have worked together in the creation, financing or promotion of other small public companies that had notable surges in their stock prices, followed by sharp declines.
Two examples are Kentucky USA Energy Inc. (OTCBB: KYUS.OB) and Charys Holding Company Inc. Charys’ shares rose from a low of 21 cents in 2005 to a high of $10.75 in 2006, before the company sank under the weight of numerous acquisitions and went bankrupt.
Sharesleuth found that Mesa’s reverse-merger deal was almost a carbon copy of the one that Kentucky USA used to go public in 2008. The shell companies used in both transactions had the same attorney and the same auditor. Each sold an identical amount of stock, at an identical price, to investors that wound up owning a substantial stake in the combined company for a minimal amount of money.
Kentucky USA’s stock more than doubled in the month following the completion of its reverse merger. It then fell almost as swiftly, and has continued on a long, steady decline.
Gottbetter is a prominent player in the world of reverse mergers and PIPE (private investment in public equity) financing. Barron’s reported last year that federal prosecutors in New York were investigating whether Gottbetter and an associate manipulated the shares of another of his reverse-merger clients, Alternative Energy Sources Inc. (Pink Sheets: AENS.PK). That ethanol company went public in 2006 and ceased operations in the summer of 2008.
Gottbetter denied the allegations, calling the story a “hatchet job” in a written reply to that publication.
Mesa, which has been in business since 2003, has oil and gas holdings in New York and Oklahoma. Its main focus is the development of properties at the upper end of the Marcellus Shale formation, a long and promising basin stretching from New York to Virginia.
Mesa currently has 19 wells in western New York, part of a 3,235-acre mineral lease package that it acquired for $440,000 on Aug. 31. That investment and its potential are the basis for the company’s current $56 million market capitalization.
Mesa had $16,639 in revenue last year, representing four months of production for its New York wells, according to the annual report it filed with the SEC this week. It posted a $1.93 million loss, and ended 2009 with just $267,141 in cash.
Mesa raised an additional $665,000 through Gottbetter in January to cover the initial phase of development at its New York, known as the Java Field. The company said in its filng that it needs $4 million to fund the next phase, and that it plans to raise $8 million to $10 million in new capital in the current quarter.
To aid its development efforts in New York, the company has appointed several influential politicians as advisors. The list includes Pataki, former state senator Nicholas A. Spano and former New York City environmental official Robert C. Avaltroni.
Mesa said in an SEC filing that it granted Pataki an option to buy 224,000 of its shares, at an exercise price equal to the market price on the day he signed his agreement. Until last week, Pataki was viewed as a likely Republican candidate for the U.S. Senate seat now held by Democrat Kirsten Gillibrand. However, the told the Wall Street Journal that he would not run, and instead would become chairman of an organization called Revere America, whose first project will be a campaign to repeal the recently enacted federal healthcare reform legislation.
Mesa said last month that it could drill as many as 80 more wells on its acreage, and that an engineering review found that its field could produce more than $400 million of natural gas. The review was prepared by Jeffrey A. Chadwick, another member of the company’s advisory board.
Mesa has 40 million shares outstanding. Griffin and two other executives hold 20.5 million that are subject to a lockup agreement. That means most of the shares in the market had to have come from the former Mesquite Mining stockholders — an explanation Griffin did not dispute in an interview with Sharesleuth..
“If you’re going to build a company, the liquidity’s got to come from somewhere,” he said.
According to SEC filings, those stockholders were:
– Marlifran Investments LLC, of Holmdel, N.J. State corporation filings list the company’s address as DelPresto’s house, and list his wife, Michelle DelPresto, in the section that identifies the company’s officers, directors or members. However, it categorizes her title as “other.”
– Gottbetter Capital Group Inc., of New York. SEC filings identify Adam Gottbetter as its president.
– NBM Investments LLC, of Henderson, Nev. Corporation filings list Nathan B. Montgomery as its manager.
– Theory Capital Corp., of Las Vegas. Corporation filings list Derek Carbajal as its president.
According to the company’s annual report, Mesa’s executives are the only investors who currently own more than 5 percent of the company’s shares. If that is correct, it means that Marlifran, Gottbetter Capital and the other two entities sold at least 1.5 million shares each — or more than 6 million shares total — to drop their holdings below that ownership threshold.
Mesquite Mining’s SEC filings never identified those companies as stockholders. The filings did say that in April 2008, the company sold 1 million of its shares in a private placement for $25,000, or 2.5 cents a share.
Mesquite Mining changed its name to Mesa Energy Holdings last June, in preparation for the reverse merger it was negotiating. Its board authorized a 14-for-1 stock split in August, a few weeks before that deal closed. That reduced the effective price per share of the original 1 million shares to less than two-tenths of a cent each.
Beverly Frederick, listed in SEC filings as the president of Mesquite Mining, refused to answer Sharesleuth’s questions about the company or its stock transactions. She referred us to Gottbetter, who did not respond to a list of written questions.
DelPresto (whose last name sometimes appears as Del Presto) has been involved with Gottbetter in at least 10 public companies, SEC filings show.
He was listed as the contact person for Corporate Evolutions last year in a press release for another of its clients, Nevada Gold Holdings Inc. (OTCBB: NGHI.OB) – until a correction went out listing someone else in his place. Gottbetter represented Nevada Gold when it went public through a reverse merger in December 2008.
DelPresto worked in the 1990s for two notorious boiler-room brokerages, Hibbard Brown & Co. and L.C. Wegard Inc. Federal authorities said both firms were secretly controlled by Robert E. Brennan, who is currently serving a 12-year prison sentence for bankruptcy fraud, money laundering and obstruction of justice.
DelPresto was one of eight L.C. Wegard managers and brokers indicted in November 1997 on charges that they defrauded customers by using high-pressure tactics to sell them high-risk stocks whose prices were being manipulated.
Sixteen people ultimately were charged in connection with the scheme. DelPresto, who was a broker and assistant branch manager, pleaded guilty to a reduced charge of conspiracy to commit securities fraud and agreed to cooperate with authorities. He was sentenced in 2000 to six months of home confinement and three years’ probation.
The SEC also barred him from association with any broker-dealer. DelPresto did not respond to a list of written questions submitted by Sharesleuth.
Corporate Evolutions, which is based in Great Neck, N.Y. and describes itself as “the ultimate concierge service in the financial industry,” is handling Mesa’s media and investor relations inquiries.
Corporate Evolutions is an alter ego of New Century Capital Consultants Inc., whose president, Stephen E. Apolant, was charged with fraud by the SEC in connection with a 2001 “pump and dump” scheme.
Corporate Evolutoins’ Internet site is mirrored at the web address for New Century Capital Consultants.
The SEC alleged that Apolant helped prepare press releases and investor packages that contained false and misleading statements about Spectrum Brands Corp., which claimed to have an ultraviolet flashlight that could kill anthrax and other harmful germs in seconds.
Apolant agreed to settle the charges without admitting or denying guilt, then withdrew that offer and asked for a trial. Although the SEC quietly dropped the case against him last year, four other participants in the scheme were indicted and wound up in prison.
Apolant and New Century Capital figured into an earlier Sharesleuth story that examined the rise and fall of a now-defunct public company called House of Taylor Jewelry Inc.
Mesa hired Corporate Evolutions at Gottbetter’s recommendation, Griffin said. The firm has been compensated with 150,000 shares of Mesa stock, part of an allotment of 1 million shares held in escrow by Gottbetter’s law firm, Griffin said.
Corporate Evolutions did not respond to telephone messages from Sharesleuth.
Mesa also has been mentioned frequently on BuyIns.net, a site that purports to identify stocks that have been subjected to heavy shorting and are poised to rise in price as traders cover their positions.
BuyIns.net is run by Thomas Ronk, a former stockbroker with a history of disciplinary actions by the Financial Industry Regulatory Authority, including the revocation of his license for failure to pay a $50,000 fine. Ronk was named in a recent Sharesleuth investigation about Lenco Mobile Inc. (Pink Sheets; LNCM.PK).
BuyIns.net contended in a report last month that more than 10.7 million shares of Mesa’s stock had been shorted since December, and said that the shorting had contributed to the company’s declining stock price. The report noted that Mesa is paying $995 a month for the trade monitoring and analysis.
The BuyIns.net report made no mention of the heavy selling by large Mesa shareholders.
In addition to operating BuyIns.net, Ronk is partners with former SEC Chairman Harvey Pitt in another venture, RegulationSHO.com.
A PROMOTIONAL BROCHURE
In early March, a glossy brochure called the Intelligent Investor Report began showing up in investors’ mailboxes. The cover featured a photograph of Texas billionaire T. Boone Pickens, whose natural resources empire includes several companies that also call themselves Mesa.
The report suggested that investors who followed Pickens’ lead and invested in the natural gas sector could “turn $10,000 into $90,900,” and that Mesa could grow into a “$12.5 BILLION natural gas powerhouse.”
Investors have reported getting several installments of the report, produced by Jarret Wollstein. The most recent version disclosed that a firm called Northbound Marketing Group Ltd. had received “monies from shareholders” and paid $714,106 for the creation and distribution of the Mesa reports.
If Mesa and its management did not pay for that promotional campaign, then the only other shareholders with the economic incentive to do so would be the four companies that got the 14 million shares in the reverse merger, or other investors who purchased a large amount of those shares.
KENTUCKY USA ENERGY
Mesa’s story is similar to that of Kentucky USA Energy. Like Mesa, it was the product of a reverse merger with a California-based shell, this one called Las Rocas Mining Corp.
SEC filings show that the auditor for the shells involved in both deals was George Stewart. The Vancouver Sun recently wrote about Stewart, a Seattle-based accountant, as the person who signed off on the financial filings of a number of dubious companies packaged by stock promoters in British Columbia.
The SEC filings also show that Las Rocas sold 1 million shares of its stock to a group of unidentified investors in May 2007 for $25,000, or 2.5 cents a share. The company completed a 12-for-1 stock split in November of that year. It also changed its name to Kentucky USA Energy in preparation for the reverse merger.
SEC filings show that Gottbetter helped facilitate the deal, and that Gottbetter & Partners and DelPresto later split at least $250,000 in fees for arranging financing for the company.
Those filings show that Kentucky USA Energy set aside 5 million shares to pay for investor relations services, with Gottbetter’s law firm as the escrow agent.
Corporate Evolutions became the company’s investor relations representative in May 2008.
Kentucky USA Energy’s shares were at $1.70 on May 2, 2008, the day it completed its reverse merger. Within two weeks, trading volume exploded to millions of shares a day, and its stock more than doubled, peaking at $4.47 on May 23, 2008.
In the days leading up to the surge, an eight-page mailing began circulating, touting Kentucky USA and predicting that its stock could bring gains of 500 percent or more.
Fine print in the document, issued under the name Global Investor Report, disclosed that another entity called Green Century Capital had provided $2,398,485.50 in compensation for preparing and distributing the report.
At the time the report was issued, Kentucky USA Energy had no revenue, no drilling operations and less than $100,000 in cash. The increase in its share price gave the company a market capitalization of more than $150 million.
Kentucky USA Energy’s share price returned to its starting point of $1.70 a share by July 2008. Its stock ended last week at 34 cents.
SEC filings show that, from its inception through Jan. 31 of this year, the London, Ky.-based company has generated just $32,360 in natural gas sales, and has accumulated more than $5 million in losses.
OTHER PROMOTIONAL CAMPAIGNS
Sharesleuth noted that Global Investor Report put out a similarly glowing profile of another obscure company, Yasheng Eco-Trade Corp. (OTCBB: YASH.OB), last August. The disclosure information in that report said Green Century Capital had provided the exact same amount of compensation that was listed in the Kentucky USA Energy report — $2,398,485.50.
(Editor’s note: The Green Century Capital mentioned in this story has no connection to Green Century Capital Management Inc. (GCCM), a Boston-based investment firm. GCCM told Sharesleuth that it did not pay any amount to prepare or distribute the brochures on Kentucky USA Energy or Yasheng Eco-Trade, and that neither the firm nor anyone associated with the firm every promoted or owned stock in those companies. GCCM said that, upon learning of the brochures, it promptly informed the SEC and filed a written complaint regarding the misstatements in the brochures and the improper use of the firm’s name.)
Press releases show that Corporate Evolutions started providing investor relations services to Yasheng the same month that its mailer began circulating. SEC filings show that Yasheng issued 500,000 shares of its stock to Corporate Evolutions in October.
That company’s shares doubled from Feb. 1 to Feb. 8, peaking at $3.22. They closed Friday at 56 cents.
Corporate Evolutions also was the investor relations consultant for Spongetech Delivery Systems Inc. (OTCBB: SPNGE.OB), which disclosed in September that it was the subject of a formal SEC investigation regarding “possible securities laws violations by the company and/or other persons.”
IN 2008, Pataki joined the board of directors of Perf Go Green Holdings Inc. (OTCBB:PGOG.OB). His picture was used in fliers put out by stock promoters touting the company, whose shares surged to more than $3. They now trade for a nickel.
MORE ON THE REVERSE MERGER
In most cases, the companies that do reverse mergers with public shells are privately held businesses seeking a stock market listing and access to the equity markets. The deals are popular in the penny-stock world because combining with a public shell usually is faster and cheaper than going through the SEC’s registration process.
Mesa found that it was “difficult to get traction” as a Pink Sheets company, Griffin said, and concluded that if it wanted to raise the capital it needed to execute its business plan, it would have to step up to the Over the Counter Market. A reverse merger with a shell that already had an OTCBB listing seemed the fastest way to accomplish that, he said.
Mesa was referred to Gottbetter by its auditors, GBH CPAs PC, a Houston-based firm that also works with some of Gottbetter’s other reverse-merger companies, Griffin said.
The 14 million shares that Gottbetter Capital and the other entities received in the deal were part of the consideration that Mesquite Mining received, Griffin said.
“They brought the deal to the table,” he said. “They contributed the shell.”
Gottbetter & Partners LLP represented Mesa Energy Holdings Inc. in the reverse merger, SEC filings show. Gottbetter Capital Markets LLC acted as placement agent for the sale of $1.95 million of notes, convertible to stock at $1.50 a share.
Griffin said he was unaware of DelPresto’s past, and added that he and his counterparts at Mesa didn’t look closely at the history of Mesquite Mining and its shareholders when they were reviewing potential funding deals.
“It is extraordinarily difficult from the point of view of the people who are running a company to pick through all that,” he said.
Griffin said he was pleased with the legal services provided by Gottbetter’s firm, and by the investor relations services provided by Corporate Evolutions. He said that although the Intelligent Investor Report seemed “pretty hyped,” he did not see anything in the brochure that was “clearly not factual.”
Griffin insisted that Mesa had a real chance to become a successful company.
“We’re a viable company, in a viable industry with viable assets,” he said.
Gottbetter, DelPresto and Apolant were involved in the development and promotion of Charys, an Atlanta company that grew rapidly in 2006 and 2007 by rolling up businesses in several fields, including disaster remediation and wireless communications.
SEC filings show that Gottbetter’s companies arranged a $20 million private placement for Charys, and also bought some of its preferred stock and convertible notes.
Those filings show that Charys hired DelPresto as a financial consultant in March 2006, for a fee of $240,000.
The filings said New Century Capital was Charys’ investor relations consultant, and identified Apolant as the person with control over the shares that firm received as compensation. Press releases from 2006 and 2007 listed a representative of Corporate Evolutions as Charys’ contact person.
Sharesleuth spent some time last year digging through the documents filed in Charys’ bankruptcy case. We discovered that the company had no fewer than four convicted felons involved in its financing or investor relations activities. Three, including DelPresto, had been charged in connection with stock manipulation cases and the fourth in connection with an insider trading ring.
Attorneys for an entity called the Charys Liquidating Trust filed complaints in February against DelPresto and three of Gottbetter’s companies, seeking the return of nearly $1 million they received from Charys.
The complaint said that DelPresto and an entity called DelPresto Family LLC provided no actual services in return for the $165,000 they received under two consulting agreements in 2006 and 2007. It said that one of the financing deals DelPresto purportedly worked on – a $20 million convertible note package arranged by Gottbetter Capital Master Ltd. – was “substantially complete” at the time he was hired.
Similarly, the trust is seeking $800,000 from Gottbetter Capital Master Ltd., Gottbetter Capital Finance LLC and Gottbetter & Partners.
The complaint asserts that, just three days before Charys completed a $175 million note sale arranged by another investment firm, Charys’ chief executive, Billy V. Ray Jr., signed an advisory agreement with Gottbetter Capital Finance, providing for a payment of $800,000 upon the closing of any financing of $25 million or more.
The trust said Gottbetter Capital Finance provided “few or no services” under the agreement because the debt financing was substantially complete. The complaint also says that Charys’ board was unaware of the agreement and never approved it.
Sharesleuth will keep following this story and report on any significant developments.