Mary R. Wong, a financial advisor in Omaha who sold NFL players fake investments, pleaded guilty in federal court this week. According to the Associated Press: “Prosecutors say Wong worked out of her Omaha home and purported to sell investments in luxury properties in Arizona, Tennessee and Michigan along with private jets and other investments. Prosecutors say many of the investments never existed. Instead, they said, Wong used the money to support her other businesses and a lavish lifestyle.”
In June, the Supreme Court said that U.S. stock fraud laws are best left to cases involving domestic stock purchases, after a group of Australian investors who purchased securities from an Australian bank tried to sue in U.S. courts. The Wall Street Journal says the decision is a powerful new weapon for multinational companies like BP, facing securities lawsuits over the Gulf oil spill. “Judges have been interpreting the ruling in Morrison v. National Australia Bank Ltd. as preventing fraud claims in U.S. courts by any investor–either from the U.S. or abroad–who purchased shares on foreign exchanges,” the Journal said.
In testimony before Congress, the Securities and Exchange Commission’s Inspector General, H. David Kotz. said the culture at the agency encouraged its enforcement division to go after the easy cases, because the staff felt like they were judged on the numbers they won. “…cases like Stanford, which were not considered “quick-hit’ or “slam-dunk’ cases, were not encouraged,” Kotz said, according to Investment News. He told Congress that the SEC needs to improve coordination between the inspection and enforcement divisions and change the mindset from one primarily concerned about litigation risks to one concerned with investor safety.
Vision Capital Advisors LLC, a New York-based hedge fund manager that has figured into several Sharesleuth stories (here and here), said Wednesday that the Securities and Exchange Commission is investigating its activities.
The shares of SinoCoking Coal and Coke Chemical Industries Inc. (Nasdaq: SCOK) skyrocketed earlier this year, after the company went public through a reverse merger that included a private placement of common stock and warrants.
As Sharesleuth previously reported, SinoCoking’s stock shot from $6.45 on Feb. 16 to a high of $53.70 on March 5. Although the price has plunged over the past week, the current price of around $8.60 still represents a decent premium for the private placement buyers, who paid $6 for a unit consisting of one common share and a warrant for half a common share.
Sharesleuth took a closer look at the registration statement covering the resale of those shares, and found that no fewer than eight people who participated in the placement have been the subject of Securities and Exchange Commission actions or criminal prosecutions.
The list includes at least four people who were directly or indirectly linked to stock-manipulation schemes. Several other investors were previously involved in a small cluster of U.S. companies whose placements were manipulated by a ring of boiler room brokerages in the 1990s.
Sharesleuth’s investigation found that the investors in SinoCoking’s private placement included:
- Richard N. Molinsky, a former senior vice president at D.H. Blair & Co., who pleaded guilty to securities fraud and attempted enterprise corruption in 2002 in connection with that brokerage’s boiler-room style activities. He received probation but paid $1.5 million in restitution. The SEC also barred him from association with any broker-dealer as a result of his criminal conviction.
- Bryant D. Cragun, a former stockbroker who was an owner of two unlicensed, offshore brokerages that sold shares of obscure U.S.-listed companies to investors in Europe, Asia and other parts of the world. Regulatory agencies described those firms – Oxford International Management and PT Dolok Permai (which did business as International Asset Management) – as boiler rooms. Many of the people who bought shares through the firms lost all, or nearly all, of their investments. Cragun acknowledged to the Wall Street Journal in 2000 that the SEC spent five years investigating his activities but did not bring charges. SinoCoking’s filings identified Cragun as president of Wilmark of Nevada Inc., which got 80,000 shares and 40,000 warrants in its placement.
- R. Gordon Jones, an accountant who was barred by the SEC in 2001 for “intentionally, knowingly or recklessly” violating professional standards in auditing the financial statements of Dynamic American Corp., which turned out to be fraud. Corporation filings show that Jones is treasurer of Wilmark of Nevada. Jones’ former firm — Jones, Jensen & Co. of Salt Lake City — was the auditor for a number of the companies whose shares were sold to foreign investors by Cragun’s offshore brokerages.
- Kenneth A. Orr, who faced both civil and criminal charges in connection with a stock-promotion scheme in which brokers were paid kickbacks for selling shares of certain companies that were vehicles for fraud. The SEC alleged that Orr took payments to sell shares of two of the companies. Orr neither admitted nor denied the charges, but allowed the entry of a permanent injunction against him in 2002, prohibiting future violations of securities laws. He was ordered to pay $154,000 in disgorgement, penalties and interest. Orr also pleaded guilty to a criminal charge of conspiracy to launder money. He was sentenced to probation and fined $3,000.
- Lawrence E. Kaplan, former president of G-V Capital Corp., which as a company pleaded guilty to criminal fraud charges in 2004 in connection with a broader manipulation scheme by several brokerages, including Walsh Manning Securities Inc. and J.B. Sutton Group LLC. In addition to his role at G-V Capital, Kaplan was a director of one of the companies whose shares were manipulated, and later joined the board of another. Kaplan also was indicted personally on fraud charges, but federal prosecutors dismissed their case against him in 2007.
- Stewart R. Flink, former managing member of Crestview Capital Partners LLC, who was charged by the SEC with making fraudulent representations in connection with Crestview’ investments in two other stock placements. The SEC alleged that Flink and Crestview falsely asserted that they had not shorted the shares of those companies in the 10 days preceding the offerings. Flink and Crestview settled the charges in 2007, with Flink paying a $120,000 civil penalty and Crestview paying $432,519 in disgorgement, penalties and interest. Flink’s new fund, Next View Capital LP, got 150,000 shares and 75,000 shares and warrants in SinoCoking’s placement.
- Shaye Hirsch, the former compliance officer for Pond Securities Corp., who is currently fighting SEC charges related to a scheme in which an investor engaged two of the firm’s traders in the manipulative short selling of shares in Sedona Corp., a company in which the investor held convertible notes. Although the SEC did not implicate Hirsch in the manipulation scheme, it said he was aware of the traders’ dealings in the stock and failed to adequately supervise them. Thomas Badian, who headed the investment firm that shorted Sedona’s shares, was charged with fraud by the SEC, and was indicted on criminal charges. The traders, who had dual registrations with Pond and the now-defunct Refco Securities, also were charged by the SEC. Hirsch and Pond recently settled related charges with the Financial Industry Regulatory Authority, agreeing to jointly pay a $100,000 fine.
Two investment banking firms, Rodman & Renshaw LLC and Madison Williams and Co., placed the shares for SinoCoking. They raised $44 million for the company, which operates coal mines and coking plants in China’s Henan Province.
Sharesleuth is not alleging any wrongdoing by SinoCoking, its placement agents or the people who bought shares in the offerings. However, we think that people who are considering an investment in the company might be interested in the backgrounds of some of the other stockholders.
(Disclosure: No one associated with Sharesleuth.com has any position, short or long, in SinoCoking’s stock.)
According to SEC filings, SinoCoking issued 5 million shares and 2.87 million warrants to U.S. investors and its placement agents. It issued 2.34 million shares and 1.17 million warrants to non-U.S. investors. All of the warrants sold to investors are exercisable at $12 a share.
At the current market price, the investors in those deals would be showing paper gains of roughly $18 million.
SinoCoking’s shares closed Friday at $10.26, off nearly $5 for the week, giving the company a market capitalization of $214.1 million. At its peak, in March, the company had a market cap of more than $750 million.
SinoCoking’s registration statement shows that the investors with SEC histories got at least 581,001 shares and warrants, or nearly 7.5 percent of the total sold to U.S. buyers. In some cases, the investors bought shares in their own names; in others, they bought shares on behalf of funds they manage.
Molinsky, for example, bought 10,000 shares and 5,000 warrants in his own name; Kaplan personally bought 25,000 shares and 12,500 warrants.
Hirsch bought a total of 28,001 shares and warrants through Brio Capital LP, a New York-based company where he is managing partner. Orr purchased 4,000 shares and 2,000 warrants through an entity called Triumph Small Cap Fund Inc., in Woodbury, N.Y.
SinoCoking’s filings did not disclose the regulatory or criminal pasts of any of the private placement investors. Sharesleuth used addresses listed in the filings to make the connections, by cross referencing them with corporation filings, court filings, old SEC filings and other records.
MORE INVESTORS WITH REGULATORY PASTS
Another SinoCoking investor with a regulatory record is Gregory A. Bied, who in January settled SEC charges alleging violations of short-selling rules. According to the SEC’s summary of the charges, one investment fund controlled by Bied and a partner shorted shares of two public companies just before another of their funds bought shares in follow-on offerings. The SEC said the fund that shorted the stock used some shares from the other fund’s placement purchase to cover its positions. One of the funds cited in the case, Del Rey Management LP, got 25,000 SinoCoking shares and 12,500 warrants.
Bied, his partner and their other fund, AGB Partners LLC, agreed to pay $61,365 in disgorgement, penalties and interest.
High Capital Funding LLC, headed by Frank E. Hart, got 8,000 SinoCoking shares and 4,000 warrants in the placement. The SEC brought charges against Hart in 1994, alleging that he caused account holders at savings and loans that were converting to stockholder-owned institutions to claim that they were buying shares for themselves when, in fact, Hart and another of his companies, Generation Capital Associates, were acquiring the stock.
Hart and Generation Capital settled the charges without admitting or denying guilt, and paid more than $620,000 in disgorgement and interest.
THE SHAREHOLDER LIST
SinoCoking’s registration statement covers roughly 160 shareholders, including 45 individual Chinese investors. The list also includes Rodman & Renshaw, Madison Williams, and about 15 people who work at those firms or have close relatives who do.
The registration statement did not identify which firm was responsible for placing shares with specific investors. Madison Williams said in a response to questions from Sharesleuth that its focus was on marketing the private placement to institutional investors.
Rodman & Renshaw did not respond to our questions. However, we noted that the registration statement for shares sold in another private placement handled by that firm also included Cragun’s company, Wilmark of Nevada, and at least a dozen other SinoCoking investors.
SinoCoking did not comment on Sharesleuth’s findings.
SinoCoking, based in Pingdingshan, China, owns coal mines, washing facilities and coking plants in Henan Province. It went public on Feb. 5 through a reverse merger with Ableauctions.com, a British Columbia-based company whose shares traded on the Over-the-Counter Market.
SinoCoking’s stock moved to the Nasdaq market two weeks later. At the time, the company was projecting that its revenue for the 12 months ending June 30 would reach $69.4 million, and that its net income would be in the neighborhood of $19.3 million.
SinoCoking has not yet reported its full year results. According to the most recent version of its registration statement, it had $41.4 million in revenue for the nine months that ended March 31, but posted a loss of $25.6 million, reflecting a change in the value of the warrants it issued in its financing.
SinoCoking also disclosed last month that all coal mining operations in Pingdingshan had been shut down by government order on June 22, after an explosion at another company’s mine killed 47 miners. The company said the mining moratorium would have a significant impact on its financial performance.
Nevertheless, SinoCoking reported preliminary revenue of $58 million for the year ended June 30, and preliminary earnings of $16 million.
The company announced Friday that it had signed a deal to buy as much as 3 million tons of coal a year from another Chinese producer. It said the supply agreement would allow it to operate its washing and coking facilities at full capacity, and would add as much as $146 million in annual revenue and $7 million in annual profits.
THE PLACEMENT AGENTS
Rodman & Renshaw has been one of the most active investment banks in the Chinese reverse merger market, helping to arrange financing at the time of the transactions, as well as secondary offerings afterward.
SinoCoking’s filings listed Rodman & Renshaw with 54,000 warrants exercisable at $6 a share. Eight of its employees were listed as holding individual stakes ranging from 2,000 warrants to 20,870 warrants, for a total of more than 50,000 warrants exercisable at $6 each.
Madison Williams is a relative newcomer to such deals. It was spun off from Sanders Morris Harris Group Inc. in late 2009.
SinoCoking’s filings list Madison Williams as holding 52,000 warrants exercisable at $6 a share and 46,865 warrants exercisable at $12. In addition, another entity called the MW Equity Pool LLC is listed as holding another 148,298 warrants, with an average exercise price of a little over $8.
Individuals and funds with ties to Sanders Morris Harris were listed as holding an additional 137,500 shares and warrants.
SinoCoking’s filings show that Don A. Sanders, the vice chairman of Sanders Morris Harris, and Ben T. Morris, the chief executive, were among the investors who got shares in the private placement.
BOILER ROOM TIES
When looking into the histories of the private placement participants, Sharesleuth discovered that Kaplan, Orr and several others listed in SinoCoking’s filings previously invested alongside one another in the companies that G-V Capital and Walsh Manning used in their frauds, which ran from 1995 to 1998.
Prosecutors said Frank J. Skelly and Craig Gross, the principals of Walsh Manning, orchecstrated a pump-and-dump scheme that artificially inflated the shares of at least four companies: Brake Headquarters Inc., Multimedia Games Inc., American Healthchoice Inc., and Jenna Lane Inc. Skelly and Gross were convicted of securities fraud and other charges in October 2004, and got matching 57-month prison terms.
Kaplan’s company, G-V Capital, handled stock or debt placements for all four companies, and he got shares in each of them. Walsh Manning arranged additional placements for some of the companies.
SEC filings show that, in each placement, a large block of shares went to an entity secretly controlled by Kenneth S. Greene, a former principal at Stratton Oakmont Inc., one of the most notorious boiler room brokerages of the 1990s. The SEC had barred Greene from the securities business in 1994 and ordered him to pay a $100,000 fine in connection with Stratton Oakmont’s activities.
Greene was convicted on criminal charges in the Walsh Manning case. He cooperated with authorities and was sentenced to 15 months in prison.
Prosecutors said the architects of the scheme arranged for their brokerages to gain a hidden majority interest in the companies by purchasing shares at below market prices from the private placement investors, who in some cases had agreed in advance to flip their stock. The transactions gave the boiler rooms control over the availability of shares, making it easier for them to manipulate the price.
Orr was one of the participants in the G-V Capital and Walsh Manning placements, buying shares in Brake Headquarters and Multimedia Games.
The filings show that another participant in SinoCoking’s private placement – a New York real estate and venture capital investor named Michael Miller – got shares in all four of the companies that figured into the manipulation case.
A third SinoCoking investor, Ronald I. Heller, participated in the Multimedia Games and American Healthchoice placements. At the time, he was an investment banker at M.H. Meyerson & Co., a brokerage firm whose initial public offering was handled by Stratton Oakmont, and whose shares were being touted by Walsh Manning. M.H. Meyerson also was an investor in some of the placements.
SinoCoking’s filings also show that several employees of Maxim Group LLC, another investment banking firm that has been active in the Chinese reverse-merger market, bought shares in the private placement.
A team of Maxim investment bankers headed by Ramnarain “Joe” Jaigobind moved to Rodman & Renshaw in June 2008.
SinoCoking’s registration statement showed that two of Flink’s former associates at Crestview also participated in the placement, buying more than 70,000 shares and warrants for themselves or funds they represent.
Sharesleuth will keep following SinoCoking and its placement agents and report on what we find.
Speculation mounted for weeks about what effects the whistleblower bounty in the recently passed financial reform act would have. Well, now, ABC and the Wall Street Journal both say the Securities and Exchange Commission has seen a surge in fraud tips. Under the new laws, whistleblowers who provide “original information” about large frauds could net as much as 30 percent of penalties collected by the SEC. || Previously on Sharesleuth
Bloomberg takes a look at the case of Kenneth Wayne McLeod, a financial advisor who handled retirement accounts and other investments for more than 1,100 people, most of them in law enforcement. McLeod gave frequent presentations on retirement planning at the FBI and other agencies, using them to sign up customers for his firm, F&S Asset Management Group. After a phone tip, the Securities and Exchange Commission raided McCleod’s offices. It took days of questioning, but McLeod eventually admitted he was a con artist — one of the first, the SEC thinks, brazen enough to scam an entire group of cops. Investigators say virtually all of the money is gone. And five days after confessing, McCleod killed himself.
Despite finding evidence of fraud, the Washington Post says the Securities and Exchange Commission has decided it won’t charge Moody’s, one of the credit rating firms that seriously misjudged the mortgage-backed securities at the heart of financial meltdown. “The SEC said it chose not to file suit because of ‘jurisdictional’ limitations. The activities at the center of the SEC investigation took place in Europe, beyond the agency’s reach at the time,” the Post said.