Small Companies, Big Questions: Who really owned the shell company that became Kandi Technologies Corp.?

(Part two of a three-part series)

A few weeks after Kandi Technologies Corp. (Nasdaq: KNDI) went public by merging  with a moribund mining company, one of its promoters wrote that 4 million of the shares not held by insiders went “almost exclusively into sophisticated Chinese hands.”

That would have been news to anyone who scrutinized the Securities and Exchange Commission filings on the deal.

Those documents did not mention any sort of transaction that could have transferred so much stock from the Canadian investors who originally owned the mining company, Stone Mountain Resources Inc.

But a Sharesleuth investigation turned up major discrepancies in the share reporting by Kandi and Stone Mountain, which might explain how undisclosed parties came away from the 2007 deal with one-fourth or more of the Chinese vehicle maker’s stock .

Those shares later could have been sold on the open market for tens of millions of dollars.

As we reported in the first part of this series, the SEC filings on the deal said that the chief executive of Stone Mountain got as many as 3 million Kandi shares, or 15 percent of the total outstanding after the merger. Within nine months, however, he no longer was listed among Kandi’s largest shareholders, even though he never reported any stock sales or other changes in his ownership, as required under U.S. securities laws.

In addition, three people who were listed in earlier SEC filings as holding 1.25 million shares of Stone Mountain shares told Sharesleuth they never were investors. Three more told us they weren’t sure whether they owned the 1.15 million shares in their names. They added that they never heard about the merger and never got any Kandi shares.

Thus, an additional 12 percent of Kandi’s shares inexplicably wound up in the hands of other parties, who never were identified in the filings related to the merger. That raises the question of who really owned Stone Mountain, and who wound up with the 8 million Kandi shares issued to its investors.

When Kandi’s shares began trading in July 2007, the stock purportedly issued to Dodge and the other shell owners had a market value of roughly $20 million. Within three months, that value had doubled.

When Kandi’s shares reached a high of $7.25 in April 2008, the stock issued to the Stone Mountain holders would have been worth $60 million.


The revelations about Kandi’s share ownership before and after the merger add to the red flags surrounding the company, which is based in Jinhua and makes go-karts, electric cars, all-terrain vehicles and other products.

Sharesleuth reported last year that Kandi appeared to have greatly overstated the number of electric cars it has sold in the United States since introducing them in the second half of 2008.

Kandi has said in SEC filings that it sold more than 6,700 of those low-speed, golf cart-like vehicles between 2008 and 2011 – primarily in America. But our survey of U.S. dealers that carry the cars found that those outlets sold fewer than 1,000.

The vehicles that cannot be easily accounted for represent well over $20 million in sales, or more than 15 percent of the company’s reported revenue over that period.

Kandi said after our story appeared that it stood by its numbers. But in its latest annual SEC filing, it disclosed in a footnote that 960 of the 1,618 mini cars it said it sold in 2010 actually were gas powered rather than electric.

In other words, Kandi’s sales of electric vehicles fell by nearly two-thirds from 2009. That  does not square with the company’s statements — in press releases and SEC filings — that sales of its “all electric’’ mini cars were one of the main reasons for its improved revenue and earnings, particularly in the second quarter and first nine months of 2010.

Sharesleuth also reported last year that a Hong Kong-registered entity called Winner International Group Ltd. played a hidden financial role in the deals that created Kandi and three other U.S.-listed Chinese companies.

According to testimony in a Canadian court case, Winner International agreed to finance the legal, accounting, investor-relations and listing expenses for those companies in return for large blocks of low-priced, pre-merger stock.

Kandi did not disclose that financial arrangement with Winner International in its SEC filings. Nor did Kandi or Stone Mountain disclose the sale or transfer of stock in return for the cash and services provided.

A judge in Canada ruled earlier this year that Winner International was partly owned by a man who defrauded a computer company of nearly $10 million in the 1990s.

Documents filed in that case show that Winner International also had received money from at least two other people who had previously been charged by the SEC for their roles in fraud schemes.

We submitted questions to Kandi’s U.S. law firm about the share reporting and other issues surrounding the company. It did not answer them.

(Disclosure: Mark Cuban, majority owner of LLC, has no position in the shares of any of the companies mentioned in this report. Chris Carey, editor of, does not invest in individual stocks and has no position in the shares of any of the companies mentioned in this report.)


Kandi was one of 11 Chinese companies that a low-profile financier and promoter named S. Paul Kelley helped to bring public in the United States through reverse mergers.

None of those companies produced lasting gains for ordinary investors. Four were delisted from major exchanges last year, and two more received delisting notices this year. The shares of three others trade for less than 15 cents — when they trade at all.

Although some of the other Chinese companies achieved higher stock prices and market capitalizations, Kandi currently stands as the most valuable. Its closed at $3.95 on Dec. 27, giving the company a market value of $118 million.

The reverse-merger deals packaged by Kelley and his associates were notable for the large percentages of stock that went to the owners of the shell companies, rather than to the owners of the Chinese businesses they acquired.

The shareholders of shell companies used in such deals typically end up with 10 percent to 20 percent of the stock in the surviving entity.

Stone Mountain’s owners got a 40 percent stake in Kandi, even though they contributed little to the combined company beyond a stock-market listing. The annual financial report that Stone Mountain filed with the SEC just days before the reverse merger listed its only asset as $396 in cash.

Kandi, by comparison, had $6 million in revenue and $941,000 in profits for the first quarter of 2007. It ended that period with $8.7 million in shareholders’ equity.


Our investigation of Kelley’s reverse-merger deals found a common pattern — large blocks of stock that were allocated to the top officers of the shell companies disappeared after the deals, with little or no disclosure.

Dodge, the president and majority shareholder of Stone Mountain, declined to tell us what happened to his shares, saying he was not authorized to talk about Kandi.

Documents filed in the Canadian court case show that Winner International wound up with 950,000 Kandi shares, just below the 5 percent ownership threshold that would trigger SEC disclosure. Based on the details of the merger transaction, those shares had to have come from Dodge or the other Stone Mountain investors.


Stone Mountain’s roots raise further questions about the deal that created Kandi.

Sharesleuth’s investigation found that several of the mining company’s largest shareholders were people who previously worked with a Canadian stock promoter named Harold C. Moll. He was blacklisted by the Vancouver Stock Exchange in the 1990s.

Those people or their relatives held at least 2 million Stone Mountain shares, which would have translated to a corresponding number of Kandi shares.

According to SEC filings, one of those shareholders was a man named Logan B. Anderson. He previously was president of Pineridge Capital Group Inc., a publicly traded company in Vancouver.

Moll was the founder and former majority shareholder of Pineridge, a mini-conglomerate that had stakes in a number of other public companies. Pineridge collapsed in 1992, prompting the British Columbia government to authorize a wide-ranging investigation of the Vancouver Stock Exchange and its own securities regulators.

SEC filings show that two other people who were listed as Stone Mountain shareholders were family members of another Moll associate named Chet Kurzawski. They were said to have owned 750,000 Stone Mountain shares.

Kurzawski previously was involved with Anderson and Moll in two publicly held companies that were partly owned by Pineridge but traded separately on the Vancouver exchange.

Shares of those companies, Norfolk Ventures Inc. and Cross Pacific Pearls Ltd., plunged after Canadian news outlets documented false claims they had made about their businesses.

A fourth Stone Mountain shareholder, Douglas D. Reid, also was involved with Pineridge, according to Canadian court documents. He and his wife were listed as owning 1 million Stone Mountain shares, which would have become an equal number of Kandi shares.

We noted that Kurzawski and Reid were listed as the top officers and shareholders of a second shell company, Hurley Exploration Inc. It became China Clean Energy Inc. (OTCBB: CCGY) through a reverse merger in 2006. Unlike the Kandi deal, the owners of that shell received very little of the stock in China Clean Energy.


In Kandi’s five-plus years as a public company, its shares have spiked four times. In each instance, the stock rose more than 75 percent over a period of months, then quickly gave up most of those gains.

This summer, its stock nearly doubled, briefly topping $5 for the first time since early 2011.

The latest surge was propelled by claims that the company was poised to sell 20,000 of its electric cars through a new monthly vehicle-rental program in the city of Hangzhou.

Although Kandi initially characterized the agreement with China Aviation Lithium Battery Co. as a “cooperative letter of intent,’’ articles on,  and other Internet sites treated it as a firm order. Both the SeekingAlpha and Forbes article went so far as to declare that Kandi had won the largest electric-vehicle order in history.

Kandi’s electric cars, however, are not comparable to the ones produced by Tesla, Nissan, Ford and other manufacturers. The earliest versions sold in the United States had a top speed of around 25 miles per hour and were not legal to operate on many public roadways.

The models it is selling in China can go faster, but still top out at less than 50 miles per hour. What’s more, those vehicles can travel only 45 to 60 miles without recharging.

Kandi’s stock got another boost in August, when it announced that it had signed a “cooperative framework agreement’’ with a leasing company to develop a fleet of electric cars for hourly rentals, much like Zipcars in the United States.

It said that the venture would be based on a feasibility study that envisioned 100,000 of the cars in the Hangzhou area in five years. That would translate to one vehicle for every 90 or so residents, in a city already choked with traffic.

Kandi announced at the start of October that it had signed a sales contract with China Aviation Lithium Battery, calling for the delivery 5,000 of its electric cars by the end of the year. It said those sales would be worth more than $30 million.

But it noted that its customer has the option to adjust the delivery schedule to account for market response, vehicle quality and other factors.

Kandi said Dec. 17 that the first 300 vehicles bound for the rental fleet had passed government inspection and were eligible to receive license plates. It said nothing about the other 4,700 vehicles that it was supposed to deliver.


Kandi has announced other breakthrough deals that didn’t produce the expected results.

In 2009, Kandi said the postal service in Jinhua had ordered 30 of its mini cars, marking the first sale of its electric vehicles in China. Kandi said it anticipated that postal services throughout China would ultimately replace 300,000 of their gas-powered vehicles with electric ones. But the only other order it has publicized since then was a 60-vehicle deal with the postal service in Hangzhou

Last year, Kandi said it had received a purchase order for 1,000 of its electric cars from a company in Italy. It characterized that deal as a first step toward developing a market in Europe. But SEC filings show that the Italian order has yet to produce any deliveries or revenue.

We have placed phone calls to the Italian company, and sent emails, in both English and Italian, seeking confirmation of its deal with Kandi and an explanation for the delay. We have never received a reply.


The author of the SeekingAlpha article trumpeting the purported 20,000-vehicle order was a former brokerage executive named Arthur J. Porcari. His regulatory history includes disciplinary action by the SEC and the National Association of Securities Dealers (now the Financial Industry Regulatory Authority).

Porcari is the same person who posted the Internet message in 2007 saying that 4 million shares of the shell that became Kandi went into the aforementioned “sophisticated Chinese hands.”

Porcari also suggested in a post in 2009 that the order for 30 electric cars from the postal service in Jinhua could lead to more than $3 billion in revenue for Kandi.

He said in another post that year that Kandi’s stock could be worth more than $120 a share.

The SEC brought administrative proceedings against Porcari in 1994 in connection with his work as a financial-relations consultant. It said he sought to engineer a “short squeeze” in the shares of a company he represented, by making baseless predictions about its stock price to brokers and urging them to make coordinated purchases to lift the market.

Porcari settled the charges without admitting or denying guilt. He agreed to cease and desist from further violations of securities law, and to provide a copy of the SEC order to companies or certain other parties that might hire him for investor-relations work for a period of three years.

Porcari previously operated a brokerage in Texas with Michael T. Fearnow, who specializes in providing shells for companies that want to go public in through reverse mergers.

Fearnow and his longtime parther, Ruth H. Shepley, controlled four of the 11 shell companies used in Kelley’s reverse merger deals. Our investigation found that Fearnow also played an undisclosed role in the Kandi transaction.

Porcari and Fearnow both were fined and suspended by the NASD for violating insider-trading and fair practice rules at their now-defunct firm, Porcari, Fearnow and Associates Inc. The NASD ultimately revoked Porcari and Fearnow’s registrations for failure to pay their fines.


In addition to posting information about Kandi on stock message boards under the nicknames “corstrat” and “tchauncy,” Porcari is one of the moderators of a private forum set up to counter negative information about the company.

Porcari maintains that he has never been compensated by Kandi for his promotional activities. But our investigation found that he has longstanding financial ties to some of the other people who helped package Stone Mountain for the reverse merger.

In fact, those ties are closer than he has disclosed in his Internet posts.

We found that Porcari had been involved with Logan Anderson, one of Stone Mountain’s shareholders, in another company that went public a few years before Kandi.

Porcari was hired as a consultant by that company, House of Brussels Chocolates Inc. Porcari became one of its largest shareholders, and promoted the company on  Internet message boards., just as he has promoted Kandi.

House of Brussels’ stock rose more than tenfold in the first half of 2004, but later collapsed after the company ran low on cash, defaulted on a loan and surrendered key assets it had pledged as collateral.

Neither Porcari nor Anderson responded to questions submitted by Sharesleuth.

SEC filings show that a former stockbroker named Roger D. Lockhart and his wife, Davina Lockhart, also were large shareholders of House of Brussels. They later invested in at least two of the Chinese reverse-merger companies, New Oriental Energy & Chemical Corp.  (formerly Nasdaq: NOEC, now Pink Sheets: NOEC) and China Auto Logistics Inc. (Nasdaq: CALI).

Porcari also said in a message board posting that Lockhart accompanied him on a visit to Kandi’s operations in China.

Porcari previously touted the shares of a company called Host America Corp. Its stock quadrupled in the summer of 2005, after it issued a false press release saying it was preparing to install its energy-saving systems in 10 Wal-Mart stores as the first phase of a bigger deal with the retail giant. No such agreement existed.

Lockhart, who was one of Host America’s biggest shareholders, sold more than $6 million in stock as the price neared its peak. The SEC halted trading soon after.

Although Host America’s share price collapsed when trading resumed, the company announced in 2007 that the SEC would not be bringing any charges.



Our investigation also turned up a copy of an email that suggests Porcari was assisting Winner International with Kandi long before the reverse merger with Stone Mountain.

Winner International played a hidden financial role in the deals that created Kandi and three other companies: New Oriental Energy; Telestone Technologies Corp. (Nasdaq: TSTC); and Orsus Xelent Technologies Inc. (formerly AMEX: ORS, now Pink Sheets: ORSX).

Kelley was vice president of Winner International from 2002 to 2009. He set up the brokerage accounts in the United States that it used to sell its shares in the Chinese companies, and had trading authority over those accounts.

A judge in Canada ruled this summer that an associate of Kelley’s named Jay Tien Chiang secretly owned half of Winner International.

Chiang, who lives in the Toronto area, was found to have defrauded a Korean computer company of nearly $10 million in the 1990s. He has avoided the financial judgment against him by remaining in bankruptcy for more than a decade.

Chiang insisted in those proceedings that he has little in the way of assets or income. But attorneys hired by his main creditor presented evidence that he received undisclosed payments from Winner International, and that he was in Hong Kong on multiple occasions when large amounts of cash were withdrawn from its bank account in that city. In addition, an admitted money launderer testified that he helped route money to Chiang in Canada, doing his best to make the transfers untraceable.


The documents filed in Chaing’s bankruptcy case included a copy of an email from Chiang to Michael Fearnow, Porcari’s former brokerage partner.

In it, Chiang asked Fearnow to have “Art” — presumably Porcari — look at Kandi’s web site. The date on the email was three months before the merger, which would mean that Porcari was involved with the company at least three months before it went public.

Chiang also made a reference in the email to Kelley getting in touch with Fearnow to discuss the structure and pricing of the Kandi deal.

The SEC brought charges against Fearnow for that very activity in 2000. It said he paired shell owners with companies seeking to go public and provided advice on the terms of the deals, thus engaging in securities transactions without being a registered broker/dealer.

He settled the charges without admitting or denying guilt, paid a $10,000 fine and agreed not to violate SEC rules again. Fearnow did not respond to questions submitted by Sharesleuth.

According to testimony in the court case, Chiang was the main link between Kelley and a man in Beijing named Ning “Jack” Tang, who worked to find Chinese companies that wanted to go public in the United States.

One of the filings said that Kelley and Tang were allowed to designate certain parties who would get shares in the shell companies prior to the mergers. No such transfers were disclosed in SEC filings related to those deals.


SEC filings showed that Dodge, who lives in British Columbia, held 15 million shares of Stone Mountain Resources before the reverse merger that created Kandi. It said he surrendered 12 million shares for cancellation just before the deal was completed. That meant he should have emerged with 3 million Kandi shares.

The filings say Excelvantage Group Ltd., an entity registered in the British Virgin Islands, got 12 million shares for the Chinese assets it contributed. That amounted to a 60.1 percent stake in Kandi.

Kandi’s SEC filings contain conflicting figures on the number of shares that Dodge actually received.

A filing submitted on July 6, 2007, which included the share exchange agreement and other merger documents, showed Dodge as holding 1.47 million shares after the change in control. That would have been 7.4 percent of the total outstanding.

A proxy statement a week later listed Dodge as still holding 3 million shares, or 15 percent of the company.

The July 6 filing did not say who, if anyone, got the remaining 1.53 million shares that should have been issued to Dodge. Nor did it say who wound up with another 5 million shares that were to be issued to Stone Mountain’s minority stockholders.


Kandi’s annual SEC filing for 2007 – submitted March 31, 2008 – did not list Dodge among the shareholders with a 5 percent or greater stake in the company. If that chart was accurate, Dodge would have needed to reduce his holdings to just under 1 million shares, based on the nearly 20 million shares outstanding.

If Dodge held 1.47 million shares after the reverse merger, then he would have needed to sell roughly 480,000 of them to fall under the 5 percent threshold. If he held 3 million shares, he would have needed to sell roughly 2 million – which would have been difficult, if not impossible, given Kandi’s trading volume.

Our check of SEC filings showed that Dodge never reported selling any of his Kandi stock.


Although it appears that large amounts of Stone Mountain’s stock changed hands around the time of the reverse merger, none of those sales was disclosed in the SEC filings related to the deal.

In fact, the SEC filings covering the reverse merger asserted that Stone Mountain had 50 shareholders of record at that time. That number was little changed from the 53 shareholders that the company listed, by name, in earlier filings.

Those filings said that Dodge owned 15 million of Stone Mountain’s nearly 20 million shares. They said 13 other people 4.8 million shares, which were issued for a penny each in a private placement in 2004.

The remaining 161,000 shares were held by 39 others who participated in a second placement in 2005.

When we started contacting the people listed as Stone Mountain’s biggest shareholders, we found that many of them were unaware of the company or its merger with Kandi.

Two people, a husband and wife listed as holding 500,000 shares each, told us they never invested in the company. They said that even at the stated cost of a penny a share, they would not have risked $10,000 on a speculative mining venture.

Another person listed as owning 250,000 shares also said he had never heard of Stone Mountain or Kandi, and never invested in either company.

Two more people – friends of Chet Kurzawski – said they were unsure whether they had actually purchased the 375,000 shares listed in each of their names. Both said they occasionally gave money to Kurzawski for deals he was pitching. They speculated that  he might have put shares in their names to reflect those contributions. However, they said they never heard about the reverse merger and never got any Kandi stock.

Kurzawski’s brother, Michael Kurzawski, also was listed as owning 375,000 Stone Mountain shares.

Michael Kurzawski said his brother once mentioned that he “had some stock set aside for him.” But he added that he was unfamiliar with Stone Mountain or Kandi. He said he never was told about the reverse merger and never got any Kandi stock.

He also told us it was highly unlikely that Chet Kurzawski’s wife, Isabel, got the 375,000 Kandi shares she stood to receive in the merger, based on her reported holdings in the shell company.

Those shares could later have been sold for more than $2 million. Michael Kurzawski said his brother and sister-in-law never had that kind of money.

Chet Kurzawski died earlier this year. In addition to his work with public companies, he was active in the Vancouver Canucks alumni organization, and the British Columbia Hockey Benevolent Association.

Some of the other people listed as investors in Stone Mountain – including those who said they weren’t sure they owned shares — also were involved with those groups.

Based on our findings, it appears that at least 2.75 million shares of Stone Mountain that were converted to shares of Kandi in the reverse merger went to recipients other than the people listed in Stone Mountain’s SEC filings.

That figure excludes the 3 million shares that were reportedly issued to Dodge but also appear to have wound up elsewhere.


Kandi’s stock began trading on the Over-the-Counter market in July 2007, and moved to the Nasdaq in March 2008. Over that period, the company’s share price ranged from a low as $2.10 to a high of $5.65.

Trading records show that Kandi’s stock surged in October 2007, at the same time as Orsus Xelent and New Oriental Energy — the companies whose rise and fall were covered in the first installment of this series.

For example, on Oct. 3, 2007, Kandi’s stock rose 7.5 percent, to $4.30, on a volume of 273,300 shares. That was more than 10 times the average daily volume.

Over the next four days, the stock rose to $4.50, $4.75, $5.10 and $5.20, resulting in a one-week gain of 30 percent. We could find no press releases or other developments to explain the escalated price or trading activity.

Documents filed in the Canadian court case showed that Winner International and the people behind it worked closely with executives of the Chinese companies on strategy, financing and publicity.

Our research also found several instances in which Winner International’s deposit of stock in its brokerage accounts were followed by surges in the shares of those companies.

For example, on March 7, 2008, Winner International deposited 110,000 Kandi shares in its account at E*Trade Securities. On March 18, the company’s stock moved to the Nasdaq market.

On April 1, 2008, Kandi’s stock jumped nearly 30 percent, to an all-time high of $7.25, with trading volume soaring as well.

On that day, Kandi announced that revenue for 2007 rose nearly 140 percent, to $34.7 million. It said profits jumped 366 percent, to a little more than $5 million. With the exception of a few brief surges, Kandi’s stock declined steadily for the rest of the year.

At the end of 2008, cumulative trading volume was just below 9 million shares. That means the Stone Mountain shareholders who received Kandi shares in the reverse merger still would have been holding a large percentage of them.

Kandi’s slide continued into 2009, with its share price bottoming out at 48 cents in early March. By end of that month, its stock was back above $1. By the end of April, it was above $1.50.

In August 2009, Kandi reported that even through sales for the first half of that year were down more than 50 percent, the company had returned to profitability.

On Sept. 28, 2009, Kandi’s shares rose nearly 25 percent, to $2.25, on no news and a volume of just 25,000 shares.

A little over two weeks later, on Oct. 14, Kandi’s shares again rose almost 25 percent, for no obvious reason. Its stock closed at $2.99 after reaching an intraday high of $3.45. Trading volume was more than 10 times the three-month daily average.

The next day, Kandi’s shares rose nearly 10 percent.

Then, on Oct. 16, Kandi announced that the U.S. Treasury Department had approved its Coco electric vehicle for federal tax credits of $4,434 per vehicle. The company’s  shares rose as high as $4.12, before ending the day at $3.69.

Nearly 1.3 million shares changed hands, the highest total since the company went public. After that, volume remained high, with hundreds of thousands of shares trading daily.

On Nov. 9, Porcari wrote on a stock message board that the marketing director at Kandi’s U.S. distributor, Solus International Corp., told him that it had received orders for 3,500 Cocos, with 50 percent deposits.

He said in other postings that the bulk of those vehicles were bound for Oklahoma, which had among the most generous tax credits of any state for low-speed electric vehicles.

Government records in that state, however, show that only 328 people ever claimed tax credits for Coco purchases, which would have been worth more than $4,000 per vehicle. We find it unlikely that hundreds of other buyers would have neglected to file for those benefits.

Our conversations with dealers in Oklahoma confirmed that sales of Kandi’s vehicles were nowhere close to the level that Porcari claimed in his message-board posts.

On Nov. 12, 2009, Kandi announced that it had completed the sale of 30 Cocos to the postal service in Jinhua, marking its first electric car sales in China. The company said it expected that as many as 300,000 gas-powered postal service vehicles in China would soon be replaced by electric ones.

Porcari posted on a message board that day that the sale of 300,000 electric cars could translate to $3.2 billion in revenue for Kandi. The company’s stock rose more than 22 percent.

From July 2007 through December 2009, Kandi’s cumulative trading volume totaled more than 30 million shares. SEC filings show that the company’s officers and directors reported only minimal sales, which means that nearly all of the shares that were introduced to the market came from the shell holders.


Kandi’s stock had another notable surge in January 2010. On Jan. 4 of that year, Kandi announced that it had formed an alliance with two larger companies, including a subsidiary of China National Offshore Oil Corp., to help speed up the commercialization of electric vehicles in China. Kandi said the joint effort would include battery-replacement stations where drivers of electric vehicles could exchange depleted batteries for fully charged ones.

Kandi’s stock rose 30 percent, to $5.72. Volume also jumped, topping 1.8 million shares. On Jan. 5, the stock gained 5 percent, with an additional 1 million shares changing hands.

The stock reached $6.75 on Jan. 11, 2010.  Within three weeks, however, it was back below $4.

In March 2010, Kandi announced that revenue for 2009 was down 16.5 percent from 2008, while earnings fell more than 75 percent. Despite those declines, the company said in its annual SEC filing that it sold 2,110 of its electric vehicles in 2009, down only slightly from 2,125 the previous year.

Kandi’s shares sank as low as $3 a share that summer. But they rallied again later in the year, climbing as high as $7.25 on Nov. 15.

That was the same day that Kandi announced that revenue for the first nine months of the year was up nearly 50 percent, while non-GAAP “adjusted gross income” rose 57 percent.

Kandi attributed the gains to the continuing recovery of its go-kart business, and to what it referred to as the “strong second-quarter sales contribution from U.S. sales of the super-mini Kandi Coco.’’

Kandi said it had sold 1,005 Cocos in the second quarter, and 1,582 Cocos through the first nine months of the year. The company never explained the source of those sales, which came after the U.S. government reduced tax credits for electric vehicles and many states eliminated them entirely.

Our investigation, which included a survey of all the listed Kandi dealers in the United States, found that none sold more than a few Cocos in the first half of 2010 and that several had stopped carrying them because of a lack of consumer interest.

As we noted earlier, Kandi belatedly disclosed that 960 of the 1,618 cars it sold in 2010 were gas powered rather than electric. Given that the company reported selling just 214 cars in the second half of that year, it is clear that most of the gas-powered vehicles were sold in the first half.

That is significant because Kandi’s press releases and SEC filings clearly stated that the 1,005 vehicles it sold in the second quarter were electric.

In other words, Kandi’s made false representations about the progress of its electric-car business in an earnings report that sent its stock price sharply higher.


In the days after that earnings announcement, the son of Kandi’s chief executive, Xiaoming Hu, sold 87,000 shares for $500,000. That amounted to more half of his holdings.

The son, Wangyuan Hu, had been a Kandi officer. He now is president of Kandi USA Inc., a separate company that imports and resells Kandi’s go-karts, electric cars and other vehicles.

Xiaming Hu also sold a small amount of stock he received through the exercise of stock options.


We believe that the high trading volume in Kandi’s stock in late 2009 and much of 2010 would have allowed the individuals and entities that got 8 million shares in the reverse merger to unload the remainder of their stock.

If they still were holding 4 million of those shares at the start of that period, and liquidated them at midpoint price of $4.50 a share, they would have collected $18 million.

If they had 5 million shares to sell, the proceeds could have reached $22 million or more.

We estimate that the Stone Mountain owners who got 8 million Kandi shares in the merger could have sold all of their stock between 2007 and 2010, at an average of $4 a share or more. That would have produced total proceeds of at least $32 million.


After Kandi’s Nov. 15 earnings announcement sent its shares as high as $7.25, the price declined to prior levels, reaching a low of $5 in mid-December.

On Dec. 17, the stock jumped to $6.11 a share, on a volume of nearly 1.2 million shares. The following day – a Friday – it continued rising, to $6.70.

But when the markets reopened after the weekend, Kandi’s shares plunged more than 21 percent, after the company announced that it had raised $16.6 million in a private placement of shares, at a price of $5.50.

Trading volume that day was almost 3.2 million shares.

Kandi’s stock continued to sink, falling below $2 in the spring of 2011. It stayed there for much of the year, before climbing back above $3 at the end of the year.

Despite the surge in Kandi’s share price this summer, its stock is up less than 5 percent for 2012.


Our research turned up one other unusual item, which links Kandi to another of the Chinese reverse-merger companies. We noted that Kandi reported in an SEC filing that it executed a consulting agreement in October 2009 with two men, Wang Rui and Li Qiwen, to provide business-development services in China.

They received options to buy 350,000 Kandi shares at $1.50 a share.

SEC filings show that Rui also is a director of Guanwei Recycling Corp. (Nasdaq: GPRC), which Kelley and his associates took public in late 2009. Those filings say that Rui covered some of Guanwei’s expenses related to its U.S. market listing – the same sort of role that Winner International played for Kandi.

Guanwei’s filings identify Rui as president of Tianjin Yuanchuang Shuntian Architect Design & Consulting. It is unclear what business development services he provides to Kandi.

Kandi’s SEC filings said that 250,000 of the options granted to Rui and Qiwen became exercisable on March 6, 2010. On March 8, the first trading day after that date, Kandi’s shares jumped 25 percent, to $5.89. They remained in the $5 range for much of March and April.

SEC filings show that Rui and Qiwen exercised the 250,000 options between April 1 and June 30. If they did so at the start of that period, their gain would have been in the neighborhood of $850,000.

According to Kandi’s most recently quarterly financial filing, the remaining 100,000 options have yet to be exercised. They currently have an in-the-money value of nearly $250,000.

In other words, Rui and Qiwen could wind up with more than $1 million in gains for their consulting work.


In its annual SEC filing for the year that ended Dec. 31, 2009, Kandi disclosed that an entity called Ever Lotts Investment Ltd. had paid roughly $840,000 in expenses on its behalf on 2008 and 2009.

Kandi said in subsequent filings that Ever Lotts was set up by certain shareholders of Stone Mountain — the shell company it used to go public – to cover U.S. expenses related to the merger and market listing.

Again, that is the same role that Winner International was said to have played. Kandi did not identify the people who created Ever Lotts. But it said in some of its SEC filings that Ever Lotts also was one of its shareholders.


Guanwei Recycling went public in November 2009, through a reverse merger with MD Holdings Corp., a Maryland company that had operated a money-losing mortgage business.

Fresh Generation Overseas Ltd., the holding company for the Chinese businesses, got 12 million shares in the combined company. That translated to 60 percent of the outstanding stock.

Guanwei is based in Fuqing City. It imports plastic waste from Europe and converts it into low-density polyethelene that it sells to Chinese manufacturers.

SEC filings show that immediately before the reverse merger was completed – on the same day, in fact — MD Holdings took several steps to alter the number of shares outstanding and change the company’s ownership structure.

First, the company executed a 3.5-for-1 stock split, boosting the total number of shares outstanding to 72.5 million. Marshall Davis, who was MD Holdings’ chief executive, held 65.6 million of those shares. He surrendered 64.5 million of them for cancellation.


Guanwei’s first SEC filing after the merger listed Davis as holding just over 1.1 million shares, or 5.6 percent of the total outstanding. But in his personal Form 4 filing disclosing the surrender of the 64.5 million shares, Davis listed his ownership after that transaction at zero shares. That suggests that someone else wound up with his remaining 1.1 million shares.

Davis did not respond to questions we sent him by email.

SEC filings show that the other shareholders of MD Holdings owned just under 2 million shares prior to the split, or roughly 10 percent of the company. The split boosted their total to 6.9 million shares.

After the cancellation of most of Davis’ shares and the issuance of new shares to the owners of the Chinese recycling operations, those 6.9 million shares represented a 34.5 percent stake in the combined company.

The filings show that the two name partners in Anslow and Jaclin, the law firm that represented MD Holdings, had been among the biggest shareholders in the company prior to the reverse merger.

Those attorneys, Richard I. Anslow and Gregg E. Jaclin, also represented the shell companies that became Kandi, New Oriental Energy and Orsus Xelent.

According to a registration statement from the summer of 2008, Richard Anslow and Gregg Jaclin each owned an amount of stock that would have given them matching 1.64 million share stakes in Guanwei.

If they received those shares, both of the men would have owned more than 8 percent of Guanwei. Anslow & Jaclin did not respond to questions submitted by Sharesleuth.

Peter J. Goldstein, chairman of a Florida-based broker/dealer called Grandview Capital Partners Inc., owned a stake in the shell company that would have given him 3.28 million shares of Guanwei Recycling, or 16.4 percent of the total outstanding.

Together, those three men would have controlled 6.56 million shares of Guanwei, or nearly a third of the company. None of them, however, filed anything with the SEC reporting the ownership of 5 percent or more of its shares.

That means that they either failed to file the necessary disclosures, or that they transferred some of their shares to other parties prior to the reverse merger.

We noted that Goldstein and Grandview Capital are part of China 360 Solutions, an entity set up by a group of financial firms to help U.S.-listed Chinese companies counter negative publicity and maintain investor confidence.


Guanwei’s SEC filings make no mention of Paul Kelley or any of his partners in the earlier deals that created Telestone, Orsus Xelent, New Oriental Energy or Kandi.

But it is clear from the company’s actions that he had influence over its affairs.

Shortly after the revese merger, Guanwei appointed Howard S. Barth, a Toronto accountant and longtime associate of Kelley’s father, to its board of directors.  Barth also was a director of three other Chinese-reverse merger companies — Orsus Xelent, New Oriental Energy and China Auto Logistics Inc. (Nasdaq: CALI).

Liya Wu, a Chinese national who worked for Kelley, became Guanwei Recycling’s vice president of marketing. And the same media relations and investor relations specialists who represented many of Kelley’s other Chinese reverse-merger companies also began representing Guanwei.


Guanwei’s shares began trading on the Over the Counter Market on Dec. 28, 2009. They opened at $1.92, and rose as high as $3 before ending the day at $2.25.

Over the next seven trading sessions the price rose every day, ending that period at $4.65 a share. Trading volume in the first month was roughly 1.2 million shares.

Like Telestone, Orsus Xelent and some of the other Chinese companies, Guanwei’s shares had several noticeable price spikes, some of which appeared to be unrelated to any press releases or SEC filings.

On April 14, 2010, Guanwei announced that it had been accepted for listing on the Nasdaq Capital Market. Its shares rose 13 percent to $5.45, on a volume of around 206,000 shares.

The next day, the price reached $5.70 – its all-time high — before closing again at $5.45. Within three weeks, the price was below $4.

On July 30, 2010, Liya Wu was interviewed about Guanwei on The’s China Watch segment. Her remarks focused on the size of China’s market and the potential for the growth of the company’s recycling operations.

A few days later, on Aug 4, Guanwei’s stock rose almost 14 percent, climbing as high as $4.70 in intraday trading. Volume that day was more than 10 times the average for the previous month.

Over the next few trading sessions, however, the stock fell back to $4. By early September, the price had dipped below $3.

With the exception of one minor surge, Guanwei’s shares continued to trade in a range of $3 a share to $4 a share for the remainder of the year. By early March of 2011, Guanwei’s shares were down to $3. By late May, they were below $2.

Guanwei reported in November 2011 that sales for the first nine months of its fiscal year rose nearly 39 percent, to $46.6 million. It said profits rose more than 28 percent, to $9.5 million. Despite that positive report, Guanwei’s stock fell below $1.

In Guanwei’s first 30 months as a public company, the total trading volume in its stock was around 15 million shares.

Based on that level of activity, we believe that the shell owners who got 8 million shares in the merger would have been able to sell at least 3 million of them. At a midpoint price of $2.50, those sales would have generated $7.5 million.

If they were able to sell half of the shares, the proceeds would have reached $10 million.

On March 30, 2012, Guanwei announced record revenue and record profits for its previous fiscal year. That touched off a surge in trading that lifted the company’s share price from 85 cents to $1.85 in just five sessions.

An additional 15 million shares changed hands in the two weeks following the announcement, with the shares ending at $1.50. After that, a further 18 million shares  traded, with the price falling back to the 85 cent range.

We think that the shell owners who got shares in the reverse merger could easily have sold their remaining stock during this period, at an average price of at least $1.15 a share.

If they still had 4 million shares remaining, the sale of those shares would have generated $4.6 million in proceeds. If they had 5 million shares left, they could have realized $5.8 million.

Based on the above scenarios, we believe that the shell owners who got 8 million shares of Guanwei in the reverse merger would have been able to liquidate them for somewhere between $13 million and $15 million.

After the surge in March and April, Guanwei’s stock sank back below $1, and the company once again faced delisting from the Nasdaq exchange. In early December, it executed a 1-for-2 reverse split, which lifted its shares above $1.70 and averted that fate.

Guanwei’s stock is currently trading for around $1.80, giving the company a market capitalization of just under $19 million.


Telestone Technologies (Nasdaq: TSTC) had nearly $260 million in uncollected accounts receivable at the end of June, an amount nearly equal to all of its sales since the start of 2010.

Although Telestone’s assets, including the receivables, exceed its liabilities by more than $130 million, the Chinese company had a market capitalization of less than $20 million. That suggests investors have doubts about Telestone’s ability to collect on those receivables, or about its ability to prosper without that cash.

Sharesleuth’s investigation found that despite the questions surrounding the company, one group of shareholders still managed to make millions – by helping Telestone go public through a reverse merger.

Telestone gained a U.S. market listing in 2005 by combining with Milestone Capital Inc., a public held company that had just emerged from bankruptcy and was essentially an empty shell.

U.S. Bankruptcy Court records show that Milestone’s reorganization was aided by $50,000 in financing that it used to pay legal fees and other administrative costs.

SEC filings show that the individuals and entities that provided that funding got the equivalent of 3.8 million shares, at 1.3 cents per share.

The court documents listed 14 participants in the financing deal. They included one of Paul Kelley’s companies, MCC Group USA Inc.; his wife, Alexandra Kelley; and several offshore entities.

One of those was identified as “Winter International Group Ltd.” Based on the testimony in the Canadian court case, it is clear that this actually was Winner International, which secretly paid the legal, accounting, investor relations and U.S. listing expenses for Telestone and three other Chinese reverse-merger companies.


Milestone Capital’s reorganization was orchestrated by Michael Fearnow. He provided additional money to fund settlements with some of the bankrupt company’s creditors.

Our research found that Fearnow’s partner, Ruth Shepley, also was among the 14 individuals and entities that provided the $50,000 to Milestone Capital.


In return for that contribution, those individuals and entities got promissory notes that were later converted to 3.8 million Telestone shares. That amounted to 44 percent of the company, at a price of just 1.3 cents per share.

The funders also got warrants to buy an additional 1 million shares at $3 each.

The owners of the Chinese business that was merged into Milestone Capital came away from the deal with 4.1 million shares of Telestone, or roughly 51 percent of the shares outstanding. SEC filings show that those shares went to an entity called Success Million International Ltd., registered in Hong Kong.

Telestone is based in Beijing and makes hardware and installs systems for wireless communications, including wi-fi systems in office buildings. Its SEC filings say its main customers are China’s Big Three telecom companies: China Mobile Ltd., China Telecom Corp. and China Unicom (Hong Kong) Ltd.

After the reverse merger, Kelley’s group and Success Million controlled more than 95 percent of Telestone’s stock. Those shares began trading on the Over the Counter Market, then moved to the AMEX in May 2005.


Our research found that between August 2004 and early May 2005, the total trading volume in Telestone’s shares was just over 1 million shares. The company’s stock began trading at $3.75 and was in the neighborhood of $5 when it moved to the AMEX.

By the end of 2005, another 1 million shares changed hands.

Telestone moved to the Nasdaq exchange in September 2006. In the nine months leading up to that listing, roughly 4 million shares traded. That brought the total volume from the time the company went public to around 6 million shares.

Kelley’s group started out with 3.8 million shares and 1 million warrants. According to Telestone’s SEC filings, they exercised nearly all the warrants prior to the end of 2006.

Unless the members of that group accounted for most of the selling activity between August 2004 and September 2006, they still would have been holding millions of shares when Telestone’s stock moved to the Nasdaq.

Like the other companies that Kelley’s group took public, Telestone’s trading history has been marked by sharp swings in price and volume, often in the absence of any company news or market developments.


From Sept. 27 to Dec. 31, 2006 – Telestone’s first three months on the Nasdaq – trading volume topped 11 million shares. The following year, volume exceeded 45 million shares.

That level of trading would have given MCC Group, Winner International and the other original shareholders ample opportunity to liquidate their holdings by the end of 2008. If they were able to sell three-fourths of their stock at an average price of $6 a share, their combined proceeds would have topped $20 million.

If they sold all of it at that average price, the figure would have approached $30 million.


Telestone’s main appeal to investors has been its rapid growth. According to SEC filings, its revenue doubled from 2008 to 2009, rising from $35.3 million to $71.9 million. Its sales nearly doubled again in 2010, reaching $131.6 million.

Telestone’s reported profits climbed from $7 million in 2008 to $12.5 million in 2009, then to $25 million in 2010.

Although the compnay claimed nearly $45 million in net income from 2008 through 2010, its operations produced just $2 million in positive cash flow — largely because of its unpaid receivables.

And although it reported sales of $109 million and earnings of $14.9 million in 2011, its net cash flow was a negative $13.4 million.

Telestone attributes its receivables backup to slow payments by the Big Three telecom companies. It says they have always lived up to their obligations, and that even though some debts are more than two years old, it still expects to collect.

Nevertheless, Telestone has reduced the carrying value of its receivables by $32 million this year as an allowance for doubtful accounts.


Our review of the SEC filings by Telestone’s top customer, China Mobile, found that its breakdown of the age of its accounts payable did not list any that were older than one year.

China Mobile has accounted for more than half of Telestone’s revenue in the past three years. If China Mobile’s reporting of its payables is accurate, then Telestone’s explanation for its uncollected receivables has to be false.

Similarly, Telestone’s second biggest customer, China Unicom, said in its latest annual filing that only about 10 percent of its payables are older than a year. That suggests it also has been paying its vendors more promptly than Telestone claims.

China Mobile and China Unicom together accounted for about 90 percent of the company’s reported revenue in 2009 and 2010, and about 86 percent in 2011.

If none of China Mobile’s payables are older than a year, and only 10 percent of China Unicom’s are older than a year, it would be nearly impossible for Telestone to have such a high dollar amount of receivables dating back to late 2009 or early 2010.


Documents filed in the Canadian court case show that Winner International deposited 100,000 Telestone shares in an E*Trade brokerage account in Hong Kong on Jan. 4, 2007.

Four days later, Telestone put out a press release announcing contract awards from several Chinese telecom companies. The release did not disclose the dollar value of the contracts, or any other specifics, but it appeared to move the stock.

Telestone’s shares rose nearly 12 percent that day, closing at $9.38 after climbing as high as $10.12. Trading volume that day was roughly 760,000 shares.

Documents in the Canadian court case show that Winner International wired more than $1 million out of the E*Trade account and two other brokerage accounts over the next four weeks.

On March 31, 2007, the day that Telestone announced its 2006 financial results,  the company’s stock opened at $9.08, rose as high as $9.55 and closed at $8.71, for a one-day gain of 13 percent. Nearly 1.9 million shares changed hands.

Telestone said revenue for 2006 was up almost 25 percent, while earnings were up almost 24 percent.

By the end of April, however, Telestone’s shares were back into the $7 range, and by May, they were near $6.

Telestone’s stock sank below $5 in September 2007, but was back above $6 by the first week of October. That was when the shares of Orsus Xelent, one of the other Chinese companies taken public by Kelley and Winner International, soared to their all-time high.

We noted that Telestone’s stock followed a similar trajectory that week, rising from $6.10 on Oct. 2 to highs of $7.87 on Oct. 3 and $7.94 on Oct. 4. More than 2 million shares traded over that three-day period.

Telestone’s shares also surged the following week, which coincided with the high point for the stock of yet another of Kelley’s reverse-merger companies, New Oriental Energy.

As we noted in the first story in our series, the Dow Jones Industrial Average, the Standard & Poor’s 500 and other indexes were flat during those periods.

Telestone’s stock hit $8.50 on Oct. 15, with trading volume topping 1.2 million shares.


Telestone’s shares ended the year almost $2 lower, at $6.57. In the first week of January 2008, they fell to $5.50. Before the end of that month, they were down to $4.

Trading in Telestone’s shares slowed considerably in the first half of 2008, with volume topping 100,000 shares just three times. By August, the stock was under $3. By September, it was down to $2. And in late December, it dipped below $1.

In March 2009 — the same month that the stock market as a whole hit bottom — Telestone began a remarkable comeback. Its shares rose from $1 that month to $2.50 in May, $4 in June and $10 in October. By January 2010, the company’s shares were above $20. They peaked that month at $24.94.

The only reported share sale by a Telestone insider came a few weeks later. Lian Renguang, who had stepped down as a member of the company’s board, filed a Form 144 disclosing the sale of 120,000 shares.

Telestone’s chairman and chief executive, Daqing Han, apparently held onto all of his shares, which were worth more than $80 million at the company’s peak. Those same shares are worth less than $5 million today.


Another big beneficiary of Telestone’s surge was investment manager Andrew Barron Worden. He, too, has a record of serious regulatory violations.

Worden runs a hedge fund called Barron Partners LP. He previously pleaded guilty to wire fraud for failing to pay brokerages for stocks that he had purchased and that had declined in value. He also settled civil charges with the SEC.

On Sept. 21, 2009, Worden filed a Form 13D disclosing the acquisition of 725,743 Telestone shares, or 7.8 percent of the total. Worden reported that he and various entities bought the shares through open market purchases at $4.51 to $5.44 a share.

The day the filing became public, Telestone’s shares rose nearly 14 percent, to $6.87.

On Oct. 20, 2009, Telestone’s shares jumped 31 percent, to $11.15, on no news. A total of 3 million shares changed hands that day. The company’s stock continued rising from there.

SEC filings show that Worden sold 215,500 of his shares in late November 2009, at prices ranging from $10.30 to $13.25, and ceased to be an owner of 5 percent or more of Telestone’s shares.

It is unclear when he sold the remaining shares. But if he sold at or nearTelestone’s peak in January 2010, the gains on his initial investment would have approached $10 million.

In August 2010, published an article that focused on Telestone’s mounting receivables, and raised questions about whether its characterization of the debts owed by China’s Big Three telecom operators was accurate.

Telestone’s stock ended 2010 at around $10 a share. The price dropped by a third in November after the company — while still reporting record profits — sold shares in a private placement at a 15 percent discount to the market price.

The price continued to drift downward in 2011, touching $4 in early October.

In the first week of November 2011, Telestone’s stock gained 50 percent in four days, rising from $6 to $9, with volume surging as well. The share price peaked at $9.55 on Nov. 8.

Telestone had not issued any press release or submitted any SEC filings that might explain that move.

On Nov. 14, Telestone announced that it had agreed to acquire another Chinese telecommunications systems company for $18 million in cash and stock.

On Nov. 15, it released its financial results for the third quarter. It said revenue for the quarter was down 31 percent from the same period a year earlier, while revenue for the first nine months of the year was down 3 percent.

Telestone reported that net income for the quarter was down more than 56 percent, and net income for the first nine months was down almost 10 percent.

Telestone’s stock fell 21 percent on Nov. 15, to $5.52, and fell a further 11 percent the following day.

In the press release announcing its earnings, Telestone reaffirmed its earlier financial guidance, saying it expected its revenue for all of 2011 to be approximately $171 million, a 30 percent improvement over 2010.

It said it expected earnings of around $27.5 million, up 10 percent from the previous year.

But on Dec. 31, after the markets had closed for the year, Telestone issued new, bleaker guidance. The company said it instead expected revenue for 2011 to be 15 percent to 20 percent lower than its revenue for 2010.

That put its projected revenue roughly $60 million to $65 million lower than originally forecast. We fail to see how Telestone could not have known on Nov. 15 – halfway through the fourth quarter – that revenue was going to fall dramatically short of projections.

Telestone also revised its earnings projection downward, to a range of $16.8 million to $22.4 million. The company said the new guidance reflected a “change in investment direction among China telecom carriers, who are increasingly focusing their capital spending on next-generation technologies such as 4G wireless…”

In March of this year, Telestone reported that revenue for 2011 totaled $109 million, down 17 percent from the previous year. It said earnings were $14.9 million, off 40 percent.

Telestone’s stock is down by more than two-thirds in 2012.

(NEXT: In part three of our series, Sharesleuth will look at the reverse-mergers that created China Infrastructure Investment, Winland Ocean Shipping and a handful of other U.S.-listed Chinese companies)

Saar Research provided fact checking for this story

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