Small Companies, Big Questions: Who secretly got millions of shares of stock in Chinese reverse-merger companies?

(Part one of a three-part series)

In the spring of 2005, a publicly held dating business called Universal Flirts Inc. gave up on love and did a reverse merger with a Chinese cell phone maker.

According to Securities and Exchange Commission filings, founder Darrell C. Lerner walked away with a 26 percent stake in the Chinese company, Orsus Xelent Technologies Inc. (formerly AMEX: ORS, now Pink Sheets: ORSX). By 2007, Lerner no longer was listed among its top stockholders, even though he never reported selling any of his 7.7 million shares and could not have liquidated large amounts on the open market because of a lack of trading volume.

When Orsus Xelent’s stock surged in the fall of that year — on a wave of publicity about big phone orders that never materialized — whoever held those shares might have been able to sell them for $20 million or more.

A Sharesleuth investigation found similar discrepancies in the reported share ownership of six other Chinese companies that a low-profile promoter named S. Paul Kelley helped to bring public in the United States between 2005 and 2009.

Our analysis of SEC filings found that tens of millions of shares allocated to the chief executives of the shell companies used in those mergers essentially disappeared – sold or transferred to other parties with little or no disclosure. Under U.S. securities laws, anyone owning 5 percent or more of a company’s stock must report significant changes in their holdings within 10 days of the transaction.

Based on share prices and trading volumes, we calculated that the people who wound up with the missing shares in the other six Chinese companies might have sold them for upwards of $50 million.

That total includes:

  • Shares of New Oriental Energy & Chemical Corp. (Formerly Nasdq: NOEC; now Pink Sheets: NOEC) that could have been sold for $8 million when that company’s stock price and trading volume were at their highest levels.
  • Shares of Kandi Technologies Corp. (Nasdaq: KNDI ) that could have been sold for $12 million to $18 million.
  • Shares of China Infrastructure Investment Corp. (Formerly Nasdaq: CIIC; now Pink Sheets: CIIC) that might have brought $20 million or more, depending on when and how they were sold.

Our analysis of SEC filings found that the people behind the shell companies used in the mergers used stock splits and other maneuvers to put millions of additional shares into the hands of unknown parties.

We believe the recipients of those shares could have sold them for a further $80 million.

In other words, the architects of the reverse mergers and their associates might have reaped $150 million from the deals — and possibly much more.

It appears that the SEC employees who review proxy filings and other submissions for compliance with disclosure rules did not notice the discrepancies in the reported share ownership at Orsus Xelent, Kandi and the other Chinese companies.

As Sharesleuth reported in our previous story on the reverse mergers, none of the 11 Chinese companies that Kelley and his associates brought to America have produced lasting gains for ordinary investors.

Four of the companies were delisted from major exchanges last year, and two more received delisting notices this year.


We found that the people who controlled eight of the shell companies used in the reverse mergers had previously been charged with securities violations, or had close ties to others who had been charged.

We also found that the officers and directors of the Chinese companies have sold very little of the stock they received, losing out on a fortune in gains.

Instead, most of the profits have gone to the promoters who put the reverse mergers together, and to the individuals or entities that held stock in the U.S. shell companies that were used in the deals.

Our year-long investigation found that most of the U.S. shells or their Chinese successors failed to disclose the sale or transfer of large blocks of stock, which in some cases made up most of the initial public float.

We found that some of the Chinese companies made what appear to be false or misleading statements that helped boost their share prices and allowed the architects of the reverse mergers to sell stock at elevated levels.

Finally, we found that the promoters of the reverse mergers hired third parties to recommend shares of those companies, at around the same time that the promoters or their associates were unloading some of their stock.

The Chinese companies that generated the most trading activity and had the highest market capitalizations eventually saw their shares plunge because of negative surprises. Those included sudden drops in sales and earnings, big jumps in accounts receivable, unexpected write-offs and dilutive private placements.

We believe that the common twists in the deals, the concealment of key participants and the conduct of some of those people point to the existence of an elaborate pump-and-dump scheme.

If that is true, the combined proceeds from the sale of the inflated shares would rank among the biggest scores yet in the dubious world of Chinese reverse mergers.

It’s possible that some of the heavy trading in the stock of certain companies was artificial — the result of matched buying and selling by people trying to boost the price or create the appearance of heavy investor demand.

If that was the case, then our estimates of the proceeds from the stock sales might be high. But it also would be further evidence of manipulation.


Although all of the 11 Chinese companies are relatively small, eight were listed on either the Nasdaq or AMEX exchanges. At their peaks, the companies had a combined market capitalization of more than $1.6 billion.

Their current value is around $220 million, with one company — Kandi — accounting for more than half of that total.

The companies created through the reverse mergers are:

Orsus Xelent, New Oriental Energy, China Infrastructure Investment and China INSOnline were delisted from the Nasdaq or AMEX last year. China Auto Logistics and Guanwei Recycling received delisting notices from Nasdaq this year, in part because their stock had been languishing below the exchange’s minimum price of $1 a share.

(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.)


Our research found that four of the shells used in the reverse mergers trace to Michael T. Fearnow, a former brokerage executive whose registration was revoked by the National Association of Securities Dealers in the 1990s.

The SEC brought administrative proceedings against him in 2000, in connection with his role in several earlier reverse-merger transactions. According to the SEC, he paired shell owners with merger partners and investors. He also provided input on structuring the deals and got cash and stock as compensation, thus engaging in securities transactions without being registered as a broker/dealer.

Two other shells were controlled by people with direct ties to Byron R. Lerner, who settled fraud charges with the SEC in 2002. Those charges stemmed from his activities as head of a public company called Teltran International Group Ltd.

Darrell Lerner, who controlled the shell that became Orsus Xelent, is Byron Lerner’s son. James E. Tubbs, the majority shareholder of the shell became New Oriental Energy, previously was executive vice president at Teltran.

Two more shells, including the one that became China Infrastucture Investment, were controlled by people we linked to a Utah financier named David N. Nemelka. He previously pleaded guilty to federal criminal charges in connection with a scheme to manipulate the shares of another reverse-merger company.


A reverse merger is a technique that allows a privately held company to gain a stock-market listing without the time and expense of an initial public offering. In a typical deal, an unsuccessful company that has a listing but no viable business acquires a privately held company, using stock as currency. The owners of the privately held company usually get the vast majority of the shares in the combined entity.

The reverse mergers orchestrated by Kelley and his associates were notable for the large amounts of stock that the shell owners retained in the post-merger businesses. In most cases, their stakes in the Chinese companies ranged from 30 percent to 49 percent, compared to the more standard 10 percent to 20 percent.

That is significant because the shares originating from the shell companies were the only ones that could be readily traded in the first year or two after the deals.

Our research also found that many of those shell companies executed stock splits shortly before the mergers, creating millions of additional shares at no cost to the holders.


Our analysis of SEC filings by the companies involved in the reverse mergers found that some of the officers or directors failed to report the sale or purchase of shares. Under U.S. securities laws, anyone holding 5 percent or more of a company’s shares must report any increase or decrease in that position.

SEC filings said that Tubbs, the chief executive of the shell that became New Oriental Energy in 2006, surrendered 13.7 million of his 15 million shares for cancellation at the time of that reverse merger.

The remaining 1.3 million shares represented more than 10 percent of the combined company. But Tubbs was not listed among the holders of 5 percent or more of New Oriental Energy’s stock in another SEC filing immediately after the deal.

Tubbs never reported the sale or transfer of any of those shares, which could have been sold for at least $6 each when New Oriental Energy’s stock price and trading volume surged in late 2007 and early 2008.

SEC filings said that Peter Dodge, the head of the shell company that became Kandi, emerged from that deal with as many as 3 million shares, or 15 percent of the total outstanding.

Nine months later, the Chinese vehicle maker no longer listed Dodge among its top shareholders, even though he never reported any changes in his ownership. His 3 million shares eventually could have been sold for $4 to $6 each.

Holders of 5 percent or more of Kandi’s shares, from July 2007 proxy filing

Holders of 5 percent or more of Kandi’s stock, from March 2008 annual SEC filing

SEC filings said that S. Gene Thompson, the majority shareholder of the shell that became Winland Ocean Shipping, got 16.6 million shares of its stock, or more than 16 percent of the total.

Thompson was not listed in subsequent filings as holding 5 percent or more of Winland’s stock. Like Tubbs and Dodge, he never reported selling any of his shares, which represented almost three-fourths of the company’s public float.

Those shares clearly found their way into the market, as evidenced by a $700,000-plus touting campaign last December that produced a trading volume of more than 14 million shares and helped to double Winland’s share price.

Whoever held Thompson’s shares could have sold a portion of them into that surge and collected around $2 million.


When we asked Thompson what happened to his shares, he referred us to Fearnow, the operator of a Houston company called Go Public Institute. SEC filings made no mention of Fearnow’s involvement in the reverse merger that created Winland.

Tubbs declined to say what became of his shares in the shell that became New Oriental Energy.

“I don’t want to make any comment,’’ he said in a brief interview. “I didn’t really handle the transaction.’’

Tubbs did not respond to a list of follow up questions that we submitted by email. Nor did Darrell Lerner, who headed the shell that became Orsus Xelent and was a consultant to New Oriental Energy.

Dodge declined to comment, saying he was “not at liberty” to discuss anything involving Kandi. He referred us to an attorney who represented his shell company in the reverse merger, then hung up when we continued asking questions.

Our investigation found that Fearnow also played a behind-the-scenes role in the Kandi deal. That means he was involved in at least five of the 11 Chinese reverse mergers.


The SEC has brought numerous cases over the years against shell-company insiders who secretly sold shares to promoters and other third parties in connection with reverse mergers.

In many of those cases, the SEC took the position that the sales by people in control of the shells represented unregistered distributions of securities. (see examples here, here and here).


Our investigation also found that:

  • a Hong Kong-registered entity called Winner International Group Ltd. played a hidden role in the reverse mergers that created Orsus Xelent, New Oriental Energy, Kandi and Telestone. According to documents in a Canadian court case, Winner International fronted those companies’ legal, accounting, investor-relations and listing expenses, in return for low-priced, pre-merger stock. None of the Chinese companies disclosed their financial arrangements with Winner International in the SEC filings related to the mergers. Nor did they or the shell companies used in the deals disclose the transfer of shares to Winner International in exchange for the cash and services that it provided.
  • While Winner International was paying the investor-relations expenses for Orsus Xelent and New Oriental Energy, a stock-promotion service called RedChip Companies issued favorable reports on them. Those reports included financial projections that proved to be wildly inaccurate. Financial summaries filed as evidence in a Canadian court case indicate that Winner International and others involved in the reverse-merger deals sold large amounts of stock in those companies after the reports helped to lift their prices and trading volume.
  • The people behind Winner International appear to have used straw parties – three members of a Chinese family of modest means – to hide the true identities of the people holding and trading the shares. A woman named Mei Huang was listed as president and beneficial owner of Winner International, with Kelley listed as vice president. Huang’s sister was listed as the owner of another entity called Wainwright Ventures Ltd., and her sister’s husband was listed as the owner of Jevington Trading Ltd. Huang’s mother was listed as the owner of New Global Investments Ltd. Records show that Wainwright and Jevington also got blocks of stock in Orus Xelent, New Oriental Energy, Telestone and Kandi, and got cash distributions from Winner International. A Canadian judge ruled in July that an associate of Kelley’s named Jay Tien Chiang was the undisclosed owner of 50 percent of Winner International and New Global Investments.
  • Winner International’s first account representatives at two U.S. brokerages that it used to sell stock in the Chinese companies were people who were later barred from the industry for serious violations. One of them was Gregg M. Berger of Gilford Securities Inc. The SEC brought charges against Berger last year in connection with his role in a fraud scheme involving other Chinese reverse mergers. He also pleaded guilty to criminal charges and was sentenced to two years in prison. Another of Winner International’s brokers was John V. Hull of Public Securities Inc. He was barred by the National Association of Securities Dealers in 2006, after it alleged that he engaged in a series of pre-arranged and manipulative trades, some of which were directed by a recidivist securities offender named Mayer A. Amsel.
  • Members of the reverse-merger network kept close tabs on trading in the shares of the Chinese companies, and in some cases intervened in the market when prices were sinking. Court filings show that Winner International bought stock in Winland on the same day that sales by one of its partners, a Chinese man named Ning “Jack” Tang, sent the share price plunging more than 85 percent. Winner International’s purchases, all in the last hour and a half of trading, lifted the stock back to its previous level.
  • Former executives from Orsus Xelent and Telestone later became shareholders in a pair of U.S. shell companies, just before they did reverse mergers with two additional Chinese businesses. We found that the executives were part of larger offshore investment groups that bought majority stakes in the shells. It’s possible this was the same method used by unidentified parties to acquire pre-merger stakes in the shells that became Orsus Xelent, New Oriental Energy, Kandi and some of the other Chinese companies. The SEC brought fraud charges in August against the people behind the two shells the ex-Orsus Xelent and Telestone executives and their partners acquired. It alleged that two of the defendants, Thomas D. Coldicutt Jr. and Elizabeth L Coldicutt, used nominee officers and directors to create 15 purported mining companies that were actually meant to be shells for reverse mergers. It said they aided the nominees in filing false registration statements, obtaining public listings and then selling the companies. The SEC said the Coldicutts collected nearly $5 million through the scheme.


According to SEC filings, only a handful of insiders from the Chinese companies that Kelley and his associates took public have sold shares they received in the reverse mergers. Their combined proceeds were under $10 million.

The filings show that Telestone’s chairman and chief executive, Daqing Han, hasn’t cashed in any of the 3.3 million shares he got when his company went public in 2005.

Telestone’s stock reached a high of nearly $25 a share in January 2010. It now trades for around $1.40, which means the value of Han’s stake has fallen by more than $75 million from that peak.

The filings show that the head of New Oriental Energy, Chen Si Qiang, not only kept his original shares but added to his position, even as his company’s stock was losing nearly all of its market value.

When New Oriental Energy’s shares hit their high in October 2007, Qiang’s stake was worth more than $48 million. Those same shares are worth less than $100,000 today.

Orsus Xelent’s original chief executive, Xin Wang, did not sell any stock while he was running that company. After he stepped down in 2009, he sold just over half of his 3 million shares, at a price that was 90 percent below the company’s high.

It is unclear when Wang sold his remaining shares, or what price he received, because his holdings dropped below 5 percent and he no longer was required to report the transactions.


As Sharesleuth previously reportd, Winner International played a central role in the reverse-merger deals. Court records show that it operated as a sort of middleman, pairing Chinese companies that wanted to go public in the United States with available shell companies, then preparing the way for the mergers and the market listings.

Those court records show that Winner International set up accounts at U.S. brokerages to trade the shares it received in Orsus Xelent, New Oriental Energy, Kandi and Telestone.

Paul Kelley opened most of the accounts and had trading authority over them. A summary of Winner International’s financial transactions showed that it wired at least $11.4 million in proceeds out of its U.S. brokerage accounts from 2005 to 2009.

The summary showed that it also transferred $2.5 million from a brokerage account in Hong Kong. That account still had a balance of more than $7 million early last year.

In other words, Winner International appears to have reaped more than $20 million from its stock holdings in the Chinese companies, without ever appearing on the radar screens of securities regulators or ordinary investors.

A second Kelley company, Asia First Financial Corp., was involved in the other seven Chinese reverse mergers covered in our report.


Our investigation found evidence that the top shareholders of eight of the shell companies used in the reverse mergers sold some or all of their stock, either just before or just after the deals.  It appears that all of those sales were private transactions.

In five cases, the selling shareholders did not report the transfers, even though they held more than 5 percent of their companies’ stock and were subject to SEC disclosure rules.

In two other cases, the shareholders properly reported the sale of stakes that exceeded 20 percent of the post-merger shares. But no buyer or buyers ever filed SEC forms disclosing the acquisition of 5 percent or more of those companies’ stock.

In the final case, the two principal shareholders sold much of their stock, in what appeared to be coordinated transactions. Although they reported the sales to the SEC, no one filed forms disclosing the acquisition of those shares, which amounted to more than 10 percent of the post-merger company.

Our review of SEC filings found that:

  • Marshall Davis, the majority shareholder of the shell that became Guanwei Recycling, was listed in the company’s SEC filings as receiving 1.1 million of its shares in the reverse merger. That was more than 5 percent of its outstanding stock. But Davis said in his own filing that he no longer owned shares as of the merger date. That suggests he privately sold his stock, or that someone else actually received those shares, which later would have brought $2 million or more on the open market.
  • Fred L. Hall, the majority shareholder of the shell that became China Infrastructure Investment, was listed in SEC filings as receiving 21.9 million shares of its stock, or one-fourth of the total outstanding. He reported selling them in a private deal for $72,500 – which translates to less than a penny a share — at a time when the stock was trading on the open market for more than $4. No one reported buying Hall’s shares, or even a portion big enough to meet the SEC’s 5 percent disclosure threshold. Hall’s stock made up most of the company’s public float. Our review of trading activity found that a large number of those shares were likely sold during trading spikes in 2009 and 2010, for as much as $20 million.
  • Mathew W. Evans, the majority shareholder of the shell that became Chisen Electric, emerged from that deal with 9.8 million shares. He reported selling them them in a private transaction for $45,000. But no individual or entity reported buying those shares, which amounted to nearly 20 percent of the company and represented almost all the public float. Nor did anyone report the acquisition of enough stock to trigger the 5 percent reporting requirement. Unlike the other companies, Chisen’s shares never traded in large volume.
  • Philip E. Ray and Ruth Daily, the principal stockholders of the shell that  became China Auto Logistics, sold the equivalent of 500,000 shares in a private deal shortly before the reverse merger. After the merger was completed, they sold an additional 1.36 million shares for 0.6 cents a share, at a time when the company’s stock was trading on the open market for more than $2. That stock later could have been sold for at least $5 million.


Our investigation found that Evans and Hall had close ties to David N. Nemelka, who in 2005 pleaded guilty to federal charges stemming from an earlier reverse-merger scheme. Nemelka’s father and two other men also pleaded guilty.

Evans, who was described in SEC filings as a city planning specialist, is Nemelka’s brother-in-law. He previously headed a second public company with ties to the Nemelka family, and was a director of a third.

Our research found that Hall and Nemelka had been involved in an earlier public company called Sportsman’s Wholesale Co. According to SEC filings, Hall became  chief executive and majority shareholder of that company after it acquired a sporting goods business and shooting range he operated. He was succeeded a few years later by Nemelka, after Nemelka purchased newly issued stock equal to 90 percent of the company. Sportsman’s Wholesale was then used as the vehicle for a reverse merger with a U.S.-based company.

Other SEC filings show that prior to the China Infrastructure Investment deal,  Hall’s then-wife, Brenda M. Hall, was the trustee for a trust benefitting Nemelka’s children.

Nemelka was indicted in 2002 on charges of securities fraud, wire fraud and conspiracy in connection with a scheme to manipulate the shares of Lanstar Semiconductor Inc., which also went public through a reverse merger.

The grand jury also indicted Nemelka’s father, David R. Nemelka, a recidivist securities-law violator; Kurtis D. Hughes, an executive at a stock transfer company called Interwest Transfer Co.; and a third person who acted as middleman.

According to the indictment, Hughes controlled a shell company called Kazmir Kliffs Inc. that was available for use in a reverse merger. Hughes sold shares in Kazmir Kliffs to the Nemelkas in a private transaction, with the understanding that he would be paid when the stock in the successor company was eventually resold.

After Kazmir Kliffs completed its reverse merger with Lanstar, the defendants controlled 90 percent of the stock. The indictment said they manipulated the market by artificially raising Lanstar’s share price, and by coordinating their selling to prevent actions that would depress that price.

According to the indictment, the SEC was monitoring the scheme through a confidential informant, and halted trading in Lanstar’s stock before a large amount of shares were dumped on the market.

David N. Nemelka pleaded guilty in 2005 to a reduced, misdemeanor charge of aiding and abetting a false stock transfer request prepared by Hughes. He was sentenced to two years’ probation and fined $5,000.

David R. Nemelka and Hughes also pleaded guilty to reduced charges, and also got probation. David R. Nemelka died last year.

The U.S. Attorney’s office in Salt Lake City, which prosecuted the case, declined to discuss its decision to reduce the charges against the defendants. The SEC never took action against any of the participants in the scheme.

Neither Hall, who controlled the shell that became China Infrastructure Investment, nor Evans, who controlled the one that became Chisen Electric, responded to our request for comment.

Nemelka also did not respond to a list of questions we sent him.

Hughes’ company, Interwest Transfer, later became the transfer agent for China Infrastructure Investment and Chisen Electric. Hughes did not respond to our request for comment.


Filings in the Canadian court case asserted that Jay Chiang, who lives in the Toronto area, secretly controlled Winner International.

An American court previously found that Chiang and his brother defrauded a computer company of nearly $10 million in the 1990s. Chiang has circumvented the financial judgment against him by spending more than a decade in bankruptcy, claiming that he has few assets and no significant source of income.

However, a brokerage statement plucked from Chiang’s trash by a private investigator led to the discovery that he was involved with Winner International, and that it had acted as a middleman in some of the Chinese reverse mergers.

After a creditor presented evidence that Chiang had electronic access to Winner International’s bank and brokerage accounts in Hong Kong, a judge ordered a worldwide freeze on its assets in February 2009.

A second judge who took over the bankruptcy case ruled in July of this year that Chiang was, in fact, the hidden owner of 50 percent of Winner International. The judge concluded that Chiang also owned half of New Global Investments, another entity that reaped some of the financial benefits of the reverse mergers.

According to testimony in the case, Chiang was the key link between Kelley and Tang, who lives in Beijing and who recruited Chinese companies that were interested in going public in the United States.

Kelley handled the U.S. side of the deals, locating shell companies and preparing them for the reverse mergers. Because he did not speak any of the Chinese dialects, he needed someone to communicate with Tang and others.


All 11 Chinese companies created through the reverse mergers have been represented by K&L Gates LLP, a global law firm with headquarters in Pittsburgh, or by one of its predecessor firms, Kirkpatrick & Lockhart Nicholson Graham LLP.

Anslow & Jaclin LLP, a firm in Manalapan, N.J., represented the shell companies that became Orsus Xelent, New Oriental Energy, Kandi and Guanwei Recyling.

Documents in the Canadian court case show that Winner International made payments to K&L Gates, Kirkpatrick & Lockhart and Anslow & Jaclin on behalf of the reverse-merger companies. That suggests that the law firms were aware of the financial arrangements between Winner International and those companies.

Sharesleuth sent written questions to K&L Gates about its dealings with Winner International, about the discrepancies in the share reporting and about other SEC disclosure issues surrounding the Chinese companies.

A spokesman for K&L Gates said the firm would not be responding to them.

The two name partners in Anslow & Jaclin also did not respond to a list of questions.

A Utah attorney, Cletha A. Walstrand, represented the shell companies that became China Infrastructure Investment and Chisen Electric. She has since represented other shell companies in reverse merger deals that involved David N. Nemelka and his brother, John F. Nemelka.


In determining who reaped the biggest profits from dubious Chinese reverse mergers, following the money often means following the stock.

What follows is a breakdown of the Orsus Xelent and New Oriental Energy deals, including a look at the people behind the shells used in the mergers, the allocation of shares in the newly public Chinese companies, and the developments afterward.

We will present similar breakdowns on the other deals in parts two and three of this series.


Orsus Xelent went public on March 31, 2005, through a reverse merger with Universal Flirts, a New York-based company that was trying to develop several online dating sites, including and

Orsus Xelent is based in Beijing and designs and manufactures cell phones for retail and wholesale distribution.

SEC filings related to the reverse merger show that a Hong Kong-registered entity called United First International Ltd. got 15 million shares in the combined company, or just over half of the total outstanding.

At the time of the deal, Universal Flirts had been a public company for less than a year. Other SEC filings show that it had generated just $137 in revenue since its inception, and that it ended 2004 with around $34,000 in cash and $11,000 in other assets.

Nevertheless, its shareholders got a 49 percent interest in Orsus Xelent, which reported $70.8 million in revenue and $8.7 million in profits the previous year.


SEC filings show that right before its deal with Orsus Xelent, Universal Flirts did a 4-for-1 stock split that boosted its outstanding shares to roughly 43 million.

Darrell Lerner, the company’s chief executive, owned 36 million of those shares. Other investors wound up with 7 million shares after the split, or roughly 5 million more than they held previously.

SEC filings show that Lerner surrendered 28.3 million of his shares on the date of the  reverse merger, in return for the rights to the dating business. That left him with 7.7 million shares, or more than a quarter of the total outstanding.

The other Universal Flirts stockholders emerged with more than 20 percent of Orsus Xelent.

We found that Universal Flirts’ original investors had paid only a nominal sum for their stock in the company. SEC filings show that Universal Flirts raised its initial capital by selling 1.5 million shares in a May 2004 private placement, at 5 cents each.

The stock split prior to the reverse merger reduced the cost basis to 1.25 cents. When Orsus Xelent’s shares began trading in April 2005, each of those shares had a market value of $1.50.


The SEC filings related to the Orsus Xelent deal did not say who got the 7 million shares that didn’t go to Lerner. But a registration statement that Universal Flirts filed a few months before the reverse merger showed that three of its larger stockholders were people who had been officers or directors of Teltran International, the now-defunct telecommunications company that was headed by Byron Lerner.

The SEC brought charges against Byron Lerner in 2002, alleging that he caused Teltran to materially overstate revenue and earnings, and that he benefitted by selling some of his shares. The SEC also charged Teltran, saying the company issued misleading revenue, earnings and stock-price projections.

Teltran’s shares went from a low of 43 cents to a high of $16.50 in the first nine months of 1999, largely as a result of those misleading statements.

Byron Lerner settled the SEC charges without admitting or denying guilt, and agreed to pay $137,000 in disgorgement and penalties. Teltran also agreed to a settlement, promising to refrain from future violations of securities laws.

SEC filings show that at the time of the reverse merger, Universal Flirts was operating from office space it leased from Byron Lerner.

According to the company’s earlier registration statement, the investors in Universal Flirts’ 2004 private placement included Tubbs, chief executive of the shell company that became New Oriental Energy.

Tubbs had been executive vice president of Teltran; James J. Supple, former chief financial officer of Teltran, also was among Universal Flirts’ larger shareholders. So was Martin A. Miller, who was a Teltran director.

The stakes that those three men and their spouses held in Universal Flirts would have equaled 1.7 million shares of Orsus Xelent at the time of the reverse merger.

Universal Flirts’ law firm, Anslow & Jaclin, held 250,000 shares prior to the split, representing stock it received as payment for its services. The firm stood to receive an additional 750,000 shares through the split.

Thus, Darrell Lerner, the three former Teltran insiders, and Anslow & Jaclin held what would have become 10.4 million of the 14.7 million shares that did not go to Orsus Xelent’s officers, directors and other owners.


Orsus Xelent said in its annual filing with the SEC in April 2006 that Darrell Lerner still owned 7.7 million shares. However, he was not listed as holding 5 percent or more of the company’s stock in its annual filing the following April.

Holders of 5 percent or more of Orsus Xelent’s stock, from its 2006 annual filing with the SEC

Holders of 5 percent or more of Orsus Xelent’s shares, from its 2007 annual filing with the SEC

Lerner never reported the sale of any stock. And because Orsus Xelent’s trading volume in the year between the filings was less than 4.5 million shares, it would have been impossible for him to have sold enough of his stock in the open market to fall below the SEC’s reporting threshold.

We noted that the National Association of Securities Dealers barred Lerner in April 2007 from association with any member firm. It said that, while registered with a brokerage firm, PMG Securities Corp., he engaged in outside private securities transactions without getting approval from his firm or notifying it that he stood to receive compensation for his efforts. The NASD (now the Financial Industry Regulatory Authority) said he also provided false testimony under oath and willfully failed to amend his registration by adding material information.

The NASD’s summary of the disciplinary action did not say whether any of the private transactions involved shares of Universal Flirts or Orsus Xelent.

According to a document in the Canadian court case, Winner International got 1.45 million shares of Orsus Xelent for its participation in that reverse merger. That amount was just under the SEC’s 5 percent threshold for public disclosure.

Based on the details of the merger transaction in SEC filings, Winner International’s stock had to have come from Lerner or the others who held shares in Universal Flirts prior to the deal.


Orsus Xelent’s stock began trading on the Over the Counter Market in April 2005 at $1.50 a share. Roughly 1.5 million shares changed hands in the first month, a period in which the stock climbed as high as $3.10 a share.

The company’s stock stayed in the $1.50 to $3 range for most of the next two years, at a trading volume that seldom exceeded 50,000 shares a day.

Orsus Xelent’s share price and trading volume began rising in January 2007, after the company announced it had been chosen to provide specialized mobile phones to China’s State Administration for Industry & Commerce (SAIC).


Orsus Zelent said in a press release on Jan. 11, 2007 that it expected to sell 20,000 of its new model X180 phones to the SAIC that year. The company projected that it would deliver as many as 300,000 of the phones within 18 months.

Orsus Xelent said in the release that the phones would sell for $400, which meant that the company could see as much as $120 million in additional revenue. Its stock rose more than 20 percent that day, to $3.50.

In February 2007, Orsus Xelent appointed a Canadian accountant named Howard S. Barth to its board of directors. Barth was a longtime associate of Paul Kelley’s father, Stafford P. Kelley, who operated a stock-promotion firm called Medallion Capital Corp.

At the time, Stafford Kelley was facing charges by Ontario securities regulators that he helped to manipulate the share price and trading volume of a small mining company by engaging in improper trading. He later settled the charges and was barred from securities trading for five years and serving as an officer or director of a public company for 10 years.

Paul Kelley also had worked at Medallion Capital before getting into the Chinese reverse-merger game.

In March 2007, Orsus Xelent announced that it had signed a contract to supply 10,000 of the X180 phones to a second customer, a subsidiary of the Bank of China.

The next month, Orsus Xelent announced that revenue for the previous year rose 137 percent, to just over $68 million. It said profits rose 92 percent, to $6.7 million. By the end of April, the company’s stock was trading for more than $5 a share.


Orsus Xelent’s shares moved to the American Stock Exchange on May 10, 2007. Not long afterward, the company began issuing increasingly favorable updates about sales of its X180 phones.

On May 29, 2007, Orsus Xelent said in a press release that it expected to deliver 15,000 of the phones as the first phase of a 50,000-unit order from a subsidiary of China Unicom Ltd. It said that China Unicom, one of the biggest Chinese telecom providers, would be its partner in the sale of the phones to the SAIC.

In the release, Chief Executive Xin Wang was quoted as saying that Orsus Xelent expected to sell at least 70,000 of the X180 phones in 2007. He reiterated his projection that sales to the SAIC would grow to 300,000 units over time.

However, our investigation found that the company’s actual sales of the phones stalled at 10,000 units.

On June 17, 2007, a stock-promotion firm called RedChip Companies issued a paid report on Orsus Xelent. It included a “strong buy’’ recommendation and a 12-month price target to $7.15. That was more than double the prevailing share price.

The report cited Orsus Xelent’s revenue growth, as well as the potential for additional gains through the sales of the X180 phones.

RedChip said in a disclosure statement that it received $34,500 in compensation for the report and that an affiliate, Aurelius Consulting Inc., was being paid $10,000 a month under a services agreement with Orsus Xelent.

RedChip did not say who paid for the report, or who was paying Aurelius. But Canadian court documents show that at the time RedChip issued its report, Winner International was financing Orsus Xelent’s investor-relations activities.

They also show that Winner International had paid money to Aurelius.


On July 31, 2007, Orsus Xelent announced the launch of two additional phone models, the X388 and the X688, which it said would build on success of the X180.

Wang said in the release that the company expected orders for 20,000 of each new model, plus 50,000 orders for the X180. That meant it was positioned for sales of 90,000 advanced phones that year, equal to $36 million or more in new revenue

In an earnings announcement the following month, Wang was quoted as saying that because of the anticipated orders for those phones, Orsus Xelent projected that sales for 2007 would rise at least 30 percent.


Wang said Orsus Xelent expected to start getting orders in September 2007 for the X388 phones, and to start getting orders in November for the X688 phones. But our review of the company’s later SEC filings – which include breakdowns of sales by model – found that it never sold a single one of those phones.

Our review of those filings also showed that at the time Wang made those financial projections, he knew or should have known that China Unicom would not be placing orders for large numbers of advanced phones in 2007.

According to an overview of business conditions that Orsus Xelent included in a registration statement the following year, China Unicom had notified the company in June 2007 that the contract for the 50,000 X180 phones was being postponed because of “decreased market demand and the government delay of their funding.’’

That was the month before Orsus Xelent reiterated in a press release that it expected to sell all 50,000 of the X180 phones in 2007 as well as 40,000 of the X388 and X688 phones. Those, too, were to be distributed by China Unicom.

In other words, Wang knew or should have known when he projected the sale of 90,000 specialized phones in the company’s July and August press releases that the bulk of those orders would not be forthcoming in 2007.

Orsus Xelent did not disclose the postponement of the X180 orders at the time it received the notification from China Unicom.


On Oct. 2, 2007, RedChip issued a press release calling attention to its updated report on Orsus Xelent. It included a “strong buy’’ recommendation and a 12-month price target of $6.65. The report once again highlighted Orsus Xelent’s revenue and earnings growth, as well as the potential of the company’s new phone models.

Orsus Xelent’s share price rose more than 7 percent the day after the RedChip report appeared.

The next day, Oct. 4, 2007, Orsus Xelent issued a release saying it had experienced “a very robust third quarter.” It projected that revenue would be up 20 percent compared to the same period a year earlier.

The company said those gains were partly the result of its success in product development, as well as the shift in its marketing to mid- and high-level product lines.

Its stock shot to $5.05 on the news, with volume soaring to more than 3.2 million shares.

On Oct. 5, Orsus Xelent’s stock opened at $6.41, jumped to an all-time high of $7.90 then fell sharply, closing at $5.36. More than 4.9 million shares traded that day. Volume remained well above historic levels for the next week.

Our review of trading summaries showed that roughly 16 million shares changed hands between Oct. 2 and Oct. 11. Orsus Xelent’s stock ended that period at a little over $5, or more than 60 percent higher than the price at the start of the month.

A further 12 million shares traded by the end of December, with the price dropping back below $3.


By our count, Orsus Xelent’s trading volume from the time it went public in 2005 to the start of the October surge was around 10.5 million shares

That means that even if the Universal Flirts investors who got 14.7 million Orsus Xelent shares in the reverse merger accounted for as much as half of the selling in that time, they still would have had 9 million shares to unload.

If they sold all of their remaining shares in the last three months of 2007 and the first few months of 2008 — at an average of $3.50 — they would have collected more than $30 million. If they realized a higher price, the proceeds could have topped $40 million.

As we noted earlier, it’s possible that some of the volume in late 2007 was artificial, and that the actual proceeds from the share sales by people who got stock through the reverse mergers were lower than it might appear.


In November, Orsus Xelent announced its financial results for the three months that ended Sept. 30. Instead of the 20 percent year-over-year revenue increase that its CEO predicted in the Oct. 4 release, sales were up just 7.4 percent.

The company explained that the 20 percent gain it had highlighted in the Oct. 4 release was an error, and was meant to refer to improvement from the prior quarter. It said that because of miscommunication with its investor-relations firm, the earlier release wrongly used the third quarter of 2006 as the basis for comparison.

In the earnings report, Orsus Xelent lowered its guidance for the full year, saying that it was projecting a revenue increase of 20 percent to 30 percent.

The release did not mention the expected orders for 90,000 of the X180, X388 and X688 phones. And the detailed financial report in its quarterly filing with the SEC showed that the company sold none of those three models in the period.

Orsus Xelent’s stock fell by 26 percent that day, closing at $3.39.


Three and a half months later, Orsus Xelent announced its financial results for 2007. Despite its earlier cautions, the company reported that revenue and earnings wound up close to its original guidance. It said sales for the year rose 32 percent, to almost $90 million, while profits jumped 44 percent, to $9.7 million.

The annual report that Orsus Xelent filed with the SEC showed that it sold only $4 million of its X180 phones – all in the first half of the year — and that it sold no X388 or X688 models.

In other words, the revenue from those specialized phones fell far short of the $36 million in sales that the company had led investors to expect.

The fact that sales from the X180, X388 and X688 phones were so much lower than Orsus Xelent projected raises the question of how the company managed to come anywhere close to meeting its financial guidance.


Orsus Xelent’s annual SEC filing showed that it made up for the loss of anticipated revenue from the high-end phones by selling $27.6 million worth of three lower-end models – the TY725D, TY725E and TY732.

Our analysis showed that all of that business was recorded in the fourth quarter, and that those phone models accounted for more than 85 percent of the company’s revenue for the period.

Based on the sales breakdowns in Orsus Xelent’s annual filing, the TY725D and TY725E phones were the company’s two biggest sellers for the year, accounting for $20 million in revenue, or 22 percent of its total.

Our research found that Orsus Xelent executives never mentioned either of the TYD725 models in press releases or earnings announcements.

We also found that those models had not appeared in the product-by-product sales charts in Orsus Xelent’s previous quarterly filings. Nor did they appear in the charts in any  subsequent quarterly filings, or in the section of the company’s website that showed off its new and existing phone models.

We find it unlikely that Orsus Xelent – or any other company – would introduce a new line of products, sell more than $20 million of those products in a single quarter, and then discontinue the line.

Orsus Xelent’s annual SEC filing for 2007 showed that 92 percent of its sales were to a single customer, Beijing Xingwang Shidai Technology and Trading Co. Based on that figure, it would have been the buyer of the TYD725 phones.


According to SEC filings, Orsus Xelent continued to rely on the sale of lower-end phones in 2008 and 2009. The company reported record revenue of $108 million in 2008, along with record profits of $11.3 million. But its accounts receivable soared, to $82 million, and its cash at the end of the year had dwindled to around $100,000.

The filings show that Orsus Xelent’s major customer, Beijing Xingwang Shidai, was responsible for the vast majority of its unpaid accounts receivable.

Despite the rising sales and earnings, Orsus Xelent’s stock declined steadily. Its shares, which traded for $2.55 at the end of 2007, were down to 35 cents by the end of 2008.

Orsus Xelent reported in subsequent annual filings that its revenue fell to $77.4 million in 2009 and to $24.4 million in 2010. The company ultimately ran low on cash and laid off most of its employees.


SEC filings raise questions about certain sales of Orsus Xelent shares

We noted that on March 14, 2007, a former Orsus Xelent vice president named Zhou Liangyun filed an SEC form disclosing the sale of 292,600 shares. Liangyun said that he had sold the shares nine days earlier, for $863,170.

Liangyun said in the filing that he bought the shares in a private placement on April 4, 2005 – four days after the completion of the reverse merger.

Orsus Xelent made no mention of any private placements in its filings related to the reverse merger. Given that Zhou’s shares were not among those issued to the owners of Orsus Xelent, it appears that he bought the stock privately from someone who originally held shares in the shell company, Universal Flirts.

Our search turned up no filing by Liangyun reporting the original purchase of those shares.

It also appears that Liangyun resold that stock in a private transaction. The trading volume in Orsus Xelent’s shares on the date that he reported selling was just 2,040 shares, so all 292,600 shares could not have been sold on the open market.

And the reported price per share, $2.95, was outside the trading range for the date listed on the Form 144 filing.

If the purchaser or purchasers of Liangyun’s shares resold them when the company’s share price and volume peaked in October of that year, their profit could have exceeded $1 million.


Wang Zhibin, a former director and major stockholder of Orsus Xelent, said in a later SEC filing that he sold all 6 million shares of his shares on Sept. 10, 2009. That stake amounted to nearly one-fifth of the company’s outstanding shares.

Zhibin reported that the proceeds totaled $3.9 million, or a little over 60 cents a share.

Zhibin said in an SEC filing that he sold the shares privately to seven different buyers, in blocks ranging from 75,000 shares to 1.4 million shares. One of the buyers was an American stockbroker named John C. Leo, who was a promoter of two other Chinese reverse-merger deals.

Top executives at one of those companies, China Yingxia International Inc. (Pink Sheets: CYXI) were found by Chinese authorities to have engaged in fraud. And the SEC recently brought charges against the company’s former chief financial officer and some of its U.S. investors and consultants, alleging insider trading, the sale of unregistered securities and other violations.

The other company, Advanced Battery Technologies (Pink Sheets: ABAT) was delisted from the Nasdaq last November, amid allegations that the company had overstated its sales and earnings, and had fabricated the cash on its balance sheet.

About a month after Zhibin’s transfers, Orsus Xelent’s surged once more. On Oct. 14, 2009, the company’s stock rose 44 percent, to $1.24, on trading of nearly 3.9 million shares. That was 10 times the previous day’s volume.

Over the next five trading sessions, a further 5 million shares changed hands, with the price falling to $1. We could find no new release or corporate development to explain the surge.

By the end of the 2009, Orsus Xelent’s stock was down to 60 cents. By the end of 2010, it was under 20 cents.


Orsus Xelent’s stock sank to a low of 6 cents a share in the spring of 2011, before the company executed a 1-for-12 reverse split in an effort to boost the share price enough to maintain its AMEX listing.

After that maneuver, the stock went on a wild ride, with trading volume rising to millions of shares a day and the price climbing as high as $7.89 a share.

The reverse split last April left Orsus Xelent with roughly 2.5 million shares outstanding. That included 515,000 shares held by its current chief executive, who never reported selling any of them.

In the first week after the split, the company’s stock quadrupled, reaching a high of $2.89 on yet another unexplained surge in volume. By mid-May, it was back to $1.

On May 23, 2011, Orsus Xelent’s trading volume jumped once more, to 1.6 million shares, lifting the price as high as $2.98. The next day, volume topped 2 million shares, and the price rose again.

In June, more than 10 million shares – or five times the public float — traded hands over three days, moving the price from a low of $2.81 to a high of $7.89.

Orsus Xelent did not release any news that might have prompted the surges, and the company’s chief financial officer told Reuters that he could offer no explanation for the price movement or trading activity.

By mid-August, the stock was under $3.

The AMEX eventually delisted Orsus Xelent’s shares, citing a number of concerns, including the financial impairment caused by the $100 million in uncollected receivables. Its stock now trades on the Pink Sheets for around 5 cents.


Darrell Lerner now is part of the management team at Snap Interactive Inc. (OTCBB: STVI), which operates an online dating and social networking platform called He co-founded the company with his brother, Clifford Lerner, who is chairman and chief executive.

SEC filings show that Snap Interactive hired Byron Lerner as a consultant in June 2010. The two-year contract paid him $8,000 a month, plus a $600 transportation allowance.

James Supple, who was chief financial officer of Teltran International and a shareholder of Universal Flirts, has worked as Snap Interactive’s controller.

Snap Interactive’s stock currently trades for around $1.30 a share, down from a high of $2.37 in February.


New Oriental Energy was created in October 2006 through a reverse merger with Sports Source Inc., a New York-based company whose shares were listed on the Over the Counter market.

New Oriental Energy has headquarters in Xinyang and manufactures a variety of fertilizer and chemical products. Its most promising product at the time it went public was coal-based alternative fuel called dimethyl ether (DME).

SEC filings show that the actual merger was between Sports Source, which had hoped to establish itself as a central source for fantasy sports information, and a Hong Kong-registered company called Kinfair Holdings Ltd.

Kinfair got 7.5 million shares of the combined company, or just over 59 percent of the total outstanding.

SEC filings show that Sports Source had generated less than $100 in revenue since its inception. In the quarterly filing preceding the reverse merger, its balance sheet showed roughly $10,000 cash and $3,000 in other assets.

Still, the owners of the shell got more than a 40 percent interest in New Oriental Energy, which was listed as having $30.8 million in revenue and $2.75 million in profits in its previous fiscal year.


James Tubbs, the former Teltran executive, was Sports Source’s chief executive and majority owner. According to SEC filings, Darrell Lerner was a consultant to the company, but he was not listed among its shareholders.

Like the shell company that became Orsus Xelent, Sports Source split its stock just before the reverse merger. Its 2-for-1 split boosted the total number of shares outstanding to 18.8 million.

Tubbs had 15 million of those shares. As we mentioned previously, he surrendered 13.7 million shares for cancellation at the time of the reverse merger. That would have left him with 1.3 million, or just over 10 percent of the combined company.

Other Sports Source shareholders came away from the deal with 3.84 million New Oriental Energy shares, which amounted to a 30 percent stake.

Those shareholders were not identified. But an SEC filing from the summer of 2005 listed the people who held the stock at that time. Because there was little, if any, trading in Sports Source’s shares, those people could not have displosed of their stock on the open market prior to the reverse merger.


According to the filing, Sports Source had sold 1.62 million shares in a private placement the year before the reverse merger, for 5 cents a share. Sports Source also had issued 300,000 shares to its law firm, Anslow & Jaclin, as payment for its services.

The participants in the private placement included Dolores Miller, the wife of former Teltran director Martin Miller. SEC filings show that she held 400,000 Sports Source shares — the equivalent of 800,000 shares after the split.

So did an entity called the Myatt Defined Benefit Plan. Corporation filings show that it is managed by Jason S. Myatt, a Florida lawyer. He is the son of Stanley Myatt, whose alleged ties to organized crime, securities fraud and drug smuggling were recounted in a story in Vanity Fair magazine in 2003.

Stanley Myatt’s name also came up in the 2001 trial of Joey Merlino, a Philadelphia mob boss who was convicted of extortion and illegal gambling and sentenced to 14 years in prison. Ralph Natole, an acknowledged Mafia member who said he considered Merlino a protégé, testified that Myatt was the person who helped their group establish a “good connection’’ with the Russian mob.


Martin Miller and Stanley Myatt had been the largest shareholders of a publicly traded telemarketing company called Epixtar Corp., whose stock rose from 29 cents in the second quarter of 2002 to $8.85 a year later.

Miller also was chairman and CEO of Epixtar. Its stock collapsed in 2003 after the Federal Trade Commission charged it with “cramming’’ – surreptitiously billing businesses for web pages, Internet access and other services they did not order.

Epixtar filed for bankruptcy in 2005. A New York judge issued an order in 2006 barring the company from future violations and requiring it to pay millions in restitution to customers.

Corporation filings show that Martin Miller and Stanley Myatt were involved in at least two other businesses together after Epixtar, and that Jason Myatt was the legal representative for both of those businesses.

Jason Myatt did not respond to questions sent by Sharesleuth.


The merger documents suggest that Tubbs should have wound up with more than 10 percent of New Oriental Energy’s stock, which would have made him the company’s second-largest individual shareholder.

But a proxy filing submitted to the SEC on the same day as the share exchange agreement and other merger-related documents did not list him among the people owning 5 percent or more of the company’s stock.

Our check of other filings showed that he never reported selling any of his shares.

Neither Dolores Miller nor the Myatt Defined Benefit Trust ever reported owning 5 percent or more of New Oriental Energy’s stock, even though the shares they initially held in Sports Source would have become matching 7.5 percent stakes in the reverse merger.

According to a document in the Canadian court case, Winner International received 599,700 shares of New Oriental Energy for its role in the reverse merger. Based on the account of the transaction in SEC filings, those shares had to have come from Tubbs or the other holders of Sports Source stock.

As in the Orsus Xelent deal, the number of shares that Winner International received was just under the SEC’s 5 percent threshold for public disclosure.

The two deals had another common element: New Oriental also appointed Howard Barth to its board of directors. He was chairman of the audit committee at both companies. That meant he had oversight over their financial reporting, and their compliance with legal and regulatory requirements.


We searched for other investors who later sold stock in New Oriental Energy and found four SEC filings covering the sale of shares acquired around the time of the reverse merger.

We found two filings by Keen Merit Investments Ltd., a Hong Kong-registered company that had invested alongside Kelley and Winner International in the deals that created Telestone and China INSOnline.

A third was filed by another Hong Kong-registered company, Long Triumph Investments Ltd. SEC filings show that it also had prior ties to Kelley and Winner International.

Keen Merit filed a disclosure form in November 2007 covering the planned sale of 500,000 New Oriental Energy shares, which it estimated had a market value of $3 million. It said in the filing that it had acquired the shares in 2006 from Chen Si Qiang, New Oriental Energy’s chairman and chief executive, for $100.

Curiously, the filing listed the purchase date as May 8, 2006 — five months before the reverse merger. That date was two months after Sports Source had split its stock, creating more than 9 million additional shares.

Another Keen Merit filing, submitted to the SEC in February 2008, appeared to cover some of the same 500,000 shares as its earlier filing. This one also said that it acquired the shares for $100 in May 2006. However, it said Tubbs was the seller.

Tubbs never reported selling any stock.

Keen Merit said in the second filing that it sold 148,044 New Oriental shares in December 2007 and January 2008, collecting $859,000. It said it expected the remaining 351,956 shares to bring around $1.9 million.

Long Triumph filed its disclosure form in November 2007, covering the sale of 20,800 New Oriental Energy shares it valued at $135,200. Like Keen Merit, said it purchased the shares from Chen Si Qiang for $100 in May 2006.

The SEC filings related to the reverse merger did not say anything about Qiang owning shares in the shell company prior to the deal. He has never reported selling any of his stock in New Oriental Energy, and the company’s SEC filings never have reported a reduction in the number of shares he controlled.

His ownership stake in New Oriental at the time of the reverse merger was nearly 4.8 million shares, or 38 percent of the total outstanding.

The fourth disclosure form was filed by an American woman named Davina S. Lockhart. She reported the planned sale of 100,000 New Oriental shares, valued at $600,000, in November 2007.

Lockhart said in the filing that she bought the shares privately from Winner International on Nov. 16, 2006. That date was about a month after the completion of the reverse merger.


Davina Lockhart is the wife of Roger D. Lockhart, a former stock broker who was among the biggest shareholders of a public company called Host America Corp. The SEC investigated Lockhart and Host America after the company issued a false press release in 2005 that led to a quintupling of its stock price.

The false release suggested that Host America was making preparations to install its energy-saving systems in 10 Wal-Mart stores as the first phase of a larger agreement with the retail giant. No such agreement existed.

According to a class-action lawsuit against Host America, Lockhart sold more than $6 million of stock on behalf of himself, his wife and others as the company’s shares neared their post-press release peak.

The SEC halted trading a few days later. Although the stock collapsed when trading resumed, Host America announced in 2007 that the SEC’s Ft. Worth office had decided not to recommend charges against the company.

Host America ultimately agreed to pay $2.45 million to settle the class-action complaint. Lockhart agreed to pay $550,000 to settle claims against him.

We noted that one of the two investor-relations contacts on the false Host America press release was Mark Miller, who runs a firm called East West Network Group.

Our research found that Miller and East West Network Group later handled investor relations for New Oriental Energy and some of the other Chinese reverse-merger companies.

A second firm, Focus Asia Partners LLC, also provided investor-relations services to New Oriental Energy, Orsus Xelent and some of the other Chinese companies.

Our research showed that Focus Asia’s co-founder, Scott W. Feldhacker, was involved in Host America with Roger Lockhart.  And after the Chinese deals, Feldhacker, Davina Lockart and Kelley were among the founding shareholders of a publicly traded U.S. company, American Standard Energy Corp. (OTCBB: ASEN).


New Oriental Energy’s shares began trading on the Over the Counter Market in October 2006. They ended the first day at $1.60. The next day, they rose 62 percent, to $2.60 and climbed again on the third day, to $2.95.

In the first month of trading, about 1.4 million shares changed hands. Within a year, total volume was approaching 5 million shares.

New Oriental Energy began expanding its dimethyl ether production facility in 2006, as part of a plan to boost its capacity from 50,000 tons a year to 150,000 tons a year.

It said in press releases and SEC filings that the growth to 150,000 tons a year would generate an additional $57 million in revenue.

In early 2007, New Oriental Energy or its promoters enlisted the RedChip Companies to produce paid research reports, just as RedChip did for Orsus Xelent.

On Feb. 7, RedChip initiated coverage of New Oriental Energy. The report, like the one on Orsus Xelent, was issued at a time that Winner International was paying the company’s investor-relations expenses.

RedChip projected that New Oriental Energy’s revenue would grow at a compound annual rate of more than 50 percent for the next two years, based on a “favorable market outlook and the company’s aggressive expansion strategy.” RedChip said it expected earnings to grow at a compound annual rate of nearly 58 percent in that period, and set a 12-month price target of $8.75 on the company’s shares.

At the time, New Oriental Energy’s stock was at $4, and average trading volume was less than 20,000 shares a day.

Our research found that the reality at New Oriental Energy was different than the story RedChip presented, at least where DME was concerned. Documents filed in the Canadian court case show that Jay Chiang and some of the company’s other backers were worried that it was seeking capital to expand DME production at a time it was operating at only a fraction of its existing capacity.

In an email exchange on April 1, 2007, Chiang noted that New Oriental Energy’s revenue figures showed that it was producing just one-fifth its maximum output of DME and focusing on methanol instead.

“It is hard to sell the idea of additional build out if the company is not even using the current capacity,’’ Chiang wrote.

The recipient of the email, a Chinese national named Liya Wu who worked for Kelley, sent a response to both men. Wu said she had talked to her contacts at the company and was told they would be “making up some reasonable reasons’’ to explain the situation while on an upcoming investor road show.

On July 2, 2007, New Oriental Energy announced that revenue for the fiscal year that ended March 30 totaled $39 million, up 26 percent from the previous fiscal year. It said earnings rose nearly 10 percent.

New Oriental Energy attributed most of the improvement to a doubling of its DME and methanol sales, which accounted for more than $12 million of its revenue.

On Sept. 6, New Oriental Energy announced that it had signed contracts with several new DME customers and would begin tapping its extra capacity ahead of schedule. It added that it hoped to boost production to 10,500 tons a month, which it said would make it one of the biggest DME producers in China.

On Sept. 7, the company got even more visibility when Qiang rang the closing bell at the Nasdaq exchange. A photo that captured the event shows Kelley a few feet behind the Chinese executive, applauding.



New Oriental Energy’s stock rose nearly 14 percent over that two-day period.


Like the shares of Orsus Xelent, the shares of New Oriental Energy were volatile. Our review of the company’s trading history turned up a number of notable — and often inexplicable — surges in volume and price.

Documents filed in the Canadian court case show that on Sept. 20, 2007, Winner International deposited 200,000 shares of New Oriental Energy in a newly established account at E*Trade Securities.

Five days later, New Oriental Energy’s shares jumped 52 percent, to $7.50. Trading volume shot to 1.2 million shares, up from just 19,600 the day before.

Our research turned up no company announcements or other developments that would account for such a move. Even the company’s backers on Internet message boards were mystified.

New Oriental Energy’s stock had similar surges on Oct. 3, 4, and 11, moving the price to $7.95, $8.50 and $10.10, respectively. More than 4.5 million shares traded hands on those three days — again in the absence of any news.

On Oct. 11, New Oriental Energy’s stock opened at $9.95, up 21 percent from the previous day’s close. The shares reached $10.10, which would prove to be their all-time high, before sinking to end the day at $7.97.

Our research found that the shares of New Oriental Energy and Orsus Xelent both surged during the same seven-day stretch, at a time when the Dow Jones, the Standard & Poor’s 500 and other indexes were nearly flat. Shares of Kandi and Telestone, two other Chinese companies taken public by the same group, also rose noticeably during that period.

Within two weeks, New Oriental Energy’s stock was back to $6.


On Oct. 25, 2007, an Internet site called issued a paid report on New Oriental Energy, touting the company’s growth potential and its financial performance in the second quarter of the year. disclosed at the bottom of the report that it had been paid $30,000 by one of Kelley’s companies, MCC Management Inc., for a 90-day advertising campaign.

New Oriental Energy’s shares rose 16 percent the day the report appeared, to $6.98. Over the next two days, the stock climbed as high as $7.45.

Within a week of the StockUpticks report, however, the share price returned to the $6 range.

New Oriental Energy released its quarterly earnings on Nov. 14, 2007. It announced that revenue rose 129 percent from the same period a year earlier, to $18.2 million. It added that sales of DME were up 790 percent, to $12.2 million.

But profits for the quarter rose less than 15 percent, to $900,000. New Oriental Energy’s shares fell nearly 10 percent the day it announced those earnings, and fell another 5 percent the following day, closing at a little over $5.

On Nov. 19, StockUpticks issued a follow up, also paid for by MCC Management. It highlighted New Oriental Energy’s revenue and earnings growth, saying they were “a strong affirmation of the company’s business plan and leadership.”

The second report did not produce another surge in the company’s share price or trading volume.


In the first three days of trading in 2008, New Oriental Energy’s shares rose 24 percent, to $7.43. The total volume was 1.2 million shares. The next day – Jan. 7, 2008 — a stock-promotion service called Beacon Equity Research issued a positive note on the company.

Although volume that day totaled nearly 1.8 million shares, New Oriental Energy’s stock fell by more than 9.5 percent. The price fell a further 9.5 percent the following day, closing at $6.09.

New Oriental’s stock didn’t stay down for long. On Jan. 14, 2008, the price rose 20 percent to $7.40, on a volume of 2.9 milion shares. The next day, another stock promotion service called issued a report on the company.

Among other things, it preducted that New Oriental Energy’s shares could be headed back to $9, or even $10.

Despite that forecast, the company’s shares fell more than 14 percent, again on heavier-than-usual volume. Neither Beacon Equity nor Bellwether disclosed who, if anyone, compensated them for their reports.

New Oriental Energy’s total trading volume for the month of January was more than 11 million shares. Our investigation suggests that the architects of the reverse merger used the periods of heavy trading in late 2007 and early 2008 to liquidate much of the stock they or their associates received in that transaction.

That is reinforced by the timing of the SEC filings by Keen Merit, Long Triumph and Davina Lockhart, whose forms covered the actual or planned sale of more than 620,000 shares in that period, or more than 10 percent of the public float.


A summary of Winner International’s cash transfers from its brokerage accounts — submitted as evidence in the Canadian court case — suggests that it also was selling some of its shares in the Chinese companies in late 2007 and early 2008.

Those records show that on Nov. 28, 2007, Winner International transferred $2 million from its brokerage account at Westminster Securities to its bank account at HSBC Bank in Hong Kong.

They show that, on that same day, Winner International transferred $700,000 from an account at Lighthouse Securities to the account at HSBC Bank.

Of the 11 Chinese companies taken public by Kelley and his associates, only four were trading at the time — Orsus Xelent, New Oriental Energy, Telestone and Kandi.

Winner International also transferred $2 million out of its account at E*Trade Securities in Hong Kong on Jan. 10, 2008, and moved an additional $800,000 from its Westminster Securities account to its HSBC Bank account on Jan. 25, 2008.

All told, Winner moved at least $5.5 million out of its brokerage accounts over that two-month period — more than in any comparable period between 2005 and 2009.

New Oriental Energy’s total trading volume from Sept. 25, 2007 to Oct. 25, 2007 was roughly 11 million shares. Factoring in the additional volume before and after that surge, we estimate that the Sports Source investors who got just over 5 million shares of New Oriental Energy in the reverse merger could easily have sold all of their holdings by mid-2008, at an average price of $4 or more.

At that price, those sales would have generated proceeds of more than $20 million.


New Oriental Energy’s stock traded in a range of $4.50 to $6.50 in the first half of 2008.

In March 2008, RedChip reiterated its buy rating, with a price target of $8.50. It cited the company’s revenue gains and its “strong’’ year-over-year increases in DME output. RedChip added that New Oriental’s expansion of its DME capacity from 50,000 tons a year to 150,000 tons a year in late 2007 helped move the company closer to its goal of producing 600,000 tons annually by 2010.

But our quarter-by-quarter analysis of New Oriental’s SEC filings found that the company’s DME production actually had peaked in the three months that ended Sept. 30, 2007. Total output in that period was around 25,600 tons.

SEC filings show that production fell to 18,210 tons the following quarter. It dropped again, to less than 10,000 tons, in the quarter that ended in March 30, 2008 – the same month that RedChip highlighted the company’s growth.

In other words, despite RedChip’s positive outlook for the DME business, New Oriental Energy’s quarterly production of that fuel had actually declined by more than 60 percent over the previous six months.

In July 2008, New Oriental Energy announced that revenue for the fiscal year that had ended in March rose 77 percent, to a record $67.8 million. It said profits were up 34 percent, to $4.1 million.

Although trading volume rose sharply that day, the company’s share price fell 16 percent, to $4.

New Oriental Energy’s stock continued on a downward trend as it became clear that rising coal prices in China would put financial pressure on the company’s DME and methanol businesses, which used coal as their main feedstock.

On Nov. 14, 2008, New Oriental Energy’s shares plunged 33 percent, to $1.11, after the company announced a year-over-year decline in revenue for its second quarter, and a $590,446 loss instead of a profit.

By the end of that year, the company had all but abandoned the production of DME, which was supposed to be the main contributor to its revenue and earnings growth.

New Oriental Energy’s fortunes continued to slide in 2009 and 2010. By March 2011, its stock was below 50 cents, and was delisted by the Nasdaq. By May, its shares were below 20 cents.

Earlier this year, New Oriental Energy announced that it had completed a second reverse merger, combining with a Chinese paper and packaging company. However, New Oriental Energy no longer is filing financial reports with the SEC, and that latest deal has done little to lift its share price or trading volume.

Its stock currently trades on the Pink Sheets for a penny.


In the course of our research, we turned up two more Chinese reverse mergers that involved some of the same players as the earlier 11. The mechanics of those deals could help explain how shares of Universal Flirts and Sports Source were put into friendly hands prior to the creation of Orsus Xelent and New Oriental Energy.

We found that Xin Wang, the former chief executive of Orsus Xelent, teamed with another former Orsus Xelent executive and a former Telestone executive on the reverse mergers that created HQ Global Education Inc. (Pink Sheets: HQGE) and Pacific Bepure Industry Inc. (Pink Sheets: PBEP). Both deals closed in 2010.

In a twist on the usual formula, the alumni from Orsus Xelent and Telestone were shareholders in the U.S. shell companies used in the deals, rather than investors in the Chinese businesses that were taken public.

In both cases, the men were part of larger foreign investment groups that acquired majority stakes in the shells prior to the mergers.

Our research found that Wang was the signatory for two entities that bought stakes in U.S. companies called Green Star Mining Corp. and Wollemi Mining Corp. He had sold some of his Orsus Xelent shares earlier that year, for around $1.2 million

Our research showed that Liu Dongping, the former chief financial officer of Telestone, also bought shares in those shells.

Green Star Mining became HQ Global Education, which operates vocational schools and has headquarters in Changsha, the capital city of Hunan Province. Wollemi Mining became Pacific Bepure, a footwear maker based in Jinjiang City.

The filings show that Zhou Liangyun, a former vice president of Orsus Xelent, signed for another entity that bought a sizeable stake in Wollemi Mining before it became Pacific Bepure.

Liangyun had sold some 290,000 shares of Orsus Xelent in March 2007, for more than $860,000.

A second former Telestone executive named Zhong Zhao became chief financial officer of Pacific Bepure after the reverse merger.

SEC filings listed Green Star Mining’s majority shareholder as Nan E. Weaver. She is related to Robert C. Weaver Jr., former executive vice president and general counsel of La Jolla Capital Corp. (later Pacific Cortez Securities).

That California-based brokerage was headed by recidivist securities violator Harold J. Gallison Jr. and shut down under regulatory pressure in 1998.

SEC filings listed Wollemi Mining’s majority shareholder as Christopher Coldicutt. He is the son of Thomas Coldicutt and Elizabeth Coldicutt, both of whom were involved with Burnett Grey & Co., another defunct California-based brokerage.

Thomas Coldicutt, Elizabeth Coldicutt and Burnett Grey were the subject of disciplinary actions by both the SEC and National Association of Securities Dealers (now FINRA) in the 1990s.

The Coldicutts settled the SEC case by agreeing to refrain from future violations of federal securities laws.

However, the SEC brought new charges in August against the Coldicutts, Weaver, and three other defendants. It alleged that the Coldicutts, working through nominee officers and directors, controlled 15 publicly traded mining companies that had did little actual business.

That included the two that became HQ Global and Pacific Bepure.

The SEC alleged that the Coldicutts never intended those companies to engage in mining, but instead created them so they could be sold as shells for reverse mergers. It said the Coldicutts:

  • Provided funding to capitalize the companies and take them public.
  • Provided funding for investors to buy shares in the companies through registered offerings.
  • Directed their nominees in obtaining market listings for the companies.
  • Directed their nominees in filing quarterly and annual reports and ultimately selling the companies.

The SEC said that the Coldicutts collected nearly $5 million from the sale of the shells. The complaint alleged that Robert Weaver, a close friend of the Coldicutts, aided in the scheme.


SEC filings show that Nan Weaver, who was listed as Green Star’s majority shareholder, sold 1.5 million shares of that shell to various Asian investors for $229,000.

The amounted to 60 percent of the shell. The total number of shares held by the Asian investors later rose to 7.5 million through a stock split.

Wang, formerly of Orsus Xelent, was the signatory for one of the buyers, American First United Investment Group Ltd. It got 800,000 of the 7.5 million shares. Another SEC filing shows that Dongping purchased 100,000 shares of the shell.

Two months later, Green Star became HQ Global Education through a reverse merger that involved the issuance of 20.5 million new shares to two more Chinese entities.

SEC filings show that a Hong Kong attorney named Siu Choi Fat was listed as the beneficial owner of one of those entities, Nicestar International Ltd. It became HQ Global’s biggest shareholder.

Our research found that Fat had been involved in at least four of Paul Kelley’s previous reverse-merger deals — the ones that created New Oriental Energy, China Infrastructure Investment, Winland Ocean Shipping and China INSOnline.

Documents show that he also had acted as a legal representative for Winner International when it opened a brokerage account in Hong Kong.

HQ Global Education’s shares peaked at $6 on Aug. 13, 2010. Total trading volume has been minimal, however, with fewer than 600,000 shares changing hands. The last trade was at 26 cents.

HQ Global Education said in a recent SEC filing that a new entity created by its founders had acquired 9.3 million shares from other investors, including Wang and Dongping, for $5.9 million.

The transaction gave the founders control of more than 90 percent of the company. The filing said they intend to have HQ Global’s stock removed from the Over the Counter Market and deregistered with the SEC.


SEC filings show that Christopher Coldicutt, who was listed as Wollemi’s majority shareholder, sold 2 million shares to eight investors for $249,000. That became 3 million shares through a stock split, and equaled 67 percent of the company.

Wang, Orsus Xelent’s former chief executive, was the signatory for an entity called China Overseas Financial Group Ltd., which got 750,000 of the post-split shares.

Liangyun was the signatory for an entity called Asia Alpha Ltd., which got just over 1 million of the post-split shares. Dongping, the former Telestone executive, bought 20,000 Wollemi shares.

Pacific Bepure’s shares began trading on Jan. 27, 2010. They closed at $2.08 the first day, $2.25 the second and $3.15 the third, all on very low volume.

Pacific Bepure’s shares peaked at $4.50 a share on March 29, 2010. However, total trading volume since the company went public is less than 200,000 shares. The last trade, in April, was at 11 cents.

Because of the lack of trading volume, it appears that Wang and the other Chinese investors who bought into the shell that became Pacific Bepure have been unable to cash out most of their holdings.

(NEXT: In part two of our series, Sharesleuth will look at the reverse-mergers that created Kandi Technologies, Telestone Technologies and Guanwei Recycling)

Rick Feldman and Gregory Stevens provided fact-checking services for this report



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