Ex-Rockwell Medical consultant implicated in new fraud scheme

A former financial consultant to Rockwell Medical Inc. (Nasdaq: RMTI) has been implicated in a second securities fraud case, this one involving an alleged pump-and-dump ring that netted at least $13 million.

The consultant, Michael J. Xirinachs, was not one of the nine people charged in the case, nor was he identified by name in the court documents.

But Sharesleuth’s review of the federal indictment unsealed last week found that another of the alleged participants in the scheme — “Unindicted Co-Conspirator 2” — was identified as a hedge fund manager who controlled Emerald Asset Advisors LLC, based in Cold Spring Harbor, N.Y.

Xirinachs is the sole manager and shareholder of Emerald Asset Advisors. He also is one of the co-founders of Rockwell Medical, a Michigan-based company that makes and distributes dialysis products.

The indictment alleges that Xirinachs worked with some of the defendants to artificially boost the stock price of a company called Genmed Holding Corp. (OTCBB: GENM), so that they could profit by dumping their shares on unsuspecting investors.  It says that during the promotion and manipulation campaign, campaign, Xirinachs sold at least 2.2 million shares of Genmed stock he got from the defendants.

It also says that he and some of the defendants bought shares on the open market in advance of the campaign, to create the appearance of investor demand.

PREVIOUS CASE

The Securities and Exchange Commission previously brought charges against Xirinachs and Emerald Asset Advisors in connection with their role in a massive fraud scheme involving a now-defunct company called Universal Express Inc. (formerly OTCBB: USXP).

A federal judge found Xirinachs and Emerald Asset Advisors liable for selling billions of unregistered shares of Univeral Express. They were ordered last year to pay more than $10 million in disgorgement, interest and fines. Another person charged in the Universal Express case, a stock promoter named Tarun Mendiratta, was among those indicted last week.

Xirinachs’ alleged involvement in the Genmed case came after his contract with Rockwell Medical had expired, but while he was still holding warrants equal to more than 3 percent of the company’s common stock.

(Disclosure: Mark Cuban, the majority owner of Sharesleuth.com LLC, has a short position in Rockwell Medical’s shares. Chris Carey, the editor of Sharesleuth, does not invest in individual stocks and has no position in Rockwell Medical’s shares).

XIRINACHS AND ROCKWELL MEDICAL

Xirinachs, a former stock broker and investment banker, helped bring Rockwell Medical public in 1997. At that time, he owned more than 15 percent of its shares. He also had a consulting contract that paid him $300,000 the first year and $240,000 the second year.

Rockwell Medical signed Xirinachs and Emerald Asset Advisors to another consulting contract in November 2008. Its stock more than doubled in the 15 days following the signing of the agreement, which called for Emerald Asset Advisors to introduce the company to licensing partners, acquisition candidates, analysts, brokers and institutional investors. Rockwell Medical’s shares surged at a time when the overall stock market was slumping because of the global financial crisis.

Emerald Asset Advisors got 700,000 warrants as compensation, exercisable at prices ranging from $1.99 to $ 7 a share. Sharesleuth calculated last year that those warrants likely were exercised at a profit of somewhere between $2.5 million and $3.2 million.

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Fifteen charged in connection with international stock-manipulation scheme

A federal grand jury has indicted 15 people, including three who were spotlighted in Sharesleuth investigations, alleging that they participated in a series of “pump-and-dump” schemes that netted more than $30 million.

The defendants include Regis Possino, a disbarred lawyer with convictions for drug dealing and fraud; Sherman Mazur, a onetime real estate mogul with a prior fraud conviction; and Edon Moyal, the former chief executive of Who’s Your Daddy Inc., a publicly traded energy-drink company. He is currently awaiting sentencing in an unrelated criminal case.

The FBI said in a press release that its investigation included a series of wiretaps that resulted in the interception of more than 60,000 phone calls and 24,000 text messages.

Who’s Your Daddy was the subject of a Sharesleuth story three years ago. Entities connected with Possino provided early funding  in exchange for notes that could be converted to large amounts of stock.

Who’s Your Daddy now is called Fitt Highway Products Inc. (OTCBB: FHWY).

Companies tied to Possino and another of the defendants, Grover Henry Colin Nix, also provided to financing to Pure Play Music Ltd. (Pink Sheets: PPML) and got millions of shares of stock. Sharesleuth detailed those connections in a pair of stories in 2009.

The indictments unsealed this week allege that Possino, Mazur, Moyal and Nix were part of two networks that fraudulently inflated the share prices of small public companies before dumping their holdings on unsuspecting investors.

The indictments said the participants in the schemes acquired a large percentage of the shares in those companies, distributed those shares to nominees to conceal their ownership, boosted the share prices though manipulative trading and misleading press releases, then sold the shares.

Authorities said the schemes defrauded more than 20,000 investors in the United States and other countries.

The indictments (see details here and here ) identified five public companies whose shares were manipulated. They were:

–Sport Endurance Inc. (OTCBB: SENZ)

–GenMed Holding Corp. (OTCBB: GENM)

–BioStem U.S. Corp. (OTCBB: HAIR)

–FrogAds Inc., previously known as Imobilis Inc. (Pink Sheets: FROG)

–Empire Post Media Inc. (Pink Sheets: EMPM)

It appears from certain details in the court documents — such as the reported proceeds from the schemes involving those five stocks and the overall profits of the purported “pump-and-dump’’ network — that even more public companies were involved.

The indictments against Possino, Mazur, Moyal, Nix and the other defendants were issued last year, as part of ongoing investigations being conducted by the FBI and the Internal Revenue Service’s criminal division.

The indictments were unsealed Wednesday after 14 of the 15 people charged in the cases were arrested. The other, who authorities said operated from Switzerland and Dubai, remains at large.

Possino, Moyal, Nix and a stock promoter named Mark Harris were charged in both indictments. Mazur was charged in one. Those documents identified Possino and Mazur as the leaders of the schemes.

The other people who were indicted include Julian Spitari, the chief executive officer of FrogAds, and Dwight Brunoehler, the chief executive of Biostem. The FBI said four of the defendants allegedly participated in the schemes while on pretrial release in other criminal cases.

That group included Moyal, who was convicted last year of conspiracy to distribute marijuana. The new indictments allege that Moyal used another of his companies, 8 Sounds Inc., to pay promoters for touting the stocks used in the manipulation schemes. They say he also received a cut of the proceeds.

Another of the defendants, Tarun Mendiratta, pleaded guilty in 2009 to conspiracy and tax evasion charges in connection with a fraud scheme at a public company called American Fire Retardant Corp. According to the indictment, Mendiratta boasted of grossing more than $75 million from stock-manipulation schemes over the past decade.

The Justice Department has asked that Possino be held without bond, adding that he has considerable assets overseas and is a flight risk.

 

Alabama gold company’s tout campaign has a familiar look and familiar players

A financial felon who owned millions of shares in an energy company whose stock soared and then plummeted now is one of the funders of a heavily touted gold-mining venture.

Samuel DelPresto — a former brokerage executive who pleaded guilty to conspiracy charges in connection with a 1990s fraud scheme — has provided more than $500,000 to Southern USA Resources Inc. (OTCBB: SUSA).

Southern USA Resources went public through a reverse merger last April. It says it is developing a gold mine in Alabama, a state that has had no commercial gold production for decades.

Southern USA Resources is the focus of a promotional campaign that began earlier this month and has a budget of at least $900,000.

Our investigation found that the amount being spent to tout the company is seven times greater than the amount of cash and other current assets it listed in its latest quarterly financial report. It also is only slightly lower than the carrying value of all of the company’s assets, including its land, minerals and mining equipment.

Securities and Exchange Commission filings show that DelPresto and four other funders are bankrolling Southern USA Resources in return for notes that can be converted to stock at a fraction of the current market price.

Southern USA Resources’ stock closed Monday at $1.50 a share. At that price, the company had a market capitalization of nearly $45 million.

The shares underlying the $2.6 million in convertible notes that Southern USA Resources has issued to DelPresto and the other funders since the reverse merger would be worth an additional $20 million.

Although the SEC barred Del Presto in 2002 from associating with any broker or dealer, the order did not prohibit him from financing or promoting public companies.

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Small Companies, Big Questions: Chinese toll road and shipping companies take North American investors on strange trips

(Part three of a three-part series)

To U.S. investors, buying a piece of a toll road company in one of China’s fastest-growing provinces might have seemed like a pretty safe bet.

But the twists and turns at China Infrastructure Investment Ltd. (Pink Sheets: CIIC) have taken the company from the Nasdaq to the Pink Sheets and wiped out much of its market capitalization, which once topped $400 million.

A Sharesleuth investigation found that certain undisclosed parties profited handsomely  from the reverse merger that brought the company public, by buying 21.9 million shares from the former chief executive of the U.S. shell it combined with.

Securities and Exchange Commission filings show that the ex-CEO, Fred L. Hall, sold the stock for $72,500 just days after the reverse merger, in February 2008.

The sale price translates to less than 0.4 cents a share. At the time, the company’s stock was trading on the open market for more than $4.

Whoever got Hall’s stock appears to have resold much of it during periodic surges in trading volume in 2009 and 2010. Based on China Infrastructure Investment’s share prices in those periods, it’s possible that the seller or sellers could have collected $20 million or more.

Our investigation also found that the holding company that owned a majority stake in China Infrastructure Investment at the time it went public might have ended up with some of Hall’s stock.

SEC filings show that the holding company boosted its stake by more than 13 million shares over a two-year period, without disclosing any changes in its ownership, as required under federal securities law.

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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.

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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.

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Rockwell Medical countersues former drug-development executive

Rockwell Medical Inc. (Nasdaq: RMTI) has filed a countersuit against its former chief medical officer, alleging that he overstated his qualifications, breached a confidentiality agreement and made false and defamatory statements about the company to third parties.

Rockwell Medical brought its action against Dr. Richard C. Yocum in state court in Michigan, which it is based. It is seeking a restraining order, as well as injunctive relief and financial damages.

Rockwell Medical fired Yocum from his job as vice president of drug development and medical affairs in September 2011. As Sharesleuth previously reported, Yocum alleged in a wrongful-termination suit that he was ousted because he repeatedly complained to Robert L. Chioini, the company’s chairman and chief executive, about violations of Securities and Exchange Commission and Food and Drug Administration rules.

Among other things, Yocum alleged that certain press releases issued in 2010 and 2011 made it appear that clinical trials for a new product called Soluble Ferric Pyrophosphate were going better than they actually were.

Rockwell Medical makes and distributes dialysis products. It is conducting Phase III clinical trials of SFP, which is used to deliver water-soluble iron into the bloodstream during dialysis treatment. The iron helps combat anemia, a common side effect in patients with end-stage renal disease.

Rockwell Medical is hoping that the trials prove SFP is not only safe for patients, but effective in treating their underlying conditions. It says the product is aimed at a market worth $600 million a year in the United States and $1 billion a year globally.

Yocum alleged in his suit that Rockwell Medical:

–falsely claimed that the results of its earlier Phase IIb studies of SFP were positive, despite the fact that they failed to demonstrate that the treatment was effective.

– falsely claimed that the Phase IIb trials produced clear dosing data.

– falsely claimed that the company had an agreement with the FDA on the design of its Phase III clinical trials.

– proceeded with those trials despite unresolved differences with the FDA, without correcting its public statements and informing investors of those differences.

– announced an unrealistic date for bringing SFP to market, disregarding Yocum’s much longer timetable.

– failed to modify its Phase III trials to account for changes in FDA product labeling for erythropoiesis-stimulating agents, which are used to treat anemia and would likely be taken by all of the participants in the trials.

Rockwell Medical alleged in its filing last week that Yocum withheld vital information from management in early 2010 regarding the SFP program. It said that the “deliberate and negligent omission of data’’ was not discovered until  months later, after considerable expense to the company.

Rockwell Medical also alleged that, at the time he was hired, Yocum made false and misleading representations about his experience and successes in dealing with the FDA on clinical programs.

In addition, Rockwell Medical  said that he performed his duties in a fraudulent and incompetent manner. It said an investigation found that Yocum – who was based in San Diego rather than at company headquarters – did “little or no work, evading work and conducting private activities throughout each and every work day.’’

Finally, it said that in the final months of his employment, Yocum made false and defamatory statements about the company and its SFP program to third parties and investors, revealing confidential information.

Sharesleuth’s story on Yocum’s allegations was based entirely on his lawsuit and the company’s SEC filings.

Rockwell Medical said Yocum’s statements have harmed its reputation, hindered its business relationships and hurt its stock price, reducing its market capitalization by $50 million.

Rockwell Medical noted that soon after Yocum was fired, he began working for another pharmaceutical company, making significantly more in compensation and benefits than he received in his former job.

Houston American says SEC probing its Colombian resource claims

Houston American Corp. (AMEX: HUSA) says the Securities and Exchange Commission’s investigation into the company appears to be focused on disclosures about the potential of its CPO-4 prospect in Colombia in late 2009 and early 2010.

Houston American, which was the subject of a Sharesleuth story in the summer of 2010, provided additional details of the investigation in a new SEC filing covering the sale of $10 million in stock.

Houston American said in the filing that it had provided the SEC with information supporting its disclosures about the resource potential of the CPO-4 prospect. It said it would be discussing that material with the SEC this month.

Houston American’s stock has fallen from a high of $20.36 a share in April 2010 to its current price of 63 cents. The first two wells that the company and its partners drilled on the CPO-4 prospect produced no oil.

The third is more than half way to its targeted depth.

Houston American said in an investor presentation and a related SEC filing in November 2009 that the CPO-4 prospect was estimated to hold anywhere from 1 billion barrels to 4 billion barrels of “recoverable reserves.’’

As Sharesleuth noted in our original story, the higher figure exceeded the official proved and probable reserves for all of Colombia.

Houston American said in its latest filing that the SEC began an informal inquiry into the company in October 2010, which turned into a formal investigation on March 1, 2011. It  said it received a subpoena from the agency in February of this year.

Houston American publicly disclosed the investigation in April, saying it had received subpoenas calling for the testimony of its chief executive officer, John F. Terrwilliger; its chief financial officer, John J. Jacobs, and for the delivery of certain documents.

 

Former Rockwell Medical executive alleges SEC violations

The former head of drug development at Rockwell Medical Technologies Inc. (Nasdaq: RMTI) says the company and its chief executive knowingly issued false and misleading press releases and violated other securities laws.

Dr. Richard C. Yocum, who was fired from Rockwell Medical in September, alleged in a wrongful termination suit that he was ousted because he repeatedly complained to its chairman and CEO, Robert L. Chioini, about violations of Securities Exchange Commission and Food and Drug Administration rules.

Rockwell Medical, a Michigan-based company that makes and distributes dialysis products, was the subject of an earlier Sharesleuth story.

Yocum said in his suit that press releases the company put out in 2010 and 2011 made it appear that the clinical trials for a new product called Soluble Ferric Pyrophosphate (SFP) were going better than they actually were.

Yocum was Rockwell Medical’s vice president of drug development and medical affairs, and had primary responsibility for the SFP development program.

He said in his suit that Chioini not only ignored his concerns about the trials but caused Rockwell Medical to issue press releases that included statements directly contradicting what Yocum had told him.

Yocum also said that, based on the nature of questions he received from analysts or investors, it appeared that Rockwell Medical engaged in selective disclosure regarding details of those trials.

Because Yocum was fired from his job, which had a base salary of $298,000 a year, he could be viewed as having a grudge against Rockwell Medical. But his allegations are not the only red flags at the company.

Yocum’s successor, Dr. Annamaria Kausz, recently left Rockwell Medical after just seven months, adding to the turnover in its clinical-development program. The company provided no explanation for that departure in the press release it issued April 19 to announce the hiring of her replacement. In fact, it didn’t even mention her or say that she had resigned.

Sharesleuth also noted that Rockwell Medical took the unusual step last November of extending the life of 400,000 warrants it had issued in the fall of 2008 to a consultant who was later found to have participated in a massive fraud scheme at another public company.

That consultant, Michael J. Xirinachs, was one of Rockwell Medical’s co-founders.

The federal judge hearing the SEC’s civil case against Xirinachs and his company, Emerald Asset Advisors LLC, last week ordered them to pay as much as $10 million in disgorgement, interest and fines.

The 400,000 unexercised warrants gained more than $900,000 in value after Rockwell Medical pushed back the expiration date by six months, to May 4.

Rockwell Medical’s decision to grant Xirinachs and Emerald Asset Advisors the extension  – for no additional consideration – sets up the possibility that they could use the additional profits to help offset the SEC judgment.

Rockwell Medical did not respond to a list of questions submitted to its investor-relations representative. In court filings, the company has denied Yocum’s allegations and has asked the judge to dismiss the case.

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Kandi Technologies: When is an electric car not an electric car?

Last year, Sharesleuth.com published a story questioning whether Kandi Technologies Corp. (NASDAQ: KNDI) had truly sold more than 3,700 of its electric cars, as it reported in Securities and Exchange Commission filings.

Among other things, we wondered how Kandi managed to sell 1,618 of those vehicles in 2010, given that the United States was its main market, and that the federal government and some state governments had significantly reduced tax credits for buyers.

Kandi, a Chinese company that also makes go karts and all-terrain vehicles, said in a letter to shareholders after our story appeared that it stood by its sales numbers.

But the company’s latest annual filing with the SEC raises further questions. In a footnote to a chart detailing unit sales by product, Kandi said that 960 of the 1,618 mini-cars it reported selling in 2010 were, in fact, gas-powered rather than electric.

The distinction is notable because Kandi says its electric cars are one of the main drivers of its growth, and the breakdown in its latest annual report shows that sales of those vehicles actually plunged in 2010.

The company reported selling 1,892 electric vehicles in 2009, including nearly 1,000 in the final quarter of that year.

Kandi did not mention in its 2010 earning releases or quarterly SEC filings that the majority of the vehicles it was selling that year were conventional gas-powered models.

In announcing Kandi’s earnings for the first three months of 2010, Chairman Xiaoming Hu said that sales in the quarter had risen for its “COCO EV,’’ a clear reference to the company’s electric vehicles.

Kinda reported selling 372 Cocos in that quarter, up from 169 a year earlier. The Coco is a golf-cart like vehicle, approved for street use, with a top speed of around 35 miles an hour.

The release for the second quarter of 2010 said this: “The company reported that the top contributor to the revenue gains in the period was its all electric COCO LSV, with sales of 1,005 units, primarily in the U.S., generating $4,131,674 in revenues.’’

Kandi said in the release that it sold 1,377 mini cars in the first half of 2010, compared with 474 a year earlier. It said that revenue for the period was up 80 percent, and that profits were up 435 percent.

Given that Kandi reported selling just 241 mini cars in the second half of 2010, it is clear that most of the gas-powered units would have been sold in the first half of that year — at the time that the company was reporting higher electric vehicle sales.

And given that the company said in its latest annual filing that it sold only 658 electric mini-cars for all of 2010, it would have been impossible for the company to have sold 1,005 in the second quarter, as the earnings release for that period asserted.