Florida jury convicts Mitchell J. Stein in Signalife fraud case

A jury in Florida has found Mitchell J. Stein guilty on all 14 counts related to a multimillion-dollar  manipulation scheme involving shares of Heart Tronics Inc. (Pink Sheets: HRTT), formerly known as Signalife Inc.

Signalife was featured in a Sharesleuth investigation in 2008. That story presented evidence that Stein, a lawyer who split his time between Florida and California, secretly controlled the company.

It also suggested that Stein and others had engaged in market manipulation with the help of consultants who got millions of dollars in stock.

Stein was arrested in December 2011 under an indictment charging him with securities fraud, mail fraud, money laundering, conspiracy to commit mail fraud and wire fraud, and conspiracy to obstruct justice.

The Securities and Exchange Commission also filed a civil case against Stein, the company and its co-chief executives, alleging that they falsified sales, issued misleading press releases and committed numerous other violations. That case is pending.

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Customs records contradict Kandi Technologies Corp.’s electric-vehicle sales claims

Customs records do not support Kandi Technologies Corp.’s (Nasdaq: KNDI) claim that it sold thousands of electric cars in the United States, a Sharesleuth investigation found.

The records, which originated with the Department of Homeland Security, reinforce our earlier findings that Kandi greatly exaggerated the sales of those vehicles.

The Chinese company has said in Securities and Exchange Commission filings that it sold more than 4,600 of its mini cars from 2009 through 2011. For most of that period, the United States was the main market for the vehicles.

But a database containing detailed cargo information for vessels delivering goods to U.S. ports shows that fewer than 1,100 of Kandi’s cars were ever shipped here.

The database was created by ImportGenius.com, an Arizona company that helps businesses find sales prospects, evaluate suppliers and monitor rivals. It contains more than 79 million records drawn from the bills of lading for all ocean-freight imports.

Sharesleuth’s investigation turned up a number of discrepancies between Kandi’s reported sales of its low-speed, battery-powered cars and the actual deliveries of those vehicles to American ports.

For example:

– Kandi said in an SEC filing and an earnings release that it sold 1,141 cars in the United States in the first nine months of 2009. But the Customs records show that only 203 were delivered to American ports in that period. They also show that just 143 additional vehicles were delivered in the last three months of that year.

– Kandi said in an earnings release in 2010 that one of the main contributors to its revenue and income growth was a “strong second quarter contribution from U.S. sales of the super mini Kandi Coco.” Kandi previously had reported selling 1,005 electric-powered Cocos in that quarter, primarily in the United States. But Import Genius’ database shows that just 156 of the cars were delivered to American ports that year.

– Kandi disclosed in its annual SEC filing last year that only 658 of the 1,618 cars that it reported selling in 2010 were actually electric, and that the rest were gasoline-powered. That unexplained revision means it would have been mathematically impossible for Kandi to have sold 1,005 electric cars in the second quarter of that year, as it claimed.

The above examples suggest that the gains in electric-car sales that Kandi reported during pivotal periods in 2009 and 2010 were illusory. The company’s public statements regarding those sales contributed to spikes in its stock price and trading volume, and allowed certain parties to sell shares at peak levels.

Kandi, through its U.S. law firm, declined to comment on the discrepancies.

Kandi has said that because it sells its vehicles to middlemen who export them to the United States, Europe and other markets, it has no specific knowledge of where those products end up. Nevertheless, the company expressly stated in its SEC filings and earnings releases that the bulk of its car sales in 2009 and 2010 were “U.S. sales.”

The Customs data shows that although Kandi reported selling around 2,000 electric cars in the United States in the first nine months of 2009 and the second quarter of 2010, only about 500 were delivered to American ports in those years..

 

mini2Kandi said in an SEC filing that it sold 1,077 cars in 2011. It did not specifically say that those sales were in the United States. But with the exception of a purported order from Italy that has yet to materialize, it did not report any large sales elsewhere in the world.

Our analysis of the records in Import Genius’ database showed that 290 of Kandi’s mini cars were delivered to American ports in 2011.

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Houston American Energy abandons heavily touted Colombian property

Houston American Energy Corp. (AMEX: HUSA) has given up its interest in a Colombian oil property that it once claimed held as many as 4 billion barrels of reserves.

Houston American said in a Securities and Exchange Commission filing that it transferred its 37.5 percent stake in the CPO-4 prospect to its partner, SK Innovation Co. Ltd., of Korea.

Houston American – which was the subject of a Sharesleuth investigation in 2010 — did not receive any payment. But it added that the move released it from any claims for past, present or future capital calls related to the joint operating agreement with SK Innovation.

Houston American, SK Energy and a third partner, Gulf United Energy Corp. (Pink Sheets: GLFE), have drilled three wells on the Colombian property. All three were unsuccessful, and were plugged and abandoned.

Houston American’s shares traded for more than $20 as recently as July 2011, just before drilling began on the initial well. The company’s stock closed Tuesday at 21 cents.

Houston American had said in SEC filings and investor presentations that the CPO-4 prospect, in Colombia’s Llanos Basin, was estimated to hold anywhere from 1 billion to 4 billion barrels of recoverable reserves.

It announced in late 2011 that it encountered “strong shows of hydrocarbons” at the first well, Tamandua #1. But it later said that the well was being abandoned, in part because of damage to the formation during the drilling process.

Houston American said last April that it had received three subpoenas from the SEC as part of a formal investigation into the company. It has since disclosed that the investigation appears to be focused on claims about the resource potential of the CPO-4 prospect.

Houston American said in the announcing regarding the relinquishment of its interest in CP0-4 that it still had roughly $10 million to finance exploration activities elsewhere in Colombia.

Houston American has a 12.5 percent stake in a prospect known as Serrania. One of its partners there is Canacol Energy Ltd. (TSX Venture Exchange: CNE). Canacol acquired a 37.5 percent interest when it absorbed Shona Energy Co. last year.

The other partner at Serrania is Hupecol Operating Company LLC. Houston American has been involved with Hupecol on several earlier projects that were more successful than CPO-4.

Houston American has said that it expects the first well to be drilled at Serrania this year.

 

Judge sides with Rockwell Medical in wrongful-termination case

A federal judge has issued a tentative ruling in favor of Rockwell Medical Inc. (Nasdaq: RMTI) in a wrongful-termination suit brought by its former head of drug development, who was fired in September 2011..

Dr. Richard C. Yocum said in his suit that he was fired because he repeatedly complained to Chief Executive Officer Robert L. Chioini about possible violations of Securities and Exchange Commission and Food and Drug Administration rules.

The judge hearing the case did not rule on whether Rockwell Medical had, in fact, committed any violations. Instead, he considered the more narrow issue of whether the company was within its legal rights to fire Yocum.

Rockwell Medical, which makes and distributes dialysis products, is based in Wixom, Mich. The company had argued that Michigan is an “employment at will’’ state, which means that businesses can fire workers for any reason, or no reason. One of the exceptions to that rule is if an employee is fired in retaliation for reporting improper activity, either to management or outside bodies, such as regulatory agencies.

Yocum worked from his home in California, which also is an employment at will state. The law there does not require a worker to report improper activity to an outside agency to qualify for whistleblower protection.

The judge, Gonzalo P. Curiel, said in his tentative ruling that there was an “absence of evidence’’ linking Yocum’s firing to any protected activity. Curiel also said he was prepared to rule against Yocum on his claim that the firing constituted the intentional infliction of emotional distress. Rockwell Medical had noted in court filings that Yocum was soon hired by another medical company, at a higher annual salary.

Finally, Curiel said that Yocum had not presented evidence demonstrating that Rockwell Medical owed him any unpaid wages. According to the court docket, the judge is preparing a final written order in the case.

Curiel still must issue a written order reaffirming Rockwell Medical’s request for summary judgment for the ruling to become official.

Yocum’s suit against Rockwell Medical was the subject of a Sharesleuth story last year.

Yocum said in his complaint 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 the questions he received from analysts or investors, it appears that Rockwell Medical engaged in selective disclosure regarding details of those trials.

Among other things, Yocum alleged 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.

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

Rockwell Medical announced in February that one of its clinical trials for SFP showed that regular use reduced the need for erythropoietin stimulating agents (ESAs) by as much as 37 percent. The company has said that such a reduction could mean big savings for dialysis providers and their patients.

Rockwell Medical expects to announce the results of its other trials later this year. Those are intended to show that SFP is safe and effective.

 

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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