Using its stock as currency, Lenco Mobile Inc. (Pink Sheets: LNCM.PK) has spent the past few years snapping up cell phone and Internet marketing companies.
Lenco’s share price has risen with the acquisitions, hitting a new high of $6.05 on Friday. The company now has a market capitalization of $389 million, and is seeking a listing on the NASDAQ exchange.
But a Sharesleuth investigation has found that at least two of the businesses that Lenco acquired – for 8.5 million shares and other consideration – were connected to Michael Wayne Crow, the subject of two previous Securities and Exchange Commission cases.
In November 2008, a federal judge found that Crow secretly controlled a securities firm called Duncan Capital LLC, unlawfully collecting millions of dollars in commissions while violating broker-dealer registration and reporting provisions. Crow was ordered to disgorge those earnings, with interest, and pay a $250,000 fine.
He had previously settled another SEC case alleging that he engaged in insider trading as chief executive of a public company, and also filed false financial reports.
Although one of Lenco’s SEC filings mentions a “Michael Crow,” the company has not disclosed that he is the same Michael Crow who has been barred from serving as an officer or director of any public company, or from associating with any broker, dealer or investment advisor.
Crow filed for personal bankruptcy in California last month, listing $30,000 in assets and $11.5 million in debts, including $7.25 million owed to the SEC. In that filing, he said that one of the companies that Lenco purchased, for millions of dollars in stock, never had any business operations.
Sharesleuth found that a third business that Lenco acquired is connected to Thomas C. Ronk, a former stockbroker with a history of disciplinary actions by the National Association of Securities Dealers (now FINRA).
Ronk operates several investment web sites, including BuyIns.net, which purport to identify companies whose stocks have been targeted by illegal “naked shorting” and are poised for price jumps.
He also is partners with former SEC Chairman Harvey L. Pitt in RegSho.com, a site created to help short sellers locate shares to borrow so that they can remain in compliance with market rules.
Lenco describes itself as a mobile marketing solutions company with operations in the United States and South Africa.
It said in its most recent SEC filing that it had revenue of $8.7 million for the first nine months of 2009, compared with just over $2 million in the same period of 2008. Lenco posted a loss of $205,195 through Sept. 30, 2009, versus a profit of $343,299 a year earlier.
Lenco operates from a cluster of offices near the ocean in Santa Barbara, Calif. Its headquarters is a street-level storefront that holds just a few desks. There are two signs on the building, one for Lenco and another for AdMax Media, a Lenco subsidiary.
Lenco also rents several small, windowless offices around the corner from its headquarters, and pays $3,000 a month for a condominium in a residential complex just north of Santa Barbara’s downtown core.
Before moving to Santa Barbara, Lenco used a residential address in San Diego that has appeared in SEC filings as the headquarters for a slew of shell companies.
Lenco (known previously as Sovereign Wealth Corp.) got into its current line of business in February 2008, acquiring a South Africa-based business called Digital Vouchers (Pty) Ltd.
Michael Levinsohn, the founder of Digital Vouchers, took over as chief executive, and Lenco borrowed $1 million from another entity he controlled. According to SEC filings, that debt was later repaid with 10 million shares of stock, worth more than $60 million at current market prices.
Lenco acquired another of Levinsohn’s South African companies, a mobile advertising business called Multimedia Solutions, in August 2008. He now is Lenco’s biggest shareholder, with 22.4 million shares, or nearly 35 percent of the total outstanding.
Levinsohn told Sharesleuth that because Lenco has a registration pending with the SEC, he was legally prohibited from responding to our questions about the company, its involvement with Michael Crow and the valuation of the businesses it bought. He added, though, that a law firm advised Lenco on “all matters related to acquisitions and the regulatory environment.”
“I am comfortable that we have dealt with our acquisitions in a professional and transparent manner,” he said in an email to Sharesleuth.
(Disclosure: No one associated with Sharesleuth has any investment position, short or long, in Lenco Mobile)
In June 2008, Lenco bought what it described as undeveloped technology from a California company called eAccounts Inc., paying with 10 million shares.
Lenco says on its web site that the CellCard technology it acquired included “an advanced compression technology platform that enables marketers to instantly convert and deliver any existing TV, print, radio or web advertisement so that it can be viewed on most mobile handsets.” It says CellCard also has an application that allows people to make secure credit card or debit card payments over their cell phones.
Lenco’s purchase agreement for eAccounts Inc. and its CellCard technology did not list Ronk among the company’s officers or shareholders.
But Sharesleuth noted that he was listed as the contact person on CellCard’s Internet domain registration.
Sharesleuth also found that Ronk filed a trademark application for the CellCard name and logo in April 2008 – two months before Lenco acquired the company – listing himself as their owner.
The status of Lenco’s CellCard and Digital Vouchers units is unclear. Although Lenco Mobile has links to both of those businesses on its web site, they return error messages, indicating the sites are not accessible to clients or to the general public.
Some of Lenco’s businesses engage in domaining – the practice of parking highly trafficked Internet domains and filling their pages with ads. Others use Internet sites to gather names, email addresses and other information valuable to marketers.
Lenco’s two major acquisitions last year were Eden Marketing LLC and the online marketing unit of Superfly Advertising Inc. (Pink Sheets: SPFL.PK).
Lenco acquired Eden in May 2009 for 3.5 million shares, which the company valued at more than $8.2 million. In an SEC filing, Lenco said it bought the company for its domain names and its consumer gift-card business, which had the rights to market a U.S.-based program for charities to accept donations of unused gift cards and tap the balances.
Nevada business filings show that Eden was incorporated there just a few months prior to the deal. Those filings list its managing member as MC2 Squared Inc., and its managers as Michael Crow and Michelle Wasserman.
Crow said in his bankruptcy filing that he was chief executive of MC2 Squared. He also said that Eden was one of a handful of limited liability companies he created to develop new business ideas with different partners. He noted that only one of them – not Eden – ever had any operations, and that it was discontinued at a loss.
The list of assets did not include any shares of Lenco stock.
Lenco announced last February that it was buying the online marketing unit of Superfly Advertising for 5 million shares, a $625,000 convertible note and just over 200,000 warrants. Lenco said it got more than 1,200 unique URLs, customer databases and contracts and a call center in Costa Rica. As part of the transaction, Lenco also assumed some of Superfly’s debts. It said in an SEC filing that it issued over $2 million in convertible notes and almost 645,000 warrants to seven of Superfly’s creditors.
SEC filings show that Crow and other entities connected with him were the biggest shareholders of Superfly at the time of the deal.
Superfly’s headquarters address in New York City also was home to many of Crow’s companies, including Duncan Capital Group LLC, one of the defendants in his most recent SEC case.
Lenco turned the businesses that it bought from Superfly into AdMax Media, a subsidiary that promises enhanced online and mobile ad delivery through proprietary technology.
AdMax shares a building with Lenco in Santa Barbara.
SEC filings show that Superfly had purchased the businesses just five weeks earlier from Commerce Planet Inc. (Pink Sheets: CPNE.PK), which was facing a Federal Trade Commission investigation into complaints of deceptive business practices.
The FTC ultimately sued the company and two of its executives, alleging that many of the people who signed up for its “free” Internet auction kits wound up paying $59.99 for enrollment in an online supplier program. The FTC said people who discovered the unexpected charges had difficulty getting them reversed.
A California court issued a $19.7 million judgment against Commerce Planet, its chief executive, Michael Hill and Aaron Gravitz, former head of its Legacy Media division –one of the businesses acquired by Lenco.
That judgment was suspended because of the defendants’ inability to pay. But the FTC negotiated a settlement that calls for them to come up with as much as $1.2 million in reparations.
Hill, who is responsible for the biggest chunk of that money, now is president of Lenco’s AdMax unit. Real estate records list Hill as the owner and occupant of the condominium that the company is renting in Santa Barbara.
Michael Crow once was president and chief executive of Wilshire Technologies Inc., a public company in Carlsbad, Calif., near San Diego. The SEC sued Crow and Wilshire’s vice president, Peter Kuebler, in 1996, saying they overstated Wilshire’s earnings and issued misleading press releases and financial reports. The SEC also accused Crow of insider trading, saying that he sold shares with the knowledge of the company’s true financial condition, helping to avoid more than $1.2 million in losses.
Crow settled with the SEC in 1998 without admitting or denying guilt. He agreed to disgorge $1.25 million, plus $225,773 in interest. He also was barred from serving as an officer or director of a public company, or from practicing or appearing as an accountant before the SEC.
In 2007, the SEC brought a new case against him, this time for violations of its registration and reporting requirements. In the complaint, the SEC said that from November 2003 through at least December 2004, Crow secretly controlled Duncan Capital, a New York investment firm that specialized in arranging private share placements for public companies.
The SEC said that although Crow received most of the profits from Duncan Capital’s activities, the firm never disclosed his involvement, or his previous run-in with regulators in Southern California. In fact, Duncan Capital explicitly stated that no one affiliated with the firm had ever been the subject of an SEC order or been enjoined by a court for investment-related activities.
After a seven-day trial in 2008, a federal judge ordered that Crow, a business partner and Duncan Capital repay “ill-gotten gains” of nearly $9 million (more than half of which was to come from Crow and entities related to him). He was also ordered to pay a $250,000 penalty.
Ronk was a stock broker in Southern California before running afoul of regulators.
In 1999, he was fined $50,000 and suspended for 30 days by the NASD. Without admitting or denying the allegations against him, Ronk consented to the entry of findings that he participated in private securities transactions without providing prior written notification to his firm, describing the proposed deals or his role in them.
Ronk’s securities registration was later revoked for failure to pay the fine.
Ronk now is proprietor of several web sites, including BuyIns.net and SqueezeTrigger.com, that purport to identify stocks that have been the subject of heavy shorting and are poised to rise in price as traders cover their positions.
Ronk has been one of the most vocal proponents of a theory that a shadowy network of hedge funds and other investors have been driving down the stock prices of U.S. companies through so-called “naked shorting” of their shares.
Two of the companies that complained most loudly about the issue – Universal Express Inc. and Pegasus Wireless Corp. – later became the subject of SEC cases alleging that they improperly dumped vast amounts of stock on the market, undercutting their own share prices.
Sharesleuth will keep following this story and report on what we find.