Huiwen Liu is part owner of a natural food store in the Vancouver suburbs. The business has only a few employees and is sandwiched between a sex shop and a clinic for drug addicts.
According to Securities and Exchange Commission filings, Liu also is sole shareholder of an offshore investment company that got 10.1 percent of China Fire & Security Group Inc. (Nasdaq: CFSG) when it went public through a reverse merger in 2006.
That offshore company, Worldtime Investment Advisors Ltd., notified the SEC on Dec. 4 that it planned to sell 600,000 of its 2.58 million China Fire shares, for estimated proceeds of $9.6 million.
The business address listed for Liu in Worldtime’s initial disclosure form corresponded to her food store. The unlikely scenario of a shop owner in Canada holding more than $30 million of stock in a little-known Chinese manufacturer, through an investment company in the British Virgin Islands, was just one of the reasons that Sharesleuth decided to take a closer look. The quintupling of China Fire & Security’s share price in the 12 months following the reverse merger also got our attention. So did the company’s murky ownership and the mounting casualties among other “hot” Chinese stocks that have gained listings on U.S. exchanges through reverse mergers.
Sharesleuth’s investigation turned up questions about transparency and disclosure at China Fire, which has headquarters in Beijing and makes fire detection and protection systems for steel mills, oil refineries and other industrial customers. For starters, we found that Huiwen Liu is the sister-in-law of China Fire’s chief executive officer, Bin “Brian’’ Lin – a fact not mentioned in any SEC filing.
Sharesleuth also found that China Fire’s merger partner, UniPro Financial Services Inc., was one of three shells packaged by the same group of American financiers and middlemen, some of whom have previously been connected to stock manipulation schemes. Given that information, investors thinking about buying shares of China Fire might want to seek more information on the true identity of its major shareholders.
Lin told Sharesleuth that his sister-in-law was simply a nominee for other owners who live in China and didn’t want to register their names. But SEC filings don’t reflect that. They state clearly that Liu is the beneficial owner of the shares, via Worldtime, and declare that Liu knows of no one else with the right to proceeds from their sale.
Three more British Virgin Islands entities that got blocks of stock when China Fire merged into UniPro in October 2006 have reported plans to sell 1.5 million shares. They projected their proceeds at $19.8 million. China Fire’s SEC filings have not identified the people behind those entities, or explained how they originally acquired their stakes, each of which fell below the 5 percent threshold that triggers more detailed disclosure.
Based on China Fire’s account of the reverse merger deal, those shareholders would have been Lin’s fellow owners of the fire-protection business. Lin said he helped arrange the stock sales at the suggestion of China Fire’s investment bankers, who wanted to get more shares into public circulation so that institutional buyers could take positions in the company. That may be true. But the effect was that certain unidentified parties appear to have sold tens of millions of dollars in stock at the same time that China Fire’s executives were issuing consistently positive statements about the company’s prospects.
Lin said no one associated with China Fire knowingly violated any SEC rules or engaged in any impropriety. He said that he had not received any money from the share sales, nor had China Fire’s chairman, Gangjin Li, or members of their families. He added that the money from Worldtime’s stock sales were still in that company’s bank account.
Lin said China Fire’s lawyers told the company it did not have to disclose Huiwen Liu’s relationship in its filings because she was not an immediate blood relative, such as a father, mother or child. However, the attorney who represented China Fire in the reverse merger deal told Sharesleuth that he gave no such advice.
China Fire’s stock rose from $3.25 a share the day of the reverse merger to a high of $18.10 on Nov. 1, 2007. At its peak, the company had a market value of nearly $500 million. The company’s stock closed at $8.76 a share, off $1.56, on Monday.
Sharesleuth also discovered that the sole American on China Fire’s board of directors, Gene Michael Bennett, does not have the law degree that he claimed. And contrary to what China Fire said in its press release announcing his appointment, he is not a Certified Public Accountant and has not been licensed as one in the United States for many years. Bennett heads China Fire’s audit committee, which is responsible for overseeing financial reporting, internal controls and transactions between the company and its officers, directors and affiliates.
Sharesleuth turned up the American reverse-merger network in the course of another investigation, the results of which we will publish in the coming months. We decided to post this story first because at least two brokerages have issued buy recommendations on China Fire’s stock and we think that anyone considering an investment in the company might benefit from the additional information.
Disclosure: Mark Cuban, the majority member of Sharesleuth.com LLC, has a short position in the shares of China Fire. Chris Carey, editor of Sharesleuth.com, does not invest in individual stocks and has no position in China Fire.
THE REVERSE MERGER
In September 2005, a U.S.-based investor group bought a majority stake in UniPro, which had headquarters in Boca Raton, Fla., and was listed on the Over the Counter market. The UniPro consultant who arranged that deal had done prison time for conspiracy and wire fraud. John F. LaSala, a partner in now-defunct Sheffield Securities Inc., pleaded guilty in 1990 to participating in the manipulation of penny stocks. His two co-owners in the brokerage also pleaded guilty.
Martin A. Sumichrast headed the investor group that bought into UniPro. He is the former chief financial officer of Czech Industries Inc., a company whose $15 million public offering in 1995 was used as a fraud vehicle by Stratton Oakmont Inc., a boiler-room brokerage that shut down under regulatory pressure.
Stratton Oakmont’s owners wound up in prison. So did some of their friends who got allotments of Czech Industries stock or received them through a purported “bridge loan’’ deal just before the offering. They admitted holding the shares for Stratton Oakmont and another boiler room, which resold them for big profits after manipulating the price.
Sumichrast was not charged with any wrongdoing.
Sharesleuth’s investigation found that Sumichrast also has numerous ties to associates of Irving Kott, a Canadian stock promoter and financier with two convictions for fraud.
Sumichrast’s investor group bought controlling stakes in three public shells. Two did mergers with Chinese companies, and the third is seeking a Chinese partner. Testimony in a California court case alleged that some of those same investors manipulated the shares of another company, Recom Managed Systems Inc, now called Signalife Inc. (AMEX: SGN).
Sumichrast did not respond to written questions from Sharesleuth and told us Monday that he had no comment.
THE NETWORK
The members of the investment group doing the reverse-merger deals include:
- Sumichrast, a partner in several investment and consulting companies based in Charlotte, N.C. He previously was chairman and chief executive of Global Capital Partners Inc., a brokerage firm that was the corporate successor to Czech Industries.
- Ralph O. Olson, Sumichrast’s partner in the investment and consulting companies. He is a former investment banker for Global Capital and was vice president of one of its brokerage subsidiaries in Englewood, Colo.
- Raul C. Silvestre Jr., an attorney in Westlake Village, Calif., and president of Castle Bison Inc., an investment company. He previously was secretary and treasurer of Recom Managed Systems.
- John Scardino, a real estate developer based in Westlake Village. He shares office space with Silvestre.
- Ariel Coro, manager of Menlo Venture Partners LLC, an investment company in Agoura Hills, Calif.
Our investigation found that either LaSala or his wife, Alicia M. LaSala, was a shareholder in three of the four shell companies that have done deals with Sumichrast.
The first of those shells, Tele-Optics Inc. of Boca Raton, did a reverse merger with an American company, Velocity Asset Management Inc. (AMEX: JVI) in 2004. UniPro was next, followed by International Imaging Systems Corp. of Fort Lauderdale, Fla. It was transformed into China Bio Energy Holding Group Co. (OTCBB: CBEH.OB).
Sumichrast’s investment group bought control of another shell, Forme Capital Inc. (FOCP.OB), in September.
COMMON FORMULA
The reverse mergers with the Chinese companies followed a common formula. First, a group led by Sumichrast bought an interest in the public shell. Then, the shell merged with a privately held Chinese partner, in a transaction that included a sale of shares and warrants to one or more outside parties.
A New York-based hedge fund, Vision Capit
al Advisors LLC, was the biggest private-placement buyer in the China Fire deal, and the only buyer in the China Bio Energy deal.
Vision Capital teamed up with Sumichrast, Olson and Silvestre last month to buy a controlling interest in yet another shell company, Southern Sauce Co. (SSAU.OB) of Morriston, Fla. Vision Capital’s investment was made by Vision Opportunity China Fund Ltd. (AIM: VOC.L), which trades on the London Stock Exchange’s AIM market
More than 150 Chinese companies have gained listings on U.S. exchanges through reverse-mergers. Many of their owners ended up holding shares through British Virgin Islands intermediaries because of Chinese government restrictions on foreign investment. However, our review of SEC filings for dozens of those deals showed that the companies usually made clear whether the people listed as officers or directors of the intermediaries were nominees or the actual owners of the shares.
CHINA FIRE
Unlike some of the companies that Sharesleuth has investigated, China Fire is an established business with substantial revenue and several sizable customers. Its main operating subsidiary is Sureland Industrial Fire Safety Ltd, whose products range from basic heat and flame detectors to complete fire prevention and suppression systems.
According to China Fire’s website, Gangjin Li and Brian Lin founded Sureland in 1995. Li is now chairman of China Fire’s board of directors and the company’s biggest shareholder.
China Fire bills itself as the leader in the Chinese fire protection business. However, it holds less than 5 percent of the overall market there. And the company’s most recent quarterly financial report to the SEC shows that just three customers accounted for 42.6 percent of its revenue.
According to China Fire’s marketing materials, it has supplied systems to many of China’s biggest state-owned industries. The company announced Nov. 26 that it had won a $31 million contract to provide an automated fire-protection system for a giant new steel mill being built east of Beijing. It said it expected to recognize that revenue in 2008.
China Fire’s growth has been one of its biggest selling points with investors. China Fire announced preliminary financial results for 2007 last month, saying it expects to report $46.3 million in revenue, an increase of more than 42 percent from 2006. It expects net income of $16.8 million, up 141 percent. China Fire projected that revenue would reach $66.6 million this year, and that net income would be at least $22.3 million.
Lin says he hopes to build the company into a $1 billion a year business. He said China Fire is well positioned to capitalize on its home country’s surging economy, and also sees opportunities in India, which is going through a similar industrial boom. In addition to supplying protection systems for new factories, the company expects to help existing Chinese factories retrofit their operations to meet more stringent fire codes and safety standards. China Fire says it helped draft new regulations covering Chinese iron and steel facilities, and that the standards incorporated in them could give it an edge in that market.
Although China Fire’s quarterly financial filings with the SEC are unaudited, the company says they are in accordance with generally accepted accounting principles (GAAP). We noted that China Fire’s reported operating margins were nearly double the margins of the biggest players in the global fire-protection industry, including United Technology Corp. and Tyco International Ltd. China Fire has said in investor presentations that its strong margins stemmed partly from its focus on higher-end, proprietary products. SEC filings show that China Fire’s spending on research and development – the source of those proprietary products — fell by 13 percent in 2006, to $1.27 million. It dropped 32 percent in the first nine months of 2007, to $457,126.
BRIAN LIN
Lin became China Fire’s chief executive in October 2006. He is a Canadian citizen with a master’s degree in electrical engineering from the University of Toronto. Lin is no stranger to public companies and their reporting requirements, having worked as an executive for a succession of them over the past decade.
In addition to his role as CEO of China Fire, he is a director of two other U.S.-listed Chinese companies: e-Future Information Technology Inc. (Nasdaq: EFUT) and Wuhan General Group Inc. (OTCBB: WUHN.OB).
Lin previously was vice president of China operations for PacificNet Inc. (Nasdaq: PACT). He joined PacificNet when it acquired a 51 percent interest in Beijing Linkhead Technologies in early 2004. Lin was one of the founders of Linkhead, a telecom services company specializing in hardware and software for interactive voice response systems.
PacificNet’s shares soared in the fall of 2004, after it reported record revenues aided by Linkhead and other acquisitions, and then announced several big new contracts. Its stock rose from $2.57 on Oct. 8, 2004 to a peak of $12.30 on Dec. 8, 2004.
PacificNet’s shares began a long decline after that, and fell below $2 a share on Monday. The company disclosed last year that its independent accounting firm had withdrawn its certification of the company’s 2003, 2004 and 2005 results, citing concerns about the possible backdating of stock options. PacifcNet has classified Linkhead as a discontinued operation, and says the subsidiary is largely inactive.
Before launching Linkhead in 1999, Lin worked as a research and development director in China for UTStarcom Inc. (Nasdaq: UTSI). He also has worked for several technology companies in the United States, living for a time in the Dallas area. Sharesleuth turned up a 1996 Texas corporation filing for a company called Acce Investment (U.S.) Inc. The filing listed four officers: Brian Lin; Zhong “Kevin” Lin, Gangjin Li and Sharon Yao.
Kevin Lin is Brian Lin’s brother, and is married to Huiwen Liu. Sharon Yao is married to Brian Lin. According to old media reports, Acce Investment once owned 60 percent of Linkhead. China Fire’s SEC filings did not mention Gangjin Li’s ownership in Linkhead or his prior business dealings with the Lin family.
Lin said China Fire’s management has been relying on its investment bankers and other partners for advice on making the transition to a U.S.-listed company.
“We’re business professionals,” he said. “In terms of capital markets, we don’t really know too much.”
MARTIN SUMICHRAST
Sumichrast is an officer or partner in four companies that figure into this story. They are: Lomond International Inc., Jaybelle Inc., Stallion Ventures LLC and Crown Reef Holdings Inc.
Sumichrast’s previous company, Global Capital Partners, surrendered its brokerage license in 2002. Its stock had been delisted from the Nasdaq market, partly because of its sub-$1 stock price and partly because of the exchange’s concerns about some of the people involved with the company. Global Capital had received financing from a partner who later admitted getting the cash from a company controlled by Regis Possino, a disbarred lawyer in California with convictions for drug dealing and fraud.
Sharesleuth turned up a series of connections between Sumichrast and close associates of Irving Kott, who has been a frequent target of regulatory and law enforcement agencies. Kott pleaded guilty in 2004 to concealing his ownership in J.B. Oxford Holdings Inc., a brokerage in Beverly Hills., Calif. That compa
ny cleared trades for Stratton Oakmont, Monroe Parker Securities Inc., Biltmore Securities Inc. and several other firms that were shut down by regulators or closed under pressure.
According to the indictment against Kott, two of his close associates got allotments of shares in the Czech Industries offering and seven other offerings and flipped them into the inflated market created by Stratton Oakmont and the other boiler rooms. Between them, they reaped more than $2.4 million in instant, virtually risk-free profits. The indictment said that Kott received a share of the profits. The other two men were not charged; the counts against Kott were dropped as part of his plea bargain.
Czech Industries was originally in the hotel business. It shifted to the securities industry in late 1996, and began buying up small brokerages in Europe and the United States. It changed its name to Eastbrokers International Inc., and then to Global Capital Partners.
In July 2001, Global Capital appointed J.B. Oxford’s former chief executive, Stephen M. Rubenstein, as its chief operating officer. The following month, it signed a financial consulting agreement with Intasys Corp., a Montreal company with ties to Kott.
In early 2002, an Intasys director named Sam Luft led a financial restructuring of Global Capital and became chairman of its board.
In 2003, Sumichrast and Richard MacLellan, another longtime Kott associate, became partners in a company called Vitasave.com, Nevada corporation records show. MacLellan is president of EBC Corp. in Monaco. He was one of the investors who got shares in the Czech Industries offering and other Stratton Oakmont deals and sold them for a fast profit. He has admitted in California court proceedings involving J.B. Oxford that he acted as a front for Kott in some financial transactions.
In 2004, Sumichrast made his first investment in a shell company, Tele-Optics. His partner in the deal was Harold Wine, a Kott associate who’d been a shareholder in J.B. Oxford and an officer and director of other companies linked to Kott. Sumichrast bought his shares through Lomond International, the same company involved in the UniPro deal.
THE UNIPRO-CHINA FIRE DEAL
In 2005, Lomond International acted as agent for a group that bought 4.55 million shares of UniPro’s stock for $400,000, giving them a majority stake in the company. Jaybelle Holdings, another of Sumichrast’s companies, got 1.97 million of the shares.
UniPro issued 100,000 shares to John LaSala’s company, LaSala & Associates, as a consulting fee.
That same year, Brian Lin met Anthony J. Sarkis, an investment banker with Maxim Group LLC of New York. According to Lin, Sarkis was touring China in search of reverse merger candidates. He suggested that such a deal could help the fire-safety business, then known as Sureland Industrial, raise capital for expansion.
Sarkis later became director of investment banking at another firm, H.C. Wainwright & Co., which also has been arranging reverse mergers between Chinese companies and U.S. shells.
Lin told Sharesleuth that Sarkis paired China Fire with UniPro.
As a preliminary step toward the merger, a newly formed British Virgin Islands company called China Fire Protection Group Ltd. agreed in July 2006 to acquire all of the capital stock of Sureland. Lin said that move was designed to convert the shareholders of Sureland into shareholders of the new entity. SEC filings show that Lin signed the purchase agreement for China Fire Protection. Gangjin Li signed as the legal representative for one of the five companies that held stakes in Sureland.
UniPro also restructured prior to the reverse merger, reducing its shares outstanding with a 5-for-1 reverse split.
On Oct. 27, 2006, China Fire Protection combined with UniPro in return for preferred stock that could be converted to 22.8 million common shares. The combined company was renamed China Fire and Security.
Sumichrast’s group came away from the deal with 910,000 shares, or a little less than 5 percent of the company. At the current market price, the stake that the group originally acquired for $400,000 would be worth roughly $8 million.
John LaSala received 10,000 shares in China Fire, SEC filings show. He filed to sell those shares in December 2006. Allen Weinstein, another Sheffield Securities owner who pleaded guilty to conspiracy in the manipulation case, also got 10,000 shares.
THE CHINESE SHAREHOLDERS
SEC filing list seven recipients of the preferred shares that were issued in the reverse merger.
Those shareholders were:
- Li Brothers Holdings Inc., described as a British Virgin Islands corporation controlled by China Fire’s chairman, Gangjin Li.
- Vyle Investments Inc., another British Virgin Islands corporation. China Fire’s SEC filings say that Brian Lin owns 30 percent of Vyle. The initial filing also listed his wife as secretary and director.
- China Honor Investment Ltd., a British Virgin Islands corporation. The sole shareholder was listed as Ang Li, the son of Gangjin Li. He was described as a student in Vancouver.
- Worldtime Investment Advisors, the British Virgin Islands corporation controlled by Brian Lin’s sister-in-law, Huiwen Liu, who sometimes uses the first name Wendy.
- Linkworld Venture Inc.
- Fustar Technology Inc.
- China Tide Investment Inc.
The SEC filings provided no additional information on Linkworld, Fustar or China Tide. Lin said those three entities were incorporated in the British Virgin Islands and hold stock for some of the original Chinese investors.
Linkworld said in December that it intended to sell 700,000 China Fire shares for an estimated $8.4 million. Lin acknowledged that the person who signed Linkworld’s SEC filing was a nominee rather than an actual shareholder.
Our comparison of the handwriting on the filings for Worldtime and Linkworld showed that they were filled out by the same people. And although Worldtime and Linkworld said in those filings that they had no relationship with China Fire or its officers and directors, the documents for both of them listed the same address — China Fire’s administrative, sales and marketing office in Beijing.
When we asked Lin about that, he said China Fire prepared the SEC filings for Worldtime and Linkworld because of language barriers. He said the company put its address on the filings so that any return correspondence would come to people who could read and write English.
CONFLICTING NUMBERS?
Sharesleuth noted that the ownership interests for the five entities listed in SEC filings as the original Sureland shareholders did not correlate with the ownership interests listed for the seven entities that got China Fire shares in the reverse merger.
For instance, SEC filings regarding Sureland show that the investment company for which Gangjin Li signed as legal representative had a 32 percent stake. Immediately after the reverse merger, Li reported holding a 50 percent stake in China Fire, and a British Virgin Islands entity headed by his son, Ang Li, reported holding a separate 10.4 percent stake.
Brian Lin was not listed as the representative of any of the Sureland shareholders, but reported owning 936,498 shares and options, or 3.6 percent of the shares outstanding after the deal.
Two other entities were listed as holding stakes of 40 percent and 22.7 percent, respectively, in Sureland. The names of the people who signed as representatives for those entities appear nowhere in China Fire’s later SEC filings.
Lin said that one of those signatories, Shuangrui Zhao, is Gangjin Li’s uncle. He said the other, Zengliang Feng, is an early investor in Sureland and a longtime friend of Li.
Lin said Feng was among the investors who sold shares through Worldtime.
Lin said the ownership percentages
attributed to the Sureland shareholders in the initial restructuring agreement were not precise. He said some individuals had smaller stakes than indicated, and that others had stock spread among more than one of the listed holders. Lin said the breakdown for the seven entities that got shares in the reverse merger were the actual figures.
“Before we went public, we really wanted to make sure the numbers were correct,’’ he said.
No outsiders acquired shares through the restructuring of Sureland, he added.
WORLDTIME INVESTMENT ADVISORS
Worldtime said in the SEC filing disclosing its initial China Fire stake that it was a “holding company for strategic business operations and activities,” and that Liu was self-employed and “engaged in various business matters.’’
That filing listed an administrative address for Worldtime in the British Virgin Islands. It was the same as the administrative address used by Vyle Investments, the holding company through which Brian Lin owns his China Fire shares. One of Worldtime’s filings was signed by Brian Lin, as secretary, under his given name, Bin Lin.
The address listed for Liu in the SEC filings led Sharesleuth to a store in Richmond, British Columbia, that has operated under the names Organic and Nature House Inc. and Yogi House Inc. We visited the business in January and asked for Liu. The manager told us Liu and her husband were in California, running another store.
We thought it curious that Brian Lin’s sister-in-law would have received nearly three times as much stock in China Fire as Lin himself, who is described on the company’s website as co-founder of Sureland and as an early stage investor in the business.
So we went to California to ask how that happened. When we visited the store that Huiwen Liu and Kevin Lin run in Arcadia, the mystery deepened. Kevin Lin told us that his wife had no financial interest in the stock owned by the Worldtime, and that neither he nor his wife was ever an investor in China Fire or Sureland.
“I wish,’’ he said. “We’d be rich.’’
Kevin Lin said he didn’t know how his wife wound up being listed as Worldtime’s sole shareholder and director, or who actually owned its stock. But he acknowledged that his brother may have played a role.
State corporation records list Kevin Lin as the president of the Yogi House business in California. They list Brian Lin as the registered agent, again under his given name, Bin Lin.
Sharesleuth also asked Ang Li, the 17-year-old son of China Fire’s chairman, how he came to be listed as the sole shareholder of a British Virgin Islands entity that holds nearly 2.67 million shares of the company’s stock.
He said that although he had seen the documents, he was unaware of the details.
“I don’t actually know,’’ he said. “I’m not really involved.’’
COMMON ADDRESSES
Worldtime’s SEC filing covering the sale of 600,000 China Fire shares listed its address as B-25 TYG Center in Beijing. Linkworld Venture used the same address a few days later, when it filed to sell 700,000 shares.
Those addresses refer to the 25th floor of Tower B at an office complex referred to in English as TYG Center. China Fire has half of the 25th floor of that building, which is home to its administrative, sales and marketing offices.
The first of two filings by Fustar Technology listed its address as B-2503 TYG Center. Fustar disclosed plans in December to sell all 729,600 of its China Fire shares for an estimated $7.67 million.
Sharesleuth hired a reporter in China to check out the addresses. The reporter found no trace of Worldtime, Linkworld or Fustar at TYG Center — no signs or other identification on office doors, no names on mailboxes and no mentions in building directories.
Suite B-2503, the address that Fustar used, was occupied by another company that said it had no connection to Fustar or China Fire.
Lin said the address on Fustar’s SEC form must have been a typographical error. He said the person who signed the filing, Luhe Gu, was one of Sureland’s original employees and investors. He left the company in 2006.
Our reporter who visited the 25th floor of Tower B at TYG Center found that China Fire indeed occupied Suite 2508. The company also had suites 2501, 2502 and 2509, as evidenced by the Sureland logos etched into their glass entry doors.
Worldtime and Linkworld sold their shares through Roth Capital Partners LLC, a brokerage based in Newport Beach, Calif., that is a market maker for China Fire’s stock.
Fustar sold its shares through Brean Murray, Carret & Co., a New York brokerage that also is one of China Fire’s market makers. Brean issued a buy recommendation on the stock in November, with a target price of $19 a share.
China Tide’s stock was to be sold through a Merrill Lynch office in City of Industry, Calif.
THE PRIVATE PLACEMENT
On the day the reverse merger was completed, China Fire sold 1.54 million shares in a private placement for $3.25 a share. The buyers got warrants to purchase 615,442 additional shares at an average price of $4.23 a share.
Some of the investors got the right to buy a further 923,077 shares, also at $3.25, in the weeks that followed. Those shares came with 369,230 warrants, exercisable at an average price of $4.23.
The agent for the private placement was H.C. Wainwright, the same firm that originally paired China Fire with UniPro.
Vision Capital Advisors took more than half of the overall placement. It got 1.35 million shares and 553,848 warrants, which amounted to a 6.9 percent stake in China Fire. Two other hedge funds took smaller stakes, totaling 861,552 shares.
The remaining investors in the private placement all had connections to China Fire or H.C. Wainwright.
A buyer called Great Gain International Ltd. took 387,874 shares and warrants, representing a 1.5 percent stake in China Fire. SEC filings identified the person with the power over those shares as Zhonglin Dai.
What they didn’t say was that Dai is general manager of Brian Lin’s old company, Linkhead Technologies. Dai told Sharesleuth that he set up Great Gain International and personally owns all of the shares. He said Lin and Li had no involvement with that company.
Another investor who got 86,155 shares and warrants in the private placement is an 86-year-old women in Florida. We found that she is the grandmother of Michael S. Messinger, chief operating officer of H.C. Wainwright.
Although investing in a Chinese reverse-merger deal might not be suitable for many investors that age, Messinger told Sharesleuth that his grandmother had a high net worth and wasn’t putting much of her money at risk.
“It was an opportunity to take a shot on a company that we believed in,’’ Messinger said.
At the stock’s peak last fall, those shares and warrants would have been worth more than $1.5 million. Messinger would not say how many shares his grandmother had sold, but did say she still owns some.
H.C. Wainwright and its employees got warrants to buy 184,626 shares at $3.25 as its placement fee. Messinger was listed in China Fire’s SEC filings as the person having power over the 81,702 warrants
that went to the firm itself.
He said he thought that the family relationship with his grandmother was disclosed by the company, but we could find no evidence of that.
Vision Capital cashed out within 13 months of its initial investment in China Fire. It said in an SEC filing in mid-November that it had sold all of its shares and warrants. The hedge fund had filed no previous forms disclosing changes in its holdings. Vision Capital declined to comment.
China Fire’s stock climbed more sharply in the second half of last year, after its listing moved to the Nasdaq market from the Over-the-Counter market. Our analysis of SEC filings shows that that nearly all of the company’s outstanding warrants were exercised in the third quarter. Its share price in that period ranged from $6.70 to $12.25.
China Fire’s stock rose from $14 a share to $18 a share in the last week of October, on heavier-than-usual volume. The only press releases that the company issued in that time were an announcement about a new $2.9 million contract with a Chinese steel producer and an announcement about presentations at several investment conferences.
The stock peaked on Nov. 1. The sales form for Worldtime was prepared at the end of that month. By our calculations, the individuals and investment firms that got stock in China Fire’s reverse merger and private placement have sold or declared their intention to sell at least 4.4 million shares, representing roughly one out of every six shares issued.
Lin said in an email to Sharesleuth that short sellers who target China Fire should be careful, because of the strength of the company and the many big deals the company has in the works.
We will continue to investigate and update this story
