CONSPIRACY THEORISTS COME UP SHORT

Oliver Stone, please answer the courtesy phone.  Conspiracy theorists may soon be mourning the demise of one of their pet plots – the notion that short sellers have been targeting, and destroying, dozens of obscure, penniless and nearly penniless companies that trade on the over-the-counter market.  NASD is beginning to publish short interest information for OTC stocks, and the numbers suggest that the short-selling boogeyman is just Sasquatch in a pin-striped suit.

In recent years, promoters and proponents of these marginal companies have been trying to convince the public and potential investors that these tiny OTC companies have suffered at the hands of naked short-sellers who have conspired to drive share prices into the ground.  For the uninitiated – short-sellers borrow shares of stock, then sell them, hoping that stock prices will sink and they can “repay” the borrowed shares by buying stock at a later date and a lower price.

Some OTC Bulletin Board and Pink Sheet companies have charged that illegal “naked” short sales are depressing the market.  A short-sale is “naked” when the seller and has not arranged to borrow the shares.  For the most part, only legitimate market-makers are permitted to engage in naked short sales.

While some companies may have been adversely affected by crooked short sellers, or fallen victim to aggressive, but legitimate, short selling, other factors are far more likely to damage OTC businesses.  Unscrupulous promoters, greedy insiders, pump and dump schemes and shady secondary market trading tactics all have contributed to the dire state of these companies, most of which are under-capitalized and have minimal or no revenues.  For those entities, the specter of naked short selling is a handy scapegoat – but it is hardly their biggest problem.

The impact of short selling on OTC companies should soon become evident.  Effective July 2006, NASD expanded short interest reporting requirements to include OTC equity securities- including the OTC Bulletin Board and Pink Sheets.  The initial report, for July 2006, reflects a far more modest level of short-selling than some conspiracy theorists may have anticipated.  Take Nexia Holdings, Inc., (OTCBB: NEXH) whose CEO Richard Surber recently expressed his view that Nexia had been victimized by “abusive shorting practices.”  According to NASD’s July report, the short position in Nexia was a mere 37 shares – an insignificant fraction of the almost 4 billion Nexia shares currently outstanding.

StockPatrol.com readers are already familiar with Surber, a penny stock promoter with connection to a series of troubled OTC companies.  See Dark Dynamite Inc — Dancing In The Dark; Update: Dark Dynamite, Inc.  - No Escape; Vinoble, Inc. - Trick or Treat in This Treasure Chest? ; and Update: Vector Holdings - Room at the Top.

NASD’s reports are unlikely to silence the conspiracy theorists, but investors will now have the ability to do their own research and verify claims of improper trading.  And perhaps struggling OTC companies will focus on the source of their problems and stop handing out shares to unscrupulous promoters and shady financiers.

Remember, before you invest, investigate.

Mr. Hartley Bernstein represents clients in regulatory and enforcement proceedings. Also, he regularly represents the law firm’s clients in state and federal court proceedings. He previously served as a Trustee of Temple Israel of the City of New York.

THESE PHONES ARE OUT OF SERVICE

Here’s some good news for investors. The Securities and Exchange Commission isn’t devoting all of its attention to the Enrons, Adelphias and ImClones of the world. The Commission still has its eye on phony telemarketing schemes as well. That’s bad news for those telemarketers.

On August 6, 2002, the Commission filed four separate civil lawsuits, charging 81 individuals and entities with using telemarketing schemes to defraud up to 1800 investors out of more than $30 million.

The actions, filed in a New York federal court, allege that a nationwide network of telemarketers, calling themselves “Independent Sales Offices,” or “ISOs,” sold securities to hapless investors by making misrepresentations and failing to disclose hidden commissions.

As the following summaries indicate, the four complaints sound common themes:

• SECURITIES AND EXCHANGE COMMISSION v. HERITAGE FILM GROUP, LLC.

The SEC charged nine individuals and entities in connection with the fraudulent offer and sale of securities in three companies that develop medical devices and software for health care professionals. Between 1997 and 2000, the defendants allegedly raised over $13 million from approximately 670 investors, by falsely stating that the funds would be used to build the businesses, and promising that commissions would be limited to 12%. Instead, a substantial portion of the offering proceeds was used to pay undisclosed cash commissions to the telemarketers.

The defendants include the three issuers (Intracom Corporation, Hyperbaric Systems, Inc. and Surgica Corporation), their chief executive officers, an unregistered broker who operated a boiler room sales operation, and an attorney who helped effect the fraudulent schemes. 

• SECURITIES AND EXCHANGE COMMISSION v. EPHONE, INC

This scheme involved the use of boiler room telemarketers to sell shares of three companies purportedly formed to establish long distance telephone service over the Internet. Here again, the defendants allegedly misrepresented that investment funds would be used for business purposes. According to the SEC, approximately $1.2 million of the $2.9 million raised was used to pay commissions.

The defendants include the issuers (Ephone, Inc., Webphone, LLP and Newera Communications, LLP), their principals, individuals who orchestrated the offerings and unregistered telemarketers.

• SECURITIES AND EXCHANGE COMMISSION v. AMERICA IN-LINE CORPORATION, AMERICA IN LINE OF MOUNT SINAI, INC., and PETER RICCARDO.

The SEC charged America In Line Corporation ("America In Line"), America In Line of Mount Sinai, Inc. ("Mount Sinai") and Peter Riccardo ("Riccardo") with securities fraud in connection with a fraudulent private placement scheme that raised approximately $650,000. 

The Complaint charges that the defendants raised at least $650,000 through five unregistered offerings. The funds were supposed to be used to build a roller rink in Mt. Sinai, New York, but the offering materials misrepresented the commissions that would be taken out of the offering proceeds. In some case, investors were told that there were no commissions, while in other instances they were assured that commissions were capped at 8%. According to the Complaint, however, Riccardo, America In Line and Mount Sinai paid undisclosed cash commissions of 30% to unlicensed brokers, thereby substantially reducing the amount of funds available to develop and maintain the companies' business. 

It’s good to know that regulators are poised to crack down on telemarketers, but investors should set up their own first line of defense. Telemarketing crime has been estimated to costs consumers more than $40 billion per year. Experts say that at least $10 billion of those losses can be traced to phony investment scams.

So protect yourself. Here are a few suggestions for recognizing, and handling, unscrupulous telemarketers.

• If the telephone caller tries to convince you that there are no risks, just hang up the phone. You know that he or she can’t be telling the truth. Every investment has some risks.

• Don’t be pushed, cajoled or bullied to make an investment immediately. If you are curious about the investment, insist upon reviewing written materials, including audited financial statements. If the salesman insists on an immediate answer, give it – just say no.

• If you don’t want to receive unsolicited telemarketing calls, tell the caller to put you on the “do not call list.” If you then receive more calls from the same salesperson, or someone else offering the same investment “opportunity” contact your state Attorney General’s Office.

• Tell the caller you want to call back, and ask for his or her telephone number, address, and the name of the firm. If you don’t get the information, hang up. If you do get the information, contact your state or local consumer protection agency and see whether they have information about those telemarketers.

• Review any potential investments with a trusted financial advisor or attorney.

And remember. Before you invest, investigate.

About Hartley Bernstein: Hartley Bernstein is a corporate and securities attorney and civil litigator with a specialty in business transactions and civil litigation. 

ALL THAT GLITTERS IS NOT GOLDMEN

These days if you’re one of the thousands of defrauded investors trying to contact the offices of A.S. Goldmen & Co., Inc. just leave a message at Body By Boris in Red Bank, New Jersey. According to the NASD, that’s where this broker-dealer is now receiving its mail. But don’t expect to find any of the former Goldmen brokers at that address. The firm, which once maintained offices in New York City; Iselin, New Jersey; Los Angeles, California and Naples, Florida, is now inactive. Understandably so. On July 8, 1999, the New York County District Attorney, Robert Morganthau, issued indictments against A.S. Goldmen and 33 individuals, charging that the brokerage firm had engaged in massive securities fraud. According to prosecutors, A.S. Goldmen, its brokers and other affiliated persons have bilked thousands of investors out of almost $100 million. Morganthau also initiated civil proceedings seeking to recover these funds.
Indicted along with the firm were its President, Anthony Marchiano, his twin brother, Salvatore (the firm’s Head Trader), A.S. Goldmen’s Vice-President, Stuart Winkler, and more than 20 former A.S. Goldmen employees.
The charges run the full gamut of securities offenses, including high pressure cold calling, the sale of stocks at inflated prices, price manipulation, and refusal to obey customer sell orders. The indictment also alleges that "nominee" accounts were created by A.S. Goldmen employees in the names of their friends and relatives in order to evade rules which prohibited employees of the brokerage from investing in initial public offerings. The accounts were apparently funded by the Goldmen employees, who later shared in the profits.
According to the indictment, A.S. Goldmen’s efforts to evade regulators were devised by Winkler, the firm’s Chief Financial Officer, who worked as an examiner for the NASD between 1979 and 1986. Winkler, who reportedly joined A.S. Goldmen in 1989, allegedly used his experience at the NASD to divert attention from the regulators.
In a related case the SEC instituted administrative proceedings against Goldmen and sought a cease and desist order charging the firm and eight employees with securities law violations.
The New York indictment would seem to be the final nail in the coffin for a brokerage firm which has run afoul of regulators throughout the 1990’s. If A.S. Goldmen is truly gone, it leaves behind quite a legacy. And if you’re one of the fortunate individuals who never opened an account with this outfit, chances are you will never hear of A.S. Goldmen again. But there is an equal likelihood that former Goldmen brokers (at least the ones who have escaped indictment) will resurface at other brokerage firms, once again utilizing their well-honed sales skills on unsuspecting customers. The history of A.S. Goldmen is, therefore, an instructive cautionary tale.
A.S. Goldmen began operating in 1988. Even before the New York arrests, its final demise was signaled in May of this year when NASD Regulation’s National Adjudicatory Council found that the brokerage firm engaged in fraud and market manipulation in connection with its domination of the market for warrants of Innovative Tech Systems Inc. The NASD ordered A.S. Goldmen and its President, Anthony Marchiano to pay a $150,000 fine and make restitution of $500,000 to the firm’s customers (this decision cut in half the amount of restitution originally ordered by NASD District 10’s Business Conduct Committee). Marchiano was also required to requalify as a securities principal and censured for his failure to supervise. Goldmen’s Vice-President, Stuart Winkler, was suspended from the securities business for two years and fined as well. Stacy Meyers, the firm’s head trader at that time was also sanctioned.
The NASD sanctions resulted from A.S. Goldmen’s conduct in connection with a July 1994 Initial Public Offering for Innovative Tech Systems. Prior to that IPO Innovative had issued warrants as part of a bridge financing (Companies about to go public often arrange for bridge financings through their underwriters so that they will have sufficient funds to operate until the offering is completed. The people who offer the bridge financing generally receive securities from the company in return for providing these funds). In this case, the NASD found that, within two hours after the IPO began trading, Goldman had purchased most of the 1.3 million warrants from the bridge lenders at substantial discounts from the market price. Goldmen then artificially inflated the price of warrants to $2.00, a 700% increase over the initial offering price.
NASD Regulation considers markups of over 5% to be excessive and markups of over 10% to be fraudulent. 700%? That’s in a class all by itself.
The NASD order was merely one more blemish on A.S. Goldmen’s complexion. Other highlights –

• Since 1991 the State of Missouri has issued four separate orders directing the brokerage firm to cease and desist from its practice of selling unregistered securities to residents of that state.
  
• In December 1997 the State of Massachusetts suspended Goldmen’s registration in that state for five years, charging the firm with selling over $890,000 in unregistered securities.
  
• In May 1995 the State of Maine issued a Notice of Intent to Revoke the Broker-Dealer License of Goldmen for refusal to execute customer orders and unauthorized transactions.
  
• In February 1999 the State of Delaware suspended Goldmen for a period of five years from selling any security that was not listed on the New York Stock Exchange.
  
• In April 1998 the NASD sanctioned Goldmen for its failure to comply with required reporting and bookkeeping practices.

A.S. Goldmen’s brokers came up with a few creative ways to violate the securities laws on their own. In July 1997 the NASD found that six Goldmen brokers had used imposters to take their qualifying securities license exams. The NASD fined the six brokers and barred them from the securities industry.
Customer complaints? The NASD reports 79 arbitrations filed against the brokerage firm through the end of 1998.
That’s not all. The recent New York indictments apparently had their genesis in April 1998, when Morganthau’s office, with the assistance of Florida law enforcement officials, raided A.S. Goldmen’s offices in Iselin, New Jersey and Naples, Florida (as well as Marchiano’s Naples estate).
The Naples office of Goldmen is now closed, but the presence of the firm in that prosperous community will not soon be forgotten. It seems that Goldmen became involved with local officials and businesspeople as the investment banker for a project known as Stadium Naples – a proposed golf course stadium project. When rumors of Goldmen’s sales practices began to surface, the community started to question the involvement of the brokerage firm in the community project. Once the New York District Attorney’s Office raided the firm’s offices, Goldmen’s involvement in the project ceased. But the investigations continue. In a letter to the Florida Department of Law Enforcement on May 14, 1999, Governor Jeb Bush directed a review of "any possible violations of Florida’s criminal laws involving the brokerage firm of A.S. Goldmen & Co…that are not already being addressed by a current New York grand jury investigation."
And what if you invested in one of the companies taken public by A.S. Goldmen in the 1990’s? We looked at prices as of July 8, 1999:

• Apparel Technologies, Inc. (APTX) – 3/256;
  
• Cinema Ride Inc. (MOVE) – 33/256
  
• Cinemaster Luxury Theaters Inc. (LUXY) – $3 9/16
  
• Perma-fix Environmental Services, Inc. (PESI) – $1 _;
  
• Datatrend Services, Inc.(DATA) –$5 9/16;
  
• Millenium Sports Management Inc. (MSPT) – 23/32;
  
• Country Star Restaurants Inc. (KAFE) – no quote available;
  
• Innovative Tech Systems Inc. (ITSY) – no quote available;
  
• Adrenalin Interactive Inc. (ADRN) – $4.00;
  
• Imatec Ltd.(IMEC) – 1 13/32;
  
• Independence Brewing Company - (IBCO)- no quote available;
  
• Innodata, Inc. (INOD) – 9 1/8
  And the apparent winner …
  
• Winfield Capital Corp. (WCAP) – 25 13/16;

Winfield Capital is an interesting story in itself. Several Winfield directors and officers have served on the boards of directors of other companies underwritten by Goldmen. And, according to a July 1998 proxy statement filed by Winfield Capital, Marchiano owned 500,000 shares of that company, or 9.95% (including 150,000 shares held by Gas Motors, Co., a Connecticut car dealership owned by Marchiano
One thing’s for certain, former A.S. Goldmen salespersons will soon reappear in the brokerage community. It’s happened already. In June of this year federal prosecutors in New York’s Eastern District arrested 85 people, including some who were allegedly connected to organized crime, and charged them with swindling investors out of $100,000,000. Reportedly, 12 former Goldmen brokers were among those named in the indictments.
And just how do you make sure that your broker is not among the A.S. Goldmen alumni? Check him or her out with the NASD at http://www.nasdr.com. You just can’t be too careful.

About Hartley Bernstein: Hartley Bernstein is a corporate and securities attorney and civil litigator with a specialty in business transactions and civil litigation.

WITH FRIENDS LIKE THESE…

“Trust me.” That’s the mantra of every securities scam artist. Investors are more likely to jump into an investment if it is recommended by someone they trust – particularly somebody from their “group.”
“Affinity fraud” refers to a particularly insidious form of investment scam that targets members of an identifiable group – such as race, religion, ethnic heritage, age or special interests. As a rule, people are inclined to believe – and trust - someone who claims to have the same background or beliefs. Unfortunately, con artists know this, and are fully prepared to take advantage of that inclination.
Take, for example, a complaint filed by the SEC on September 13, 2000. In that case the Commission charges that Bernard Taalib-Din Hasan (a/k/a Bernard Caldwell), and his common law wife Maria Elena Gonzalez, targeted Hispanic investors as victims of their scheme. According to the Complaint, the defendants allegedly raised approximately $1.5 million while misrepresenting the risks and potential returns of “overseas trading” in rice, diamonds and precious metals. Investors are believed to have lost about $860,000 – more than half of the total funds that were invested.
The North American Securities Administrators Association (NASAA) cautions investors to be on guard against infinity fraud, telling the public to “Beware of swindlers who claim loyalty to your group.” That is often more easily said than done. As NASAA points out,
[e]veryone, in some way or another, is connected to a group or association. Our interests, backgrounds, and other factors will naturally lead us to those organizations or affiliations that serve our needs. Race, culture, and religious beliefs also play a role in identifying us as members of unique groups that we often come to trust – sometimes to our detriment.
The warning rings true. After all, at one time or another we have all been solicited to contribute money to a place of worship, a community club, an alumni association or some other common cause. So how can individuals differentiate legitimate fund raising activities from scams? It is not always easy, particularly when the con artist’s message goes something like: “You can trust me because we have a common bond.”
How do these scamsters locate their prey? Sometimes they really are members of the “group.” On other occasions, they join organizations, go to meetings or obtain membership lists. Sometimes they do not bother to actually join the “group.” Instead, they begin by soliciting some of the more prominent members of a community or organization. Then they invoke those prominent names to attract other investors.
The Internet has made it even easier to find and communicate with members of a particular group. Chat rooms, message boards and web sites are specifically geared to special interests, religions and ethnic groups. In the past, sophisticated scam artists might buy a mailing list that identified people of a particular age group, religious belief or ethnic background. Today, they can buy e-mail lists containing even more detailed information, and communicate almost instantaneously with hundreds or thousands of potential victims.
How can you recognize “affinity fraud?” Start by keeping in mind these few examples:

• Seven officials of the Tampa-based Greater Ministries International Church were charged with operating a massive Ponzi scheme that may have defrauded investors around the country out of as much as $200 million. Greater Ministries quoted from the bible as they told investors that their money would soon double.
• The Illinois Securities Department claimed a promoter allegedly targeted Christians by saying that he had a device that could find oil based upon visions he received from God. About 150 investors are believed to have lost an aggregate of $1 million through this scheme.
• A Milwaukee, Wisconsin man was charged with allegedly raising money from hundreds of Milwaukee residents, many of whom were reached through their churches, to finance a minority owned and operated telephone company. Soon after raising the money, the promoter’s company filed for bankruptcy.
• In Indiana, the NASSA says, elderly investors were duped into buying bogus promissory notes by three men "who often got on their knees and prayed with their victims to gain their trust."
• The SEC alleged that four men bilked approximately 100 elderly persons out of about $2.5 million by promising "guaranteed" returns. According to the SEC, the defendants first obtained information about the assets and investments of the senior citizens and then encouraged them to invest in phony promissory notes issued by companies with little or no business. The SEC says that these defendants preyed on the fears and insecurities of the elderly by disseminating literature designed to alarm senior citizens with claims that the Texas probate process was costly and lengthy.
• The SEC charged a stockbroker raised and misappropriated at least $1.7 million from victims, including elderly church members, through the sale of a fictitious “Interim Church Loan Fund.”
• In another SEC action, charges were brought against a defendant who allegedly bilked 375 investors, most of whom were African-American, out of $2.8 million. Victims were falsely promised that they would have an opportunity to participate in investments and reap profits not normally available to African-Americans.

How can you protect against affinity fraud? A few tips:

• Always ask for, and review, written materials detailing the proposed investment. If it involves an Initial Public Offering, make sure you receive a prospectus that has been filed with the SEC. If someone is reluctant to provide this information, or says it is not available, you should avoid the investment.
• Discuss the investment with someone who is outside the “group” – preferably an accountant, attorney, investment advisor or broker with whom you have a long-standing, and satisfactory relationship.
• Be wary of anyone who repeatedly emphasizes his or her connection to the “group” in order to gain your trust.
• Stay away from anyone who asks you to make an investment on faith alone.
• Be skeptical of someone who invokes the names of “group” leaders or who offers testimonials from other “group” members. Many affinity frauds involve “Ponzi” schemes, where the earliest investors get high payouts at the expense of later subscribers. Those early investors may then become unwitting pawns in the scheme, speaking enthusiastically about their successful investments.
• As always, stay away from “guarantees” of profits or “risk-free” investments. There are no “sure things.”
• Always check out the person who is soliciting the investment with the SEC, NASD and your state regulators. You will not be betraying a “group” member by checking on credentials. You will, however, be following a prudent course of conduct to protect your assets.

We’ve said it before, but it bears repeating. If it sounds too good to be true, it probably is.
One final word. If you believe you have been the victim of an affinity fraud, contact your state regulator and the SEC immediately. (See CONTACT THE REGULATORS for the addresses of these agencies). Do not hesitate because you are reluctant to turn against a “group member.” After all, with friends like these …


About Hartley Bernstein: Hartley Bernstein is a corporate and securities attorney and civil litigator with a specialty in business transactions and civil litigation.

Will Frank Quattrone Win This Trifecta?

Could the third time be the charm for former Credit Suisse First Boston investment banking star, Frank Quattrone? A federal appeals court raised that possibility this week when it tossed out Quattrone’s 2004 conviction on obstruction of justice charges.  His first trial, in 2003, ended with a divided jury. 
In a unanimous ruling, a federal appellate panel ruled that jury instructions were “flawed,” and chided Judge Richard Owen, who presided over the Quattrone trial, for making comments which went “beyond mere impatience or annoyance with the defense.” 

Quattrone gained prominence as a leading rainmaker for mega-Internet IPOs.  The government’s charges against him arose out of an investigation into the allocation of IPO shares during the red-hot IPO bubble of the 1990s.  In December 2000, Quattrone, while regulators were investigating possible IPO irregularities, Quattrone circulated an e-mail reminding colleagues to clean up their files.  Prosecutors claim that he did so to obstruct their investigation. 

The flawed jury instructions permitted jurors to find the investment banker guilty without first determining whether he knew he was obstructing a federal investigation.

Prosecutors have not indicated whether they plan to bring Quattrone to trial a third time.

About Hartley Bernstein: Hartley Bernstein is a corporate and securities attorney and civil litigator with a specialty in business transactions and civil litigation.
 

A SCHEME AND A DREAM, CIRCA 2003

A millennium ago (back in the 1990s) a significant portion of securities frauds could be traced to boiler room penny stock firms, where dozens of telemarketers (known as cold-callers) furiously worked the phones to dump their “products” on unwary customers. That kind of setup took time and money; it required a brokerage firm, rooms full of brokers and their assistants, capital to operate the firm, licenses, and finally, a product to sell.
Then came the Internet. And, to paraphrase one popular commercial, investment fraud just got a lot easier. Now, all a scam artist needs is a computer, an e-mail list, a vivid imagination, and a heart of stone. Now, fraudulent stock schemes can be carried out by creating an “e-buzz” – through bogus press releases, online newsletters, mass e-mailings and visits to online chat rooms and message boards. Each of these tools is employed with a single goal in mind – to get people to buy stock, increase volume, and support higher prices.
The plan is usually simple. Pump up the price of a stock, and then dump a truckload of shares at significant profits. And disappear. It is this final step that distinguishes Internet fraud from traditional incarnations of the “pump and dump.” It is just so much easier for the perpetrator to vanish.
In those old days, the boiler room brokers could be identified and located with ease - brokerage firms cannot easily fade from site. Cyber crime is different. It operates under a cloak of anonymity. Screen names and Internet “monikers” can be changed in an instant. Who is really posting false or misleading information on chat boards, in e-mails and through seemingly responsible newsletters? In all likelihood, the investor will never know - the perpetrator moves from chat room to message board, before disappearing into cyberspace.
Sound scary? It is. Still, there are some warning signs that should have investors proceeding with caution – or not at all. For example:

1. Is financial information about a Company readily available for the public to review? If so, has it been reviewed by independent auditors? Of course, investors have grown skeptical of auditors after recent revelations from Enron, Xerox, WorldCom and a host of other public companies whose audited financial statements do not withstand scrutiny.
Still, audited financial statement are likely to be a far more accurate reflection of the Company’s activity than unaudited projections posted on a Company’s web site, or touted by a paid analyst. Be skeptical if the Company does not file regular reports with the SEC, or is delinquent in those filings. Without that information how can you, as an investor, fairly assess the prospects of the business or the condition of the Company?
2. Does the person making the recommendation say that he or she is a stockbroker? Every broker must be registered with the NASD and any state in which he or she is selling securities. Investors can check out the status of any broker by contacting the NASD at www.nasdr.com. The NASD will provide public customers with detailed information about any registered broker or brokerage firm, including the broker’s employment background, registration status and disciplinary history.
What if the NASD has no records about this so-called broker? Contact NASD Regulation immediately, and provide the regulators with any information you received from that “broker.”
3. Have you been promised that an investment is “guaranteed” or “risk-free?” This one is easy. There are no guarantees in the stock market. No reputable investment advisor or broker will ever guarantee a rate of return or the success of a company. There are different levels of investment risk, from extremely conservative to highly speculative, – and a broker or salesperson should outline those risks with care - but no investment is free from risk.
4. Have you been told that you must act immediately – or lose a once-in-a-lifetime opportunity? What’s the rush? Consider the nature of the investment and its source. Take your time and investigate the potential investment. If the salesperson continues to push for an immediate commitment he or she may want you to leap before you look. That is generally the prescription for a long and perilous fall.
5. Have press releases and online promoters been announcing “big news” and projecting record revenues? Be cautious. Internet touts may be trying to drive up interest in a Company as part of a “pump and dump” scheme. Thanks to the Internet, and e-mail, these promotions can spread like wildfire, resulting in increased attention for a Company, a spike in volume, and an environment that lets the promoters dump their shares.
Investors should be wary of glowing newsletters and press releases. A fair report will always point out the risks, discuss the problems a Company is likely to encounter, and give a balanced view of the Company’s financial position. If the “report” ignores the negative, and embellishes the positive, you can be sure you are not getting the full story.
6. Investments that promise business opportunities abroad (outside the United States and Canada) pose their own set of problems. It can be significantly more difficult for investors to verify information about foreign companies or to get all of the facts about promised overseas business combinations. Unscrupulous promoters often operate from outside the United States, making it more difficult for regulators to track them down and hold them accountable.
7. An unscrupulous stock promoter is always eager to close the deal as quickly as possible. He or she may provide a federal express account number so funds can be delivered overnight. They may even offer to have an investor’s check picked up by messenger. Why? One goal should be obvious. They want to get your money before you can change your mind. Sometimes they just want to get your bank account number and other personal information.
8. Does the investment newsletter have an agenda? As an investor you want to know if the newsletter publisher has an ulterior motive for recommending a stock. Has he or she received stock, or cash, for publishing a recommendation? Newsletters should contain disclaimers disclosing this information. But even the presence of a disclaimer does not necessarily signify legitimacy. The newsletter that has been paid, whether in stock or in cash, has a conflict of interest that may prevent it from being objective. Is the newsletter providing a balanced analysis, or is it simply a paid tout trying to pump up interest so it can dump shares?
9. Beware of code words. Like “Homeland Security,” “anti-terrorism products,” and “AIDS treatments.” They are often used to lend an air of legitimacy to a Company and to kindle investor interest. Gather enough information to be certain that the Company has substance, that its management team is qualified and experienced, and that it is sufficiently financed to pursue its business plan.
10. If you receive an e-mail recommending a Company, does the sender use his or her own name? Or does it arrive from an anonymous source, with a vague or misleading subject heading? Just today we received an investment recommendation from “a good friend,” and the subject of the e-mail was “lunch at 1?” That certainly does not suggest a credible, professional or reliable source of information.
Know who is making a recommendation. Does the person use his or her own name, and provide a phone number or address where he or she can be contacted? If you are relying on nothing but an alias or pseudonym, how can you possibly verify the integrity or agenda of the promoter? Don’t deal with ghosts. They’re not all as friendly as Casper.
11. If you believe you have been the victim of an investment fraud, contact the SEC, NASD or your local state regulator without delay. A complete list of these contacts is provided at REGULATORS ON PATROL – CONTACT THE REGULATORS.

These tips only offer a starting point. The hardest task is for investors to exercise discipline, to resist the temptation to make a quick buck, and to investigate before they invest.
Every scam has one goal in common – to separate an investor from his or her money as quickly and effortlessly as possible. Unfortunately, the tools of investment fraud have become easily available. Anyone can assume a fictitious identity on the Internet, generate e-mails, chat away, and send out fictitious or misleading press releases.
All it takes is the click of a button. 


About Hartley Bernstein: Hartley Bernstein is a corporate and securities attorney and civil litigator with a specialty in business transactions and civil litigation.

Hartley Bernstein’s Guide to Corporate Law

TV has made corporate law one of the coolest professions in America. Yet, for all the good things it has done for the profession--an unintended (or deliberate?) effect of a lot of exposure has been on children and young students, who are increasingly flocking to the law school to enter the world of corporate law. This is good. But here is a word of caution: in vogue, though, the world of corporate law is, it is not easy. So New York based corporate lawyer Hartley Bernstein has written this blog to introduce corporate law to individuals whose only source of information of the field has been the television.

Corporate lawyer

The job of corporate lawyers is to ensure the commercial transactions happening under their watch are legal. To this end, they have to have a profound knowledge of both the statutory law and the regulations of state and federal agencies. Let’s try to understand this with an example: there are companies A and B. Company A wants to buy five computers a month from company B for the next five years. In this scenario, the job of a corporate lawyer is to draw a contract that is acceptable to both companies while making sure none of the terms and conditions in the contract goes against the tax law, zoning law, property law, and laws on licensing.

Although this sounds simple, the job is hard. It requires a lot of effort and hard work on part of lawyers who often have to burn the midnight oil to make sure nothing goes against the law. What it means for those aspiring to become corporate lawyers such as Hartley Bernstein is that fame and wealth come a lot later. And the road to become a successful law is paved with hard work, diligence, and perseverance.

How to hire a real estate attorney?

To hire a real estate attorney is a good idea if you are going to purchase a home. A lawyer can see to it that you have all the necessary legal documents in place and protect you from wily sellers who may try to shortchange you, or sell you a poor property by falsifying documents. A lawyer is virtually essential to go through a real estate transaction smoothly, and without expensive legal troubles. In this blog New York-based corporate lawyer Hartley Bernstein will suggest you five ways to find the best real estate lawyer for you.

·         Start early

Start looking for a real estate attorney in earnest the moment you begin your search for your property. You will have plenty of time to find a good attorney if you start early. Leaving this task to the eleventh hour will often produce poor results at a high cost.

·         Keep your ears open

Ask your friends and family, especially those who have recently purchased a home or a property. They will be in a position to guide you to a good attorney. Alternatively, you can seek the advice of real estate agents. They can usually usher you to some of the most reputed attorneys in your town.

·         Experience is paramount

When you meet an attorney, ask him or her about their experience. Prefer those professionals with an extensive experience in residential sales. You can do this in a number of ways. For one, check out the bar association to which belongs the lawyer. Second, ask others about the practice area of the attorney.

·         Internet is omniscient

That may be an exaggeration. But you get the point. When you learn about an attorney, look for him or her on the internet. The internet can be a rich source of information, and can often help you figure out if the person is the right one for you.

Three ways to save money on law attorney

Lawyers are not cheap. Some may charge as much as $250 an hour. When you are paying such a large amount, you want to make sure your law attorney is working. Also, it does not hurt to save a little. This blog shares with you three unique and highly effective methods to save money when dealing with a law attorney:

·         Right beginning equals half the journey

It is a huge waste of time to replace your old attorney and hire a new one. Do not do this. Hire the right attorney the first time. You can do it easily if you focus on those lawyers who are interested in your situation and who are attentive to your problems. Prefer to hire someone who has a profound knowledge of your business, or someone who is genuinely eager to learn. Avoid attorneys who are more interested in your life than your case.

·         Do not be an ad-sheep, focus on skills

It makes a big impression when you see ads of an attorney in newspapers, yellow pages, radio, or television. Although impressive, these ads say little about the skills of the lawyer. All an advertisement says is that the attorney can afford to pay the bill for advertising. Do not follow the local directory blindly. Instead, go with a reputed database of lawyers, or better still, hire an experienced lawyer such as Hartley Bernstein.

·         Be realistic, idealism is your biggest enemy

Be realistic. Reconsider your situation. Why are you looking for an attorney in the first place? A lot of the time it is because you are in the middle of a dispute and you want a lawyer to protect you, your family, or your business from harm. Weight your options, especially when the dispute is small. Can you really afford to hire a lawyer? Would not a skilled negotiator prove to be a less expensive option?

Conclusion

Lawyers are expensive. It is not cheap to hire them. Do not hire a lawyer unless you absolutely need them. When you go looking for them, try to find the right fit in the first go by focusing on skills and not following ads blindly.

WITH FRIENDS LIKE THESE…

“Trust me.” That’s the mantra of every securities scam artist. Investors are more likely to jump into an investment if it is recommended by someone they trust – particularly somebody from their “group.”
“Affinity fraud” refers to a particularly insidious form of investment scam that targets members of an identifiable group – such as race, religion, ethnic heritage, age or special interests. As a rule, people are inclined to believe – and trust - someone who claims to have the same background or beliefs. Unfortunately, con artists know this, and are fully prepared to take advantage of that inclination.
Take, for example, a complaint filed by the SEC on September 13, 2000. In that case the Commission charges that Bernard Taalib-Din Hasan (a/k/a Bernard Caldwell), and his common law wife Maria Elena Gonzalez, targeted Hispanic investors as victims of their scheme. According to the Complaint, the defendants allegedly raised approximately $1.5 million while misrepresenting the risks and potential returns of “overseas trading” in rice, diamonds and precious metals. Investors are believed to have lost about $860,000 – more than half of the total funds that were invested.
The North American Securities Administrators Association (NASAA) cautions investors to be on guard against infinity fraud, telling the public to “Beware of swindlers who claim loyalty to your group.” That is often more easily said than done. As NASAA points out,
[e]veryone, in some way or another, is connected to a group or association. Our interests, backgrounds, and other factors will naturally lead us to those organizations or affiliations that serve our needs. Race, culture, and religious beliefs also play a role in identifying us as members of unique groups that we often come to trust – sometimes to our detriment.
The warning rings true. After all, at one time or another we have all been solicited to contribute money to a place of worship, a community club, an alumni association or some other common cause. So how can individuals differentiate legitimate fund raising activities from scams? It is not always easy, particularly when the con artist’s message goes something like: “You can trust me because we have a common bond.”
How do these scamsters locate their prey? Sometimes they really are members of the “group.” On other occasions, they join organizations, go to meetings or obtain membership lists. Sometimes they do not bother to actually join the “group.” Instead, they begin by soliciting some of the more prominent members of a community or organization. Then they invoke those prominent names to attract other investors.
The Internet has made it even easier to find and communicate with members of a particular group. Chat rooms, message boards and web sites are specifically geared to special interests, religions and ethnic groups. In the past, sophisticated scam artists might buy a mailing list that identified people of a particular age group, religious belief or ethnic background. Today, they can buy e-mail lists containing even more detailed information, and communicate almost instantaneously with hundreds or thousands of potential victims.
How can you recognize “affinity fraud?” Start by keeping in mind these few examples:

• Seven officials of the Tampa-based Greater Ministries International Church were charged with operating a massive Ponzi scheme that may have defrauded investors around the country out of as much as $200 million. Greater Ministries quoted from the bible as they told investors that their money would soon double.
• The Illinois Securities Department claimed a promoter allegedly targeted Christians by saying that he had a device that could find oil based upon visions he received from God. About 150 investors are believed to have lost an aggregate of $1 million through this scheme.
• A Milwaukee, Wisconsin man was charged with allegedly raising money from hundreds of Milwaukee residents, many of whom were reached through their churches, to finance a minority owned and operated telephone company. Soon after raising the money, the promoter’s company filed for bankruptcy.
• In Indiana, the NASSA says, elderly investors were duped into buying bogus promissory notes by three men "who often got on their knees and prayed with their victims to gain their trust."
• The SEC alleged that four men bilked approximately 100 elderly persons out of about $2.5 million by promising "guaranteed" returns. According to the SEC, the defendants first obtained information about the assets and investments of the senior citizens and then encouraged them to invest in phony promissory notes issued by companies with little or no business. The SEC says that these defendants preyed on the fears and insecurities of the elderly by disseminating literature designed to alarm senior citizens with claims that the Texas probate process was costly and lengthy.
• The SEC charged a stockbroker raised and misappropriated at least $1.7 million from victims, including elderly church members, through the sale of a fictitious “Interim Church Loan Fund.”
• In another SEC action, charges were brought against a defendant who allegedly bilked 375 investors, most of whom were African-American, out of $2.8 million. Victims were falsely promised that they would have an opportunity to participate in investments and reap profits not normally available to African-Americans.

How can you protect against affinity fraud? A few tips:

• Always ask for, and review, written materials detailing the proposed investment. If it involves an Initial Public Offering, make sure you receive a prospectus that has been filed with the SEC. If someone is reluctant to provide this information, or says it is not available, you should avoid the investment.
• Discuss the investment with someone who is outside the “group” – preferably an accountant, attorney, investment advisor or broker with whom you have a long-standing, and satisfactory relationship.
• Be wary of anyone who repeatedly emphasizes his or her connection to the “group” in order to gain your trust.
• Stay away from anyone who asks you to make an investment on faith alone.
• Be skeptical of someone who invokes the names of “group” leaders or who offers testimonials from other “group” members. Many affinity frauds involve “Ponzi” schemes, where the earliest investors get high payouts at the expense of later subscribers. Those early investors may then become unwitting pawns in the scheme, speaking enthusiastically about their successful investments.
• As always, stay away from “guarantees” of profits or “risk-free” investments. There are no “sure things.”
• Always check out the person who is soliciting the investment with the SEC, NASD and your state regulators. You will not be betraying a “group” member by checking on credentials. You will, however, be following a prudent course of conduct to protect your assets.

We’ve said it before, but it bears repeating. If it sounds too good to be true, it probably is.

One final word. If you believe you have been the victim of an affinity fraud, contact your state regulator and the SEC immediately. (See CONTACT THE REGULATORS for the addresses of these agencies). Do not hesitate because you are reluctant to turn against a “group member.” After all, with friends like these …

TELEMARKETING HOAX

Regrettably, there always seem to be unscrupulous individuals seeking to profit from a crisis and the misfortunes of others. In the wake of Tuesday's terrorist attack, authorities have warned the public to beware of telemarketers who have been fraudulently soliciting funds by claiming that the money they collect will be used to help victims and their families. According to reports, these telemarketers do not represent any recognized charitable group.

If you have been contacted by a telemarketer soliciting such donations contact us at editor@stockpatrol.com, and we will report that activity to appropriate authorities.

Persons wishing to make contributions should contact established charitable organizations whose credentials can be checked and verified, such as the American Red Cross or the United Way. The Red Cross can be reached at 1-800-HELP-NOW. The United Way/New York Community Trust Fund can be contacted at 1-800-710-8002 or visit the United Way of New York City website at www.uwnyc.org

Anyone wishing to contribute food, clothing or supplies can contact the Salvation Army at 1-800-SAL-ARMY

Will Frank Quattrone Win This Trifecta?

Could the third time be the charm for former Credit Suisse First Boston investment banking star, Frank Quattrone? A federal appeals court raised that possibility this week when it tossed out Quattrone’s 2004 conviction on obstruction of justice charges.  His first trial, in 2003, ended with a divided jury. 

In a unanimous ruling, a federal appellate panel ruled that jury instructions were “flawed,” and chided Judge Richard Owen, who presided over the Quattrone trial, for making comments which went “beyond mere impatience or annoyance with the defense.”

Quattrone gained prominence as a leading rainmaker for mega-Internet IPOs.  The government’s charges against him arose out of an investigation into the allocation of IPO shares during the red-hot IPO bubble of the 1990s.  In December 2000, Quattrone, while regulators were investigating possible IPO irregularities, Quattrone circulated an e-mail reminding colleagues to clean up their files.  Prosecutors claim that he did so to obstruct their investigation.

The flawed jury instructions permitted jurors to find the investment banker guilty without first determining whether he knew he was obstructing a federal investigation.
Prosecutors have not indicated whether they plan to bring Quattrone to trial a third time.

BBX — A BETTER BULLETIN BOARD?

The OTC Bulletin Board has afforded companies an air of legitimacy that they have not always deserved. Some have used that listing to imply a relationship with the NASD (as in, “we are now listed on the NASD Bulletin Board,” while others have gone a step further and, inaccurately, claimed to be listed on the Nasdaq Bulletin Board.

Of course, the OTC Bulletin Board is not part of Nasdaq and its listing standards are minimal. Companies need only file regular reports with the Securities and Exchange Commission. Unlike Nasdaq listed companies, they do not have to meet any minimal financial thresholds or pass a “public interest” test. Some of that is about to change.

A year from now the OTC Bulletin Board is likely to be nothing more than a memory. Plans call for it to be phased out, beginning in early 2003, to be replaced by a new trading venue, the Bulletin Board Exchange (BBX). The BBX will facilitate trading; an electronic trading system will allow order negotiation and execution. That marks a dramatic departure from the OTC Bulletin Board, where orders are placed by telephone.

Many of the current OTC Bulletin Board companies will be listed on the BBX, but a large number are likely to be excluded. The BBX will not require companies to maintain a minimum share price, income or assets, but it will impose qualitative listing standards as a firewall against possible scams and abuses.

What will happen to those companies that do not meet the new BBX standards? Most of them are likely to wind up trading on the Pink Sheets, a privately-owned stock quotation service that already provides price information for over-the-counter securities that are not listed on any national securities exchange, or on the OTC Bulletin Board. (See In The Pink). Since the Pink Sheets are privately owned, they do not enjoy the same degree of regulatory oversight as the trading systems run by Nasdaq and the NASD.

Exiling companies to the Pink Sheets could have negative repercussions for investors. Some of those companies currently file regular financial reports with the SEC solely so that they can retain their OTC Bulletin Board listing. Companies banished to the Pink Sheets may stop filing those reports, making it that much harder for investors to obtain credible information.

THESE PHONES ARE OUT OF SERVICE

Here’s some good news for investors. The Securities and Exchange Commission isn’t devoting all of its attention to the Enrons, Adelphias and ImClones of the world. The Commission still has its eye on phony telemarketing schemes as well. That’s bad news for those telemarketers.

On August 6, 2002, the Commission filed four separate civil lawsuits, charging 81 individuals and entities with using telemarketing schemes to defraud up to 1800 investors out of more than $30 million.

The actions, filed in a New York federal court, allege that a nationwide network of telemarketers, calling themselves “Independent Sales Offices,” or “ISOs,” sold securities to hapless investors by making misrepresentations and failing to disclose hidden commissions.

As the following summaries indicate, the four complaints sound common themes:

• SECURITIES AND EXCHANGE COMMISSION v. HERITAGE FILM GROUP, LLC.

The SEC charged nine individuals and entities in connection with the fraudulent offer and sale of securities in three companies that develop medical devices and software for health care professionals. Between 1997 and 2000, the defendants allegedly raised over $13 million from approximately 670 investors, by falsely stating that the funds would be used to build the businesses, and promising that commissions would be limited to 12%. Instead, a substantial portion of the offering proceeds was used to pay undisclosed cash commissions to the telemarketers.

The defendants include the three issuers (Intracom Corporation, Hyperbaric Systems, Inc. and Surgica Corporation), their chief executive officers, an unregistered broker who operated a boiler room sales operation, and an attorney who helped effect the fraudulent schemes.

• SECURITIES AND EXCHANGE COMMISSION v. EPHONE, INC

This scheme involved the use of boiler room telemarketers to sell shares of three companies purportedly formed to establish long distance telephone service over the Internet. Here again, the defendants allegedly misrepresented that investment funds would be used for business purposes. According to the SEC, approximately $1.2 million of the $2.9 million raised was used to pay commissions.

The defendants include the issuers (Ephone, Inc., Webphone, LLP and Newera Communications, LLP), their principals, individuals who orchestrated the offerings and unregistered telemarketers.

• SECURITIES AND EXCHANGE COMMISSION v. AMERICA IN-LINE CORPORATION, AMERICA IN LINE OF MOUNT SINAI, INC., and PETER RICCARDO.

The SEC charged America In Line Corporation ("America In Line"), America In Line of Mount Sinai, Inc. ("Mount Sinai") and Peter Riccardo ("Riccardo") with securities fraud in connection with a fraudulent private placement scheme that raised approximately $650,000.

The Complaint charges that the defendants raised at least $650,000 through five unregistered offerings. The funds were supposed to be used to build a roller rink in Mt. Sinai, New York, but the offering materials misrepresented the commissions that would be taken out of the offering proceeds. In some case, investors were told that there were no commissions, while in other instances they were assured that commissions were capped at 8%. According to the Complaint, however, Riccardo, America In Line and Mount Sinai paid undisclosed cash commissions of 30% to unlicensed brokers, thereby substantially reducing the amount of funds available to develop and maintain the companies' business.

It’s good to know that regulators are poised to crack down on telemarketers, but investors should set up their own first line of defense. Telemarketing crime has been estimated to costs consumers more than $40 billion per year. Experts say that at least $10 billion of those losses can be traced to phony investment scams.

So protect yourself. Here are a few suggestions for recognizing, and handling, unscrupulous telemarketers.

• If the telephone caller tries to convince you that there are no risks, just hang up the phone. You know that he or she can’t be telling the truth. Every investment has some risks.

• Don’t be pushed, cajoled or bullied to make an investment immediately. If you are curious about the investment, insist upon reviewing written materials, including audited financial statements. If the salesman insists on an immediate answer, give it – just say no.

• If you don’t want to receive unsolicited telemarketing calls, tell the caller to put you on the “do not call list.” If you then receive more calls from the same salesperson, or someone else offering the same investment “opportunity” contact your state Attorney General’s Office.

• Tell the caller you want to call back, and ask for his or her telephone number, address, and the name of the firm. If you don’t get the information, hang up. If you do get the information, contact your state or local consumer protection agency and see whether they have information about those telemarketers.

• Review any potential investments with a trusted financial advisor or attorney.

And remember. Before you invest, investigate.

AT DEATH’S DOOR

Death Spiral Financing. The name says it all. It conjures up the image of a process that is spinning out of control, toward inevitable doom. It is a disaster for companies and their shareholders. Yet desperate companies, needing immediate financial help, succumb to the temptation of short-term aid, only to suffer its long-term ill-effects.

How did death spiral financing earn its unsavory reputation? It works like this. A lender agrees to loan money to a company in exchange for a convertible debenture that bears a reasonable rate of interest. But there’s a catch. The lender is entitled to convert the debenture into shares of the company’s common stock, but the conversion rate is a moving target rather than a fixed, predetermined number of shares.

For example, in exchange for a loan of $1.5 million, the debenture holder may elect to receive $1.5 million of the company’s stock – usually at a discount from the prevailing market price. The number of shares the holder receives will depend on the stock price at the time of conversion. Consequently, the lower share prices go, the more stock the debenture holder gets.

This presents a problem, and an opportunity for abuse, since the debenture holder benefits if stock prices decrease. Unfortunately, in order to take advantage of this process, some debenture holders sell the company’s shares short, hoping to drive down the price. As share prices dip, the debenture holders keep on selling short, pocketing more and more proceeds on the way down.

To illustrate this, consider the case where an investor is entitled to convert a debenture into $1.5 million worth of common stock. If the debenture holder were entitled to convert the debenture into a fixed number of shares – say 500,000 – he or she would have no incentive to see the stock price go down. To the contrary, if the stock price increased, so would the value of those 500,000 shares.

But look at what can happen if the debenture holder stands to get more shares as the stock price decreases. If the company’s shares were trading at $5 when the debenture was issued, the debenture holder might start out by selling short 500,000 shares and pocketing proceeds of $2.5 million. If the stock is not heavily traded (as is the case with most microcap companies) those sales could help drive the price of the stock downward.
As prices fall to $3, the debenture holder can short another 500,000 shares and realize $1.5 million more. There would be no need to stop. When the stock decreases to $2 per share the debenture holder can short 500,000 more shares for another cool $1 million. At that point he or she will have profited to the tune of $5 million.

In our hypothetical situation, when the stock reaches $1, the debenture can be converted into 1.5 million shares. The debenture holder may then deliver those shares to cover the outstanding short position. It’s that simple. For a $1.5 million loan, the debenture holder winds up with $5 million – a cool $3.5 million profit.

Death spiral financing can be a death knell for the company whose stock is battered by this practice.

Regulators are taking notice of this problem, as reflected in an action initiated by the Securities and Exchange Commission on February 26, 2003 against an unregistered investment advisor, Rhino Advisors, Inc., and Rhino’s President, Thomas Badian.

Rhino and Badian were charged with engineering a death spiral financing scheme to benefit one of their clients. The SEC complaint alleged that Rhino and Badian manipulated share prices for the common stock of Sedona Corporation by engaging massive short selling in order to enhance the value of a $3 million Convertible Debenture that had been issued by Sedona on November 22, 2000.

Rhino’s client had provided $2.5 million in financing to Sedona in exchange for a $3 million 5% Convertible Debenture that was due on March 22, 2001. The Debenture included a conversion formula that permitted the client to convert all or any portion of the Debenture into Sedona common stock at a discount to the market price – roughly, 85% of the price of Sedona stock during the five days immediately prior to conversion. Based upon this formula, the lower the share price on the conversion date, the more shares the client would receive.
Although the Debenture prohibited Rhino's client from selling Sedona's stock short while the Debenture "remained issued and outstanding," Rhino allegedly engaged in extensive short selling on behalf of its client before the Debenture was converted. According to the SEC, that short selling increased the supply of shares in the market and depressed Sedona's stock price. Consequently, Rhino’s client received more shares when it converted the Debenture. Following the conversions, Rhino allegedly engineered the trades to conceal the client's involvement in the scheme.

Rather than contest the SEC’s charges, Rhino and Badian consented to the entry of an injunction for violation of the anti-fraud provisions of the federal securities laws, and agreed to pay a $1 million penalty.
Commenting on the case, Thomas Newkirk, Associate Director of the SEC’s Division of Enforcement, noted the potentially poisonous effect of death spiral financing, stating

Certain convertible securities, particularly those referred to as ‘toxic’ or ‘death spiral’ convertibles, present the temptation for persons holding the convertible securities to engage in manipulative short selling of the issuer's stock in order to receive more shares at the time of conversion.

The results can be disastrous for issuers and investors alike.
Regrettably, this is just one example.


Hartley Bernstein and StockPatrol.com have been featured in The New York Times, The Wall Street Journal, Forbes, Barrons, Crain’s New York Business, Details Magazine, Chief Security Officer Magazine, and Investment Dealers Digest.

St. George Metals, Inc. - Heavy Metal News

This time the dragon slew St. George.  In this case the dragon was an administrative law judge who issued an Initial Decision revoking the registration of St. George's securities.

St. George Metals, Inc. (OTCBB: SGGM) is a tiny Pink Sheet company with no discernible business, that captured attention just over one year ago with a puzzling announcement.  On September 2, 2004, CMKM Diamonds, Inc. (Pink Sheets: CMKX) announced that St. George had agreed to pay $10 million and deliver 200 billion restricted shares of St. George common stock in exchange for 5% of CMKM's mineral claims.  The announcement did not indicate where St. George – which ceased operations in October 2002, claiming that it had exhausted its financial resources – would get the funds.

 See Buddy Up! - CMKM Diamonds, Inc.; U.S. Canadian Minerals, Inc.; Juina Mining Corp.; St. George Metals, Inc.; and United Carina Resources Corp

St. George and CMKM have traveled similar paths in recent months.  The Securities and Exchange Commission suspended trading in CMKM shares temporarily in March 2005 and subsequently asked an administrative court to revoke the Company's registration.  On July 12, 2005, an Administrative Judge issued an Initial Decision granting the SEC's request and terminating the registration of CMKM securities.  CMKM has now asked the SEC to review that order and a final decision is pending.

St. George now finds itself sailing a similar boat.  On July 1, 2005, the SEC issued an order temporarily suspending trading of St. George securities for 10 days, until 11:59 pm on July 15, 2005.  The Commission said that the suspension was issued because questions had been raised about the adequacy of publicly available information concerning, among other things, St. George's assets, liabilities, management, stock issuances, purported mining operations and other business activities.  St. George has not filed any required quarterly or annual financial reports since November 2002.  See, SEC Targets St. George Metals, Inc.
On July 1, 2005, the SEC sought an order revoking the registration of St. George's securities.  In granting that application, the Administrative Court noted that St. George has failed to file required annual reports since April 26, 2002 and required quarterly financial reports since November 14, 2002. St. George certainly was aware of this delinquency.  In April 2005, the Company appointed a new president and proclaimed that one of its goals was to become compliant with the SEC's filing requirements.  It failed to do so, despite prompting from the SEC.

The Administrative Court concluded that St. George's failure to file was "egregious and recurrent."  The Company failed to file eleven reports over three years, although it recognized its obligation to do so, and promised to comply.  This has left the public without accurate current information - a situation that prompted the Administrative Court to revoke registration of St. George's shares.

Like CMKM, St. George will have an opportunity to challenge the Initial Decision.

TEN TIPS FOR REVIEWING ANNUAL REPORTS

Annual reports can be a valuable tool for investors, but they also may foster unrealistic expectations. Companies, like politicians, can be masters of spin, and annual reports provide a valuable opportunity to paint a corporate picture in the most appealing strokes. Investors need to look beyond the luster, at the company’s performance and potential. In other words, it is important to separate the facts from the fluff.
Annual reports are intrinsically more appealing than the average prospectus or financial report. Why? They generally have pages of pictures and colorful charts. Shareholders get an instant peek at officers, directors, plants and products – in color no less. But appearance is far less important than substance, particularly where investment dollars are involved. A photogenic management team is no substitute for profitability. From an investor’s point of view, a successful business presents the prettiest picture.
What should shareholders focus on when they are reviewing an Annual Report? We offer a few suggestions:
1. It’s Fair to Compare. How does the company characterize the state of its business and its future plans? Take a look at the previous year’s report. Did the company perform up to last year’s expectations or did it fall short? Did the business meet last year’s projections, and were projects started or completed as previously anticipated? If not, is there a reasonable explanation? If a company did not follow through on previous promises, there is good reason to be uneasy about future projections. An annual report offers the company a good opportunity to present its vision for the future, but having done so, it needs to fulfill those goals.
2. The Bottom Line. In the end, every public company is measured by its financial performance. Focus on the financial statements, although they may be the least colorful and most tedious section of the Annual Report. Have revenues been steady, or increasing? If not, is there a logical explanation, or a troubling one? If shrinking revenues were caused by the overall economic environment, and the company remains sound, shareholders may decide to stay the course. They may be far less comfortable, however, if revenues dwindled because the company lost a major customer, or its principal product became obsolete.
3. Cash is King. In the same vein, the financial statements will tell the shareholder how much money the company has available. Has the corporate bank account grown over the past year? Does the company have access to additional financing or lines of credit? In difficult economic times it is important to determine whether the company has sufficient resources to weather a bad year or two and survive.
4. What’s Happening? Does the company’s business have forward momentum? Has it explored new products, new partnerships or promising acquisitions? Is the company warning that it may fail to meet prior expectations? A warning is not necessarily a signal to panic, but it may be a sign of deeper problems. Why does the company plan to fall short of earlier projections? The company should provide an explanation – which may be as simple as the fact that the economy has slowed and sales are down. Shareholders need to review these facts and determine whether the company, or its industry, is likely to recover in the foreseeable future.
5. Explanation for Compensation. Executive compensation has become one of the hottest topics on Wall Street, and with good reason. When the stock market was soaring in the late 1990s, companies did not hesitate to provide generous compensation packages to their top management. High salaries, astronomical bonuses and piles of stock options were handed out like candy on Halloween. It did not seem to matter whether the company was making or losing money, as long as stock prices remained high, investors did not question the exaggerated amounts being handed to corporate leaders.
Revelations of corporate corruption exposed some of the excessive practices that had been lining the pockets of management. That does not mean, however, that every company has abandoned the practice. Review management compensation with care. Have salaries and bonuses continued to increase while revenues have remained steady or dropped? Do existing long-term compensation agreements seem out of step with the current state of the company’s business and revenues? Has there been any effort to renegotiate those agreements – downward – in view of existing conditions?
6. Stability of Management. The annual report should provide detailed information about the company’s officers and directors. Has the management team remained intact? Determine whether any key employees have departed, and how that is likely to affect business. For example, if the principal investigator has resigned from a bio-tech company, has a suitable replacement been hired? Why did the employee leave and what are his or her successor’s qualifications?
These biographies should offer some insight into each officer and director’s prior experience. Have they been involved in the industry for an extended period of time? If not, what skills and experience have they brought to the company? Be wary of a management team that is comprised principally of promoters or former stock brokers who are looking to build the value of the stock rather than the quality of the business.
7. Taking Stock. Has the company issued stock or options in the past year? If so, what has it received in return? Some companies hand out stock in exchange for services – a warning sign that they lack cash. Are options due to be exercised? If they are, that may mean dilution for existing shareholders.
8. Declaring Independence. Has the company established an Audit Committee? Are there Independent Directors? What are their qualifications? Under the Sarbanes-Oxley Act of 2002 companies that are listed on any U.S. Exchange are required to have an audit committee comprised of “independent” directors. To be independent, a director may not be affiliated with the company (other than as a director) and may not receive any compensation from the company (other than as a director).
9. Subsidiaries and Affiliates. Has the company provided detailed information about subsidiaries and affiliates? This is particularly important if a significant amount of the company’s business is constructed through those affiliated corporations. The Annual Report and accompanying financial statements should offer information about those subsidiaries and affiliates, including their revenues, profits and losses. Does the company use offshore corporations as affiliates? If it does, it should offer a reasonable explanation, particularly in light of recent revelations showing that some businesses – Enron in particular – hid losses offshore.
10. Gloss is not Enough. Annual reports may be printed on slick, expensive paper, and can be filled with appealing pictures of smiling faces, sunsets and corporate offices. Try not to be overly impressed by the packaging. Content remains the key. Thumb through the pictures quickly, and take your time reviewing the state of the business, the condition of its finances, and the qualifications of its management team. In the end it’s what is on the page that counts – not the quality of the paper.
The Annual Report is a useful tool, but investors should seek additional information. Check out research reports issued by reliable analysts, review the company’s public filings, and discuss any questions with a trusted financial advisor. As always, before you invest, investigate.