Seed stock deal crashes; promoter accused of illegal sale of shares
By David Baines, Vancouver Sun December 1, 2010 5:05 AM
In February 2009, I reported that Coquitlam promoter Dan Scammell was selling seed shares of a private company, VerifySmart Corp., which was developing software to prevent credit card fraud.
As usual, Scammell was talking big numbers. He told investors that a high-volume merchant processor had signed on to the company's technology. He projected revenues would climb to $200 million by the end of fiscal 2009. The company's share of this booty would start at five per cent ($10 million) and increase to 10 per cent ($20 million per year).
I cautioned prospective investors that such deals carry many risks. First, there is the inherent risk of investing in a startup venture. Getting in on the ground floor is beneficial only if the venture gets off the ground, which many don't.
Second, there is the added risk of investing in any deal promoted by Scammell. He has touted many flameouts, including Caneco Audio Publishers Inc. (an extended-play tape recorder for novels); Capital Reserve Inc. (an optical device for measuring alcohol and drug impairment); and Axagon Resources Ltd. (a salt-free ice-melting compound).
Two of these deals -Capital Reserve and Axagon, became the subject of regulatory action. Although a player in both, Scammell was never cited for any wrongdoing.
The third risk is that seed stock deals are sold under exemptions from prospectus and registration requirements, which means the company remains private and largely outside the regulatory orbit. This exposes investors to substantially more risk than if they invested in a public company.
These risks often translate into big trouble for investors: "Year in and year out, [seed stock deals] are our leading source of complaints and investigation," B.C. Securities Commission enforcement director Lang Evans said at the time.
As events unfolded, VerifySmart came under BCSC investigation. Late last week, Evans' enforcement staff alleged in a notice of hearing that:
- Casper de Beer, who is one of Scammell's associates, illegally sold $575,000 worth of shares in Verify-Smart to 50 investors in Western Canada and Ontario;
- Scammell and de Beer sold $651,309 worth of shares in a related company, Verified Transactions Corp., to 49 investors in B.C., Alberta and Washington state.
The commission alleged the respondents purported to rely on an exemption that permits companies to sell stock to family, friends and business associates, but the purchasers did not qualify as such.
This might sound like a technical infraction, but it is not. These investors were, in fact, the first casualties in a ruthless pump-and-dump scheme on the OTC Bulletin Board in the United States.
In March 2009, VerifySmart and Verified Transactions entered into a joint-venture licensing deal with a Nevada shell company, Treasure Explorations Inc., which had been set up by Vancouver promoter Howard Gelfand. The shell then changed its name to Verify Smart Corp.
By this time, the B.C. Securities Commission had implemented new rules requiring any OTC company with a substantial connection to B.C. to become a B.C. reporting issuer. However, when commission staff inquired, they were told that Scammell had no connection to the public company, and the public company had relocated to the Philippines, under the leadership of Ralph Santos and Adi Muljo.
Free from BCSC scrutiny, the company embarked on an aggressive promotion.
That included an agreement to pay one million shares to a Californiabased stock tout service, Cohen Independent Research Group Inc., for "certain consulting services."
In September 2009, Cohen issued what purported to be an "independent" research report projecting millions of dollars in net profits and a stock price ranging from $3.21 to $4.64.
It also included a recommendation from another U.S. tout service, Wall Street Grand, dubbing Verify Smart "a MASSIVE opportunity" for investors. In its disclaimer, Wall Street Grand disclosed that it had been paid $563,000 by Cohen and "may be compensated more in the near future." Who provided the money to Cohen was not disclosed.
At the time, the stock was trading at 93 cents on only a few thousand shares a day, but it quickly spiked up to $1.45 and enjoyed robust volume for the next few months.
Alas, the "massive opportunity" never amounted to anything.
As of Sept. 30 this year, Verify Smart hadn't generated a single cent of revenues. That meant there was no money available to distribute to seed shareholders in the two private companies, VerifySmart and Verified Transactions.
The share price of the public company has since slumped to six cents. Shareholders in the private company are even in worse shape: Their shares are subject to severe resale restrictions and can't be sold at any price.
Meanwhile, another promotion -- with many similarities to Verify Smart -- took flight.
In July 2009, Muljo became chairman and CEO of a Nevada shell company called Qele Resources Inc.
It acquired marketing rights to a bizarre array of consumer products including a line of frozen salmon burgers, a hand sanitizer and a caulking gun, and changed its name to Brand Neue Corp.
Brand Neue shares the same office as VerifySmart (the private company) at 150-4170 Still Creek in Burnaby. Its stock was also pumped by Cohen Research and Wall Street Grand. The share price similarly spiked to $1.52 in heavy volume in July 2009, but as of September this year, the company hadn't sold a single cent of product. The stock is now trading at 27 cents on scant volume.With so many commonalities, I couldn't help but wonder whether Scammell was on the scene. I called Brand Neue's office and asked for him. The man who answered the phone said Scammell wasn't there right now, but he could get a message to him. When I identified myself, he became noticeably nervous and hung up.
I similarly called Brand Neue's chief financial officer, Bev Harrison of Parksville, and asked whether he knew Scammell. He said he did, and assured me Scammell was not an employee. But when I asked whether Scammell had any connection to the company, he refused to answer.
dbaines@vancouversun.com
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