SEC Casts Wide Net in Probe of Microcap Stock
Aug. 14, 2014 7:53 p.m. ET
The Securities and Exchange Commission is investigating the auditor of Cynk Technology Corp. the tiny social network that soared to a $6 billion valuation last month and then came crashing back down to Earth, say people close to the probe.
Peter Messineo, a 53-year-old accountant from Palm Harbor, Fla., is the auditor being scrutinized. He is one of a number of "repeat players" linked to several stocks that suffered suspicious trading who are being looked at by the SEC, as it shifts its tactics in its battle against penny-stock fraud, the people said.
The SEC is looking at whether some lawyers and accountants are liable for helping to enable penny-stock frauds, either by signing off on phony information or simply not asking the right questions, said people close to the agency.
Auditors, for example, have a duty to try to check basic facts, such as whether people are who they say they are. The SEC also is concerned that auditors who take on too many clients may not have time to do the basic checks needed, said one of the people close to the agency.
Mr. Messineo, who hasn't been accused of any wrongdoing, said he was just a "bystander" at the Cynk stock blowup and there is no reason he should come under scrutiny. "The SEC should look into whatever they want to, that's their job. But I had no connection to any suspicious trading and I stand by my audits," he said.
The Public Company Accounting Oversight Board, which polices auditors, said its routine 2011 inspection of Mr. Messineo showed "deficiencies" in his audits, including a failure to identify errors in financial statements. Mr. Messineo said the PCAOB frequently criticizes audits, including those done by the biggest firms.
As well as Cynk, Mr. Messineo conducted audits or prepared financial statements for a number of other tiny companies that saw their share prices surge despite little evidence of actual business prospects, according to securities filings.
One was a former games company that shifted to fish-farm products, and another was a digital-imaging firm whose 28-year-old chief executive was formerly a manager of a fireworks store.
The SEC's escalating effort to combat penny-stock frauds is increasingly targeting alleged enablers of these schemes—including lawyers, accountants and stock promoters— rather than by chasing every likely stock manipulation, the people said.
In some cases, the people under scrutiny may not have done anything wrong, but their involvement with certain companies could raise a red flag for investigators.
Even in the boom-and-bust universe of penny stocks, Cynk was a supernova—soaring 36,000% before the SEC suspended trading, then losing almost all of the gains after the halt was lifted.
Cynk's eye-popping valuation—given it reported no assets and only one employee—briefly made it the talk of Wall Street. But the affair also highlighted a complex web of people who were connected to Cynk and other microcap companies that have soared and sagged.
Recent cases show the "loose networks" linked to penny-stock manipulations that "tend to use the same lawyers and accountants," said Jacob Frenkel, a partner at law firm Shulman, Rogers, Gandal, Pordy & Ecker.
Of course, not all share spikes stem from fraud. But sudden price jumps in tiny firms can be a red flag for an age-old type of fraud, that has been given a new lease of life by spam emails and social media. These pump and dumps follow an "almost standard pattern," said Thomas Gorman, a partner at law firm Dorsey & Whitney LLP, who defends companies and individuals facing regulatory actions.
The SEC still is investigating what happened with Cynk, said people close to the agency. It isn't clear who, if anybody, made significant profits from the stratospheric stock increase. A representative of Cynk couldn't be reached for comment.
An example of an earlier share pop with echoes of Cynk came in 2011, with Amwest Imaging Inc. Mr. Messineo audited the company and it also has links to Cynk's founder, lawyer and the person who prepared its financial statements.
Amwest was registered in 2010 as a public company by Cynk's lawyer, Harold Gewerter. He didn't respond to requests for comment.
The company, aiming to digitize documents, reported that at end August 2011 its cash and assets totaled $317 and it had no revenue.
Jason Gerteisen of Evansville, Ind., was a 28-year-old manager of a Mark's Fireworks store when he was appointed Amwest's sole director and chief executive in August 2011, according to a LinkedIn account in his name.
Mr. Gerteisen and Mark's Fireworks didn't respond to several requests for comments.
In December 2011, Amwest's share price surged to $1.39, more than seven times its 18 cents price on Nov. 22. The rise pushed the company's market value to more than $600 million.
Amwest last year renamed itself Intertech Solutions Inc. and switched its business focus from technology to gold mines, according to regulatory filings. Neither Intertech's chief financial officer nor its attorney, Thomas Russell of Newport Beach, Calif., responded to several requests for comment.
Another link between Cynk and Amwest (now known as Intertech): Both had their financial reports for last year prepared by Dale Paisley of Newport Beach. He is described in both companies' securities filings as a certified public accountant, though records show his license lapsed in 1995.
In an interview, Mr. Paisley, 73, said he is "actively retired" and working on his golf game but helps companies with their financial statements "as long as I have the time and they have the money."
His only involvement with Cynk was putting together financials showing the company had no assets or revenue, he said. "How anybody would draw anything from that is beyond me."
Another company that Mr. Messineo worked for was PacWest Equities Inc., which was formed in Florida in 2003.
Since then, it has changed its name four times, switching its business from minerals exploration, to games of skill, to household green cleaning products, to a system for co-cultivating plants and fish in which "catfish do well," according to its securities filings, which add the catfish "doesn't taste 'fishy.'"
PacWest's shares shot up after a stock promotion in the fall of 2012, despite the company reporting that it had no revenue or cash and operated from a post-office-box address in San Juan Capistrano, Calif. "940% GAIN!" said one promoter's newsletter, boasting how PacWest produced "incredible gains" after it alerted investors to the stock.
The SEC suspended trading in PacWest's shares in September 2013 because of questions about the "accuracy and adequacy" of information about the company's "business operations and assets."
Intertech's attorney, Mr. Russell, also represents PacWest, according to securities filings. He didn't respond to several requests for comment.
The SEC's escalating effort to combat penny-stock frauds is increasingly targeting alleged enablers of these schemes—including lawyers, accountants and stock promoters— rather than by chasing every likely stock manipulation. Reuters
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