LEE WEBB'S LATEST 11/3/06
Conversion Solutions promotion has shallow roots
Conversion Solutions Holdings Corp (U:CSHD)
Shares Issued 103,135,657
Last Close 10/25/2006 $1.99
Friday November 03 2006 - Street Wire
by Lee M. Webb
Conversion Solutions Holdings Corp., a suspended OTC Bulletin Board promotion with no significant revenue, is shallowly rooted in virtually penniless predecessors. In a feat worthy of Miracle-Gro, however, the company claims to have sprouted a reported $7.3-billion in assets. (All amounts are in U.S. dollars.)
The company disclosed its purported $7.3-billion in assets and rosy estimated book value of $70.71 in an Oct. 16 news release after belatedly filing what is apparently intended to pass for an annual report.
The U.S. Securities and Exchange Commission (SEC) issued a 10-day trading suspension against Conversion and followed up with a fraud suit against the company and then chief executive officer Rufus Paul Harris on Oct. 24.
Conversion gave Mr. Harris the boot on Nov. 2 and replaced him with Michael Alexander, the former chief executive officer the FrontHaul Group Inc., one of the company's predecessors.
As previously reported by Stockwatch, Conversion is the recent offspring of a union between a virtually penniless grey sheet outfit with a similar name, Conversion Solutions Inc. (CVSU), and FrontHaul, a cash-strapped OTC-BB company. The merger, announced in July, was reportedly consummated on Sept. 13.
The creative cut-and-paste annual report belatedly filed by semi-literate former chief executive officer Mr. Harris does not include any financial data for the OTC-BB precursor FrontHaul and provides little, if any, reasonable insight into just how Conversion has purportedly managed to acquire billions of dollars worth of bonds.
Moreover, while starry-eyed members of the company's cult-like following seem to believe otherwise, there is nothing in the histories of the pauperish precursors to the OTC-BB promotion to instill much market confidence in Conversion.
In this article, Stockwatch will review the history of Conversion's OTC-BB predecessor, FrontHaul.
FrontHaul tale
While Mr. Harris's grey sheet outfit, CVSU, is the linchpin in the promotion, FrontHaul has the longest corporate history, though it is sketchy and unimpressive.
FrontHaul's corporate existence can be traced, in part, to Furia, Oringer Productions Inc., which was incorporated in Delaware in 1984 with the optimistic plan of writing and producing television programs and motion pictures.
The company changed its name to the Furia Organization Inc. in 1986, but the name change was of no discernible operational consequence. In 1989 or at least by 1991, depending on the particular filing being reviewed, the company folded its entertainment tent and subsequently became inactive.
The company experienced a brief revival in 1993 through a subsidiary merger with a clothing distributor. By April of 1994, however, the company's subsidiary, Pat Fashion Industries Inc. filed for bankruptcy and was subsequently liquidated. Once again, Furia became an inactive public shell.
By December of 1995, the groundwork was being laid to resuscitate Furia again after Texas-based Time for a Change Inc., controlled by Cheryl L. McMullen, acquired convertible preferred shares of the company in a private transaction.
On March 5, 1998, Ms. McMullen converted her preferred Furia shares into 13.3 million common shares, giving her a 53-per-cent controlling interest in the company.
Ms. McMullen's husband, Texas lawyer Waylon E. McMullen, was ensconced as Furia's sole officer and director.
Mr. McMullen, who disclaimed any beneficial interest in his wife's shares, has a checkered history.
The lawyer from Plano, Tex., has been named as a defendant in a number of civil lawsuits alleging fraud, including a New York suit in which Lines Overseas Management Ltd. obtained a $2.67-million default judgment against him for his alleged role in pump-and-dump schemes that burned the offshore brokerage firm.
Quite apart from a rash of civil lawsuits, Mr. McMullen is known to law enforcement agencies and U.S. prosecutors in several states in connection with criminal indictments and a number of his business associates have received prison terms.
Followers of Stockwatch's extensive coverage of the Cambridge International Bank and Trust (CIBT) debacle might remember Mr. McMullen's role as general counsel for that offshore banking mess.
CIBT, headed by former Langley, B.C., mutual fund salesman David Rowe, bilked hundreds of investors from British Columbia, Texas and other jurisdictions out of upwards of $30-million with promises of phenomenal interest rates of 60 per cent or more on certificates of deposit and other instruments.
Unfortunately for CIBT's marks, many of whom were approaching retirement age and sank all of their savings into the offshore bank, the operation was little more than a Ponzi scheme with a twist.
Among other things, the Ponzi scheme twist allegedly consisted of funnelling CIBT deposits into a number of penny stocks including Odin Industries Ltd. and Peragis Inc., Canadian Venture Exchange companies that subsequently collapsed amid suspensions and investigations.
Incredibly, Mr. Rowe hired recidivist securities violator and ex-convict Gerry Burns, who has used a number of aliases in his fraudulent schemes, as the offshore bank's executive vice-president with responsibility for CIBT's investment portfolio.
Interestingly, while involved with CIBT, Mr. McMullen and ex-convict Mr. Burns were associated in another venture, Pines International Resorts Inc., which they used as a stock trading vehicle.
Indeed, according to lawsuit allegations, CIBT money was funnelled through Pines International into a number of penny stocks including Odin and Peragis.
On March 7, 2001, in the midst of Stockwatch's coverage of CIBT, FBI agents arrested Mr. Rowe in Montrose, Ala., and nabbed Mr. Burns near Scottsdale, Ariz.
Mr. McMullen was taken into custody in Plano on April 17, 2001, after he was indicted along with Mr. Rowe and Mr. Burns by a California grand jury for conspiracy and wire fraud in connection with the offshore banking scheme.
That case has not yet come to trial, partly because of litigation against Mr. McMullen in other jurisdictions, and the defendants are, of course, presumed innocent.
In any event, after taking charge of Furia on the strength of his wife's controlling interest in the company, Mr. McMullen inked a 75 million-share reverse merger deal with an outfit called Americom Telecommunications Corp. (ATC) in March of 1998.
Oddly, while a number of SEC filings were subsequently made with respect to the ATC reverse merger, including Schedule 13D ownership disclosures relating to the 75 million shares, the deal was evidently never consummated.
Indeed, while Furia did not bother reporting the event until Aug. 20, 2002, the ATC deal reportedly collapsed and the agreement "was rescinded, nun pro tunc," on Jan. 11, 2000.
With the ATC deal undone, Mr. McMullen took over once again as Furia's only officer and director.
In other developments that were not disclosed until Aug. 20, 2002, Furia peeled off three million shares for Mr. McMullen in December of 2000 and, at the same time, issued 13.5 million shares to his business associate Martin Cohen's Boca Raton-headquartered RN Capital Partners Inc. to undertake the task of "cleaning up" the company, among other things.
On May 10, 2001, just a few weeks after Mr. McMullen was arrested in connection with the CIBT indictment, Mr. Cohen was appointed a director and took over as president of Furia. Notwithstanding his indictment, Mr. McMullen stayed on as a director of the company.
Mr. McMullen was still a director in July of 2004 when Furia executed a 1-for-5 reverse stock split, reducing the outstanding stock to approximately 8.7 million shares to make the share structure more appealing to a potential merger candidate.
As luck would have it, just such a potential merger candidate, FrontHaul Inc., was incorporated in Nevada by Michael D. Alexander on June 2, 2004.
Coincidentally, like Mr. McMullen, Mr. Alexander hails from Texas. Indeed, as things are measured in the Lone Star state, the approximately 20 miles between Mr. Alexander's Rockwall address and a Plano address formerly used by Mr. McMullen is little more than a stone's throw.
In one of those fortuitous happenstances that seem to occur relatively often in the world of penny stocks, Furia and FrontHaul found each other within a month of the public shell executing its 1-for-5 share consolidation.
On Aug. 26, 2004, Furia acquired Mr. Alexander's FrontHaul in exchange for 20 million common shares and 500,000 preferred shares convertible into an additional 50 million common shares.
In a welter of subsequent SEC filings and amended filings submitted by Mr. Alexander, the company evidently had some difficulty keeping its story straight regarding just who received the shares issued for the FrontHaul acquisition.
Some filings reported that Mr. Alexander received approximately 17.6 million common shares and 400,000 preferred shares while other filings disclosed that he received the full 20 million common shares and 500,000 preferred shares issued for FrontHaul.
Evidently Mr. Alexander ended up with the whole kit and caboodle; and it was quite an intriguing kit and caboodle.
The right to convert the 500,000 preferred shares into 50 million common shares was tied to a formula based on modest 12-month revenue schedule under which 25 per cent of the preferred stock could be converted if the company had $250,000 in revenue, 50 per cent for $500,000 in revenue and 100 per cent for $750,000 in revenue.
If the company failed to meet any or all of the revenue thresholds by the one-year anniversary date of the deal, it could either ante up 50 cents per share for the unconverted preferred shares or Mr. Alexander had the right to convert the whole amount into 50 million common shares.
As it turned out, the company did not redeem the shares, so Mr. Alexander had the right to convert the preferred shares to 50 million common shares as of Aug. 26, 2005.
Once in control of Furia, Mr. Alexander inked a rather nifty employment agreement as chief executive officer that, among other things, provided that his stock ownership would never fall below 60 per cent of the company's issued and outstanding shares.
Under Mr. Alexander's leadership, FrontHaul, which billed itself as a trucking brokerage and logistics company, set about bleeding red ink.
By Sept. 30, 2005, just over a year after Mr. Alexander took control, the company had an accumulated deficit of approximately $2.7-million, a working capital shortfall of approximately $256,000 and chump change of only $9,227 in cash.
In November of 2005, the haemorrhaging company hooked up with a coterie of financing outfits at least nominally led by Corey Ribotsky for a badly needed cash infusion.
Mr. Ribotsky is the frontman for AJW Partners LLC, AJW Qualified Partners LLC, AJW Offshore Ltd. and New Millennium Partners II LLC, which are quite active in providing toxic financing to OTC-BB companies.
On Nov. 18, 2005, Mr. Alexander signed convertible debenture purchase agreements for an aggregate $2.5-million with Mr. Ribotsky's companies.
Under the terms of the agreements, the toxic financiers advanced $1-million on Nov. 18, 2005, and another $750,000 on Dec. 23, 2005. The remaining $750,000 was to be paid upon the acceptance of a registration statement covering approximately 50.4 million Furia shares, but that never happened.
The convertible debentures were floorless, constituting what is commonly known as a death spiral financing. The onerous nature of the financing was acknowledged in a subsequent filing.
"Our obligation to issue shares upon conversion of our secured convertible notes is essentially limitless," Furia reported in an SEC filing.
As it turned out, even before receiving the second tranche of the financing, Mr. Alexander triggered a default provision in the convertible debenture agreement that made the $1.75-million and a penalty of $528,288 immediately payable.
Perhaps not noticed, or simply ignored, by Mr. Alexander, a provision of the convertible debenture agreement prohibited the company from redeeming, repurchasing or otherwise acquiring any of its own shares without the written consent of the noteholders.
Notwithstanding that provision and without bothering to make any public announcement about what he was up to, Mr. Alexander opened a brokerage account for the company and, using money from the financing, purchased more than 1.9 million shares at a cost of $376,000.
It is not clear who benefited from the default-triggering largesse of the financially challenged company, but it is fairly clear when the "open market" purchases occurred.
Through the early part of December of 2005, Furia's stock price was languishing at approximately six cents per share in light trading.
On Dec. 8, the stock closed at 6.4 cents with only 23,000 shares changing hands.
On Dec. 9, the stock rocketed from six cents to close at 20 cents on a volume of approximately 1.5 million shares and another 562,000 shares changed hands in the following trading session as the stock again closed at 20 cents per share.
Given that the company paid approximately 19.2 cents per share for the more than 1.9 million shares it purchased in December of 2005, it is fairly clear that the buying that triggered the default probably occurred during those two trading sessions.
Evidently it took some time for Mr. Alexander to twig to the fact that the company's unannounced pre-Christmas share buying spree had triggered a default provision of the toxic financing.
On Dec. 20, 2005, the company took its first stab at filing the registration statement for approximately 50.4 million shares as called for by the financing agreement and then followed up with an amended registration statement on Jan. 18, 2006.
By Feb. 15 when the company filed its quarterly report for the period ending Dec. 31, 2005, however, the default was acknowledged.
On March 28, Mr. Alexander got around to withdrawing the registration statement.
"The company intends on redeeming the convertible notes, issued to the selling shareholders and therefore, there is no need to register the shares underlying the convertible notes," Mr. Alexander reported in the withdrawal application.
"The company further advises the commission that no shares of common stock sought to be registered pursuant to the Registration Statement have been sold or offered," he added.
Just how the company planned to redeem those notes, or what ever became of that plan, is anyone's guess, but the defaulted notes were still outstanding at the end of March.
When FrontHaul filed its dismal financial results for the period ending March 31, 2006, the company had an accumulated deficit of approximately $6.9-million, which was racked up in less than two years, a negative net worth of $1.8-million, a working capital shortfall of more than $2.3-million and a paltry $57,000 in cash.
Notwithstanding its dire financial condition, the company saw fit to further breach the provisions of the toxic financing during the quarter by purchasing another 818,405 of its own shares at a cost of approximately $244,000.
No further financial information regarding FrontHaul has been filed since the company issued its third-quarter report for the period ending March 31, 2006.
Interestingly, the financing agreement with Mr. Ribotsky's companies called for Mr. Alexander to pledge more than 25 million of his shares and deliver them to the toxic financiers along with an executed transfer form.
Given that Mr. Alexander changed Furia's name to FrontHaul on April 13 by virtue of his control of more than 75.1 million shares representing more than 78 per cent of the company's stock, including 50 million shares that he had the right to acquire from the conversion of 500,000 preferred shares, he evidently still had control of the 25 million shares pledged to the toxic financiers at that time.
In any event, on July 8, cash-strapped FrontHaul entered into a share-swap merger agreement with Mr. Harris's penniless CVSU.
Under the merger agreement, FrontHaul, which oddly claimed to have approximately 62.2 million shares issued and outstanding, issued approximately 48.9 million shares to acquire Mr. Harris's company.
In spite of the fact that FrontHaul was the purchaser and its shareholders still controlled the majority of the stock, Mr. Alexander exited the company, giving way to Mr. Harris and his associates, who ratcheted up the promotion.
Interestingly, Mr. Harris and his new board of directors subsequently passed a resolution cancelling the 50 million shares that, according to SEC filings, had been reserved for issuance to Mr. Alexander.
Given recent developments, it is not clear whether the resolution cancelling Mr. Alexander's 50 million shares was ever put into effect.
In any event, the promotion galloped along quite impressively until the SEC reined in Conversion and Mr. Harris with a 10-day suspension and civil lawsuit on Oct. 24.
As previously reported, on Nov. 2, at a special meeting of majority shareholders controlling more than 51 per cent of what is now reported as 159 million issued and outstanding shares, Mr. Harris and his fellow officers and directors were given the boot and replaced by Mr. Alexander.
If Mr. Alexander still lays claim to more than 75.1 million shares, he would not have needed much help to get rid of Mr. Harris and his cronies, who certainly deserve a great deal of credit for running the stock price up from a few pennies to as high as $4 per share before the SEC threw a wrench into the promotion.
In a future article, Stockwatch will review the sketchy information available about Mr. Harris's CVSU, including its merger with privately held and closely related Waatle Holdings Corp. before falling in with FrontHaul.
Conversion, which will be headed to the grey sheets when trading resumes on Nov. 7 following the expiry of the 10-day suspension, last changed hands on Oct. 23 when it closed at $1.99.
Stockwatch will continue to follow developments.
Comments regarding this article may be sent to lwebb@stockwatch.com.
(More information regarding Conversion Solutions Holdings Corp. is available in Stockwatch articles published on Oct. 13, 16, 18, 20, 24 and 26; and Nov. 2, 2006.)
AI
