CellCyte Genetics Corp. (fka CCYG)

[scion]

Shells, stock land mines and a regulator that shoots blanks

David Baines
Vancouver Sun
Tuesday, September 15, 2009
http://www2.canada.com/vancouversun/columnists/story.html?id=15783016-58c4-4bd6-9a3e-857d7a3bd274

In November 2007 -- five months after B.C. Securities Commission Chairman Doug Hyndman announced a five-pronged assault against made-in-B.C. stock scams that trade on the U.S. over-the-counters -- I reported on yet another made-in-B.C. stock scam that was setting up to ravage investors on the OTC Bulletin board in the U.S.

CellCyte Genetics Corp. -- a biotech company "engaged in the discovery and development of breakthrough stem-cell enabling therapeutics" -- had rocketed to $6.40 per share, giving the company a total stock market value of nearly $400 million US.

I noted that, like so many other bulletin board frauds, this one was conceived as a nondescript Vancouver exploration company called Shepard Inc. Its only asset was a strip of moose pasture in the Northwest Territories acquired for $2,500. This was clearly a ruse: The real purpose was to create a tightly held shell that could be easily manipulated, making it perfect for some future promotion.

Sure enough, once the shares were registered for resale with the U.S. Securities and Exchange Commission, the company announced it would acquire stem-cell technology. SEC filings later revealed that Brent Pierce, a notorious West Vancouver promoter who had been banned from the B.C. market, was behind the deal.

"CellCyte is like watching a car collision in slow motion. We are just moments from the impact. The traffic cops are nowhere in sight. Casualties will soon litter the streets. We can only watch," I wrote in December 2007.

Sure enough, within days the stock collapsed. The SEC began an investigation that culminated last week when it laid a formal complaint in U.S. District Court in Seattle against CellCyte, CEO Gary Reyes and chief scientific officer Ronald Berninger.

The complaint alleges that CellCyte failed to raise capital privately, so it "completed a reverse merger controlled by a Canadian stock promoter to become a public company in March 2007." (The merger was with Shepard and the promoter was Pierce.)

The SEC said CellCyte agreed that the promoter (once again Pierce) would receive 15 million free-trading shares as part of an illegal unregistered stock distribution, in exchange for about $6 million in funding.

"CellCyte then made false and misleading statements in several SEC filings and other materials distributed to potential investors," which Reyes and Berninger knew or ought to have known were false, the SEC charged.

Meanwhile, "the stock promoter conducted a promotional campaign on behalf of CellCyte that included millions of spam e-mails, blast faxes, and newsletters containing false and misleading statements, some of which originated from CellCyte's own investor materials."

This boosted the stock to a high of $7.50 US. It has since collapsed to eight cents, "leaving investors who were deceived by the fraudulent materials with massive losses," the SEC noted. Pierce is not identified in the complaint but, according to his Seattle lawyer, he is under criminal investigation by U.S. authorities.

How, you might ask, can a reporter chronicle a fraud in progress and predict its outcome without our securities regulators intervening? Well, welcome to B.C.

For well over a decade, Vancouver promoters -- assisted by local lawyers, accountants and geologists -- have been creating shell companies for illicit purposes. This sort of activity peaked during 2006 and 2007 when, according to the BCSC's own figures, an average of four or five shells, each with a substantive connection to B.C., were being registered with the SEC every week. By the summer of 2008, the total exceeded 1,000.

What happened was that, due to BCSC negligence and/or bumbling, Vancouver promoters were able to plant hundreds of these land mines in the public market. Many, like CellCyte, have already exploded. Many others are still out there, waiting for investors to step on them.

To impede the creation of shells, the commission created new rules requiring any company that had a substantive connection to B.C. to become a reporting issuer in B.C. This would place the company squarely under the commission's jurisdiction. Just over 800 companies were initially deemed to fall into this category. Upon closer examination, about half were deemed not to have a strong enough connection to B.C. to trigger the reporting requirement. Of the remaining 400, about 200 became reporting issuers, 130 others were cease traded for failing to meet the reporting requirements, and the rest are not yet trading, so they are not required to report.

Concurrently, the commission implemented a surveillance program to detect unusual share price fluctuations, and a protocol to review press releases and follow up on questionable disclosures. As well, commission staff -- often accompanied by RCMP and SEC staff -- started knocking on promoters' doors, making their presence known.

The tactic has worked. The creation of new shells has slowed to a trickle, to about one or two every month. For this, Martin Eady, the commission's director of compliance, and John Porges, who is heading up this initiative, deserve much credit. But the program has serious limitations.

First, a cease-trade order in B.C. means little or nothing to most companies that trade on the U.S. over-the-counter markets. The bulk of their trading occurs in the United States.

Secondly, the rule does not apply to companies that have significant shareholders in B.C. The argument here is that issuing companies have no control over who buys their shares. This is a joke. With penny stocks, the largest shareholders are almost always the controlling minds.

Thirdly, promoters are now restructuring their affairs to give the impression they have no B.C. connection. In essence, one game has given way to another.

Fourthly, this program does not, and cannot, extend to shell companies that have left the jurisdiction. As mentioned, these companies are like land mines waiting to explode. Investors will reap the whirlwind of the BCSC's neglect for years to come.

Fifthly, this program is a necessary, but not sufficient, prerequisite to regaining control of the market. A cease-trade order should not be the end game, it should trigger real enforcement action where individuals are called to account for their misdeeds and sanctioned accordingly. In B.C., however, shell packagers have been able to operate with virtual impunity.

One example is Jupiter Resources Inc., which was packaged by (or with the assistance of) Surrey lawyer Scott Morrice.

In my Sept. 4 column, I noted that Jupiter had changed its address from B.C. to Saskatchewan to avoid the new reporting requirements. I described Jupiter has "yet another scam-in-progress" that had escaped the "myopic oversight "of BCSC chairman Doug Hyndman.

This was not accurate. Eady's staff had, in fact, issued a cease-trade order against the company on grounds it had a substantive B.C. connection and had not complied with the new reporting rules.

But to what end? Like the hundreds of other made-in-B.C. shells, nobody has been punished for foisting this sham onto the market. Like CellCyte, the BCSC will wait until the land mine explodes, then leave it to the SEC to clean up the mess.

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