Makemoney18..Is this the same 'Adam Tracy' that you refer to in your Tracy investigation post? Please confirm if it is. Here is what I found on the internet >>
Who Is Adam Tracy?
In recent years Adam Tracy, a Chicago area securities attorney, has become a big player in the shell business. At the website for his sole practice, Securities Compliance Group, he describes himself as offering “full-service consulting and legal assistance” to businesses of all kinds, emphasizing his experience with the reverse merger process. Tracy deals in both kinds of shells described above. As an attorney, Adam Tracy compiles and opines on Form S-1 initial registration statements, and applies for custodianship of dormant Nevada shells. In addition, he occasionally acquires shells from other vendors, and has bought at least two shell companies from bankruptcy trustees.
Last fall, the SEC selectively began to take an interest in Tracy’s Form S-1 registration statements. On October 28, 2015, the Commission issued an order of investigation into 15 issuers that had filed S-1 registration statements between March 2014 and August 2015. The order stipulated that information reported by SEC staff “tends to show” the filings were fraudulent in a variety of ways. It empowered staff attorneys to “administer oaths and affirmations, subpoena witnesses, compel their attendance, take evidence, and require the production of any books, papers correspondence, memoranda, or other records deemed relevant or material to the inquiry…”
Beginning on November 3, 2015, the SEC attorneys from the Atlanta Regional Office issued and served six subpoenas on Securities Compliance Group, Adam Tracy, and his paralegal Megan Ruettiger. Though Adam Tracy hired an attorney—Alexander James Rue, who’d until a few years ago worked for SEC Enforcement in Atlanta—the documents required were not produced, and no testimony was scheduled. Nearly nine months later, on June 15, 2016, the SEC filed an application in federal court in Atlanta for an order to show cause, and for an order requiring Securities Compliance, Adam Tracy, and Ruettiger to comply with the subpoenas they’d been sent. While the investigation had been confidential, the court filings put the matter including the SEC’s formal order into the public domain.
The filings are of considerable interest. The SEC’s memorandum in support of the application clearly explains the reasons for the agency’s interest in Adam Tracy, and also tells a strange tale of Tracy’s apparent disinclination to comply.
The SEC begins by explaining that it’s investigating “possible violations” including “engaging in, or intending to engage in, offering frauds.” It describes these alleged offenses in greater detail:
Since April, 2014, fifteen corporations have filed with the Commission similar Form S-1 and Form S-1A registration documents and amendments to register initial public offerings with Tracy acting as either the drafter of the documents, providing a legal opinion on the registration statement, or both. These filings have common characteristics and indicate that some of these companies: (1) may not appear to be viable developmental stage companies; (2) may be seeking to create fraudulent shell companies that evade requirements applicable to offerings by “blank check” companies under Rule 419 promulgated under the Securities Act of 1933 (“Securities Act”); or (3) may have failed to disclose the identity of their true control persons, promoters and gatekeepers.
What the SEC suggests—that Tracy was hired by one or more unknown persons to create the shell companies, make it look as if they were operational entities, and install one or more front men as officers and directors—has become increasingly common in recent years, and is a problem that’s attracted the agency’s attention. In January 2015, the SEC moved against Canadian penny stock attorney John Briner, Colorado attorney Diane Dalmy, and several accounting firms for their roles in the creation of 20 fraudulent shell companies. According to the SEC, Briner controlled the entities, and recruited friends and business associates to act as officers and directors; some of them were pursued by the SEC as well. Dalmy allegedly opined on the Form S-1 registration statements. The accountants conducted audits “so deficient that they amounted to no audits at all.” Very likely Briner’s plan was eventually to resell his newly created SEC reporting shells to companies seeking public company status or others who may well have pumped and dumped them.
In our opinion, the SEC suspects Tracy of participating in a similar scheme. But its efforts to obtain the information subpoenaed were thwarted for many months, as Edward Saunders, the SEC attorney investigating the case, explained in a declaration submitted to the Atlanta court. Things began well enough; Adam Tracy’s attorney Rue called Saunders in early December and promised to send the material the next day. When Saunders hadn’t received a package 10 days later, he contacted Rue. Rue once again promised to deliver the documents that afternoon. Rue’s runaround continued into January. Once he even declared that he had sent the package, but nothing was received by Saunders. Through February and the first half of March, Rue continued to tell Saunders that the material was literally “in the mail.” It was not. Finally, on March 14, 2016, a package arrived. It contained a substantial number of documents, but according to Saunders, “859 pages were either completely blank, unreadable due to illegible copies or duplicates of documents produced.”
Worse yet, none of the documents had any bearing on the matters being investigated by Saunders. Court documents reflect that when Saunders finally spoke to Rue again, Rue told him he’d accidentally sent documents Adam Tracy had prepared for an entirely different investigation being conducted by a different SEC office. Saunders must have wondered if he’d stepped into an alternate universe. There’s no way to tell what this second investigation is about; Saunders said merely that it referenced two companies unrelated to his own interests. It’s unclear whether Adam Tracy is a potential target, or merely a witness.
On July 13, Tracy, newly aware of the SEC’s action in the Atlanta federal court, submitted a response in which his new attorney Stephen Council explained that Adam Tracy and Ruettiger had not intentionally disregarded the SEC’s demands: the fault was to be laid at Alex Rue’s door. On December 3 and 4, Tracy had sent Rue two copies of “documents responsive to the Commission’s subpoena.” Rue assured him several times that the documents had been produced to the SEC, or would be soon; Adam Tracy had no idea that the promised production never happened, or that at one point Rue sent Edward Saunders the wrong documents. He only learned of the SEC’s action in the Atlanta court through an RSS feed once the action had been filed, and immediately terminated Rue as his counsel.
The material Tracy had sent to Rue in early December was, he said, “non-privileged [and] responsive.” Yet evidently it was only responsive in a rather limited way. The subpoena had, for example, required him to produce all correspondence related to the 15 companies under investigation, all documents created in connection with the compilation of the Forms S-1 for those companies, phone records, instant messages, and more. In July 2016, Tracy noted that the “vast majority of responsive documents relate to his clients and appear to be privileged.” He added that he’d already made an initial production on July 11, and was “working diligently to confirm that they have provided all responsive documents to their new counsel who will continue to supplement the document production as soon as practicable.” It is not at all clear whether that production would include the “vast majority” of material Tracy considered to be privileged.
On September 8, the SEC dismissed the Atlanta action without prejudice; as Tracy had assured the agency of his continued cooperation. That does not mean the investigation is over, only that Tracy will produce the information requested by the SEC’s subpoena enforcement action. No further details will be made public by the SEC until and unless an enforcement action is brought.
Tracy Enters the Nefarious World of Shell Purveyors
Around the time Tracy began writing the S-1 registration statements, he decided to boost his business by obtaining and selling dormant public shell companies. This was not a secret strategy. Tracy announced announced it in a press release issued on January 23, 2014. Tracy isn’t alone. At least one South Florida law firm has sold hundreds of shell companies most obtained using fraudulent custodianship filings.
The idea wasn’t yet fully developed. Originally, Tracy planned to seek shareholders of abandoned Pink Sheet companies, and bring actions to “place such neglected entities under the control of state and federal courts across the country.” He added that he expected to file his first petition in the Federal District Court for Northern Illinois by February 1, 2014. It isn’t clear what kind of petition that would have been, as applications for custodianship must be filed in the appropriate state court. Perhaps it somehow involved bankruptcy, but it’s hard to see how he’d have persuaded one or more creditors to throw the company in question into involuntary bankruptcy, much less get himself named receiver or trustee. He would later gain control of at least three bankruptcy shells, but in none of those cases was he involved in the bankruptcy itself.
Calculating that “millions upon millions of aggrieved shareholders” must still own stock in abandoned companies, he urged such people to contact him. Perhaps he initially planned to name those longtime shareholders as custodians, or perhaps he simply thought they’d be of help in identifying the dormant shells he sought for his reverse merger inventory.
Tracy was generally familiar with the custodianship process. In a custodianship petition from July 2016, he indicates he’d “acted as counsel to the court-appointed custodian” on seven earlier occasions. The public shells in question were AdSouth Partners Inc (formerly ASPR), DIBZ International, Inc (DIBZ), SIPP Industries, Inc (SIPN), Chenghui Reality Holding Corporation (CRHO), Osyka Corporation (OSKA), Eastern Environment Solutions Corporation (now Precicion Trim, Inc., PRTR), and China Infrastructure Investment Corp (formerly CIIC). It’s not clear what Tracy’s role was; his name appears in none of the Nevada court documents. He may simply have been lending a hand to the shell vendors who took control of the seven companies. The one thing all have in common is that the cases were handled by a Nevada attorney. Tracy is not licensed to practice in Nevada and, would later use the same attorney for some of his own custodianship applications.
The remaining four custodianship actions in which Tracy says he assisted are more recent. The petitions were all granted in 2015. The custodian of Chenghui Realty Holding Corporation and Osyka Corporation was Ketcher Industries LLC, which entered the shell business in Nevada in 2014. Ketcher Industries LLC should not be confused with Kitcher Resources, Inc a custodianship shell controlled by the FBI in an undercover operation that resulted in multiple indictments of penny stock participants.
Tracy’s Nevada Shells
Evidently the work Tracy did for his clients in the custodianship shell business persuaded him that acquiring dormant Nevada shells was easy, and could be profitable. He didn’t begin immediately after he put out his press release on the subject. He waited nearly two years, applying for his first two custodianships—of China Ivy School, Inc (CIVS) and Sunset Suits Holdings, Inc (SNSX)—on November 25, 2015. He was appointed custodian of both in early 2016. The name he used as custodian was Barton Hollow LLC. Barton Hollow is a Nevada company he formed in February 2014, apparently for the sole purpose of obtaining control of shells. His first two applications were quickly followed by others. To date, Tracy has brought more than 50 custodianship actions in Nevada.
The prospective custodian of a dormant Nevada company must meet requirements set by state law. First, he must be a shareholder of the company. We know from court filings that Tracy’s paralegal, Megan Ruettiger, purports to purchase 1000 shares of stock of each entity he’s interested in before he files a custodianship petition. A custodianship action may be brought in two circumstances: if the company directors are so divided that any vote they may take would be split; and if the business has been abandoned, and no steps have been taken to dissolve, liquidate or distribute its assets. Tracy relies on the second option, seeking shells whose management has not made any filings with the state for several years.
The applicant must also provide certain information specified by the Nevada statute, along with an affidavit in which he swears to its truth and accuracy. He must include a list of all previous applications for custodianship of a publicly traded company filed in any jurisdiction; if those applications were granted, he must supply a detailed description of the activities he performed as custodian including reverse stock splits and share issuances. The custodian must also append a description of the current corporate status and business operation of those companies. He must in addition disclose “any and all previous criminal, administrative, civil or National Association of Securities Dealers, Inc., or Securities and Exchange Commission investigations, violations or convictions concerning the applicant and any affiliate or subsidiary of the applicant.” That would include sanctions by the Commodity Futures Trading Commission (CTFC), and any state or federal actions, no matter how old. We note many custodians hiding behind their affiliates such as corporate egos to conceal required disclosure of background matters despite representing to the court that no such matters exist. Examples of administrative actions includes actions by the CFTC, state and federal administrative actions no matter how old. These high standard of disclosure was created because custodians are fiduciaries to the other shareholders of the corporation whom they are obligated to protect even above their own self interest. Lastly, he must provide evidence of an attempt to contact the officers and directors of the company in question. That is practically achieved by serving them through the company’s resident agent, if it still has one, or by mail at the company’s last known address.
If the custodianship is granted, the applicant must set a date for a shareholder meeting, and inform all shareholders of record of it; he must then inform the court of actions taken at the meeting. He must also reinstate or maintain the company’s corporate charter, and show that he is “continuing the business and attempting to further the interests of the shareholders.” Unfortunately, custodians of dormant penny shells often disregard those fiduciary duties, performing reverse splits and other actions that may affect the size and value of the holdings of the very shareholders the custodian is obligated to protect. These actions are taken to make the vehicle more attractive to a potential buyer. Once the vehicle is purchased, the custodian and his associates pocket the proceeds from the sale as payment for their purported “services” as a fiduciary and custodian.
We’ve examined Tracy’s application for custodianship of a company called Clean Hydrogen Producers, Ltd (CHPO) to see whether it meets the requirements specified by the Nevada statute. The action was filed on July 20, 2016, along with nine others. In the application, Tracy dutifully notes that he’s filed 35 prior applications, lists them, and reports which have been granted. For each that has, he provides an update on its status. In his discussion of China Ivy School, of which his custodianship was granted on 27 January 2016, he says “the reinstatement has been submitted with the Nevada Secretary of State and the transfer agent and is pending.” It is difficult to imagine that a simple reinstatement would take six months. In fact, CIVS has not been reinstated in Nevada to this date. He also claims a shareholder meeting had been noticed, and was pending. In reality, it appears to us that usually he doesn’t reinstate his companies’ corporate charters until he’s made a sale of the public shell for a reverse merger; the cost of reinstatement is, as we shall see, included in the cost of his shells.
Tracy says specifically: “Petitioner has not been the subject of any previous criminal, administrative, civil or National Association of Securities Dealers, Inc. or Securities and Exchange commission investigations, violations or convictions.” He swears to that under penalty of perjury in the affidavit he supplied to the court. As noted, he filed the application on July 20, 2016. He’d known since early November 2015 that the SEC was investigating the allegedly fraudulent Forms S-1 he’d written in 2014 and 2015.
Evidently the judges to which Tracy’s custodianship actions were assigned found his applications adequate and unremarkable, and granted them routinely. Clean Hydrogen was an exception. The case was dismissed on September 27; the judge hearing it believed it belonged in Business Court, and Barton Hollow requested a voluntary dismissal.
Selling the Shells
By the spring of 2016, Tracy had assembled a sizable collection of public shells. Now he needed to sell them efficiently. To that end, he began to prepare lists of available shells, and post them publicly. We’ve made a spreadsheet based on information from the lists, the Nevada court, the Nevada SOS database, OTC Markets, and more. In the past year, Tracy’s had at least 57 shells on offer, and may have sold as many as 21 of them. He didn’t obtain all of them through custodianship actions. Integrated Cannabis Solutions (IGPK), for example, is a company he once merely represented, but on January 11, 2016, its old management resigned and Tracy took over as sole officer and director. Another individual became custodian of Triad Pro Innovators (TPII) in June 2015; it’s unclear how Tracy later gained control. He appears to be in the process of selling it: it was reinstated in Nevada on August 22, 2016, and a new officer list was submitted, but there’s no new disclosure explaining the company’s situation at OTC Markets. A few others came into Tracy’s hands by unknown means, but most of his wares are his own custodianship shells.
Some custodians reinstate their dormant Nevada companies immediately, but Tracy does not. If a company has been delinquent in Nevada for years, reinstatement fees can be high, as much as $15,000 or more. Tracy notes the cost of reinstatement on his lists. It seems that once he’s made a tentative deal, his first move is to reinstate the company, at least as long as the buyer ponies up. He then posts a new officer list in Nevada. If the company resides on the Pink No Information tier at OTC Markets, he waits till the buyer has paid to use the OTC Disclosure & News Service before making changes to the issuer’s profile page or submitting new filings. As the individual profiles on the lists show, he also issues himself convertible debt to ensure his control. The new owner will purchase the debt; it’s included in the price of the shell.
The shells are relatively inexpensive, at least as far as the costs disclosed indicate. The priciest of the current crop is iGlue (IGLU), at $85,000. The cheapest is China Global Media Inc (formerly CGLO) at $5,000. But CGLO is entirely worthless; its registration was revoked by the SEC for delinquency on 26 August 2016.
Tracy’s moneymaking opportunities don’t end with the sale of the shell. In most cases, after the deal is finalized, he’ll become the company’s legal counsel. He’ll also become its investor relations representative through Pacifix Financial, one of his many finance-related companies. He also owns a transfer agency called Cathedral Stock Transfer. Although Cathedral appears on the OTC Markets Service Providers list, it has no clients listed. While owning a transfer agency could be very convenient for a lawyer turned shell peddler, it is also a conflict of interest, and potentially problematic in other ways. Tracy formed the agency in Louisiana in 2012; it’s recently lost its good standing status for failure to file a required annual report. He owns yet another company of potential use to the penny stock crowd: Rule 144 Direct, LLC. Calling himself an “expert attorney,” he promises to find “creative solutions related to aged stock, convertible debt, and other complex liquidity issues.”
Buyers of shells who intend to reverse-merge their private companies into those shells naturally want to change the name and ticker of their newly-acquired public company to reflect its new business. In order to do that, they must make a corporate action request to FINRA. So far, only Sunset Suits, one of the first two companies Tracy took control of in Nevada, has done that. Tracy obviously found new buyers very quickly: he was granted custodianship on January 4, 2016, and reinstated Sunset’s corporate charter on 28 January. The company’s name and ticker were changed to Honsen Energy & Resources International Limited and HSEN on July 6, 2016. HSEN has been making disclosure at OTC Markets. On Monday, October 24, the company’s stock split 1:100; the company has made no announcement about the reasons for the split.
Sooner or later, there will be more symbol and name changes for Tracy’s shells, and more reverse splits. While some buyers will be ordinary business people looking to go public on the cheap, others will no doubt use their new shells for pump and dumps and other manipulations the SEC says it deplores.
Where Are the Regulators?
The SEC is investigating Tracy’s activities in at least one jurisdiction but could they really be unaware of his dozens of custodianship actions in Nevada? They certainly shouldn’t be. So far, he’s filed eight Forms 15 to terminate registration of shells that are delinquent filers. Another 12 of his shells are currently delinquent filers. The agency could easily suspend those shells and revoke their registration, effectively removing them from the marketplace. No investigation is required; a delinquent filer’s delinquency is a matter of fact that cannot be challenged.
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