OSC target Valentine attracted to Amer. Nortel, Wasatch
2002-06-21 08:26 PT - Street Wire.
by Brent Mudry
While Canadian regulatory investigations into Mark Edward Valentine, the ousted chairman of Thomson Kernaghan, remain shrouded in mystery, a review of U.S. regulatory filings shows the Bay Street brokerage had a rare talent for picking OTC Bulletin Board promotions featuring controversial American penny stock touts. Among Thomson Kernaghan's notable favoured penny promos are American Nortel Communications and Wasatch Pharmaceuticals
In keeping with his nose for quality, or lack of it to be more correct, Mr. Valentine took a shine to American Nortel, a penny stock dogged by a pervasive stench of scandal. In April, 1997, Canadian Advantage LP, the flagship "hedge fund" run by Mr. Valentine, featuring Thomson Kernaghan as general partner, invested $230,000 in American Nortel through a convertible debenture financing. (All figures are in U.S. dollars.) Canadian Advantage, also known as CALP, began a series of conversions within five weeks, starting off at 42 cents and finishing off in mid-1998 at about 25 cents.
American Nortel was no blue chip special. After a series of evolutions, it began bartering long distance phone time for assorted assets, starting in December, 1995. In 1996, this bizarre business model led to the company trading phone time for eight offshore undeveloped lots on Grand Cayman Island, various condominiums in Missouri and rural lots in Kentucky and Arizona.
On March 15, 1997, three weeks before Mr. Valentine picked American Nortel as a good investment for CALP, the company agreed to trade 12.22 million long distance minutes for 110 pieces of "museum quality art." While it is not known whether the pieces were churned out by Sky Jones, whose atrocious art was bartered for shares in a number of other dubious penny stock promos, the deal later fell through. American Nortel claimed its appraisal did not support the value of the barter art.
Basic due diligence, had Thomson Kernaghan done any, would have shown that American Nortel, bounced off the former Vancouver Stock Exchange, had some unfortunate baggage.
Past promoter Ken Rogers, of Kelowna, B.C., was arrested in Salt Lake City, Utah, in November, 1994, while two fellow former directors, his brother William Rogers, of Vancouver, and Edmonton associate John Pickens, were also arrested. Revenue Canada, now known as the Canada Customs and Revenue Agency, claimed the trio evaded $4.6-million (Canadian) in income taxes, related to another promotion, Auramet International. All three pled guilty and were sentenced to two years less a day in 1996 and 1997. Auramet was fined $9.24-million (Canadian), the largest fine for tax evasion in Canadian history.
American Nortel had the misfortune of having the United States Securities and Exchange Commission air its dirty laundry in two more distressing cases in recent year, including Swiss-German fraudster Guido Bensberg's certificate-leasing scheme and Mark Schultz's Internet penny stock touting scheme.
Mr. Bensberg became an SEC poster boy in May, 2001, when the former Vancouver resident was ordered to pay more than $27-million in disgorgement and penalties for defrauding Bank Leu and Lehman Brothers of $10-million, part of a $200-million-plus share-leasing scheme he allegedly masterminded. The massive award marked one of the largest trial wins in the history of SEC.
"This sends a strong message not to use U.S. markets as a platform for international securities fraud," Eric Miller, Assistant Chief Litigation Counsel of the SEC in Washington, D.C., told Stockwatch. "The Bensbergs of the world will be caught and pay a hefty price," says Mr. Miller. The May 1, 2001, judgment capped a case which spanned five years and followed a one-week trial in California that March.
According to SEC prosecution documents, American Nortel was one of Mr. Bensberg's target companies. The Salt Lake City company rented out 40 million of its restricted shares in July, 1994, in Mr. Bensberg's broad scheme, which involved dealings in at least six offshore secrecy havens, including Switzerland, Aruba, the Isle of Man, the Turks and Caicos Islands, Bermuda, and the British Virgin Islands.
The Bensberg trial featured deposition testimony from Edmonton lawyer Robert Hladun, who allegedly vouched to Bank Leu that Mr. Bensberg was wealthy, reputable and trustworthy. Mr. Hladun is best known as lead Canadian counsel for controversial German-Canadian businessman Karlheinz Schreiber, an associate of former Canadian prime minister Brian Mulroney in the Airbus affair, and a major player in the German campaign finance scandals which led to downfall of former chancellor Helmut Kohl.
In addition to major target Mr. Bensberg, the SEC also nailed a number of co-conspirators in his certificate-leasing scheme, shutting down Alpha Tech Stock Transfer Inc., a small transfer agent in Salt Lake City and banning its principal, James W. Farrell, from the industry.
While the Bensberg fiasco took place well before Thomson Kernaghan came on the scene at American Nortel, the Bay Street brokerage's Canadian Advantage financing was smack dab in the middle of the Schultz case.
In a 23-page civil complaint filed May 5, 2000, in U.S. District Court for the Southern District of New York, the SEC claims Mr. Schultz, an Internet stock promoter, was paid more than $2.5-million for touting 15 OTC Bulletin Board companies, including American Nortel. The SEC claims Mr. Schultz, 49, a former resident of Jupiter, Fla., now believed to be in Spain, broke numerous securities laws and violations in a fraudulent Internet touting scheme between 1995 and 1999.
American Nortel was Mr. Schultz's best account. The SEC notes that in exchange for his promotional services, the company gave Mr. Schultz compensation valued at $594,000, consisting of 350,000 shares transferred in June and July of 1996, which he forgot to disclose to his subscribers.
In an ad in Individual Investor that September, Mr. Schultz claimed American Nortel would have "tremendous growth in the future" and "explosive growth to the end of this century." The well-paid tout predicted the stock would rise to $4 to $5 within two or three months, as part of a "rapid move up." Instead, American Nortel shares fell from the $2 range to below $2.
Mr. Schultz was apparently fond of at least one Canadian brokerage, the Howe Street house Wolverton Securities. On March 23, 2000, six weeks before the SEC launched its case against him, Mr. Schultz filed a Form 144 to sell 400,000 shares of American Nortel, designating his brokerage as Wolverton.
Besides American Nortel, Mr. Schultz's other top tout clients included Wasatch Pharmaceuticals, which paid him $459,400 in shares, compensation he again neglected to tell his readers about. The Internet tout was quite bullish on Wasatch, based in Boynton Beach, Fla., despite its own bleak history.
In a Stocks for Tomorrow tout in April of 1997, Mr. Schultz claimed an expansion planned by Wasatch the next month would push its revenues to $250-million to $300-million, and boost its stock price to $5 to $6 in the short term and $8 to $10 later that year. The SEC notes that Wasatch had discontinued its active operations in 1989 and it received no revenues and earned no profits in fiscal years 1994, 1995 and 1996. In the summer of 1997, Wasatch's stock slumped to below the $1 level.
In the amazing serendipity of the penny stock world, Thomson Kernaghan later took a shine to Wasatch as well.
The Bay Street brokerage made a significant proposed loan to Wasatch, which issued one million shares on July 5, 2000, as collateral. While the loan was never completed and the restricted shares were cancelled, the pair concluded another financing less than a year later. On April 11, 2001, Wasatch entered into a written agreement to grant Thomson Kernaghan up to two million shares.
Aside from Mr. Schultz's Internet touting, some basic due diligence would have revealed further malodorous affairs. Notorious penny stock figure Richard Gladstone and now defunct penny stock brokerage La Jolla Capital filed Form 144 filings to sell modest amounts of Wasatch shares in late 1998.
Mr. Gladstone emerged last year as one of Vancouver brokerage Pacific International Securities' clients. A review of Mr. Gladstone's regulatory record reveals that he has been a Florida-based fixture of the mob-linked boiler-room scene for more than a decade. Mr. Gladstone's latest and greatest claim to fame came on June 14, 2000, when he was indicted in a massive Mafia-related penny-stock sting known as Operation Uptick. American authorities call the overall case, which involved a broad network of bribed penny-stock brokers, the largest stock fraud case in U.S. history. The P.I. client was acquitted last year after a four-week securities fraud trial in the United States District Court for the Southern District of New York.
In both these stocks, American Nortel and Wasatch, there is no suggestion that Mr. Valentine and Thomson Kernaghan had any idea the promotions had ever attracted any unsavoury characters. The Bay Street brokerage's attraction to these, and many other troubled penny stocks, remains quite remarkable, however.
bmudry@stockwatch.com
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