SEC target Lancer attracted to four Khan deals
Securities and Exchange Commission
Tue 15 Jul 2003
Street Wire
by Brent Mudry
Michael Lauer's Lancer Group, the controversial $1-billion offshore hedge
fund organization shut down by the United States Securities and Exchange
Commission last week, had positions in at least four dubious penny stock
promotions linked to Rafi Mohamad Khan. (All figures are in U.S. dollars.)
Lancer funds had varying stakes in World Wireless, Hemispherix and Ontro
Inc., in addition to Aura Systems Inc., a Khan promotion revealed Friday by
Stockwatch.
THE KHAN QUARTET
The controversial penny stock promoter and SEC target got a light penalty
in a federal income tax evasion plea deal a few years ago, which included
his co-operation as a key federal informant.
In a consent settlement with the SEC in May, 2000, Mr. Khan agreed to a
five-year brokerage ban for his rig jobs of L.L. Knickerbocker in 1995 and
Future Communications in 1993. He was not fined.
Since then, Mr. Khan has emerged as a new target of the SEC.
In April, 2002, the SEC revealed Mr. Khan was under investigation again.
The regulator claims he may have used a Pakistani holding company and his
wife, Rubina Khan, to trade shares of four companies: Ontro, Aura Systems
Inc., GenesisIntermedia Inc. and eUniverse Inc., in contravention of his
market ban imposed two years earlier.
According to court filings, the Khan family holding company, Aura Private
Ltd., or Aura Pvt. in short, traded through brokerage accounts in Canada,
as well as the U.S. While SEC officials decline to identify any brokerages
by name, regulatory filings show Aura Pvt. held shares of eUniverse and
Ontro at Research Capital, a Toronto-based brokerage. Although the SEC
believed Ms. Khan fronted for her husband, she has been reluctant to
testify and provide other evidence about numerous transactions in a bank
account and brokerage account in her name, forcing the regulator to go to
court for her co-operation.
The SEC investigation into these four stocks -- Ontro, Aura,
GenesisIntermedia and eUniverse, was launched in October, 2001. The
regulator is investigating concerns Mr. Khan may have promoted all four
stocks, then sold his shares through undisclosed brokerage accounts.
GenesisIntermedia, the most notable, also featured Saudi arms figure Adnan
Khashoggi, a key defendant in the $2-billion collapse of Bangkok Bank of
Commerce.
It might seem odd to see any savvy fund manager hold positions in even a
single Khan promotion, given the promoter's regulatory baggage, but
Lancer's Mr. Lauer appeared to like four: Aura, Hemispherix, Ontro and
World Wireless.
Lancer's experience was not a total success. As of July 31, 2001, its
flagship Lancer Offshore hedge fund held 6.15 million shares of World
Wireless, with an average cost of $2.29 a share. By this time, the stock
had collapsed to 45 cents, an 80-per-cent loss. On paper, Lancer Offshore
had lost $11.3-million on its $14.06-million stake in World Wireless. with
its position worth just $2.77-million at this date.
A year earlier, as of June 29, 2000, Aura Pvt., the Khan family's
Pakistani-based holding company, filed to sell a modest 60,000 shares of
World Wireless through a U.S. brokerage.
Hemispherix is another Khan-linked promotion which attracted Lancer's
attention. As of mid-1999, Aura Pvt. was one of Hemispherix's biggest
selling shareholders, filing to sell 200,000 of its 540,000 warrants.
Lancer was also a significant shareholder of Hemispherix through its
various funds.
Lancer also had a much smaller position in Ontro, one of four stocks the
SEC is probing for Mr. Khan's alleged touting and scalping. In one of its
managed funds, the Viator Fund, Lancer held a modest 125,000 Ontro warrants
as of March 31, 2000.
Unrelated to Lancer, some other funds also had significant positions in
Aura Systems. Regulatory filings also show Canadian brokerage CIBC World
Markets held 2.5 million shares of Aura Systems for a pair of shareholders
in mid-2000: 1.5 million shares for PRIF LP, and one million shares for
Excaliber Limited Partnership. There is no suggestion that these two major
Aura shareholders were anything but innocent bystanders.
The renewed SEC investigation into Mr. Khan was especially unfortunate for
Aura Systems, as the company has been rebuilding its reputation and
credibility in the wake of an SEC accounting and auditing prosecution in
1996. The SEC charged Aura, chief executive and chairman Zvi Kurtzman, and
accountants Francis T. Phalen and Joseph Bevacqua with boosting Aura's 1993
and 1994 revenues by 22 per cent and 11 per cent, respectively, through
booking a bogus transaction with a company called John Jory Co.
"Kurtzman, Phalen and Bevacqua knew or were reckless in not knowing that
the Jory transaction was a sham. All three participated in the October 1993
meeting where the transaction was discussed and the fictitious Jory
purchase order was drafted," stated SEC secretary Jonathan Katz in a
15-page decision. Both Mr. Phalen, Aura's senior vice-president and chief
financial officer, and Mr. Bevacqua, Aura's chief accounting officer who
had been hired away as a consultant by John Jory, were suspended from
appearing before the SEC as accountants. Mr. Phalen won reinstatement of
SEC privileges in April, 2000, while Mr. Bevacqua later won reinstatement.
Mr. Kurtzman, who headed Aura since 1987 and remains its CEO and chairman,
settled the charges by promising to do his best to refrain from securities
violations in the future. Fast forward to June, 2001, and Mr. Kurtzman
joined the board of Ontro, an alleged promotion of Mr. Khan which
purportedly works in the research and development of "integrated thermal
containers" to heat liquids such as coffee, tea, hot chocolate, soups and
alcoholic beverages.
It is not known if Mr. Lauer or anyone else at Lancer had any idea that Mr.
Khan or any party associated with him had any interest or involvement in
the public companies Aura, Ontro, Hemispherix or World Wireless.
bmudry@stockwatch.com
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