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Securities and Exchange Commission (C-*SEC) - Street Wire
SEC continues Howe St. shock and awe with Nano World
Securities and Exchange Commission *SEC
Tuesday March 25 2003 Street Wire
Also Nano World Projects Corp (U-NOWD) Street Wire
by Brent Mudry
Controversial Vancouver penny stock promoters Robert Papalia and David Hunter have been targeted by the United States Securities and Exchange Commission for their promotion of Nano World Projects Corp., which collapsed from a peak market value of $340-million to virtually nothing. (All figures are in U.S. dollars.) Canada's most feared penny stock watchdog continues its shock and awe on Howe St. program with claims the pair promoted Nano World shares to a $24.50 peak in April, 2000, based on a series of false and misleading press releases.
The SEC announced Monday that it has launched a civil complaint against Surrey resident Mr. Hunter, 48, now believed to be in Mexico, and Mr. Papalia, 57, of West Vancouver. The SEC seeks unspecified civil fines, orders barring Mr. Hunter or Mr. Papalia from serving as an officer or director of a public company, and injunctions enjoining both from future securities violations. The SEC action follows an extensive investigation by the SEC's Denver branch office, and was filed by Denver staff attorney Leslie Hendrickson Hughes.
The allegations have not yet been proven in court and neither Mr. Hunter nor Mr. Papalia have yet filed a defence statement. Mr. Papalia, on behalf of Nano World, launched a civil suit last August against Mr. Hunter and others, blaming them for Nano World's woes, but no statements of defence have yet been filed.
The civil complaint, filed March 17 in United States District Court for the Western District of Washington, follows an administrative proceeding the SEC recently launched against Nano World, which operated out of South Bothell, Wash., a suburb of Seattle.
The SEC claims Mr. Hunter and Mr. Papalia issued false and misleading press releases about Nano World's business dealings with the research and development arm of Fiat Group, the Italian automotive giant, and other companies. The complaint also claims Mr. Hunter, formerly a broker with Thomson Kernaghan, issued a false press release about a proposed $15-million financing with Paul Lemmon's Bermuda-based Voyager Securities Ltd.
(In an unrelated action, Mr. Lemmon was arrested Aug. 14 as one of the top targets of Operation Bermuda Short, a joint RCMP-FBI undercover operation which resulted in the arrest of 60 penny stock players, including 20 Canadians. Mr. Lemmon pled guilty in early December and agreed to testify against his close business associate Mark Valentine of Toronto, who headed Thomson Kernaghan Securities, a Bay Street brokerage shut down by Canadian regulators several months before the Bermuda Short arrest operation.)
The SEC complaint is an unfortunate setback for Nano World director Mr. Papalia, who along with his twin brother Anthony Papalia Sr. was well known to authorities in Vancouver, Montreal and London years ago. The twins are not related, however, to Tony (the Pops) Papalia, the Hamilton, Ont., Mafia boss murdered in a mob execution a few years ago.
According to newspaper accounts, the Papalia twins were arrested by Scotland Yard detectives in 1977 for allegedly planning to defraud investors of $300-million through the sale of shares of Metals Research, a company which claimed to have a gold mine in British Columbia. Prosecutors suggested the Mafia may have been involved, but little if any such evidence was presented in court.
The Papalia twins told The Vancouver Sun in 1991 that they spent a total 18 months in jail without bail, although they were acquitted at the heavily publicized trial. Anthony Papalia made headlines when he broke out of a detention facility, in a caper called "The Great Mafia Escape" by the British press.
Fellow SEC target Mr. Hunter had the misfortune of popping up in several notable Howe Street scandals, although never as a regulatory target. The former broker, whose career stretched back to at least 1982 with now defunct Continental Securities, left the industry in March, 2000, after a brief stint with Mr. Valentine's Thomson Kernaghan. During his career, he also served notable stints at Yorkton Securities and Canaccord Capital.
Mr. Hunter emerged in Brent Pierce's Ultra Pure Water affair, when Toronto broker Stephen Taub told authorities he was introduced to Harvey Gorsuch and Grant Atkins, Mr. Pierce's fronts, in mid-1993 by Mr. Hunter and his brother Dan Hunter, who both then worked at Canaccord. Around this same time, Mr. Pierce was banned for 15 years by the B.C. Securities Commission in the Cost-Miser Coupons case, which also featured Mr. Gorsuch and Mr. Atkins.
Mr. Hunter and his broker-brother Dan Hunter were also parties of interest, but not targets, in the SEC's probe of another Howe Street scandal, the 1991-1993 promotion of Dimples Group, a Toronto-based diaper company. Besides the SEC, the Dimples case was also investigated by the RCMP, the York Regional Police near Toronto and the former VSE.
The SEC notes Mr. Hunter and Mr. Papalia joined Nano World in April, 2000, soon after the company began trading after a vend-in with Breccia International Minerals, a public shell. The U.S. regulator states Mr. Hunter was Nano World's chief executive officer, president and a director from April 10, 2000, through Aug. 21, 2000, while Mr. Papalia has beeen a director since April 11, 2000, chairman since Aug. 21, 2000, and its CEO since Dec. 12, 2000.
In its complaint, the SEC alleges that Nano World issued a series of dubious press releases announcing financing commitments and "strategic" business relationships between April, 2000, and January, 2001, reviewed and approved by either Mr. Hunter or Mr. Papalia.
In the first bogus release, dated April 20, 2000, and reviewed and approved by Mr. Hunter, Nano World claimed it had negotiated a $15-million financing of one million Section 144 shares at $15 with Mr. Lemmon's Voyager Securities, and that Voyager had "committed to finance the company for fifteen million dollars effectively immediately."
"The statements in Nano World's April 20 press release were false. At the time this press release was issued, Hunter knew that Voyager had not agreed to provide Nano World with $15-million in financing immediately, but had merely agreed on a best-efforts basis to solicit subscriptions for purchase of one million shares at a price of $15 per share." states SEC attorney Ms. Hughes in the complaint. "Hunter participated in negotiation of, and signed the informal letter agreement setting out the limited terms of the underwriting arrangement."
While the SEC blames Mr. Hunter solely for false claims about the failed Voyager financing, it targets Mr. Papalia solely for a series of allegedly bogus releases relating to Fiat. The regulator claims that Mr. Papalia vetted and approved five Nano World press releases from September, 2000, through January, 2001, falsely and misleadingly touting a "strategic partnership" with Centro Ricerche Fiat, the research and development arm of the Fiat Group, and claiming the company had received related financing commitments from third parties.
In the five releases, issued Sept. 12, from Seattle, and Sept. 25, Nov. 21 and Nov. 22, in 2000, and Jan. 22, 2001, from New York, Mr. Papalia repeatedly claimed that Nano World had a viable "long-term contract" with Fiat and characterized Nano's relationship with Fiat as a "strategic partnership" and a "joint venture" that would "speed commercialization of an advanced new technology," according to the SEC.
The regulator claims the press releases were false or materially misleading in several ways. "Papalia knew that Nano World's relationship with Fiat was not a 'partnership' and was contingent on the ability of Nano World to locate and obtain at least $3-million in financing, a fact that Papalia failed to disclose in the press releases," states the complaint.
The SEC claims that although Nano World announced in its Jan. 22, 2001 press release that it was current on all obligations to Fiat, Mr. Papalia knew ut had missed its second payment of $300,000 to Fiat, due on Dec. 31, 2000, and that Nano World had no ability to make the other payments required by the contract. The regulator alleges that Nano World only made two of the 12 payments required under its Fiat agreement.
The complaint also alleges that Mr. Papalia made false statements in two Nano World press releases in September, 2000, regarding financing relating to the Fiat deal. Nano World claims its new alliance with Fiat had "financial backing" from Venture Capital USA Inc., and the tiny company itself had the "the backing of a strong and supportive group of shareholders, international partners and the financial community." "Papalia knew these statements were false and misleading because Nano World did not have any binding financing commitments with Venture Capital USA or the financial community at the time it issued the foregoing press releases," states the SEC.
With the Fiat promotion in full stream, the SEC claims Mr. Papalia also issued a false press release in November, 2000, about Nano World acquiring a European company called Euroinks SRL. The regulator claims Nano World never acquired Euroinks and Mr. Papalia knew the deal was a "mere tentative agreement" subject to further negotiation and contingent upon Nano World raising $1.75-million in financing for the deal within four months, details which he forgot to mention in the press release and a regulatory filing.
"On Nov. 29 and 30, 2000, Papalia also participated in a massive 'spam' E-mail campaign to further distribute Nano World's press release," adds the SEC.
In the last suspect press release, dated Jan. 30, 2001, Nano World claimed it had an immediate committed loan of $500,000 from from a company called Frefax Inc., and a much broader "agreement in principle" for further financing.
"Papalia knew from his negotiation of the agreement that the 'agreement in principle' referenced in the press release was a letter of intent that Frefax did not sign. Moreover, Papalia knew that Frefax did not contractually obligate itself to make an immediate loan of $500,000 to Nano World," states the SEC in its complaint.
"Papalia also failed to disclose that the entire Frefax arrangement was contingent on Frefax's ability to quickly locate nearly $4.8-million to fund Nano World's financial obligations, when he knew that Frefax's financial statements showed only $85 in the bank and no discernable assets or prospects."
(c) Copyright 2003 Canjex Publishing Ltd.
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