Subject: Stockwatch: Street Wire: Online insiders face $2.14-million lawsuit
Online insiders face $2.14-million (U.S.) share suit
Thursday Oct 5 2000
by Brent Mudry
Vancouver penny stock player Stan Ross and several directors of Online
Innovation, a Vancouver-based student Internet dating OTC Bulletin Board
promotion, face a $2.14-million suit over a block of Online shares held in a
pooled offshore stock trading account. (All figures are in U.S. dollars.)
In a statement of claim filed Wednesday in the Supreme Court of British
Columbia, Darin Wong of Vancouver, the vendor of the Online deal, claims he
was induced to transfer 603,400 Online shares into the pooled offshore account in
mid-1999, but he was cut out of the picture in May. Online shares closed at $3.55
on Thursday.
The defendants include Chad Lee, 31, Online's president and chief executive,
Marlene Schuter, 36, the company's treasurer and a director, and Sharmen
Vigouret and Stan Ross, who played various roles setting up the deal. The
allegations have not yet been proven in court and no statements of defence have
yet been filed.
In the suit, Vancouver lawyer John Forstrom of MacLean Forstrom Jackson
claims that Mr. Ross, Mr. Lee, Mr. Vigouret and Ms. Schluter are the owners, or
the beneficial owners, of a securities trading account maintained at Boston Safe
Deposit and Trust Co. in the name of Brian Lines's Lines Overseas Management
Ltd., which is based in the secluded offshore enclave of Bermuda. The suit notes
the account was administered on behalf of the defendants by Lines Overseas.
Mr. Wong claims that at all material times, the trading authority for the account
was maintained by Mr. Ross and Mr. Vigouret. "All instructions in the pooled
account were authorized by Vigouret and Ross on their own behalf and as agents
for the other defendants," states Mr. Forstrom in the suit.
The suit notes that Online Innovation, a public company, was founded by Mr.
Lee, and the defendants are all "associated with and involved in the business and
promotion of Online."
The company was originally incorporated as Micro Millennium Inc. in May of
1997, changed names to Sinaloa Gold Corp. that October as a Mexican mineral
exploration OTC-BB promotion, and was renamed Online Innovation in April of
1999. Mr. Wong received 400,000 shares at a deemed price of 40 cents as the
sole proprietor of the private vend-in company Online Innovation.
The company's Internet dating Web site promotion, VirtuallyDating.com, included
such innovative features as "Romance & Love" chat rooms, "The Red Light
District," for fans of talking dirty, designed to help prevent "this type of interaction"
from taking place in the more upstanding chat rooms, and "The Dressing Room,"
where members can dress up and change their eyes, hair, body types and
accessories through "drop and drag technology," and, of course, the all-important
"Dating Safety Tips."
Mr. Lee, credited by Online for its "strategic visioning" prowess, initially received
8.5 million shares, at a total deemed value of $30,000, in September of 1997,
after a five-year car-lot career, for vending in the Mexican property interests of his
private investor relations company, CL Communications Group.
A month later, the company printed more cheap paper by selling 1.5 million shares
at a penny each to three purchasers. Mr. Lee remains the company's biggest
shareholder, with 5.5 million shares, while Ms. Schluter holds 2.5 million shares.
Ms. Schluter joined the company in October of 1997 after a six-month stint in
investor relations for CKD Ventures Ltd., listed on the former Vancouver Stock
Exchange, and a prior five-year career with Yorkton Securities as a broker's
assistant and then a broker.
Although Mr. Ross does not show up as a director or major shareholder of
Online, he appears to be the most Howe Street-experienced of the lot, with
cheap-stock investments in a number of then-VSE companies, including
Turbodyne Technologies Inc. and Biometric Security Corp., promotions of close
associates of controversial promoter Harry Moll.
With the seed stock placed, Online subsequently papered up the Howe Street
crowd, offshore and onshore, in April of 1999, in conjunction with the abandoning
of Mr. Lee's Mexican properties and the vend-in of Mr. Wong's Internet dating
service. The company sold a modest 205,000 shares at 50 cents on April 6,
1999, in a Regulation 504 D financing to three investors, including Michael
Hislop's Aberdeen Holdings.
A week later, Online did a major private placement of 1.6 million units at 50
cents. Each unit consisted of one share and a warrant, exercisable at 50 cents in
the first year and 60 cents in the second. The biggest buyers were Graham
Redford's Clyde Resources and Richard King's Nottinghill Resources, both based
in Nassau, Bahamas, and both with 400,000 units, Martin Rakin, with 200,000
units, and Vancouver developer Milan Ilich, with 200,000 units, mainly through
482047 B.C. Ltd.
The buyers list also include Doug Anfossi's Nassau-based Laiy Ltd., with
100,000 units, and Mr. King and Kevin Gunther's Iguana Investments Ltd., with
50,000 units, based in the popular offshore enclave of the Cayman Islands,
Bloomfield International Ltd., with 100,000 units, ICCON Derivatives Trading
Inc., based in yet another offshore enclave, the British Virgin Islands, and Donald
Bruce Horton, the former chief financial officer of Doug Mason's Clearly
Canadian Beverage Corp., both with 50,000 units.
With its Howe Street backers on board, Online Innovation shares soared. After
hitting a low of 12 cents in the last week of 1998, shares of the Internet dating
service, hit a peak of $5.88 last October.
At this peak price, the $200,000 initial investments of Clyde and Nottinghill
reached a peak value of $4.5-million each on paper as the units rose from 50
cents to a paper value of $11.26. Similarly, the $50,000 initial stakes of Laiy and
Bloomfield reached paper values of $1.13-million each, while the modest $25,000
stakes of Iguana, Mr. Horton and ICCON reached peak paper values of
$562,000 each.
While the Howe Street crowd presumably had ample opportunity to get off while
the going was good, Mr. Wong, whose Internet asset was the sizzle selling the
stock promotion, was less fortunate. The suit claims that between April and
September of 1999, Mr. Wong transferred a total of 603,400 shares into Mr.
Ross and Mr. Vigouret's offshore pooling account.
Mr. Wong claims he was induced to transfer the shares with promises that along
with the defendants, he would be entitled to participate in the management and
development of Online's business and he would be paid remuneration for his
services.
The suit also alleges the defendants asssured Mr. Wong that they would all pool
their shares in the offshore account, jointly direct and control the trading and share
sales subject to their pooling agreement, and participate equally in the resulting
profits.
Mr. Wong claims that since May, the defendants have excluded him from
participation in the company's business affairs, cancelled his consulting agreement,
denied the existence of the offshore pooling account agreement and refused to
acknowledge his interest in the shares held.
In the suit, Mr. Forstrom seeks a court order for the return of Mr. Wong's shares,
interim and permanent injunctions restraining the defendants from dealing with the
shares, and an accounting of the offshore pooling account.
While Online Innovations shares still trade above $3, the company had the
misfortune of receiving questioning comments from the United States Securities
and Exchange Commission this spring, after regulators mulled its Feb. 1
registration statement.
"Pursuant to comments raised by the SEC, the company would like to clarify a
number of matters set out in previous news releases. In news releases dated June
1, 1999, and Feb. 7, 2000, the company indicated that it intended and was
strategically positioned to capture a significant share of an annual dating industry
estimated to be worth between $200-million and $1.2-billion," stated the
company in a March 9 retraction release.
"While management wishes to eventually be able to capture a significant share of
this market, it acknowledges that it will be difficult to do so and that the goal may
be optimistic given that the company is a development stage company and will be
competing against entities with a more established market presence," stated Mr.
Lee's Online Innovation.
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