BCSC's Stanhiser prosecution mirrored in OSC's Emerson case
Kensington Resources Ltd KRT
Shares issued 41,537,631 Feb 13 close $0.80
Wed 13 Feb 2002 Street Wire
See B.C. Securities Commission (*BCSC) Street Wire
by Brent Mudry
The Ontario Securities Commission's prosecution of Robert James Emerson,
the former president of brokerage IPO Capital, may offer a rare OSC insight
into Bay Street's use of offshore accounts, a time-honoured favourite of
Howe Street penny stock promotions. Mr. Emerson left IPO Capital on Oct.
19, 1998, which coincidentally marked his exit from the industry.
The overall case also offers a few parallels to the British Columbia
Securities Commission's 1999 prosecution of Gary Stanhiser, a flim-flam man
nailed for defrauding his flock of followers by circumventing prospectus
and distribution rules through offshore accounts. There is no suggestion,
of course, that either Mr. Emerson or his former close associate James
Frederick Pincock perpetrated any fraud like that of Mr. Stanhiser.
The OSC's prosecution of Mr. Emerson, launched Wednesday, is the second
related action stemming from a probe of private placements made through
offshore accounts in the Turks and Caicos Islands. The regulator launched
its case against Mr. Pincock on Aug. 21, 2001, with a three-day hearing set
to start on May 1.
The OSC claims Mr. Pincock used three offshore companies: Britwirth
Investment Co. Ltd. in the Turks and Caicos and Fulton Park Ltd. and Wifsta
Ltd. in the Isle of Man, to buy private placement shares of at least seven
penny stock promotions: Royal Laser Tech Corp., Champion Communication
Services Inc., Luxell Technologies Inc., Indocan Resources Inc.,
International Menu Solutions Corp., Pacific Concord Capital Inc. and
Vancouver promoter Wally Berukoff's Leisure Canada Inc., between May, 1995,
and May, 1999, and improperly broke up these share purchases into smaller
chunks for small investors.
In the Emerson case, the OSC claims the former IPO Capital head played key
roles in the first 19 months of Mr. Pincock's scheme, from May, 1995, to
December, 1999, relating to breakups of Britwirth financings of three of
the companies: Royal Laser, Champion Communications and Luxell.
In a completely unrelated case, another Berukoff promotion, Northern Orion
Explorations Ltd., a public subsidiary of Mr. Berukoff's former flagship
Miramar Mining Corp., has the recent misfortune of popping up in a
disturbing U.S. prosecution. On Jan. 31, U.S. authorities launched criminal
and civil cases against Enrique Perusquia, a high-level former Lehman
Brothers and PaineWebber broker who allegedly defrauded a wealthy Mexican
client, who lost more than $68-million (U.S.) by stuffing his account with
shares and convertible debentures of American Resource Corp., its
subsidiary American Pacific Minerals and Northern Orion, in return for
secret offshore kickback commissions over a six-year period ending in 1998.
The United States Securities and Exchange Commission credits staff of the
British Columbia and Ontario securities commissions with playing key
support roles in the two-year Perusquia probe, which is continuing. While
U.S. officials claim Mr. Perusquia was secretly greased through various
commissions and finders' fees, and the dirty broker also stuffed his
client's account through open-market purchases, there is no allegation of
wrongdoing made against American Resource, American Pacific, Northern Orion
or any individuals directly or indirectly involved with these companies.
The OSC claims Mr. Pincock, who was the president of Britwirth and an
officer or director of Fulton Park and Wifsta, received at least
$1.7-million and $500,000 (U.S.) from about 170 investors in Ontario and
elsewhere to purchase shares of Royal Laser, Champion, Luxell, Indocan,
International Menu, Pacific Concord and Leisure Canada.
After raising the funds from the small investors, Mr. Pincock allegedly
directed his trio of offshore dodges, Britwirth, Fulton Park and Wifsta, to
take down financings of the seven penny stock promotions, which he then
broke into smaller chunks for his retail clients.
Unfortunately, Mr. Pincock not only forgot to register as an investment
adviser or portfolio manager or file a prospectus, he also broke private
placement rules.
While Canadian securities regulators stipulate minimum investments of
$97,000 in B.C. or $150,000 in Ontario to weed out unsophisticated suckers,
Mr. Pincock's offshore switcheroo opened the door to 170 little guys with
average investments of $14,400.
Mr. Emerson had the misfortune of being tangled up in the first wave of
this scheme.
While Mr. Emerson was busy running the small national brokerage, he
allegedly found the time to dabble in offshore dodges. The OSC claims the
former IPO president solicited 70 individuals in Ontario and elsewhere, of
which 36 were IPO Capital clients, to invest in Royal Laser, Champion and
Luxell through improper pooling and subscription agreements with Britwirth,
the offshore Turks conduit.
Two of the deals had at least a veneer of slickness. With Royal Laser and
Champion, Mr. Emerson allegedly helped set up the deals with Britwirth then
stayed out of the picture. With Luxell, however, Mr. Emerson apparently got
greedy, or perhaps just sloppy. The OSC claims he arranged for the transfer
of Luxell shares from Britwirth's account at IPO to 57 individuals, of
which 37 were IPO clients. OSC investigators were no doubt quite
appreciative, as this made the job of connecting the dots quite a bit
easier.
If all this sounds at least a bit familiar to followers of innovative Howe
Street financings, there may be good reason.
Gary Stanhiser, a former Seventh Day Adventist minister with a serious
reputation problem, pulled off a similar stunt in Vancouver in the same
time period, albeit on a much grander scale and with his own special
disappearing trick.
The California fraudster, aided and abetted by Vancouver brokerage
Canaccord Capital, broker John Johnstone, both of whom claimed they were
clueless about breaking any rules or regulations, and Vancouver lawyer
Stephen Dadson, who approved the share-splitting scheme with a dubious
legal opinion and subsequently decided to take an extended holiday from
actively practicing law.
In a similar modus operandi to the Ontario case, Mr. Stanhiser set up a
number of offshore companies and trusts he ultimately controlled and raised
$13.5-million from small investors between 1995 and 1997 through his
flagship, Excel Asset Management. While just $9-million of this was
actually used to buy shares in private placements, to subvert the $97,000
exemption, only $1.5-million to $2.4-million worth of shares ever made it
into the small clients' accounts.
In an April 30, 1999, decision the BCSC found Mr. Stanhiser fraudulently
fleeced his flock of 300 victims, mostly church members in B.C. and
Alberta. Almost a year later, on March 21, 2000, the commission gave Mr.
Stanhiser a lifetime ban and a $100,000 fine in absentia.
In a consent settlement dated June 29, 2000, Canaccord agreed to pay a
whopping $428,000 in penalties and investigative costs for its key role in
facilitating the Stanhiser fraud, which counted 140 Canaccord clients among
the victims.
The agreed text of the penalty, which was hammered out behind the scenes
between lawyers for the commission and Canaccord, stressed that the
brokerage itself was an unwitting and innocent victim of its own sleepy
compliance department, which ignored scores of red flags, whether
unintentionally or otherwise.
While the Pincock and Stanhiser schemes were unrelated, there is at least
one intriguing commonality.
Kensington Resources Ltd., a Howe Street diamond promotion, had the
misfortune of selling private placement shares to Diomondmark Investments
Ltd., one of Mr. Stanhiser's offshore companies, in January, 1996, one of
the transactions which caught the BCSC's attention.
In what can only be called an amazing coincidence, Fulton Park, one of Mr.
Pincock's offshore Isle of Man dodges, also participated in this same
financing, although the OSC prosecution makes no note of the Kensingston
deal. There is no suggestion, of course, that anyone associated with
Kensington had any clue that its offshore backers were anything less than
fine financiers.
In another odd twist of fate, a few months later, in May, 1996, Richard
Bullock showed up as a director of Kensington, a role he abandoned a year
or so later. Mr. Bullock, best known as the shill for controversial
offshore bank peddler Jerome Schneider, has since relocated from the
Vancouver suburb of Langley to the more exciting locale of Belfast in
Northern Ireland.
Mr. Schneider, who sold the Exchange Bank and Trust shell to Itex Corp.
fraudster Terry Neal, subsequently used as a massive Vancouver money
laundering account for New York Mafia associate Ed Durante, is currently in
a B.C. court fight over records seized in raids by the tax man in February,
2001.
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