Re: 6/18/02 - [Kernaghan/Valentine] Stockwatch: OSC target Valentine attracted to smelly OTC-BB stocks
OSC target Valentine attracted to smelly OTC-BB stocks
2002-06-18 17:32 PT - Street Wire
by Brent Mudry
In the biggest bombshell to hit Bay Street since the downfall of Yorkton Securities chairman and Book4golf tout Scott Paterson, Mark Edward Valentine, the chairman of Thomson Kernaghan, the most aggressive Canadian brokerage in the OTC Bulletin Board market, has been abruptly terminated amid a regulatory investigation of his domestic and offshore limited partnerships and his trading in a number of OTC-BB promotions. The dark cloud over Thomson Kernaghan has killed its pending merger with Research Capital, with the brokerages' application to the Ontario Securities Commission withdrawn Tuesday.
The moves come as Canada's brokerages celebrate their success in an industry convention at the luxury resort of Whistler, B.C., as part of the annual meeting of the Investment Dealers Association of Canada, where OSC chairman David Brown signed a 15-day temporary suspension order against Mr. Valentine on Monday.
The TK debacle overshadowed the IDA's happy news on Tuesday: the naming of Terry Salman of Vancouver boutique brokerage Salman Partners as chair of the brokerage lobby group and regulator. The last time Mr. Salman was in the limelight was in 1996, when Stockwatch revealed his star broker, Sam Magid, played a starring role in the personal trading scandal of mutual fund diva Veronika Hirsch, a fiasco in which Mr. Salman was not personally involved.
Although Thomson Kernaghan quietly suspended its chairman Mr. Valentine and barred him from its premises last Thursday, resulting from an internal investigation, the debacle was not made public until Tuesday, when the OSC released its 15-day order suspending the controversial broker. The OSC order notes Mr. Valentine, acting through private companies, is the general partner of some limited partnerships, with the Canadian Advantage LP and VC Advantage Fund LP the only two named.
"Staff of the commission and the Investment Dealers Association of Canada are conducting an investigation into the affairs of Valentine, including his action as general partner of certain limited [partnerships, and his trading of shares in certain over-the-counter securities," states Mr. Brown in the OSC's order. No further details are available from the OSC, and commission media manager Eric Pelletier is unable to identify which, or how many, OTC-BB stocks are involved.
The Valentine probe is a major setback for Thomson Kernaghan, which prides itself on its reputation. "Honesty and integrity are at the heart of our business. Success depends upon complying fully with the letter and spirit of the laws, rules and ethical principles that govern us," states the brokerage on its Web site.
Regulatory filings trace the involvement of Mr. Valentine and/or Thomson Kernaghan in a web of Canadian and offshore limited partnerships and numerous OTC-BB promotions. Canadian Advantage LP, also known as CALP, an Ontario-registered limited partnership, is the beneficial owner of 73 per cent of Cedar Avenue LLC, which operates out of a Grand Cayman postbox in the Cayman Islands, while Advantage (Bermuda) Fund Ltd., which is based in an another popular secretive offshore enclave, Hamilton, Bermuda, owns the other 27 per cent.
VMH Management Ltd., which operates out of Thomson Kernaghan's Toronto offices and lists Mr. Valentine as president, is the general partner of CALP and the investment adviser to Advantage Bermuda. VMH International Ltd. operates out of a third offshore enclave, Nassau, Bahamas, through the offices of Ansbacher House (Bahamas) Ltd. (Ansbacher is a popular offshore servicer of secretive Bay Street deals.) VMH International serves as the investment manager for both CALP and Advantage Bermuda.
With these links, Mr. Valentine is deemed to have common control of CALP, Advantage Bermuda and Thomson Kernaghan.
While the OSC notice does not identify which bulletin board promotions the Valentine probe is investigating, Thomson Kernaghan has been involved in a number of OTC-BB promotions, some saddled with the unfortunate baggage of controversy, in recent years.
The timing of the Valentine case is particularly unfortunate for Joshua Tree Construction Inc., which announced an agreement on June 3 with an unidentified investment banking firm to raise up to $5-million in a best-efforts private placement financing. (All figures are in U.S. dollars.)
Thomson Kernaghan took a strong shine to Joshua Tree, acquiring a whopping 99.47-per-cent stake, or 20.2 million shares, in January for its limited partnerships. As of late February, CALP held 18.59 million shares, a 77-per-cent stake, while Advantage Bermuda held 1.61 million shares, a 23-per-cent stake. At the time, Joshua Tree was a dormant construction penny shell based in Las Vegas.
On Jan. 14, 12 days after the Valentine LPs took control, Joshua Tree announced a proposed reverse takeover of American Health and Diet Centers Inc., described as a "multichannel marketer of high quality nutraceuticals and nautral health product solutions" with 22 existing retail locations and $10.67-million in net sales in fiscal 2000. While the RTO deal fell through in April due to a default by Joshua Tree, the companies signed a revised proposed manufacturing agreement.
Joshua Tree features two executives: president Daniel Hoyng and senior vice-president Marek Lozowicki, who are eager for a success story after two recent disasters. Between 1997 and 2000, the pair led National Boston Medical Inc., a medical marketing company, with Mr. Hoyng serving as chairman and chief executive officer and Mr. Lozowicki serving as vice president of information technology. The pair served as executive officers during a two-year period prior to National Boston filing for bankruptcy.
After National Boston, the pair moved on in April, 2000, to Infotopia Inc., an OTC-BB-listed direct marketer, with Mr. Hoyng serving as chairman and CEO and Mr. Lozowicki, his loyal sidekick, serving as a senior executive. Despite its grandiose slogan, "Better Products for a Better World," Infotopia's shares collapsed from $3.85 in June, 2001, to trade below a penny in mid-January.
Thomson Kernaghan's Valentine limited partnerships were also major shareholders of Infotopia. An October regulatory filing showed combined holdings of 3.8 million shares, a 23.3-per-cent stake, with CALP holding 1.4 million shares, Advantage Bermuda holding 314,000 shares, and Fetu Holdings Ltd. with 1.34 million shares and Mr. Valentine himself with 745,000 shares. (Fetu, which also operates out of Thomson Kernaghan's Toronto head office, is deemed to be controlled by Mr. Valentine.)
Last summer, in a series of private placements dated June 1, June 25 and July 13, Thomson Kernaghan bought a total of 6.5 million shares for consideration of $6.68-million, as agent for these entities.
Thomson Kernaghan's strong interest in Infotopia was particularly peculiar, as the company had ridden several waves of hype which later collapsed.
Last August, Infotopia was hit by a class action by New York law firm Goodkind Labaton Rudoff. While Infotopia called the suit "frivolous," the allegations were quite unflattering.
The suit notes Infotopia, incorporated in Ohio in September, 1997, did an RTO of National Boston Medical on Nov. 21, 1998, and a second RTO of Dr. Abravanel's Formulas Inc. on April 25, 2000.
"During the period from June 22, 2000, through September 6, 2000, IFTP issued a series of false and misleading statements about its financial condition and performance, growth, operations, financial statements, business, products, markets, management, revenues, earnings, cash positions and present and future business prospects," stated the class action.
The suit claims Mr. Hoyng realized a profit of more than $250,000 during this period, dumping 775,000 shares. The stock rose from 12 cents on Aug. 23, 2000, to a high of $1.12 three weeks later, on Sept. 12, 2000.
In a series of gushing press releases, Infotopia hyped the infomercial sales success of its two flagship products, the Torso Tiger and the Body Rocker. "Torso Tigers are selling nearly as fast as they can be made," stated an Aug. 15 release. "With this product in place we feel that we can safely project earnings of $0.205 per share for this fiscal year," Infotopia stated in an earlier release. The bad news came out in early 2001, when Infotopia posted a loss of $16.05-million for the quarter ended Nov. 30, 2000, and a $26.73-million loss for the 10 months ended Dec. 31, 2000.
Another of Thomson Kernaghan's favourite OTC-BB stocks had even uglier baggage before the Canadian brokerage came aboard. Mr. Valentine was named to the board of Universal Trading Technologies Corp., a subsidiary of Ashton Technology Group Inc., on Feb. 15, 2000. Just over a year later, on March 8, 2001, Ashton's past skeletons emerged in full public view when the United States Securities and Exchange Commission filed an administrative action claiming the stock was launched in 1996 as a boiler room initial public offering.
In a concurrent criminal prosecution, the United States Attorney for the Eastern District of New York, the FBI and the New York State Attorney General simultaneously announced the indictment of 20 defendants. The criminal indictments alleged that two of the persons charged are associates of the Gambino organized crime family.
The cases involved "a classic boiler-room operation, carried out by individuals who were willing to tell any lie -- no matter how brazen -- in order to get their hands on the public's hard-earned money. These cases demonstrate our continuing commitment to rooting out fraud in the microcap market," stated SEC director of enforcement Richard H. Walker.
The case targeted First United Equities Corp., a Long Island, N.Y., broker-dealer, five principals including Hunter Adams, one trader and a dozen First United brokers.
"From August, 1995, through at least October 1997, operating through First United, the respondents fraudulently marketed the stock of National Medical Financial Services, Inc. ("NMFS") and Ashton Technology Group, Inc. ("Ashton") to unsuspecting investors. After underwriting initial public offerings for both of these companies, First United and its principals maintained control over large blocks of the stock. Thereafter, registered representatives employed by First United used high-pressure sales tactics and a variety of misrepresentations to induce investors to purchase this stock," stated the SEC.
"In addition to misrepresenting the prospects for NMFS and Ashton stock, certain of the respondents falsely told investors that no customer of First United had ever lost money and that the firm would reimburse customers for any losses on NMFS or Ashton. First United filled customers' buy orders with NMFS and Ashton stock that either was held in First United proprietary accounts, or that came from nominee accounts secretly controlled by the principals of First United," stated the regulator.
"The respondents amassed unlawful profits totaling millions of dollars from this activity. Once a customer purchased NMFS or Ashton stock through First United, the respondents employed various illicit methods to prevent that investor from selling the stock. Respondents either bullied investors into abandoning their attempts to sell the stock, or simply failed to execute sell orders."
Seven months later, on Oct. 18, 2001, the SEC launched a second action, targeting the boiler-room promotion of Americom Networks International Inc. from mid-1998 to the end of 1999 by another boiler room, Preston Langley Asset Management, again featuring Mr. Adams.
While these distressing promotions were long dead by the time Thomson Kernaghan and Mr. Valentine came on the scene, most Bay Street brokerages would not touch penny stocks with such a stench. As noted, the actual penny stocks probed by the OSC in its Valentine investigation are not yet known.
© 2002 Canjex Publishing Ltd. All rights reserved.
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