RE:Chell Group
Ontario Securities Commission *OSC
Monday June 24 2002 Street Wire.
Also Investment Dealers Association of Canada (*IDA) Street Wire.
by Brent Mudry
In a prospective fitting epitaph for the career of Bay Street broker Mark
Edward Valentine and the once-respectable firm he headed, Thomson Kernaghan,
the flameout financier's regulatory downfall centers on a series of dubious
transactions with the brash Calgary tech penny stock promoter he partied
heartily with: banned broker Cameron Chell.
In a 16-page statement of allegations released Monday, the Ontario Securities
Commission, based partly on an internal probe by Thomson Kernaghan and a
regulatory probe by the Investment Dealers Association of Canada, detailed
numerous serious regulatory violations by Mr. Valentine. The citation comes
one week after the OSC imposed an emergency 15-day suspension on Mr. Valentine
June 17 and 11 days after Thomson Kernaghan quietly terminated him as chairman
and barred him from its premises.
The allegations center largely on transactions by Canadian Advantage Limited
Partnership, the flagship Thomson Kernaghan hedge fund headed by Mr.
Valentine, related to Mr. Chell and two of his public companies: Jawz Inc. and
C Me Run Corp., included one of Thomson Kernaghan's notable death spiral
financings. Mr. Valentine is also cited for a peculiar deal in which the CALP
funds paid $1.3-million to one of his offshore companies for a defunct
debenture of a disastrous Howe Street penny stock promotion: Ikar Mineral,
which featured controversial financiers Bumen Shefik and Lee Gahr. (All
figures are in U.S. dollars unless otherwise noted.)
The OSC claims Mr. Valentine, who wore more hats than Dr. Seuss's Cat in the
Hat, created and fostered, and prospered from, a "culture of conflict and
non-compliance at TK" and breached Ontario securities laws as a result. While
Thomson Kernaghan and its other members of senior management are not cited,
the free reign given to Mr. Valentine should have raised more alarms than a
blazing building. Amongst Mr. Valentine's numerous and often conflicting
multiple roles were his positions as registered representative of the CALP
funds and related funds, president and shareholder of the funds' general
partner, chairman and controlling shareholder of Thomson Kernaghan, and either
registered representative or shareholder, or both, of several offshore
accounts.
In what can only be described as an incredibly cocky, or incredibly stupid,
pattern, the transactions at the heart of the OSC, IDA and TK probes mostly
took place this spring, at a time when auditors, lawyers and regulators were
examining Thomson Kernaghan's assets and deals with a fine-toothed comb amid a
proposed merger with another Eastern Canadian brokerage, Research Capital.
Mr. Valentine had a particularly close relationship with Mr. Chell, who also
served as shareholder and chairman of the general partner Thomson Kernaghan's
VC Advantage Fund LP. Despite his baggage, Mr. Chell passed the sniff test
with Mr. Valentine, who has a remarkable talent for sniffing out troubled
stock promoters and dubious stock promotions.
Mr. Chell, formerly a broker with McDermid St. Lawrence Securities in Calgary,
was kicked out of the industry in November, 1998, in a consent settlement with
the former Alberta Stock Exchange featuring a five-year ban, strict
supervision for two years if he returned, and a $25,000 (Canadian) fine. The
ASE is now part of the TSX Venture Exchange, and officials of the exchange in
both Vancouver and Calgary claim that all historic regulatory records are
available only at headquarters in Toronto, which had closed by the time the
OSC released its Valentine prosecution.
Media accounts noted the ASE accused Mr. Chell of securities violations on
three client accounts in 1996, including unauthorized and unregistered trading
and dealing with forged instructions in one case. "We weren't paying enough
attention to every single investor, shareholder or client I had. Mistakes
happen because of it and I got my wrist slapped," Mr. Chell told Canadian
Business magazine.
Mr. Chell was charged under the Criminal Code of Canada with knowingly causing
his assistant, Diana Christine Eades, to forge a client's account-opening
signature. "While the evidence creates a strong suspicion, the inconsistencies
and conflicts in the assistant's testimony, the great passage of time and the
acknowledged memory lapses all leave some doubt," ruled the Alberta judge, who
acquitted Mr. Chell in September, 1999. While the banned broker had been
forced to temporarily step aside of FutureLink Distribution, his much-hyped
application services provider promotion, amid a planned $50-million (U.S.)
financing, he returned to prominence after his name was cleared in criminal
court.
Mr. Chell's legendary profile received a fine boost last July when National
Post Business toasted him as No. 6 on its list of the 40 wealthiest Canadians
under the age of 40. The monthly glossy magazine of the National Post
newspaper ranked Mr. Chell, then a tender 32-year-old, as wealthier than
singer Celine Dion, worth $164-million, comic Jim Carrey, worth $140-million,
and retired NHL icon Wayne Gretzky, worth just $116-million. (All Top 40
figures are in Canadian dollars.) The magazine claimed Mr. Chell's Chell
Merchant Group, founded in 1996, earned $1-billion in its first three years
and had revenues of $20-million in 2000.
Even more impressive was Mr. Chell's reported athletic career in the
decathlon. "Just missed making the '92 Olympic team," stated the article. This
was quite remarkable, as Canadian track and field statisticians Cecil Smith
and Andy Buckstein, in their exhaustive list of Canadian outdoor all-time
rankings as of Dec. 31, 1999, credited Mr. Chell with the 56th highest of 68
scores recorded, posted at the Visa Invitational meet in San Francisco in
March, 1992, four months before the 1992 Games in Barcelona.
Unless Mr. Valentine succeeds at fighting the OSC charges, the regulatory
prosecution will seriously tarnish the reputation of not just himself but Mr.
Chell.
The OSC notes that Thomson Kernaghan's management committee sought an
explanation from Mr. Valentine on May 7 about suspicious trading in CALP
funds, began an internal investigation, and terminated him five weeks later,
on June 13. The two series of dubious transactions, conducted by Mr. Valentine
on March 28, when the funds were effectively frozen due to the pending
Research Capital merger, involved numerous trades, including trading in the
funds' accounts, in Mr. Valentine's own accounts and in other Thomson
Kernaghan client accounts.
The first dubious transaction is dubbed "The Chell Transaction" by regulators,
while the second relates to Ikar.
In the Chell deal, Mr. Valentine's pro account received 1.06 million shares of
Chell Group Corp. from the main CALP fund without any cash consideration. Mr.
Valentine claims these shares were to settle $1.06-million CALP supposedly
owed him personally. He claims he loaned CALP $360,000 last July and a further
$700,000 this January.
On March 28, after receiving these Chell Group shares, Mr. Valentine sold one
million shares to his inventory account, 375,000 shares from his inventory
account to the VC fund for $750,000, an identical sale from his inventory
account to the VC Bermuda offshore fund, and 250,000 shares for $500,000 to
another Thomson Kernaghan retail client. In its internal probe, Thomson
Kernaghan found a number of discrepancies and irregularities in this Chell
deal.
In the Ikar deal, the CALP funds paid $1.3-million on March 28 to Hammock
Group Ltd., an offshore company in Bermuda controlled by Mr. Valentine, for a
defunct debenture of Ikar Minerals. The OSC notes the 1998 debenture had
expired two years earlier, in March, 2000. Again, Mr. Valentine claimed this
was to settle a $1.58-million debt the CALP funds owed him.
The explanation was more revealing, and perhaps even damning, than the main
transaction. According to Mr. Valentine, his offshore Hammock paid CALP
$537,000 for 653,000 shares of Jawz, one of Mr. Chell's promotions, at 82
cents. Mr. Valentine claims he did this to help the CALP funds meet their
margin requirements, and the funds guaranteed the Jawz investment by
indemnifying Hammock for any potential losses. Over the next three weeks,
Hammock sold the Jawz shares at an average price of about 22 cents, generating
a loss of $387,000, for which CALP would purportedly reimburse the offshore
holding company.
The next part of this convoluted daisy chain involved CALP selling short
900,000 shares of Global Path to Hammock for supposed net proceeds of
$1.19-million, according to Mr. Valentine. The deal supposedly flopped, but
Mr. Valentine pulled another rabbit out of the hat, a defunct $1.3-million
Ikar debenture owned by another of his companies, VMH. Through these, and
several subsequent stages, Mr. Valentine hoped to rectify the transaction.
Ikar, in fitting with many penny stocks favoured by Mr. Valentine, had quite a
stench. In March, 1999, the United States Securities and Exchange Commission
imposed a 10-day suspension of trading in shares of Ikar , a controversial
bulletin board promotion based in North Vancouver. In its suspension notice,
the SEC cited questions about the accuracy and adequacy of Ikar's public
disclosures, including its purported agreement between Ikar and European
American Resources, also known as EPAR, a bulletin board promotion based in
the Florida town of Clearwater.
The SEC temporary suspension came four months after Ikar filed suit in the
Supreme Court of British Columbia over allegations of an intriguing short
selling scheme by a purported offshore bank. Stockwatch reported on Nov. 20,
1998, that Ikar sued Renfrew Security Bank & Trust, Bumen and Mogjan Shefik
and Lee Gahr. Ikar claims Renfrew is based in Nicosia, Cyprus, although it has
a Canadian office at an unknown location. Bumen Shefik, the chairman and chief
executive of the supposed bank, lives with his wife Mojgan Shefik in West
Vancouver.
Mr. Shefik's assistant, Mr. Gahr, was banned for life by the SEC in April from
any involvement in any penny stock offering, resulting from his fraudulent
promotion of Chill Tech Industries Inc. on the OTC Bulletin Board between
September, 1998, and May, 2000. The broad ban came eight months after the SEC
fined Mr. Gahr, Chill Tech's former chief operating officer, $493,000 last
August in a default judgment entered in United States District Court for the
District of Nevada, representing double his $246,400 in illicit profits.
Perhaps the most intriguing Valentine transactions cited by the OSC were a
series of deals in a Thomson Kernaghan death spiral financing of Mr. Chell's
Jawz. "After Valentine caused the funds to acquire the (floorless) warrants,
TK's research department issued a 'buy' recommendation for JAWZ in November,
2000. TK did not disclose to all its clients that JAWZ had entered into this
kind of financing, that the warrants were held by another TK client, or that
the chairman of TK was the general partner of the holder of the 'death spiral'
warrants," states the OSC.
Although not complete, the OSC also included some disturbing details about Mr.
Valentine's involvement in another Chell promotion, C Me Run, through an
offshore account in Bermuda, Ashland Resources, which features Mr. Valentine
as its broker. Although the beneficial owner is not yet known, the trading
nominee, Paul Lemmon of Bermuda, is also the trading nominee for Mr.
Valentine's Hammock offshore account.
The OSC claims that in a preliminary review of year 2000 trades, Thomson
Kernaghan funds were a net buyer of C Me Run shares, while the offshore
accounts, including Ashland, were on the other side of the trades. "The net
effect of the funds's numerous trades of C Me Run was a loss of almost
$4.5-million, while the net effect for Ashland Resources was a trading profit
or almost $6.4-million," states the OSC.
There are no allegations that Mr. Chell, the promoter of Jawz and C Me Run,
had the faintest clue what his close associate Mr. Valentine was up to.
(c) Copyright 2002 Canjex Publishing Ltd. stockwatch.com |
