re:SEDONA/LOM/OTC JOURNAL->Clients stood to benefit from suspect stock sales – claim
LOM Logo Scott Lines, Donald Lines and Brian Lines
Clients of investment firm Lines Overseas Management stood to profit from the alleged manipulation of a penny stock now under investigation by the US Securities and Exchange Commission, according to a court filing.
The SEC filing, first reported on yesterday by Miami-based newsletter Inside Bermuda, said the clients bought a total of 100,000 shares in Sedona Software Solutions from ICH Investments, a firm the SEC alleges is controlled by LOM principals Scott and Brian Lines.
The clients, who included directors such as company lawyer Graham Collis and Susan Wilson, senior employees like CFO Malcolm Moseley, and relatives of the Lines brothers, bought the shares for $4 a share on January 21, 2003 when the market price for the shares was $9.
In addition the SEC filing alleged that Scott Lines, the chief executive officer of LOM, and Brian Lines, the firm's president, also profited from the sales.
"Even though Brian and Scott Lines sold these shares for $4 per share, they still profited from these sales because they had purchased the Sedona shares for approximately seven cents per share," the SEC filing said.
The filing alleged that the sale of the shares took place four days after Sedona's stock price had been boosted by the issuance of a Press release which the regulator claims was misleading in that it did not disclose LOM's involvement with the buyer and seller in a merger deal.
By the time the SEC temporarily suspended trading of Sedona shares for suspected stock manipulation eight days later, LOM's clients had sold 13,000 of the Sedona shares "into the US market for a profit" even though their stock was "apparently restricted" and "could not be sold over US markets for at least one year and, even then, under certain restrictions", the filing said.
Inside Bermuda reported: "Those who did not sell prior to the suspension of trading avoided potential losses from the subsequent collapse of the stock price when, according to the SEC, LOM cancelled the transfers of shares from the ICH account."
LOM vice president of compliance Scott Hill said the company could not comment on the SEC allegations because it was pending before the courts.
"The information contained in the KYC News article was taken from the SEC's last court filings in advance of the subpoena enforcement hearing now scheduled for December 10," he said.
"Because this matter is pending in the courts, we are unable to comment on the specific allegations at this time. However we look forward to getting into court and having the SEC's allegations reviewed by a federal judge where all the facts can be considered."
According to an exhibit filed by the SEC at the US District Court for the District of Columbia on October 13, the purchasers of the discounted shares included Daisy Alexandra Lines, Francesca Elizabeth Lines, Sharon Lines, representing Nicholas Lines and Ben Lines, who are both minors; Graham Collis, Susan Wilson, Graham Redford, Kevin Winter, Kevin Christopher Way, Dave McNay, Ian Brown, Stuart M. Smith, Malcolm Moseley, Kim Moseley, Robert L. Moore, Bente Ahern, Christopher Maurice White, John Cook, Derek Lee, Constanzo Di Meglio, James Parris, Sharon Parris, James Parris Jr., Don Petkau, Derricka Brangman, Richard Paynter, Debra-Ann Paynter, Bermuda Overseas Investors Limited, First Edinburgh Securities, Clover Capital Corporation, Quindone Investments Ltd., Bart Holdings Ltd., Bably Ltd., Median Ltd., and Gigco Holdings Ltd.
Inside Bermuda said most of those identified in the exhibit bought between 500 and 2,000 of the discounted shares, although some purchased more, including Constanzo Di Meglio, who works for Bermuda's Little Venice restaurant chain, who allegedly received 5,000 shares.
Mr. Collis, a partner with Bermuda's biggest law firm, Conyers, Dill & Pearman, and a director of LOM (Holdings) Ltd., received 1,500 shares. Mrs. Wilson, who is chief executive officer of Masters Ltd. and who is also head of LOM's Audit Committee, received 1,000 shares, according to the SEC.
Mr. Collis did not respond to questions emailed to him by Inside Bermuda asking about his alleged acquisition.
According to the SEC's Washington DC branch chief, attorney Michael Ungar, ICH Investments Ltd. – whose alleged nominal head was Kevin Way – was one of several companies that acted as nominees for Scott Lines, Brian Lines and/or LOM customers. Others included Gateway Research Management Group Limited and SKN Holdings Ltd. (both allegedly nominally headed by Kevin Winter); Clyde Resources Ltd. (Graham Redford), Warwick Ventures Ltd. (Stuart Smith), Iguana Investments Ltd. and Nottinghill Resources Ltd. (both Richard King), Consensus Investments Ltd. (Eric Collins), and Aberdeen Holdings Ltd. (Michael Heslop).
Nominees for the Lines brothers were compensated by receiving stock at a steep discount to its trading price, according to the SEC. Promoters were also compensated with shares, plus cash, to promote penny stocks associated with LOM and/or two of its clients, James Curtis and Todd Peever, it was alleged.
Two of the compensated "touters" were identified as Intrepid Investor, which has a mailing list of "almost one million people", and OTC Journal, which has "over one million subscribers".
Details of the alleged discounted sales to privileged insiders and alleged compensation to stock promoters were disclosed in court filings by the SEC during October as it seeks to force LOM and Scott Lines to comply with four subpoenas for records and testimony concerning two separate investigations into alleged securities fraud involving Sedona Software Solutions Inc. and SHEP Technologies Inc., both of Vancouver, Canada, and HiEnergy Technologies Inc., of Irvine, California.
LOM and Mr. Lines contend that the United States does not have jurisdiction over them and that they are prohibited from disclosing some of the information being sought due to secrecy provisions of laws in Bermuda, the Bahamas and the Cayman Islands, where LOM has offices.
As part of an attempt to establish that LOM has sufficient ties to the United States to meet jurisdictional requirements, Ungar claimed that LOM executed substantial volumes of trades with the US operations of vFinance Investments Inc., Schwab Capital Markets LLC, and Sterne, Agee Capital Markets and also did business with CIBC Mellon Securities Trust Company, in New York.
"The volume of LOM's US trading, whether on behalf of its customers or its own accounts, is staggering," stated Mr. Ungar. "For example, in LOM's account at Schwab, during a two-week period in 2003 – the same year in which the SHEP and Sedona transactions in question occurred – LOM bought or sold, on over 4,000 different occasions, a total of 151 million shares of US securities traded over various US securities markets."
The trader at Florida-based vFinance who was in charge of LOM's account testified that "LOM's trading over the US markets was more than the trading of most US regional banks" and that he "either accumulated or liquidated millions of shares a day for them", stated Mr. Ungar.
In arguing that it was prohibited by offshore secrecy laws from disclosing certain information to the SEC, LOM had submitted declarations from attorneys Paul Smith, of Conyers, Dill & Pearman, in Bermuda; Michael Paton, of Lennox Paton, in the Bahamas; and Richard Fear, of Charles Adams, Ritchie & Duckworth, in the Cayman Islands.
The SEC countered these arguments by submitting declarations from attorneys Dennis Dwyer, of Wakefield Quin, in Bermuda; Emanuel Alexiou, of Alexiou Knowles & Co., in the Bahamas; and Charles Quin, of Quin & Hampson, in Cayman, who each stated there were legal gateways available that allowed compliance with such subpoenas if those served with them actually wanted to comply.
LOM had also claimed that it was prevented – upon pain of criminal punishment – from turning over telephone records to the SEC but Mr. Dwyer declared that the provision of Bermuda's Telecommunications Act that LOM cited only applied to "the interception of telephone conversations".
The Act "provides exceptions for telephone conversations maintained for quality control purposes" and "disclosure of confidential information is permitted on the grounds of public interest", stated Mr. Dwyer.
The current action at the US District Court for the District of Columbia was initiated on June 10, 2004 when the SEC filed an application for an order to show cause why LOM and Scott Lines should not be ordered to comply with its subpoenas. The court has re-scheduled a hearing to determine the issues of the case for December 10, 2004.
LOM said it yesterday filed a supplemental declaration with the court on behalf of Scott Lines responding to an SEC affidavit alleging that Scott Lines was "not truthful" in a declaration filed with the court, and that he did not leave Miami until April 21 as opposed to April 20 as noted in his initial declaration.
LOM said the supplemental declaration refutes the SEC claim and confirms that he did in fact leave Miami on April 20. |
