Medical Resorts International Inc - Street Wire
Medical Resorts sub privately touts AIDS cure
Medical Resorts International Inc MDRE
Shares issued 32,928,592 Oct 21 close $0.05
Mon 17 Jul 2000 Street Wire
Also (U:LGNXF)
Also Lignex Inc (LGNX)
Also (U:MRINF)
TRAGEDY, CUPIDITY, STUPIDITY: CAPITALIZING ON MISERY
by Stockwatch Business Reporter
According to information provided to a Stockwatch reporter, Medical Resorts
subsidiary International Biotech (IBC) is privately touting a development
that will stun investors, securities regulators, the scientific community,
giant pharmaceutical companies and quite likely almost everyone who has the
least bit of familiarity with a health problem of global significance,
AIDS. How the reaction to the stunning claim regarding a cure for AIDS,
which has not yet been publicly announced, will play out is an open
question.
In the often bizarre world of penny-stock promotions and outright scams
there are probably few pitches that have not been used in attempts to part
the gullible from their purses and, if possible, their entire savings.
Frequently, the promoters of shells and near-shells will seize on a topical
issue, preferably one that at least hints at a large and potentially
lucrative market, and tout their company's imminent entry into the field,
often with a revolutionary or indispensable product or service. As one wag
has commented, these companies are always looking for the next hot story;
if it happens to be moon rocks, they will soon be promoting a scheme for
the next lunar landing.
There is more than a grain of truth to that quip as anyone can attest who
has paid any attention to the dozens of restructured resource companies and
others scrambling to the Internet, electronic commerce, wireless
applications and so on with the flimsiest of business plans, barely a
nodding acquaintance with the new field and half-baked stories. However,
even among penny-stock promoters of the most dubious character there seems
to be an understanding, perhaps born more out of an instinct for
self-preservation than any sense of moral rectitude, that there are some
lines that just cannot be crossed. An unfounded claim regarding a cure for
AIDS, for example, is a line that few would have the temerity to step over.
AIDS is certainly topical, and has been for many years. Given the terrible
toll that this devastating disease inflicts on its victims and their loved
ones and the fact that it has reached epidemic proportions in some
countries, plunging entire economies into distress and extending the untold
human misery far beyond those suffering the direct effects of AIDS, it is
not surprising that it receives extensive media coverage. It is hard to
imagine that anyone who has followed any of that coverage would not be
moved by the enormity of the suffering caused by this baffling disease.
Even the most obtuse stock promoter or scam artist might shy away from
risking the moral outrage and subsequent regulatory scrutiny that would
undoubtedly follow any attempt to capitalize on such misery by making an
unfounded and irresponsible claim regarding a cure for AIDS.
Of course, there may be another reason why even the shadiest stock
promoters and scam artists might hesitate to float such a story. It might
simply be completely unbelievable to all but a few individuals beset with a
rare combination of extreme cupidity and stupidity. AIDS is a pressing
global concern. AIDS research and the quest for a cure has occupied some of
the most brilliant scientific minds, some of the largest pharmaceutical
companies and some very well-funded public research departments for years,
with hundreds of millions of dollars expended. Cupidity and stupidity can
only be counted on for so much. Even the most skilled storyteller might
have a hard time convincing anyone that an obscure subsidiary of an equally
obscure Canadian company with no cash, no relevant expertise and, by many
accounts, not much of a future has managed to secure the rights to a cure
for AIDS. That and more, however, is exactly the story that Doug Wallace,
president of IBC, has been privately recounting, according to an investor
who acknowledges feeling guilty for not previously commenting "about the
'insider' information" he received.
According to the investor who contacted a Stockwatch reporter and provided
the information on the condition of anonymity, the IBC president claims
that the company has the rights to a cure for AIDS, herpes and hepatitis-C.
Mr. Wallace has been making claims about major clinical trials in both
Mexico and Anguilla and indicating that the "serum" will be receiving
approval from the government of Anguilla, for whatever that might mean or
be worth. Apparently the "cure" involves one injection per week over a
period of eight weeks, which IBC is pleased to offer for approximately
$45,000. Whether to alleviate concerns about potential posterior
sensitivity that might perhaps be heightened by a considerably thinner
wallet or to demonstrate his knowledge of medical terminology, Mr. Wallace
claims that the injections are administered to alternating gluteus cheeks.
About 24,000 cheeks or 12,000 people per year will receive the benefits of
these wondrous injections, according to Mr. Wallace's story.
All of this is top-secret stuff, of course. Well, almost. The unidentified
doctors who developed the secret serum know about it and, by Mr. Wallace's
account, have been busily buying up shares of Medical Resorts, IBC's
parent. Those transactions have purportedly been taking place in the United
States where Medical Resorts trades on the pink sheets. In Canada, where
shares of the company traded on the Canadian Dealing Network, the stock has
been halted since Oct. 21, 1999.
According to Mr. Wallace's story, an insurance company, vaguely identified
as AXA, is also privy to this very secret information. Mr. Wallace says
that AXA offered the unidentified doctors $61-million for a 20-per-cent
unspecified interest, though it is not clear from his account whether the
offer was accepted. In any case, AXA has purportedly been acquiring a large
interest in both Medical Resorts and Lignex, a shell company that proposes
to acquire control of IBC in a cash and share transaction.
Interestingly, AXA is a huge insurance company; in fact, the AXA Group is
the largest asset management company and insurer in the world. As it
happens, "AXA" is also well known in Anguilla, where IBC's parent Medical
Resorts operates its only clinic, though the association there is more
likely to be with the airport code for Anguilla's Wallblake airport, which
is AXA. Those letters are also incorporated into the names of a number of
companies in Anguilla, such as Axa Offshore Management Services. By some
coincidence, Axa Offshore Management is closely associated with Keithley
Lake & Associates, a law firm in Anguilla used by Medical Resorts. Medical
Resorts even provides a link to information regarding Keithley Lake on its
Hotel de Health Web site and the law firm's telephone number is the same as
the one used by Axa Offshore Management.
Of course anyone privately tipped to this enormous news by Mr. Wallace is
also in on the secret. This sensitive information has also been broadly
hinted at on an Internet discussion site, suggesting that the circle of
secret-holders may be quite large. "Doug Wallace told me that IBC was
working on even bigger things and that this stock was going to be worth
much much more than it is now," an anonymous poster proclaimed on Canada
Stockwatch's public Internet forums on June 20. "If you think that the aids
(sic) testing kits are huge think of how big a company would be if they
found a cure for aids?" he mused in a post the following day.
That public musing and subsequent sharp comments from other Internet
posters less inclined to consider such a fantastic possibility seem to have
caused some concern to Mr. Wallace, who contacted Stockwatch by E-mail on
June 23. "It has come to our attention that certian (sic) postings reside
on our unauthorized forum," Mr. Wallace wrote. "These postings are stating
incorrectly that there is a 'CURE' for HIV/AIDS." Perhaps to demonstrate
his legal knowledge, which may rival his medical knowledge, Mr. Wallace
cautioned, "According to the laws of both Canada and USA, this statement
cannot be made and if made, is subject to major fines." It is not clear
whether Mr. Wallace's keen insight into the potential legal ramifications
of making claims regarding a cure for AIDS was gained before or after he
was privately making those very claims and not just some vague musings in
an attempt to lure investment into Medical Resorts and Lignex.
It is not known how many people Mr. Wallace may have deemed suitable to be
entrusted with this fantastic story but it did not ring true to at least
one confidant. "The claims regarding AIDS were particularly unbelievable,"
the investor regaled by Mr. Wallace told a Stockwatch reporter. "I'm teed
off with Doug trying to sucker me into buying LGNX (Lignex)," he said. If
Mr. Wallace was relying on a combination of extreme cupidity and stupidity
to tempt this investor to fall for his pitch, he clearly misjudged his
target. "The least he could have said is, 'Hey, we're running a scam, maybe
you can get in and get out really quick,'" the investor remarked during the
course of an interesting interview.
If it would take a rare combination of extreme cupidity and stupidity to
render such a tale credible, it might well be that only the same rare
combination would prompt someone to concoct and tell such a story so filled
with incongruities. Beyond a claim to the proprietary worldwide rights to
manufacture, market and distribute an HIV testing kit, which is subject to
a U.S. Food and Drug Administration import alert and cannot be sold in that
country and does not appear to have been sold in any other, IBC has no
assets. The suggestion that this company has secretly managed to secure the
rights to an as yet secret cure for AIDS from an unidentified group of
doctors who developed the fantastic serum does not so much stretch the
bounds of credibility as completely shatter them. The convoluted claim that
the unidentified secret serum doctors, who were purportedly offered
$61-million from a vaguely identified insurance company for a 20-per-cent
unspecified interest in the secret serum, have been buying up large chunks
of Medical Resorts on the pink sheets where it has occasionally rocketed to
two cents in the past month simply adds to the incongruity of the tale.
According to the investor who found the claims regarding AIDS unbelievable,
Mr. Wallace is "running scared" in an attempt to recoup a large portion of
his savings that he invested in Medical Resorts. On March 9, 1999, Mr.
Wallace sold his $250,000 Canada Savings Bond to Medical Resorts in return
for 2.5 million shares of the company. Oddly, that transaction was not
disclosed in a material change report until Nov. 25, 1999. Insofar as
trading in the company has been halted since Oct. 21, 1999, it may be a
transaction that Mr. Wallace wishes had never been concluded, let alone
reported. In any case, the incredulous investor believes that Mr. Wallace
is desperately doing anything he can to recover the money. "Even screw his
friends," he said.
Whatever the motivation for fabricating and privately floating this
fantasy, the tale may be of more than passing interest to regulators at the
Ontario Securities Commission (OSC) who have been investigating IBC's
parent, Medical Resorts. They may also be interested in other revelations
regarding IBC, Medical Resorts and Lignex that were incorporated into Mr.
Wallace's private touting, according to the anonymous investor, not to
mention the timing of those claims.
On June 12, Lignex prematurely announced that it had entered into an
agreement to acquire control of IBC for an undisclosed amount of cash and
14.5 million shares of Lignex. The company then scrambled to have the
unauthorized and unapproved release withdrawn. Two days later, Lignex
issued the authorized and approved version of the release, not notably
different from the first. While Lignex's false start may have been
inadvertent, as claimed by director Roger Kirby, Mr. Wallace was even
earlier off the mark, according to the information provided to Stockwatch.
Well before Lignex's "inadvertent" announcement on June 12, Mr. Wallace was
privately and deliberately touting the deal. Given that securities
regulators attach great importance to disclosure issues, insisting that
adherence to disclosure regulations is the cornerstone for maintaining
public confidence in the markets, they are apt to more than just frown at
those who disregard those regulations.
Regulators at the OSC may also be interested in sorting out an apparent
contradiction between Lignex's authorized and approved news release and Mr.
Wallace's private account of the deal. According to Lignex, the proposed
acquisition of control of IBC is an arm's-length transaction. Mr. Wallace
tells a different story, however. By his tale, Medical Resorts, IBC's
parent, owns more than 50 per cent of Lignex. When or if Medical Resorts
will ever get around to publicly disclosing this propitious alleged
investment is anyone's guess. While both Lignex and Mr. Wallace appear to
have jumped the gun with their claims, Medical Resorts has been slow off
the mark of late.
A number of pejorative but undoubtedly warranted adjectives could be used
to characterize such a callous attempt to capitalize on the misery of AIDS,
an attempt that has left some investors shaking their heads in wonder and
disgust. Even more investors wonder at the length of time it is taking the
OSC to acknowledge that IBC's parent, Medical Resorts, has been under
investigation and to release the results of that investigation. According
to several investors who have contacted Stockwatch, it is long past time
for the OSC to bring Medical Resorts to account and put an end to what they
believe are the antics of an incorrigible group of stock promoters with
little or no regard for securities regulations.
Concerns about compliance with securities regulations may be
understandable, given that both Medical Resorts president Robert Talbot and
Mr. Wallace have run afoul of the Alberta Securities Commission (ASC). In
February of 1996, Mr. Talbot, Hotel de Health, Page Edgar, Paul Owens and
Richard Cholach reached a settlement agreement with the ASC for breaches of
securities regulations relating to subscription agreements for shares of
Hotel de Health. Mr. Talbot was barred from trading securities or acting as
a director or officer of any issuer for nine months. More recently, Mr.
Wallace was among eight respondents, including Mr. Talbot's former Hotel de
Health associate Mr. Cholach, named by the ASC in November of 1999 for
similar breaches in connection with National Gaming Corp. Mr. Wallace
reached a settlement agreement with the ASC earlier this year.
Those concerns are not likely to be allayed by reviewing the often
bewildering disclosures by Medical Resorts and its subsidiary IBC. In a
SEDAR filing on Nov. 5, 1999, for example, Medical Resorts reported that it
had increased its interest in Seafeathers Bay Medical Resorts on Sept. 20
from 25 per cent to 45 per cent by issuing 14,804,209 shares at a deemed
value of 16.2 cents per share. Seafeathers holds the property housing
Medical Resorts' clinic in Anguilla. Curiously, the notes to the
consolidated financial statements for the years ended June 30, 1998, and
1997, indicate that Medical Resorts had already increased its equity in
Seafeathers to 45 per cent during 1998 at a cost of $2.4-million.
More curiously yet, another Nov. 5, 1999, SEDAR filing reported that
Medical Resorts had increased its position in Seafeathers from 45 per cent
to 78 per cent as of June 30, 1999, by issuing 35,357,142 shares at a
deemed price of 11.2 cents per share to 18 corporations and individuals.
The material change report claims that all transactions were at arm's
length but it does not bother to explain why another material change report
filed on the same day indicates that Medical Resorts did not hold the
45-per-cent interest that was to be increased to 78 per cent as of June 30
until Sept 20.
Beyond the fact that the company seems to have been a tad tardy in
reporting transactions apparently involving issuing more than 50 million
shares, something that was not done until after the stock had been halted
by the CDN on Oct. 21, 1999, investors may well have been scratching their
heads over whether Medical Resorts owned 78 per cent of Seafeathers or 103
per cent of it. Trying to tease the answer to that out of the company's
financial statements might lead to hair pulling rather than just head
scratching. According to the notes to the financial statements for the year
ended June 30, 1999, which were filed on Nov. 17, Medical Resorts held 49.6
per cent of Seafeathers at the end of that year. Moreover, the same notes
indicate that the company held 36 per cent of Seafeathers at the end of the
previous year, not the 45 per cent reported in the 1998 financial
statements.
Skipping ahead to Jan. 17, 2000, another SEDAR filing has Medical Resorts
reporting that, at an annual and general shareholders meeting of that date,
approval was given to increase the company's interest in Seafeathers from
25 per cent to 63 per cent by issuing 34 million shares. Under this version
of the company's wildly fluctuating accounts of its interest in
Seafeathers, the 34 million shares were issued to nine individuals or
corporations, with one of the individuals being at non-arm's length.
The company was also tardy in reporting a private placement apparently
completed on Aug. 23, 1999. The first notice of that financing was filed in
a material change report on Nov. 25 along with the disclosure that Medical
Resorts had purchased a $250,000 Canada Savings Bond from Mr. Wallace on
March 9 in exchange for 2.5 million shares of the company. According to the
Nov. 25 SEDAR filing, the Aug. 23 private placement of 2,884,000 shares at
six cents per share had been completed with the Goldfarb Family Trust and
the Susskind Family Trust of Los Angeles, Calif. An investor reading that
material change report might be pardoned for thinking that a total of
2,884,000 shares were issued in that placement. However, the Jan 17, 2000,
SEDAR filing following the shareholders meeting seems to indicate that the
total was double that, or at least close.
According to the information in that filing, shareholders approved private
placements of 8,128,000 shares, 2.5 million of which went to Mr. Wallace in
exchange for his Canada Savings Bond. The only other private placement
mentioned in the account is the one involving the Goldfarb Family Trust and
the Susskind Family Trust for 2,884,000 shares. That clearly does not
account for the placement of 8,128,000 shares that was approved. Then
again, simply doubling the Goldfarb and Susskind placement on the
assumption that each subscribed for 2,884,000 shares would mean that
140,000 more shares were issued than were authorized. However, in the grand
scheme of things related to Medical Resorts, quibbling over 140,000 shares
may be picayune.
If Medical Resorts' record with respect to disclosure of material changes
leaves something to be desired, its record with respect to filing insider
trading reports is atrocious. Indeed, anyone conducting an on-line search
of OSC insider reports for Medical Resorts might be left with the
impression that the company only had one insider, Robert Burgener, the
company's former lawyer. Of course, that is far from the case. An
information circular distributed in advance of the annual general meeting
on Jan. 15, 1998, for example, shows that both Mr. Talbot and Mr. Wallace,
among others, were beneficial owners of shares of Medical Resorts. Mr.
Talbot reportedly held 3,794,416 shares at that time while Mr. Wallace,
then a director of Medical Resorts, tallied a paltry 100,000 shares. Ms.
Edgar, Mr. Talbot's wife was the beneficial owner of 4,031,916 shares. How
many of those shares they presently hold is anyone's guess, as is the
disposition of the many millions of options granted to officers, directors
and employees. Filing insider trading reports evidently was not high on the
company's list of priorities.
If any of that is puzzling, and it should be, the convoluted tale
surrounding IBC is no less of an enigma. According to a Feb. 4, 1999, news
release, Medical Resorts acquired 60 per cent of IBC in return for two
million shares. By July 23, 1999, that stake had mysteriously increased.
Unveiling a dividend in specie scheme through which Medical Resorts
proposed to issue three million shares of IBC on a pro rata basis to
shareholders of Medical Resorts, the company claimed that IBC was a wholly
owned subsidiary. Apparently that status had changed by Sept. 15, though
shareholders were blissfully unaware of their now-shrunken interest in IBC
until another of the Nov. 5 material change reports showed up on SEDAR. By
that report, Medical Resorts had acquired 86 per cent of IBC, not through a
share transaction but by the expenditure of $315,000. However, another
surprise was in store for any investor who happened to be tracking
developments through SEDAR.
The dividend in specie scheme was contingent upon IBC filing a prospectus
and becoming a reporting issuer. The preliminary prospectus filed on Dec.
30, 1999, tells a remarkably different story regarding the relationship
between Medical Resorts and IBC. According to that account, IBC was
incorporated in Alberta as a wholly owned subsidiary of Medical Resorts
just two days prior to the Feb. 4 announcement by Medical Resorts that it
had acquired 60 per cent of the company in a share transaction.
Given all the puzzling transactions and tardy or non-existent disclosures,
the concern of some investors about Medical Resorts and IBC's regard for
securities regulations may indeed be understandable. At the same time, some
consideration for the position of the OSC may be warranted. Medical Resorts
is only one of more than 100 active files under investigation by the OSC
and, as large as that bureaucracy is, its enforcement resources are still
limited. For its part, the OSC will not comment on whether there is an
investigation or even whether complaints have been filed regarding Medical
Resorts or, more recently, Lignex. Nonetheless, it is quite clear that the
OSC would be very interested in hearing from investors who have concerns
about either company.
Lignex has scheduled an annual and special shareholders meeting for July 20
at which the proposal to acquire a controlling interest in Medical Resorts'
subsidiary IBC will be put forward for approval. In the meantime, Lignex
continues to trade in the reported CDN market, closing at 17 cents on July
14. It also trades on the pink sheets in the U.S., where it closed at 10.5
cents on Friday. Medical Resorts is halted in Canada but is trading on the
U.S. pink sheets, closing at one cent on July 14.
(Further information regarding Medical Resorts and Lignex can be found in
Stockwatch articles dated June 30, July 4 and July 5, 2000. Earlier
Stockwatch articles regarding Medical Resorts were published on March 29,
1999, March 30, 1999, and April 12, 1999.)
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