Miltec a scam, allege angry investors
Miltec Technology Inc MITI
Shares issued 25,268,824 Nov 24 close $0.80
Wed 24 Nov 99 Street Wire
THE MILTEC MAZE
by Stockwatch Business Reporter
Angry investors from Europe and Asia claim that they have been duped into
buying shares of Miltec Technology Inc. and that the Toronto-based company
is a scam. Miltec carries on operations through its wholly owned subsidiary
Miltec Technology Solutions Inc., a late entrant to the competitive field
of companies offering computer software solutions for testing Year 2000
(Y2K) compliance. Miltec chairman Howard Hanick, who has been fielding many
calls from disgruntled European investors, denies that Miltec is a scam. He
contends that the company's business plan simply did not work out. "It was
an honest disappointment," says Mr. Hanick.
In its promotional literature, Miltec cites an estimated $600-billion
(U.S.) market for Y2K compliance, with 50 per cent of that related to
testing. If Miltec's business plan envisioned capturing a meaningful
portion of that market, the extent of the disappointment is indicated in
the company's financial statements. For the nine months ended Aug. 31,
1999, Miltec generated a meagre $117,828 in revenue. According to Mr.
Hanick, some of that revenue came from "look-see contracts" but the
majority of it came from a contract with a retail lumber company. In
January, Miltec announced that it had won a contract with a "retail lumber
giant," following up with another flashy announcement in April that the
project had been expanded. The financial terms of the contract were not
disclosed, nor would Mr. Hanick disclose the name of the company.
Mr. Hanick suggested that the Y2K market had not reached the levels
predicted by analysts such as the Gartner Group, frequently cited in
Miltec's literature. Moreover, according to Mr. Hanick, many companies used
in-house resources to address Y2K issues. After offering his thoughts on
Miltec's dismal performance, he remarked that it was not really his area of
expertise. "I look after the numbers, not the business," he said.
Mr. Hanick also looks after the numbers for another publicly traded
company, Pinetree Capital Corp., in his role as chief financial officer. In
fact, Pinetree and Miltec share the same corporate address, along with some
other companies with ties to Mr. Hanick and other Miltec directors,
including Treat Systems Inc. and Genevest Inc. According to the
receptionist, "Mr. Hanick is the only one in the office who handles
Miltec." When asked about the $157,836 in office and general expenses
through nine months, Mr. Hanick replied that he did not know how that was
broken down but a substantial portion was related to the Web site,
marketing, and early product development costs. He did not know what
portion was attributed to the costs of the shared office.
While candidly acknowledging Miltec's less than auspicious performance in
the Y2K market, Mr. Hanick holds out some hope for the company in other
areas. According to Mr. Hanick, Miltec is looking at some deals to increase
shareholder value. Miltec was evidently entertaining ideas of
diversification earlier in the year. In February, Miltec announced that it
had entered into a letter of intent to acquire Castleweb Ltd., rather
lavishly described as a Web site development company focusing on Web
creation services and strategic Internet consulting. The proposed share
transaction would have seen Miltec issue 800,000 shares at a deemed value
of $1.55 per share to acquire the company. The news release directed
investors to the "first class" Web site developed and owned by Castleweb at
Topiaryart.com, perhaps as an indication of what Miltec would be receiving
for the deemed $1.24-million. (Topiary is the art of clipping shrubs into
ornamental shapes.) Asked whether the acquisition of Castleweb Ltd. had
collapsed, Mr. Hanick replied: "It didn't collapse; it just didn't go
ahead. Castleweb is still on the table." In spite of that characterization
of the status of the deal, Mr. Hanick does not think it is likely that it
will be completed. He did not elaborate on any other deals that Miltec may
be considering.
Many investors do not share Mr. Hanick's hopeful outlook for Miltec's
future or his assessment of the company's past performance as "an honest
disappointment." Forsaking any attempt at a euphemistic turn of phrase,
they claim that Miltec is a fraud. Some have attempted to wend their way
through the maze of Miltec's corporate structure and public disclosures,
the peculiarities of trading on the Canadian Dealing Network, the shady
tactics of a brokerage firm operating from the Turks and Caicos Islands,
and a patchwork of securities regulators, among other things. They are
clearly convinced that Miltec could give topiary aficionados some insights
into the art of making something appear to be other than what it is.
Miltec certainly fits the general profile of penny-stock scams sketched by
securities regulators in off-the-record conversations. Such scams, which
may collectively fleece investors out of billions of dollars every year,
frequently feature the following: a reverse takeover; a large percentage of
the company's stock issued in a share transaction; entry into a hot field
with a new product; puffed-up news releases; peculiar trading patterns on
an over-the-counter market; no reported insider trading; and, among other
things, the boiler-room tactics of a shady brokerage firm. Whether by
accident or design, Miltec exhibits a number of those features.
In a special meeting on Sept. 10, 1998, shareholders of Interfirst
Resources Inc. were asked to approve a share exchange agreement whereby the
company would acquire all of the shares of Miltec Technology Solutions by
issuing 150 million common shares of Interfirst. At the time, Interfirst
had 1,612,705 shares outstanding.
To help with the determination, shareholders were provided with an
independent valuation of Miltec setting the fair market value at
$4.2-million; an audited balance sheet reporting current assets of $100,000
in cash and current liabilities of $103,100 representing shareholder
advances; and an information booklet provided by Miltec, outlining the
company's business plan in vague but superficially impressive terms.
The detailed report in support of the $4.2-million valuation was not
included in the information provided to shareholders and an interview
request to the author, Rex McCafferty, has not been acknowledged. Exactly
how Mr. McCafferty arrived at that value may well remain a mystery to
investors relying on documents filed through SEDAR. Given the insignificant
tangible assets reported in the balance sheet and the fact that Miltec
Technology Solutions was incorporated on June 29, 1998, just over a month
before Mr. McCafferty's Aug. 6 valuation, some scepticism regarding that
valuation may be understandable.
Nonetheless, the reverse takeover was approved, as was a name change and a
share consolidation on the basis of one new share for every six old shares.
The upshot of the transaction was that Interfirst became Miltec Technology
Inc. (Miltec) and Miltec Technology Solutions Inc. (Solutions) became its
wholly owned subsidiary. Another result of the transaction was that the
shareholders of Solutions ended up with 98.9 per cent of Miltec's
25,268,784 shares. The identity of those shareholders is another mystery.
According to documents filed in support of the transaction, the officers
and directors of Solutions at the time of incorporation consisted of Zale
Tabakman and Howard Hanick. In a recent interview, Mr. Hanick could not
recall the names of the original stakeholders controlling the company's 100
shares and, subsequently, 98.9 per cent of Miltec's shares but he was not
among them. Somewhat oddly, none of the most recently elected five
directors of Miltec, including president Zale Tabakman and chairman Howard
Hanick, held any shares of the company as of June 1, 1999, according to an
information circular distributed in advance of the annual meeting on July
28. "Yes, it does seem peculiar," Mr. Hanick remarked when asked about the
absence of any holdings by the directors. No insider trading has ever been
reported for Miltec.
Mr. Hanick said that he could not speak for the other directors but he did
not own any shares of Miltec. He noted that Mr. Tabakman does have an
employment contract with Miltec. Mr. Tabakman did not respond to an
interview request that Mr. Hanick offered to deliver and attempts to reach
him through Miltec's automated directory service were unsuccessful. Public
documents indicate that Mr. Tabakman's contract includes a base salary and
equity participation upon achieving certain revenue milestones. His annual
salary for 1998 was $31,500 and there has not been any reported equity
participation. As for Mr. Hanick, his services "are just there."
Miltec does have other employees, though the number seems to fluctuate
rather dramatically. At the time of the reverse takeover, Solutions
reported that it had five employees. In a document filed with Industry
Canada less than two months later, Mr. Tabakman reported that Miltec had 25
employees working from its Ontario location. Miltec's Web site leaves the
impression that the company is looking for even more employees: "Mil-Tec is
growing at an incredible pace. We need terrific people who want an exciting
and challenging career." According to Mr. Hanick, however, Miltec has three
employees and the company contracts consultants. Asked how many consultants
the company had, he replied, "None, at present."
If Miltec seems somewhat mysterious and obscure, trading on the Canadian
Dealing Network (CDN) may be no less so for many investors. The CDN is an
over-the-counter stock market, a network of securities dealers who trade
unlisted stocks over the telephone. It also provides an electronic system
that displays the dealers' bid and ask quotations. The system was
established in 1986 by the Ontario Securities Commission and operating
authority and responsibility for the regulation of the market was
transferred to CDN on March 1, 1991.
There are significant differences between a stock exchange and the CDN. A
stock exchange, such as the Toronto Stock Exchange, is a continuous auction
market where orders are matched at the best available price. Any orders
that improve the existing market are reflected in the current quotation,
whether those orders are entered by an investor or a dealer. The CDN,
however, is a negotiated market where only dealers' bid and ask quotations
are entered by dealers acting as market-makers. Individual investors'
orders are not entered into the market or displayed on the electronic
quotation system.
Perhaps the most unfamiliar aspect of the CDN is the role of the
market-maker. The market-maker is a dealer who, as the name suggests, makes
a market in a particular stock. The market-maker generally maintains an
inventory of that stock, selling to investors who want to purchase it and
buying it from those who want to sell. That may seem straightforward enough
but it must be remembered that the market-maker is also the one displaying
the bid and ask quotations, the highest price at which he is willing to buy
the stock and the lowest price at which he is willing to sell. If an
investor places an order through a broker that falls somewhere between
those prices, not only is the market-maker under no obligation to fill the
order but no other investors will even see it. Moreover, there is sometimes
a huge difference between the price a market-maker is willing to pay for a
stock and the price at which he will sell it.
During live trading hours, dealers are required to report trades on the CDN
system within three minutes. In the case of a few stocks, however, no
transactions are reported during live trading hours; instead, transactions
are reported en masse after the market has closed. Miltec is one such
stock. This makes it impossible for an investor to track the volume and
price of individual trades. According to the CDN, state-of-the-art computer
programs are used to monitor trading and if unusual trading activity is
detected, the company is asked for an explanation. In July, a Stockwatch
reporter asked a former broker and veteran market observer to examine the
52-week trading chart for Miltec. Without the aid of sophisticated computer
programs, he offered a terse assessment: "It's a rig-job, pure and simple.
Presumably the rigger, who is spending some time every day manufacturing
his high close, is no pro." A review of Miltec's trading summaries from
Oct. 6, 1998, when it first traded, to Nov. 19, 1999, shows that the stock
rarely closed below its daily high. If those high closes were manufactured,
the rigger was apparently enough of a professional to avoid detection by
the CDN's state-of-the-art computer programs.
Matters are made even murkier when the boiler-room tactics of a rogue
brokerage firm are added to the mix. Evidently Miltec has been hotly
promoted by Mercantile Capital Securities Ltd., which claims to be an
investment bank and brokerage firm headquartered in the Turks and Caicos
Islands. According to Tong Yee Lim, an investor from Malaysia who purchased
shares of Miltec through Mercantile, "They are a bunch of crooks."
Mr. Lim claims that he was contacted by Mercantile after visiting Miltec's
Web site and requesting some information about the company. He is convinced
that personal information entered at Miltec's Web site ends up in the hands
of Mercantile. According to Mr. Lim, he was told by a Mercantile broker
that Miltec was going to rise to $15 (U.S.). The story was apparently good
enough to convince Mr. Lim to buy the stock at 90 U.S. cents in February.
The stock did rise to its 52-week high of $2.30 (Canadian) in June but soon
tumbled below the price Mr. Lim had paid. Mr. Lim, a member of a group
called the Malaysian Investors Association, says that he and his friends
have been unable to sell their Miltec stock. Mr. Lim says that he filed a
complaint with the local police and subsequently met with a British police
officer at the High Commission in Malaysia, providing him with the
documentation of his transactions with Mercantile Capital Securities. By
Mr. Lim's account, the police are still trying to trying to track down the
people behind Mercantile Capital. In the meantime, he has been using the
Internet and E-mail to tell anyone who cares to listen, and many who do
not, that Miltec is a scam.
Malcolm O'Neill, a Hong Kong resident, was also given a Miltec sales pitch
by Mercantile. Mr. O'Neill had previously purchased other securities
through Mercantile and had encountered some problems in having his share
certificates delivered to him. In fact, he says that he never did obtain
the certificates. Nonetheless, the spiel was evidently good enough to
convince him to set aside his concerns, at least temporarily. On Jan. 27,
1999, he agreed to purchase 5,000 shares of Miltec. A few days later,
however, Mr. O'Neill had second thoughts and stopped payment on the cheque
he had issued to cover the purchase. Mercantile pressed Mr. O'Neill for
payment until March 10 when his purchase order was graciously cancelled.
Mercantile was not finished with Mr. O'Neill, however. They promptly
offered him an even better deal, suggesting that they could sell his shares
of another company at more than 40 per cent above the prevailing market
price because a major institution needed to book a loss. Evidently that
unnamed major institution felt that Mercantile was just the company to
broker a loss. Of course, the proceeds of the generous transaction would
not quite cover the 25,000 shares of Miltec that Mercantile now proposed to
sell to Mr. O'Neill as part of the package, so he would have to top it up
with some additional money.
That was more than Mr. O'Neill was prepared to countenance or believe. He
sent a five-page letter detailing his transactions and complaints to Paul
De Weerd of the Financial Services Commission in the Turks and Caicos
Islands and Mr. De Weerd referred him to the National Crime Squad in
London. Mr. O'Neill says that he has since provided Detective Constable
Martin Woods of the National Crime Squad with a statement and extensive
documentation concerning his dealings with Mercantile Capital Securities.
Approximately 20 pages of documentation, including faxed purchase order
confirmations and telegraphic transfer instructions from Mercantile were
also forwarded to a Stockwatch reporter. According to those instructions,
payment in British pounds was to be made to Barclays Bank in London, U.K.,
for the initial credit of Barclays Bank in Providenciales, Turks and Caicos
Islands, and for further credit to Mercantile Capital Securities.
Detective Constable Martin Woods of the National Crime Squad was
unavailable for comment and a reporter's call was shunted off to the press
office. Press officer Judy Prue checked the computer files to see if there
was any information regarding Miltec or Mercantile Capital that could be
released. After conferring with a supervisor "to seek guidance," Ms. Prue
reported that there was nothing that she could report. "We don't discuss
operational cases," said Ms. Prue. She did not indicate whether either
Miltec or Mercantile were part of an operational case.
Meanwhile, Mr. O'Neill, who has been stoically pursuing the matter for more
than eight months, has been urging other people snared by Mercantile to
come forward. In a recent interview, however, Mr. O'Neill said that several
Hong Kong acquaintances who purchased Miltec shares through Mercantile are
reluctant to file complaints. "They don't want to believe it's a scam," he
said. "Mercantile has been telling them that Miltec expects to get
contracts worth about $600-million." A call to Miltec chairman Mr. Hanick
would soon set them straight on that fantasy.
Mercantile did not limit its activities to Malaysia and Hong Kong. As Mr.
Hanick knows, Mercantile found quite a few gullible investors in Europe. In
fact, Mr. Hanick says that he gets calls from angry European shareholders
every day. In spite of being in the unenviable position of fielding calls
from irate investors and bearing the brunt of complaints about Mercantile
Capital Securities, Mr. Hanick has made no effort to put an end to
Mercantile's antics or even look into the company.
In the muddled case presented by Mercantile Capital Securities and Miltec
Technology, investors may be unsure of exactly where they should lodge
complaints. Indeed, even determining which regulatory agency has
jurisdiction can be complicated. According to Al Christie of the Ontario
Securities Commission (OSC), a complaint about a broker should be made to
the securities commission with jurisdiction where the investor resides. A
resident of Hong Kong, for example, should contact the Hong Kong Securities
Commission, notwithstanding the fact that the broker is operating out of
the Turks and Caicos Islands and marketing a Canadian stock.
A complaint about a publicly traded company requires a different procedure.
In that case, says Kamal Khanna, another OSC employee, a complaint can be
lodged with the securities commission with jurisdiction where the company
is a reporting issuer. A complaint about Miltec, for example, could be made
to the OSC, should anyone feel they had cause to register one. Mr. Khanna
acknowledged that he was familiar with Miltec, but citing OSC policy would
not comment further.
Frank Switzer, corporate relations officer with the OSC, reinforced that
no-comment policy in a subsequent call to a Stockwatch reporter. "We
wouldn't comment on whether there is an investigation of a company," Mr.
Switzer said. He explained that any comment could jeopardize an
investigation if there was one in progress and would be unfair to the
company. Mr. Switzer also pointed out that the OSC would not comment on
whether it had been asked to provide information to a law enforcement
agency in connection with an outside investigation of a company. Moreover,
the OSC will not comment about whether it has received any complaints about
a reporting issuer.
Meanwhile, Miltec is trading well off its 52-week high of $2.30. On Nov.
16, Miltec recorded its highest daily volume since it began trading last
October, with 619,000 shares changing hands and the stock closing at $1.30
after dropping as low as 50 cents during the day. Two days later, the stock
shed 55 cents to close at 75 cents. Miltec is still regularly closing at
its daily high. |
