RE: JAMES DALE DAVIDSON'S Lines Overseas Management: As published in Offshore Alert on February 26, 1999.
Mezzanine Capital linked to manipulation of penny stocks
A Bermuda Stock Exchange-listed company whose minority shareholders include subsidiaries of the Bank of Bermuda and financial services firm Lines Overseas Management is caught up in what appears to be a scheme to defraud investors on the NASDAQ over-the-counter market, we can disclose.
We have uncovered an astonishing list of proven abuses and allegations of fraud and dishonesty against individuals and companies associated with Bermuda-registered investment holding company Mezzanine Capital Ltd., including its Chairman and President, Eric Chess Bronk, although we have found nothing to incriminate LOM or the Bank of Bermuda.
Bronk, some of Mezzanine's other shareholders and firms closely-linked with Mezzanine have been accused of using a variety of methods to ramp up stock prices to artificially high values so insiders can rake in profits.
These include entering into apparently bogus business deals, setting up sham firms and sending out false and misleading press releases about the prospects of companies.
Apart from allegations of share ramping, one of the companies linked with Mezzanine, Atlanta-based franchise firm Uniforms for America, has been accused by several US franchise holders of defrauding them by taking their $25,000 franchise fee and then offering no support.
One of the most damning allegations uncovered in our investigation involves a company whose stock is traded by Mezzanine, California-based XtraNet Systems, whose management includes Bronk and fellow Mezzanine Capital director Gary Davies.
An officer of XtraNet has been accused of physically stealing the financial statements of a Nevis-based Internet credit card processing company called DataBank International from its fax machine last month and then releasing them as XtraNet's a few days later, sending its stock price and trading volume soaring.
Shortly after releasing the allegedly stolen results over the Internet, XtraNet's stock went from about 16 cents per share to nearly $4 over a two week period before slipping back again to about $1.50. Trading volume, which had been almost non-existent, shot up considerably, with the biggest dump off occurring on February 1, when 1.8 million shares were sold.
Incredibly, XtraNet is currently featured as the 'Stock of the Month' for February by a promoter operating from www.hotstocknews.com, whose glowing review of XtraNet - for which it admits it was paid in shares - was largely based on XtraNet’s allegedly bogus financials.
XtraNet had indeed been negotiating to merge with the Nevis company and put out several press releases last summer announcing the deal.
However, after the deal was effectively called off in August, 1998 because the Nevis company's principal became suspicious of Bronk, XtraNet never announced the deal was off and, instead, put out a misleading press release creating the impression that it had gone through smoothly. To this day, Mezzanine's web-site at www.mezz.com still contains press releases that create the impression the deal went through.
Mezzanine Capital is a closed-end investment fund that was listed on the Bermuda Stock Exchange in the first quarter of 1995 before the current BSX regulations were in place. Its bankers are the Bank of Bermuda in Bermuda and its legal advisors are Conyers, Dill & Pearman.
The company was introduced to Bermuda by CD&P, which also represented another BSX-listed company, NimsTec, that was delisted in 1997 after we exposed its misleading and inaccurate share prospectus.
Indeed, Graham Collis, a senior partner of CD&P, helped prepare the share prospectuses for both NimsTec and Mezzanine Capital.
Although registered in Bermuda, Mezzanine is run by a group of businessmen operating out of California and Arizona and has 112 different shareholders from several countries, including the United States, Canada, Bermuda, the Cayman Islands, the Turks & Caicos Islands, Panama, Ireland, South Africa and Israel.
The company's President and Chairman is Eric Chess Bronk, of Irvine, California. Other directors are Joseph R. Glenn (Vice President), of Phoenix, Arizona; Mitchell A. Saltz, Gary Davies and Sloan B. Jones, all of Scottsdale, Arizona; Carl T. Suter, of Anaheim, California; CD&P subsidiary Codan Services Ltd. (Resident Representative) and Bermuda-based CD&P attorney Wayne Morgan (Assistant Secretary).
Mezzanine's shares have never traded on the BSX. The company posts a net asset value each week that can be determined solely on the whim of its directors, according to the company's share prospectus. It appears that this NAV has deviated little from its original $10 per share, even though the stock in which it invests fluctuates wildly.
Mezzanine essentially sells its stock to a handful of microcap companies traded on the NASDAQ over-the-counter market so that it shows up as assets on these companies' books and enhances solvency. In return, Mezzanine usually receives stock in these companies, which it then trades in the marketplace, or pays cash for Regulation ‘S’ securities.
Although the Bermuda firm of Arthur Morris & Co. appears as Mezzanine's accountants on its prospectus, the company's accounts are done by Utah-based Schvaneveldt & Co., whose boss declined to comment for this story, as did all of the parties being investigated.
Mezzanine's financial statements sometimes contain remarkable items. For example, a Note to Mezzanine's fiscal 1997 financials stated: "In the fiscal year ended June 30, 1995, the Company issued 1,000,000 shares of its common stock to acquire German Bearer Bonds that they valued at $10,099,306. In the fiscal year ended June 30, 1996, it was discovered that there was no established quantifiable redemption value for the Bonds. The Company responded to this discovery by taking a temporary write down of $10,099,206. The Bearer Bonds are listed as an asset of $100. The Company is seeking a private placement to sell the Bonds."
Since Mezzanine never pays dividends to its shareholders and its shareholders are not entitled to redeem their shares, according to its prospectus, its very existence seems to be to provide 'assets' to highly dubious companies, some of which have close links to Mezzanine's officers and shareholders.
Mezzanine's officers appear to manage companies whose shares are traded by Mezzanine and some of Mezzanine's shareholders also receive commissions and fees through entering into seemingly dubious business transactions, some of which are currently being litigated following disputes alleging fraud.
Mezzanine has or has had positions in the following US-based companies: XtraNet Systems, The Hartcourt Companies, Uniforms for America, Conectisys Corp., Phone Time Resources (now Global Access Pagers), Beverage Store Inc. (now Fortune Oil & Gas), Net Voice Technologies, Paystar Communications and Hycroft Environmental Corporation (of which we can find no trace). The stock of all but the one we could not locatefluctuates between a few cents and a few dollars, while each firm continually loses money.
All of the companies have an appalling track record.
Conectisys Corp. was found guilty by the SEC five months ago of participating in a stock manipulation scheme, although neither Mezzanine nor any of its known associates were parties to the action.
On September 22, 1998, Conectisys Corp. was ordered by the US District Court for the Central District Court of California to "disgorge $175,000 of proceeds derived from its fraudulent conduct", according to an SEC press release.
In related judgments against Andrew S. Pitt, Devon Investment Advisors Inc., Mike Zaman, B&M Capital Corp. and Smith Benton & Hughes, the defendants were ordered to disgorge a total of $1.06 million they had made from manipulating Conectisys stock.
"Based on the evidence presented at the trial, the court found that Pitt and Zaman together planned the manipulation of Conectisys stock and Zaman and Smith Benton carried out that manipulation with Pitt's assistance," stated an SEC press release.
"In the course of carrying out the manipulation, Zaman and Smith Benton controlled the number of Conectisys common shares available for sale on the market, dictated the prices at which those shares traded, engaged in 'daisy chain' trading with market participants to fill retail customer orders and artificially increased the price of the stock purchased by retail customers.
"The court also found that Pitt and Conectisys offered and sold restricted stock to private investors based on material misrepresentations and that Pitt and Conectisys drafted a false and misleading business plan that was supplied to potential investors.
"Finally, the court found that Pitt, Conectisys and Devon sold unregistered securities in violation of Section 5 of the Securities Act."
Conectisys, which has Mezzanine shareholder Mandarin Overseas Investment Company as a holder of more than five per cent of its stock, reported a net loss of $2.7 million for fiscal 1997.
Accounting firm BDO Seidman, which took over the audit of Conectisys in 1996 after the company dismissed its previous auditors over "disagreements", said net deficiencies in the company's working capital of $1.24 million and $780,357 at November 30, 1997 and 1996, respectively, raised "substantial doubt about the company's ability to continue as a going concern".
Despite the 1997 loss, the annual salary of its President, Robert Spigno, was increased to $160,000, while his wife, Patricia, received $80,000. All three senior officers, including the Spignos, also received a 'Staying Bonus' equivalent to 50 per cent of their annual salary, payable in restricted common stock, and each had options to buy 500,000 shares at "50 per cent of the average market value in the 30 days prior to it happening", according to documents filed with the SEC.
Another company closely-linked with Mezzanine, called The Hartcourt Companies, also featured on the periphery of a current investigation by the SEC into alleged stock manipulation by stock promoter Investor's Edge, although Hartcourt has not been officially implicated.
Investor's Edge has been accused by the SEC of being paid to write glowing reviews of stock that were presented to investors as impartial recommendations.
Investor's Edge recommended Hartcourt as a "strong buy" when its stock was at $1.40 but it has plummeted to 32 cents. Hartcourt's President Alan Viet Phan, who was interviewed as part of the Investor's Edge promotion, claims the promoter asked him for money but he refused to pay.
The Hartcourt Companies started an Investor's Bulletin Board for its stock last month but it was quickly taken down after a flood of negative messages from investors, some of whom claimed they had been ripped off.
Hartcourt's President Alan Phan, whose name has appeared as a director of another Mezzanine-related company called Uniforms for America, told us the bulletin board was taken down not because of the negative postings but because "someone planted a virus" and he said it would be back up again soon.
Despite the company's history of losses, Phan declared to investors that some of America's greatest companies were criticized by investors in their early days and he even likened himself to Microsoft's Bill Gates.
Hartcourt is currently suing two of Mezzanine's shareholders, Turks & Caicos Islands-registered Promed International and Mandarin Overseas Investment Company Ltd., claiming Hartcourt was defrauded in a deal to sell it 34 Alaskan gold-mines.
Hartcourt, which paid an up-front fee comprising 1.3 million Regulation 'S' Securities for the mines, reversed the deal when the defendants allegedly failed to provide a geological evaluation showing the mines were worth at least $10 million, as promised.
Hartcourt, which reported a loss of $1.6 million in 1996 and a loss of $474,372 for 1997 - $135,000 of which was due to the company issuing preferred stock dividends - now wants its shares back from Mandarin and Promed.
In another case, Eric Bronk and one of Mezzanine's other shareholders, Pagestar Inc., which appears to be operated out of Mezzanine's and Bronk's office in California, are co-defendants in a class action lawsuit filed in California on May 12, 1998 in which they are accused of stock manipulation.
Plaintiff Joseph A. Nigro claims he was conned into investing about $40,000 worth of shares in Satellite Technologies Corp. and the company it merged into, Pagestar Inc., based on false press releases about the firm's capabilities. The company's stock went as high as $3.75 based on hype but had plummeted to seven cents by September, 1997 when the alleged fraud was uncovered, states the complaint.
The statement of claim alleges that Bronk and the other individual co-defendants misled Nigro so they could "sell their own shares in the companies…and to indirectly benefit themselves by securing additional capital to pay their own salaries and bonuses as directors, employees and/or officers of the companies."
Spigno, whose attorneys are seeking between $2 million and $3 million, claims that Pagestar was nothing more than a shell company with no bona fide operations, a similar claim that has been leveled at XtraNet Systems.
There is similar discontent among investors in Uniforms for America, which sells franchises that supply medical and career uniforms.
In an investment package sent out by the company two months ago, there was a report dated August 12, 1997 by CSK Securities Research of California forecasting Uniforms for America stock price would be "in the $10 to $12 range in 1998 and in the $15 to $20 range in 1999". The reality is that, at February 25, 1999, Uniforms for America stock was trading for 56 cents.
Our research showed that CSK Securities is a business run from the home of Christina and Neal Kohlhaas, who started the company five years after being declared bankrupt in San Diego.
Uniforms for America, whose President is James D. Brockman, is facing another crisis at the moment and the possibility of a class action lawsuit from franchise holders who claim they have been defrauded.
Several of the 50 existing franchise holders in the US claim they paid up to $25,000 each for franchises but have received little or no support by the firm, as promised in contracts.
Apart from their franchise fee, some franchise holders told us they had paid Uniforms for America for merchandise but the company had failed to pay the manufacturers, who in turn eventually stopped delivering clothes to stores. One manufacturer was owed in the region of $1 million, according to one franchise holder.
It has also been claimed that Uniforms for America, which we have been told holds the leases on store properties, had failed to pay the rent to some landlords even though franchise holders had paid the rent to Uniforms for America, leading to problems for some franchise holders.
Additionally, it was claimed that Uniforms for America has tried to force some of the more successful franchise holders out of business so the corporation could take over their stores.
James Brockman failed to return a message from this newsletter.
Interestingly, Uniforms for America also holds stock in the Hartcourt Companies and Phone Time Resources, two of the half dozen or so companies Mezzanine has links with. Additionally, Hartcourt's President, Alan Phan, was listed as a director of Uniforms for America last year, although he denied to us he had been a director.
Further evidence that there might be a widespread conspiracy to defraud investors is provided by the fact that Regis Possino, a disbarred California attorney who runs Phone Time Resources, has also been involved with Hartcourt, as its corporate counsel (AFTER he was disbarred) and as an 'investment advisor' and is also a behind the scenes figure at Uniforms for America.
Possino's name appears in so many businesses linked with Mezzanine that it raises the question of whether he might be a hidden shareholder in the company.
Apart from disbarment in 1984, Possino's history includes being imprisoned for one year in 1978 for trying to sell $38,500 worth of marijuana to undercover Los Angeles cops, trying to place a monthly order for $680,000 worth of cocaine with the same officers, attempting to sell $5 million of stolen US treasury bills or bearer bonds to an undercover treasury agent, undergoing a $12 million personal bankruptcy and interfering with a witness at his trial on the marijuana offence, leading to her dismissal from the jury and his imprisonment for the rest of his trial.
"One evening during the trial, petitioner encountered one of the trial jurors as she was waiting for a table at a restaurant," reads the official record of his appeal against disbarment.
"He approached her, initiated a conversation and bought drinks for her and her companions. Although they did not discuss the merits of the case, petitioner asked the juror what she thought of the prosecutor. He also talked to her about himself, other persons involved in the trial and the judge. Learning that the juror was a religious person, petitioner discussed his own religious beliefs with her. The conversation ended when the juror and her friends were called to dinner."
Details of all of the above, with the exception of his bankruptcy, which was closed in 1992 with assets of $229,000 and liabilities of $12.18 million, were presented to the California Bar Association at his appeal against disbarment.
Although Possino's appeal against disbarment was thrown out, three of the eight members of the panel voted against disbarment and thought his licence should only be suspended for five years!
The involvement of so many businessmen with dubious pasts contradicts a claim by Mezzanine President Eric Bronk in the company's 1997 annual return with the Bermuda Stock Exchange that Mezzanine invests in companies with "strong management".
Bronk declined to discuss a list of questions we sent to him. "It appears clear that if you were interested in doing a fair article on Mezzanine Capital that you would not have waited until less than 48 hours before your publication to make any inquiries," he wrote by e-mail.
"Suffice to say that neither your questions nor the quality of your newsletter appear to merit serious or detailed response.
"Mezzanine Capital invests in emerging microcap public companies whose stock price can, by their very nature, be volatile. In the companies in which it invests, Mezzanine Capital takes only a minority position, usually less than ten per cent, and certainly has no input into the management or promotion of the companies". The last part of the sentence, however, is clearly false. In a document Mezzanine filed with the Bermuda Stock Exchange, Bronk and fellow Mezzanine director Gary Davies are listed as part of the 'Management' of XtraNet Systems.
Bronk is also listed as the Chief Financial Officer of XtraNet and Davies as one of its directors in official XtraNet documents and the telephone and fax numbers used for Mezzanine are not only the same as XtraNet's but also that of Net Voice Technologies, both companies Mezzanine holds or has held stock positions in.
Bronk, who is a licensed California attorney, has a colorful past. In 1991, he paid $1.1 million to the Federal Deposit Insurance Corporation to settle an investigation into his role in a failed savings and loan institution in which regulators suspected fraud and embezzlement.
Additionally, Bronk and two of his companies were ordered to hand over an unspecified sum of money that was in a bank account in Los Angeles. Despite the settlement, Bronk denied any wrongdoing.
Our research shows that he has been a defendant in nine lawsuits filed at California State Court and there have been four judgments against him. Several of the cases involve allegations of dishonesty.
We have handed over details of our research to the SEC. |
