OUR HERO'S BIG SCORE By CHRISTOPHER BYRON
June 2, 2003 -- I blush to confess it, but here at Cranky Acres, where nothing brings more joy than feeding captured Democrats to our feral Rotweilers, we have a new hero. Most embarrassing of all, he might actually be French. Le Hero? Mon dieu!
For now, Monsieur's true identity remains le grande mysteré. Quel dommage! But his triumph is there for all to see, immortalized in some recent Securities and Exchange Commission filings by a French company bearing the name Biocoral, Inc.
Whoever he is (and there may be more than one), our new Hero - described in SEC documents as simply being among a group of "Accredited Investors" - has almost overnight turned $450,000 into $1 billion by investing it in 10 million pieces of basically worthless paper, then somehow convincing the world (or, at least, let us say, the gendarmes of Wall Street) that this worthless paper should be valued at something approachingthe Gross National Product of Haiti.
In the process, Biocoral's stock, traded on the Over The Counter Bulletin Board, has soared from $5 at the end of February to a closing price last week of $155 - the sort of run-up not seen on Wall Street even at the zenith of the dot-com frenzy.
So how did Monsieur do that? Entre nous, I'll explain. It's all because money on Wall Street is once again flowing from the slow-witted and naive to the clever and the quick, as the current rally brings speculators streaming back into the market. So beware; for as night follows day in these things, après les dummies will again come le deluge.
Since March, stocks have been soaring, lifted by investor hopes that the Bush tax cut plan and the strong housing market will keep the economy expanding. From a closing low of 7,524 on March 11, the Dow Industrials have climbed more than 1,320 points, to a closing price last Friday of 8,850 - a rise of 17 percent in barely 21/2 months.
No one ever knows when something like this will end. It can continue for a very long time, or it can end tomorrow, though recent history doesn't give a lot of comfort to the bulls in that regard. Since January of 2000, when the Dow Industrials topped out at 11,511, the average has undergone four major rallies that have been equal to or greater than the one now underway.
The most recent of these occurred just last autumn, when the Dow surged 21 percent - once again in barely 21/2 months' time.
YET at the end of these four rallies, and several smaller ones, the Dow is still down 23 percent from its January 2000 high.
Meantime, a smart fellow can make plenty of money by cashing in on the naiveté of others - though it is rare to encounter a cleverer scheme for doing so than the one concocted by our mystery hero who has literally turned dross into gold.
Biocoral Inc. itself looks to me to be little more than road-kill in the making. The company, which is located somewhere outside Paris, began life at the start of the 1990s as a so-called "blind pool." In these deals, you buy stock in a company that has no business at all. It uses your money to go out and buy some business that already exists.
The first business the blind pool bought was an industrial warehouse outside Chicago. A year or two later it decided to get out of the warehouse game and, in 1995, it moved into what it calls the "biomaterials" business in the "health care area." As practiced by Biocoral, Inc., this amounts to the business of gluing broken bones back together using some kind of glop made out of ground up coral reefs.
The company got into the bone-gluing business by acquiring the stock of an Irish company that had a patent on the glue glop. The company purchased the stock from two British Virgin Islands companies tied to an outfit named le Societe Financiere du Seujet.
The head of le Societe was an Italian fellow named Riccardo Mortara, who thereupon became chairman and CEO of the blind pool, which changed its name to Biocoral, moved to France, and began promoting its bone gluing activities.
A search of SEC records turns up Mortara and le Societe Financiere in all sorts of curious businesses. They range from "animal cloning" to "cigarette testing" to the financing of rocket launches into outer space. None of them seem to amount to much of anything.
In any case, toward the end of 1997 Mortara passed the bone gluing baton to a fellow named Nasser Nassiri, whose credentials for leading the Biocoral parade included a background in Canadian gold-mining penny stocks.
In the half decade since then, Nassiri has built Biocoral into a biotech powerhouse with 10 employees, 11 delinquent financial filings, $34,537 in balance sheet cash, $350,300 in annual revenues, $1.13 million in losses, a negative current account balance, and an insolvent balance sheet.
BUT genius comes in many forms, and here is how it found expression for Biocoral. Three years earlier, as the stock market began its collapse, Biocoral began issuing 6 percent promissory notes, convertible into common stock, to raise cash.
Some $450,000 worth of those notes, convertible into 10 million shares of Biocoral common stock - which is to say, convertible at 4.5 cents per share - had been biding their time in the hands of our mystery hero Monsieur Accredited Investeur, waiting for exactly the right moment to convert them into stock.
The moment came last December, when the company announced, two days before Christmas, that it was executing, as of that date, a 15-for-one reverse stock split, reducing the total shares outstanding by more than 93 percent, from 19.4 million to a mere 1.3 million.
The reverse split did not, of course, include Monsieur's 10 million shares, since he had not yet converted his promissory notes, and thus received the shares.
So, when Monsieur showed up three days later, on Dec. 26, with his $450,000 of notes and cashed them in, he received back his full 10 million shares of stock, making him the instant owner of nearly 90 percent of the company.
MOREOVER, the stock was in the form of unregistered "Reg. D." shares that could not be sold without first being registered. According to the company, Monsieur had promised not to sell them, so the company did not register them.
This meant that when the company issued a press release in early March saying it had obtained a patent in the U.S. for a process that "induces osteoblast differentiation of human extramedullary adipose tissue cells," and bull market investors began placing orders for the stock in the belief that Biocoral had cornered the osteoblast market in the bone-gluing game, the stock really took off because 90 percent of it wasn't even available for sale. It took just one more press release, issued at the end of April, and by last week this $5 stock was selling for $155, sending this Wall Street bucket of bone glue from $6.5 million in at the start of April, to $1.75 billion by the end of May.
What would you do now if you were Monsieur? Would you try to sell your stock and almost certainly crush the Biocoral market and maybe even precipitate an SEC probe?
Not me. I'd find a stupid loan officer at some bank and say, "Hey, I've got a billion dollars worth of stock here. Would you take it as collateral for a $50 million loan?" Then I'd wire the loot to my account in Mauritius and hop the next flight to Tortola, and never work another day in my life - laughing myself to sleep at night as that $1 billion of worthless collateral, pledged at $155 per share against a $50 million loan, eventually sank back to $450,000, or 4.5 cents. Vive le France! |
