SEC slams plea for cash by Lancer's Michael Lauer
2003-09-15 08:51 ET - Street Wire
Also Street Wire (C-ZIC) Zi Corp
Also Street Wire (U-ZICA) Zi Corp
Also Street Wire (U-CSOR) Continental Southern Resources Inc
DEEP FREEZE
by Lee M. Webb
The U.S. Securities and Exchange Commission (SEC) filed a scathing Sept. 8 response vehemently opposing disgraced Lancer Group leader Michael Lauer's motion to carve out a chunk of his frozen assets in order to pay his living and legal expenses. In a separate response to a related motion filed in the U.S. District Court for the Southern District of Florida, the U.S. regulator also had some stinging words for Mr. Lauer's preferred high-priced legal counsel.
The SEC shut down Mr. Lauer's allegedly fraudulent $1-billion (U.S.) Lancer operation on July 10. (All subsequent amounts are in U.S. dollars unless otherwise noted.) In connection with its civil complaint against Mr. Lauer and Lancer, the U.S. regulator obtained a court order freezing the assets of Lancer and its leader and appointing a receiver.
According to the SEC, Mr. Lauer and Lancer used bogus valuation opinions and engaged in month-end price rigging of thinly traded securities to fraudulently boost the purported value of the Lancer portfolios in order to lure new investors and discourage existing investors from requesting redemptions. Mr. Lauer earned hefty management and incentive fees that were based on the allegedly grossly overstated Lancer portfolio values.
Mr. Lauer has denied the substantive allegations and has demanded a jury trial.
On Aug. 19, Mr. Lauer filed a motion and 66-page supporting memorandum to modify the injunction obtained by the U.S. regulator to allow him "to carve out from the asset freeze" personal assets acquired prior to the date the SEC claims his fraudulent activities commenced. Alternatively, Mr. Lauer is requesting that the court exempt "prior acquired assets" to the extent necessary to pay his living expenses, attorneys' fees and other litigation costs.
As reported by Stockwatch on Sept. 9, Mr. Lauer evidently believes that he can make ends meet, at least with respect to his monthly obligations and personal expenses, with $93,541 per month. That $93,541 per month, of course, does not include whatever amount Mr. Lauer might have to pay for lawyers and other litigation costs, which may yet include the costs of defending against a grand jury indictment.
The disgraced fund manager, who claims to be proud of his record, does not even offer a guess as to how much money he will need to pay for a battery of lawyers and other legal costs associated with current and potential litigation arising from the Lancer debacle. Richard Asche, one of Mr. Lauer's high-priced lawyers of choice, suggests that a proper defense against the SEC action alone "would require several hundred thousand dollars in legal fees, expert witness fees and expenses."
The SEC's blistering response to Mr. Lauer's motion to carve out a chunk of his frozen assets suggests that the U.S. regulator has removed the velvet glove of detached legal civility and bared its iron fist. The SEC "vehemently opposes the modifications to the asset freeze" requested by Mr. Lauer.
"Lauer, providing nothing more than an unsupported affidavit, has the audacity to petition the Court to release over $93,000 per month for extravagant living expenses and to allow unlimited access to funds to pay attorneys' fees and costs to defend against this litigation," the SEC states.
"Lauer's motion, in addition to being shocking and highly offensive to the investors who have lost over half a billion dollars, is unsupported, utterly unreasonable and legally deficient and should be denied," the U.S. regulator continues in the opening paragraph of its response.
"Lauer and Lancer Management swindled hundreds of millions of dollars from unsuspecting investors and reaped tens of millions of dollars in fraudulent management fees," the Sept. 8 response declares.
"Not only has this Court found evidence of a massive securities fraud, but Bruce Cowen, a former managing director of Lancer Management and Lauer's right hand man, pled guilty on August 21, 2003, to conspiracy to commit securities fraud, mail fraud and wire fraud in connection with, among other things, a scheme 'by a group of hedge funds known as the Lancer Group to defraud its investors, other potential victims, and the marketplace by manipulating the price of securities within its portfolios, by failing to disclose material information to its investors and other potential victims, and by otherwise defrauding its investors, potential investors or other potential victims by overvaluing its assets,'" the SEC states in a footnote.
The U.S. regulator goes on to sketch some of what the court-appointed receiver has been able to determine so far regarding the Lancer assets. Stockwatch provided a detailed report of the receiver's preliminary findings in a Sept. 11 article. The SEC notes that the receiver's preliminary investigation reveals that Lancer investors poured more than $1-billion into the allegedly fraudulent funds and approximately $613-million of that remained invested in Lancer when it was shut down on July 10.
"The SEC and Receiver have only identified and frozen approximately $3 million in cash in the Lancer Management and Lancer Funds' bank accounts," the SEC states. The regulator goes on to note that the Lancer portfolios have also been frozen, but the receiver has not been able to confirm ownership of more than 40 per cent of the securities in those portfolios.
"In addition to this void of assets, a majority of the securities positions in the Lancer Funds portfolios consist of huge concentrations of thinly traded penny stocks whose liquidation will be exceedingly difficult at best," the SEC claims.
As part of the support for its gloomy forecast regarding liquidation of the securities, the SEC cites two reports on Lancer's offshore funds, including Mr. Lauer's flagship Lancer Offshore Inc., prepared for the Financial Services Commission of the British Virgin Islands (BVI) by Deloitte & Touche. The U.S. regulator notes that, according to the extensive analysis by Deloitte & Touche, liquidating the securities "at even written down values is doubtful" and the likely return to investors is "cents on the dollar."
The SEC goes on to argue that Mr. Lauer's purported personal assets "are a fraction of his potential liabilities" and the court should not allow him access to those assets.
"Lauer claims a net worth of approximately $114 million dollars but it is grossly over inflated by illiquid, uncollectable and speculative assets," the SEC says. "By way of example, Lauer values certain securities in his personal portfolio at over $29 million based on their closing market prices in July. A majority of the stocks in Lauer's personal portfolio mirror the holdings of the Lancer Funds and consist of large concentrations of thinly traded penny stocks whose liquidation is questionable and returns speculative."
While not specifically noted by the SEC, two of the securities in Mr. Lauer's portfolio account for approximately $18-million or 61 per cent of the purported $29.3 million value of his personal stock holdings. Mr. Lauer assigns a July 14 value of $10.6-million to the 2.87 million shares of Zi Corp. that he reportedly holds and chalks up another $7.3 million for 2.87 million shares of Continental Southern Resources Inc.
As previously reported by Stockwatch, in addition to Mr. Lauer's reported Zi holdings, court documents indicate that Lancer controls 18.7 million shares of Zi, effectively giving the Lancer leader 55 per cent majority control of the money-losing Calgary-based technology company. Lancer reportedly peeled off more than $97.6-million to sponge up Zi shares and Mr. Lauer anted up another $18.1-million for his stake.
According to the Deloitte & Touche report for the BVI regulators, the international auditing and financial consulting firm has strong reservations about the ability to liquidate Lancer's Zi holdings at even a written down value of less than 15 cents per share.
Notwithstanding the growing body of evidence casting considerable doubt on the true value of Zi or concerns regarding Lancer's massive unreported stake in the company, Zi continues to trade on both the prestigious Toronto Stock Exchange (TSX) and Nasdaq. On Sept. 12, Zi closed at $3.60 (Canadian) in TSX trading and ended the Nasdaq session at $2.62.
(As noted in a Sept. 12 Stockwatch article, Deloitte & Touche's report to the BVI regulators offered a rather remarkable paucity of details regarding Zi in its detailed appendix for the Calgary-based company, particularly given that Zi is the most actively traded stock among the Lancer holdings and a prime candidate for wringing any value out of the dubious funds.
Much of the information in the Zi appendix appears to have been culled from a single May 15 news release issued by the company. The Deloitte & Touche report only identifies two Zi officers, Michael Lobsinger, the company's chief executive officer, and Dale Kearns, the chief financial officer. "There may be other principals however we cannot find any record," Deloitte & Touche claims.
The international auditing and consulting firm's apparent inability to find much public information regarding Zi seems odd in light of the fact that the report notes that Zi is a public company trading on both the TSX and Nasdaq. In fact, there are numerous public filings available for Zi in both the U.S. and Canada.
Making the relative scarcity of details regarding Zi in the BVI report even more peculiar is the fact that Deloitte & Touche has been Zi's auditor for many years, including signing off on the company's most recent audited financial statements for the year ending Dec. 31, 2002.
Interestingly, Deloitte & Touche included Zi in its Aug. 12 list of the "Canadian Technology Fast 50" for 2003, which is a "prestigious annual award," according to the international auditing and consulting firm. "These companies have what it takes!" Deloitte & Touche exclaims.)
While Mr. Lauer reportedly paid approximately $18.1 million for his personal holdings of 2.87 million Zi shares and Lancer peeled off $97.6-million for its stake, the disgraced fund manager acquired his 2.87 million shares of Continental Southern Resources for a mere $91,400 or approximately 3.2 cents per share. As noted above, he valued that stake at approximately $7.3-million as of July 14.
Mr. Lauer also stuffed the Lancer funds with shares of Continental Southern Resources, a thinly traded stock that changes hands on the lightly regulated and heavily prosecuted OTC Bulletin Board. According to court-filed Bank of America documents, the Lancer funds held approximately 15.2 million shares of Continental Resources as of April 30. Lancer reportedly paid approximately $2.45-million or a modest 16 cents per share for the Continental Southern Resources stake, which was valued at more than $45.5-million at the end of April.
The combined Continental Southern Resources holdings of Mr. Lauer and Lancer amount to more than 18 million shares of the thinly traded stock or more than 55 per cent of the 32.7 million shares outstanding as of April 11.
As noted by Deloitte & Touche, Continental Southern Resources changed its business focus from marketing and graphics to oil and gas exploration in conjunction with a change of control in February of 2002. According to the BVI report prepared by the international auditing and consulting firm, the market prices fetched by Continental Southern Resources shares are considerably in excess of the underlying asset value and there "is significant cause for concern" that the Lancer holdings are overvalued.
Deloitte & Touche estimates that it would take 12 years to unwind the Continental Southern Resources stake held by Lancer's two offshore funds, assuming that there is a market for the shares at historical trading levels.
Notwithstanding the growing concerns regarding the dubious value of the Lancer holdings, thinly traded Continental Southern Resources still commands a surprisingly buoyant price, closing at $2.40 on Sept. 12. Stockwatch is reviewing Continental Southern Resources and will provide a more detailed report on the company, if warranted.
Meanwhile, the SEC argues that Mr. Lauer's "illiquid, uncollectable and/or speculative assets," including his personal securities portfolio, should not be used by the Florida court in determining whether his assets exceed his liabilities. According to the SEC, the only assets "whose value, existence and collectability are somewhat certain" owned by Mr. Lauer, primarily real estate assets, are worth a mere $1.74-million, which falls far short of his potential liability. "Hence, Lauer should not be allowed to diminish the few assets which remain frozen," the SEC states.
According to the U.S. regulator, Mr. Lauer did not produce any evidence to support his request to free up assets to pay for his living expenses.
"All Lauer has submitted to the Court in support of his exorbitant living expenses is a self-serving affidavit which lacks vital supporting documentation," the SEC states. "A Court cannot make an informed decision as to the extent and reasonableness of living expenses based upon the self-serving affidavit of a fraudster."
Further into its response, the SEC serves up some more disparaging comments regarding Mr. Lauer, including a parenthetical italicized exclamatory remark regarding his claimed living expenses.
"Lauer's request for living expenses is outrageous and shameful in light of investor losses topping half a billion dollars," the SEC states. "Lauer lists over $93,000 per month (over 1 million dollars per year!) in living expenses.
"Included in the total are $20,000 for private school tuition for his children, $10,000 in voluntary child support, $50,000 payment for a tax liability to the Internal Revenue Service and another $11,000 for unspecified food, clothing, travel, cleaning and laundry bills.
"These living expenses, in addition to being completely unsupported by documentary evidence, are not by any stretch of the imagination reasonable or necessary. In fact, the gall of Lauer in requesting that he be allowed to pay these expenses demonstrates that he is simply interested in callously hoarding as much investors' money as he can to continue his lavish lifestyle at the continuing expense of the victims he defrauded."
The SEC also challenged Mr. Lauer's request for an unspecified amount of money to pay for legal fees. "If this Court were to allow Lauer to pay attorneys' fees and costs, which for all the reasons discussed herein it should not, then measures must be put in place to ensure that the attorney's fees and costs are limited and reasonable," the Sept. 8 response argues.
The U.S. regulator claims that Mr. Lauer has other sources of money to pay for his living expenses and finance his defence of the legal action.
"Lauer claims that he needs money for living expenses and is without funds to hire counsel or travel to depositions to represent himself," the SEC states. "Despite this plea of poverty, Lauer has taken two expensive trips outside of the United States since his assets were frozen."
According to the SEC, Mr. Lauer travelled to Niece, France, on July 17 and spent four days there. On Aug. 17, the regulator says, Mr. Lauer flew to Russia for approximately eight days.
"In addition to at least one expensive international airfare, Lauer presumably had accommodation, dining and other expenses," the SEC says. "These expenditures show that either Lauer has family or friends who are willing to pay his expenses or that he has undisclosed funds he is spending in contempt of the asset freeze order.
"Either way, Lauer is not only having no difficulty whatsoever in fulfilling ordinary living expenses but continues to live luxuriously. Therefore, not a single penny should be released from the frozen assets."
In addition to its scathing response to Mr. Lauer's motion requesting a modification to the asset freeze, the SEC had some rather strong words for the Lancer leader's preferred legal counsel, Mr. Asche, in connection with a related motion requesting oral argument on the matter. Mr. Lauer would like Mr. Asche to enter a limited appearance on his behalf to argue the motion.
The SEC claims that it has no objection to oral argument on the motion, in spite of the fact that it believes "that oral argument is completely unnecessary because Lauer's motion is unsupported by evidence, utterly unreasonable and deficient as a matter of law." However, the regulator does object to Mr. Asche being allowed to enter a limited appearance to argue the motion.
"Mr. Asche, and two other attorneys, Gerry Labush, Esq., and Jack Litman, Esq. (collectively 'Lauer's counsel'), are playing games with respect to their representation of Lauer in these proceedings to the prejudice of the SEC," the response states.
According to the SEC, Mr. Lauer's counsel have refused to participate in a scheduling conference on the ground that they have not yet entered an appearance in the proceedings. However, the SEC claims that when Mr. Lauer's counsel were asked whether Mr. Lauer could be contacted directly, they stated that they do represent the Lancer leader. Among other things, the SEC notes that it "has been unable to commence full discovery or issue any discovery to Lauer" because there has not yet been a scheduling conference.
"For this reason, and to avoid confusion and uncertainty in this proceeding, Lauer's counsel should not be allowed to pick and choose the aspects of the case in which they will or will not participate," the SEC argues. "Lauer is either represented by counsel or he is not."
The SEC concludes its response by asking the Florida court to deny Mr. Lauer's request to have Mr. Asche enter a limited appearance to argue the motion to modify the asset freeze.
It remains to be seen whether the court will rule on the side of the SEC's request to maintain the deep freeze on Mr. Lauer's assets or allow at least a partial thaw as requested by the disgraced fund manager. Stockwatch will continue to follow the Lancer developments.
Comments regarding this article may be sent to lwebb@stockwatch.com.
(More information regarding the Lancer Group and associated companies is available in Stockwatch articles under the symbol *SEC published on July, 15; Aug. 11, 12, and 22; and Sept. 3, 8, 11 and 12, 2003.) |
