SEC targets on-line escort directory
2005-05-09 14:30 ET - Street Wire
Also Street Wire (U-EXII) Exotics.com Inc
by Stockwatch Business Reporter
A Vancouver-based on-line escort directory that touts itself as "Better than Wives, Girlfriends & Porn" has landed in hot water with the high minded U.S. Securities and Exchange Commission. The SEC says the purported purveyor of pretty girls, OTC Bulletin Board listing Exotics.com Inc., committed several sins, and not the kind normally discussed in church.
These alleged sins included market manipulation, bogus accounting, misleading investors and spamming.
The SEC says one of the people behind this busy plan was Kamloops businessman James L. Ericksteen, a known securities violator. (In 2002 the SEC won a fine against Mr. Ericksteen and others, in connection with a $200-million-plus share leasing scheme. Mr. Ericksteen's fine, initially $2.8-million, was reduced to $100,000 based on his inability to pay.)
The other locals apparently involved with Exotics.com are lesser known in the industry. They include West Vancouverite Ingo W. Mueller, Burnaby resident Firoz Jinnah and Vancouver accountant Barry F. Duggan.
Revenue predictions
The Exotics.com accused, according to the SEC's civil complaint, suggested ridiculously high revenues for their company in a March 19, 2001, news release. "Over the past several years, the Company's revenue has shown an incredible rate of increase in an amount of over 520%," the news release touted. "In 2000, the revenue numbers surpassed $2,500,000, for an increase of 182% from the previous year," the news release continued. (All figures are in U.S. dollars.)
The SEC says this was a bunch of baloney. It says the company was only entitled to a small percentage of revenue from the "Exotics.com network," a worldwide escort directory. At the time of the news release, the SEC says Exotics.com had not yet acquired the network and, in fact, had no revenue to speak of.
Accounting antics alleged
To back these revenue claims, the SEC says Exotics.com used some bogus accounting to prematurely include its on-line escort agency on the books. It hired three accountants that apparently overstated the company's goodwill, a measure of an asset's expected performance, by $3.6-million in the third quarter of 2001.
"Recording the goodwill resulted in an overstatement of Exotics-Nevada's assets by approximately 627%," the SEC says. Although Exotics.com (known as Exotics-Nevada at the time) did eventually pick up the worldwide escort website, the SEC says it jumped the gun by assigning goodwill to it in the third quarter of 2001.
Trouble at the auditor
The SEC says the goodwill was not the only accounting-related monkey business at Exotics.com. The company's independent auditors, as the SEC tells it, were not so independent.
The auditors, given the job of ensuring Exotics.com's financial results met the SEC's accounting standards, apparently found themselves having to create Exotics.com's accounting records from scratch. This was because the records simply did not exist, or were in a condition so poor they were not usable, according to the SEC.
(An auditor is supposed to be independent of a company's day-to-day accounting matters.)
Although the SEC does not say what books the auditor created, it does say it "overstepped its role as auditor and created some of [Exotics.com's] books and records," which is enough to land the auditor in trouble, if true. (The accountants that prepared the audit are among the co-accused in this case.)
Market manipulation
The SEC says the alleged monkeying with the books went hand-in-hand with a market manipulation at Exotics.com. The company's own lawyer, also an accused, allegedly sold escrow shares to an offshore nominee buyer in the first of many prearranged trades.
"On March 20, 2001, the day after Exotics-Nevada's misleading March 19, 2001 press release and the first day that the stock traded on the OTCBB, [the company's lawyers] sold 20,000 of the Escrow Shares at $5 per share," the SEC says.
A German investor, apparently recruited by West Vancouverite Mr. Mueller, bought the 20,000 shares through an account in Bermuda in a prearranged transaction. The SEC says this prearranged sale, the largest in the stock's first six weeks of trading, kicked off the Exotics.com market manipulation.
The market manipulation, as the SEC tells it, supported the stock for several months. The stock traded above $4 for nearly two months, until May 14, 2001. The stock did not drop below $1 until July 11, nearly four months after the first of the alleged prearranged trades.
The SEC says Mr. Mueller and Mr. Ericksteen also got in on the prearranged trading. They apparently used accounts at Vancouver brokerages Yorkton Securities, Global Securities and Canaccord Capital to support the Exotics.com manipulation. There is no indication the brokerages involved knew anything was amiss.
Support for the stock eventually waned, however, and it fell to a four-cent low on Nov. 1, 2001.
The spam campaign
Complementing the alleged market manipulation, false news and funny accounting, the SEC says Exotics.com hired Stockscape Inc. to bombard potential investors with spam. Beginning on Dec. 7, 2001 (coincidentally the 60th anniversary of the Pearl Harbor bombing) Stockscape allegedly dropped misleading faxes on more than 140,000 potential investors.
These faxes apparently said the company's "revenues are exploding, almost tripling from 1998 to 1999 and almost doubling again last year [2000] to over $2.5-million."
Reality, as the SEC tells it, was much different. The company's year 2000 revenues "were only $470,202, not the $2.5 million cited in the blast faxes," says the SEC.
Also beginning Dec. 7, the SEC says more than two million potential investors opened their inboxes to find spam with the same misleading revenue statements. The SEC claims the statements were misleading "because they intermingled statements about Exotic-Nevada's operating results with statements about revenues generated by its licensees, only a small fraction of which went to Exotics-Nevada."
After the Dec. 7 spam, the SEC says the stock nearly doubled in price. The company, which traded at 39 cents on Dec. 7 in the wake of a 1:5 rollback, nearly doubled to reach 79 cents on Dec. 26. (The day after Christmas is a statutory holiday in Canada, but not in the U.S.)
The stock again collapsed after the alleged December spamming, reaching a 10-cent low on March 1, 2002.
The SEC did not accuse Vancouver-based Stockscape of any wrongdoing, perhaps because it has disappeared.
Silence from the accused
The locals the SEC did accuse of wrongdoing, Mr. Ericksteen, Mr. Mueller, Mr. Jinnah and Mr. Duggan, have not responded to the SEC's complaint. Mr. Mueller and Mr. Jinnah, who work from the same Pender Street office, did not return Stockwatch calls seeking comment. Mr. Duggan, who has not been a director of Stockscape since Sept. 15, 2001, could not be located. Stockscape and a handful of other companies eventually disappeared into Quest Capital Corp. on July 3, 2003.
Mr. Ericksteen has recently changed his phone number. The annoyed current owner of his phone number, who says she just inherited the number two months ago, would prefer to receive no more calls for him.
The SEC's allegations have not been proven in court.
Exotics.com, meanwhile, has been downgraded to the pink sheets and last changed hands on March 25 for one-100th of a penny. |
