E-Rex culls Big Apple Consulting amid fraud allegations
Thursday Aug 30 2001
BAD APPLES
by Lee M. Webb
E-Rex Inc., an over-the-counter U.S. promotion with ties to Vancouver, has fired Big Apple Consulting USA Inc., a Florida-based tout service. The culling of Big Apple was disclosed in the fourth and final paragraph of a news release on Aug. 24, ostensibly primarily issued to remind shareholders of E-Rex's annual meeting scheduled for Sept. 7. "E-Rex would also like to inform its shareholders that, effective Thursday, August 23, 2001, it has terminated its Investor Relations Agreement with Big Apple Consulting," the company reported.
The cornerstone of the E-Rex promotion is the Dragonfly, a much-hyped "6-in-1 portable printer, fax and scanner with wireless Internet connectivity." The unveiling of the prototype of this ballyhooed technological marvel has been expected within weeks for more than two years now. The move to fire Big Apple comes as shareholders, disenchanted with the seemingly endless delays in completing the prototype of the vaunted Dragonfly and the company's tumbling stock price, vent their frustration by levelling serious allegations of misconduct against the Florida tout service and E-Rex management on a popular Internet chat site, Raging Bull. According to several of the posters, the United States Securities and Exchange Commission (SEC) is investigating E-Rex and Big Apple. Moreover, some of them claim that the FBI is also interested in at least one individual connected to both E-Rex and its recently terminated tout service.
While such rants are not uncommon on Internet stock chat sites, where most posters operate behind the anonymity of an alias, the E-Rex brouhaha is notable because some of the most serious allegations, including claims that Big Apple misappropriated money intended for E-Rex, have been levelled by people who have disclosed their real names. The very public outcry against Big Apple and E-Rex is being spearheaded by Michael Capelouto, a California shareholder who claims to have invested more than $100,000 (U.S.) in E-Rex. (All subsequent figures in U.S. currency.) Mr. Capelouto's efforts have recently drawn the support of Terry Shores. A former police officer, Mr. Shores claims to have ploughed approximately $250,000 into E-Rex; he also sank money into another Big Apple promotion, Medical Services International Inc.
Ironically, Mr. Capelouto and Mr. Shores were once among E-Rex's biggest supporters, tallying hundreds of bullish posts to the Raging Bull chat site. Mr. Shores also lent posting support to Medical Services and its chairman and chief executive officer, Donald Mitchell, who is also chairman of E-Rex. In a March 20 post to the Medical Services discussion, Mr. Shores claimed that he had known Mr. Mitchell for about two years. "I have found him to be an honest man with great integrity," Mr. Shores wrote. Evidently that assessment has changed in the intervening months. "I'm absolutely convinced that Don Mitchell is a crook," Mr. Shores told a Canada Stockwatch reporter in a recent interview. "I have been scammed, and I have been scammed good." Indeed, both Mr. Capelouto and Mr. Shores are now repeatedly publicly claiming that Mr. Mitchell, E-Rex president Carl Dilley, major shareholder Roy Meadows, and Big Apple's chief tout Marc Jablon, among others connected with the promotion, are part of an elaborate scam.
Mr. Capelouto contacted a Stockwatch reporter on Aug. 13 to discuss concerns about Mr. Mitchell and E-Rex. "Don Mitchell really seems to be a scumbag, now doesn't he?" Mr. Capelouto wrote in an E-mail. "His cast of characters follow him around every where he goes. I would really like to speak with you personally regarding a mess that may be starting in E-Rex with Don Mitchell." Evidently Mr. Capelouto's concerns escalated rapidly as he delved more deeply into the activities of some of E-Rex's key players and their many links to Big Apple's boiler room operation. After repeatedly warning E-Rex and Big Apple that he would bring his concerns to the attention of the SEC, Mr. Capelouto did just that. Mr. Shores and other several other shareholders followed suit.
SEC investigator Howard Sklar contacted a Stockwatch reporter on Aug. 21, shortly after Mr. Capelouto raised the alarm about E-Rex and Big Apple with the U.S. regulator. After acknowledging that he was contacting Stockwatch with respect to E-Rex, Mr. Sklar cautioned against reading too much into that. "Yes, I was calling you in reference to E-Rex," Mr. Sklar said. "I should say right off the bat that just because I'm asking questions about something doesn't mean--and I certainly don't mean to imply--that I think anyone has done anything wrong. We ask questions for a whole bunch of reasons on a whole bunch of different subjects, and sometimes they mean things and sometimes they don't, but we ask questions anyway."
Notwithstanding Mr. Sklar's caution, Mr. Capelouto, Mr. Shores, and other E-Rex shareholders, some of whom claim to have been interviewed for several hours by the SEC, are convinced that the U.S. regulator has initiated a full-blown investigation into E-Rex and Big Apple. Moreover, Mr. Capelouto claims that Mr. Sklar referred him to an FBI agent in Florida, who is particularly interested in Mr. Meadows's involvement with E-Rex and Big Apple. Mr. Shores has also been in touch with the FBI. "You can only surmise that they want Roy Meadows real bad and they've already been working this," Mr. Shores told Stockwatch.
Mr. Meadows, a veteran stock promoter, has ties to a number of companies involved with Big Apple, the successor to Stockbroker Presentations Inc. (SPI) and, before that, Stockbroker Relations Inc., boiler room operations controlled by Mr. Meadows. In March of last year, E-Rex issued six million shares to SPI. "Roy Meadows is behind the whole thing," Mr. Shores says. "While they lied to us, telling us that the prototypes were done, Big Apple was exchanging restricted shares for free-trading shares, selling into the market and lying to us to get us to buy. That's it in a nutshell." According to Mr. Shores, Mr. Meadows unloaded approximately 2.5 million shares of E-Rex while Big Apple pumped the stock. "It's the most sleazy business that I have ever come in contact with," the ex-cop said. "It's just sleazy, everything about it is just sleazy. It's a pump and dump operation and, unfortunately, there are probably well over a thousand victims of just this one stock." Reflecting on the many companies touted by Big Apple and its predecessors, Mr. Shores speculates that the victims of the Florida boiler room operations probably number in the tens of thousands.
THE BOILER ROOM
Boiler rooms, which are particularly active in the world of microcap companies trading under the auspices of the OTC Bulletin Board and pink sheets, have been an integral part of many stock scams. While they might operate under more refined names, such as an "investor relations firm," they are little more than a telemarketing organization with one purpose: to create a market for a stock so that insiders and significant stakeholders with ties to the boiler room, which is usually paid for its services in shares, can unload their stock on gullible investors. If the boiler room does not double as a boutique brokerage firm, it invariably has ties to brokers who will ensure that the right stock gets moved. As many investors have learned, buying the touted stock is rarely a problem; but selling it can be another matter entirely.
Working from "card decks" or, as they are also known, "sucker lists," the boiler room operators cold call "prospects" and, using hard sell techniques with little regard for the truth, pitch whatever stock they are working at the time. Boiler rooms frequently have ties to both print and Internet-based tout sheets, again often paid in shares and options, that not only tout the stock but also provide leads to new prospects. Embroidered news releases from the companies that they are touting are further embellished by the boiler room operators, who frequently make claims about imminent news and hint at insiderish information that is bound to drive the price up. Once a sale is made by an "opener," the investor is sometimes handed off to a "loader," a more experienced operator whose job is to talk the investor into buying even more shares. Along the way, the investor is encouraged to alert friends and family to the wonderful opportunity, expanding the list of suckers.
As the promotion begins to wear thin, the paid touts urge and cajole investors to support the stock by buying more shares. Eventually, however, the scheme begins to unravel and, with no independent market for the shares, the stock price collapses. The boiler room simply moves on to its next project, frequently introducing their gullible marks to the new promotion. Some E-Rex shareholders claim to have already been through several other Big Apple promotions, losing money in each one. Canada Stockwatch will look more closely at Big Apple's intriguing crop of clients in a future article.
For a very brief time, it seemed that the cosmetic culling of Big Apple might pacify some of the concerned E-Rex investors. However, many shareholders are convinced that the ties between Big Apple and some of the key players and organizations involved with E-Rex are simply too deep to be remedied by firing the tout service. "The apple does not fall far from the tree," one of the Raging Bull posters remarked. Mr. Capelouto and Mr. Shores are among those who believe that the only hope of recovering their investment is to oust the current officers and directors of E-Rex and replace them with a new team that will complete the Dragonfly project. Like many other shareholders, they claim that management was complicit in many of the misrepresentations made by Big Apple. "Big Apple is the one that cultivated me and called me every day for a couple of years," says Mr. Shores. "I actually learned to semi-trust them for a while...but I would try to verify what they told me with other people and, sure enough, it was Carl Dilley and Don Mitchell that I was verifying it with and they're all in bed together."
Among other things, Mr. Capelouto and Mr. Shores point to a peculiar deal brokered by Big Apple, allegedly with the co-operation of E-Rex management, purportedly to raise $115,000 to pay Valcom Ltd., an Ontario engineering firm, to complete six Dragonfly prototypes. As part of the deal, Mr. Shores was to sell 250,000 unrestricted shares in a private transaction and use the proceeds to purchase 360,000 restricted shares to be issued by E-Rex. Mr. Capelouto paid $75,000 for Mr. Shores's free-trading shares, with the balance of the $115,000 coming from another source. According to Mr. Shores, however, the full $115,000 never made it to E-Rex, Big Apple siphoned off $50,000. "Carl Dilley admits that he only got $65,000 of the money and that Marc (Mr. Jablon) and Matt (Mr. Maguire, another Big Apple tout) absconded with the rest," Mr. Shores claims. Moreover, Mr. Shores and Mr. Capelouto claim that only $25,000 of the $115,000 ever made it to Valcom. "It was all a lie to bilk us out of our money," says Mr. Shores. Adding insult to injury, Mr. Shores claims that he never did receive the 360,000 restricted shares that were supposed to be issued to him by E-Rex.
"What I would like to do, and I don't know how to do it, is how do we get the company and the Dragonfly away from these crooks?" the disgruntled Mr. Shores wondered. Whether the insurgent shareholders will meet with any success in wresting control of the company away from the current management remains to be seen. According to Mr. Dilley, however, that is not going to happen.
E-REX RESPONDS
"It won't happen," Mr. Dilley told Stockwatch in response to a question regarding the suggestion by some shareholders that the current officers and directors should be removed. "These people, as minority shareholders in a public company, should realize before they ever make their investment that, you know, it's very simple how it works in the corporate world. The majority of the stock votes for the board of directors and those are the people that are charged with appointing the officers that are going to run it and that's the way it will continue in the future. They can jump up and down, scream and yell, and pull their hair and do whatever they want to do and accuse people of all sorts of things that are simply too incredible for words, but, in the end, the majority of the stockholders are going to elect the board of directors and it's going to carry on. And that is not going to change.
"I would tell you this, that there's 2,000 stockholders in this company and for the sake of a half-dozen misdirected individuals that have chosen to mount this attack against the company and its directors we're not about to close up shop, go away, anything of the sort," Mr. Dilley said. "It's business as usual and we're going forward. We're certainly not pleased at the damage that it has caused to people vis-a-vis the stock price and people that may have panicked and sold for some reason based upon this overwhelming amount of misinformation that has been published. We're not happy about that and we're looking at what action to take, but we're not going anywhere. The shareholders' meeting is certainly not going to be cancelled as people have said. We're going to be there to answer questions and we're going forward."
Mr. Dilley was very reluctant to talk about the events surrounding the termination of Big Apple. "I can't go into detail about that because we've got an ongoing situation that we're trying to work through and, you know, I just can't make any comment," Mr. Dilley said. "I can tell you that some of the facts that you have there are not correct, but that's about all I can tell you about that at the moment. I can tell you this, that the company has substantially--that all of the money that the company has received has gone to pay Valcom." Mr. Dilley did acknowledge that Valcom was still owed money for work done to date and that more money would be needed to complete the Dragonfly prototype. "There is a balance outstanding and it does require more money to complete it," he said.
"A bunch of people made transactions between themselves that involved the Big Apple and didn't involve the company, that the company was not aware of and didn't condone," Mr. Dilley said when asked again about the brouhaha involving the Florida tout service. "Big Apple Consulting was never authorized to act on behalf of the company as a broker-dealer to raise money, anything of that nature. People chose to do that on their own, some of them very specifically against my instructions and now there's a problem. I can only tell you that that's an ongoing situation that I really can't comment on any further."
Mr. Dilley, a former Canadian broker, was asked about his background, acknowledging that he had been a broker with RBC Dominion Securities. "I was also a branch manager and qualified as a control and compliance officer, etc.," Mr. Dilley said. Asked again about Big Apple, particularly his assessment of the company and whether, given his securities background, he did not have concerns about it being a boiler room operation from the outset, Mr. Dilley declined to answer. "I'm going to say to you again that I'm just not at liberty to discuss the Big Apple situation," he said. "I'm just not going to do that, so you can ask all day long, we're just not going to talk about it."
Mr. Dilley was not prepared to talk very much about the claims that the SEC and the FBI were investigating E-Rex, either. "There isn't, to my knowledge, an investigation--a formal investigation--by either one," he said. However, Mr. Dilley did acknowledge that the company had been in contact with the SEC. "We've spoken to the SEC; I won't divulge what the content of that is," Mr. Dilley told Stockwatch. "We've got our counsel involved looking at a variety of things to do with this situation, postings on the Internet, misinformation that's been disseminated, and the possibility of market manipulation by one or more persons and that's really all I can tell you about that."
Among other things, Mr. Dilley was also rather hesitant to discuss his association with Mr. Mitchell in any depth. "There's one other public company that I'm also a director of that Don is also a director of," Mr. Dilley said. "Other things that we're involved in are not public, so I'm not going to share that with anybody." When asked about the large number of shares that Mr. Mitchell had been selling, however, Mr. Dilley was quick to share his thoughts. "I think that one of the things that is probably somewhat misunderstood is that International Investment Banking and Don Mitchell were really responsible for putting this company back together and engineering and getting it back on track after Dr. Bauer had his debilitating stroke," Mr. Dilley remarked. "I don't know if people realize this, many of the newbie shareholders, if you will, but at that time the other directors were prepared to file bankruptcy for the company. So, Don and the group from Orlando put a program together to put this thing back on its feet and, essentially, between Don and International Investment Banking, funded operations of the company for just about a year. So, the compensation that they received, combined, went to that end. ...They are far and away the largest contributor over the last 18 months."
The E-Rex president was willing to provide his perspective on the delays in completing the prototypes of the Dragonfly. "We've had technical delays of one kind or another; in addition, we've had delays that were caused by funding at the right times," Mr. Dilley offered. "We could have substantially added people to the engineering staff, which would have speeded up the process. We have had a number of people, some of them even in that group that are involved, that had indicated that they were going to partially fund this thing at various times and didn't do that. It's been a very difficult market to raise money in and so we've just had to go at the pace that funding would allow. You know, we've really crossed all the technical hurdles. We had a group of people at the Valcom plant about 45 days ago that saw a demonstration of the device on the engineer's bench, if you will, and very clearly it is functional, it does work. We've got some things to do with the finalizing of the cases, the actual circuit boards...as well as some of our software interface that are the remaining things to be completed so that we can put a prototype under our arm and go to the OEM distributors and other people that we're looking to go to to get this thing finished."
Mr. Dilley was cautious about suggesting an expected date for the completion of the Dragonfly prototype, pointing out that he was bound by disclosure regulations. Nonetheless, he offered a carefully qualified response. "Well, in all of these timeframes, I mean even in the case of Valcom, you know this isn't like building a house, it's all subject to projections and a lot of different things" Mr. Dilley said. "I would say subject to funding, and we have a number of things that we are working on in that area and some of the stockholders are contributing, etc., subject to funding, we are looking at this being completed within the next couple of months. Now, that's a projected date and subject to funding." Mr. Dilley says that he will be able to address such questions more candidly at the shareholders' meeting on Sept. 7.
It is not known whether Mr. Mitchell, who was not available for a Stockwatch interview, will be at that meeting. E-Rex's chairman has reportedly taken a few days off for health reasons; however, Mr. Dilley believes that Mr. Mitchell will be back in his office by the middle of next week.
THE DRAGONFLY
The Dragonfly is the brainchild of Adolf "Adi" Bauer, who passed away on March 29, 2001. Mr. Bauer began to develop the Dragonfly under the aegis of Vancouver-based Plantech Communications Systems Inc., which he sold to E-Rex in a share transaction that was completed in March of 1999. According to a lawsuit against E-Rex and Mr. Bauer filed in the Supreme Court of British Columbia on July 20, 2000, the Dragonfly visionary had been shopping Plantech around for several years prior to entering into the transaction with E-Rex. What was once touted as "the Communication Tool of the New Millennium" has yet to make its debut.
As strange as it may seem, given the many claims of misrepresentation by both E-Rex and Big Apple, both Mr. Capelouto and Mr. Shores are among those who believe that the Dragonfly is a valuable asset, the potential of which might be realized under new management. "My own personal opinion, and the only reason I haven't sold, is because if in fact we see Don Mitchell and Carl Dilley step down, I'm very convinced this will take back off again," Mr. Capelouto says. In part, Mr. Capelouto's faith in the Dragonfly rests on the purported assessment of Ann Balduzzi, a marketing consultant hired by E-Rex. "Ann Balduzzi says that this is a real product, that there is nothing like it on the market," Mr. Capelouto says. "The one thing that I hung my hat on with staying in this whole thing, regardless of all this bullshit, was that she said, that from what she understands, nobody is within two years of bringing this to market; and if this can be brought to market before everyone else does, then you've got something." Mr. Shores holds a similar belief. "I think it's real; I think it's valuable," the ex-cop says.
Whether the belief in the value of the Dragonfly is warranted remains an open question. At present, however, the market is placing little value on E-Rex. The stock, which traded as high as $2.44 (U.S.) in March of last year, set a new 52-week low of three U.S. cents on Aug. 30 before closing at five U.S. cents.
Comments regarding this article may be sent to lwebb@stockwatch.com
(Earlier Canada Stockwatch articles involving E-Rex were published on July 21, 2000, and March 19, 2001. Canada Stockwatch articles regarding Medical Services International Inc., formerly Medical Resorts International Inc., were published on June 30; July 4, 5 and 17; Aug. 4; Sept. 25 and 27; Oct. 10, 13, 19, 23 and 27; Nov. 13, 22 and 24; Dec. 7 and 22, 2000; Jan. 23; Feb. 28; March 19; April 2; and Aug. 27, 2001.)
(c) Copyright 2001 Canjex Publishing Ltd.
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