Conversion Solutions asset assigned by alleged scammer
2006-11-10 13:11 ET - Street Wire
by Lee M. Webb
Conversion Solutions Holdings Corp.'s touted $310-million Uniform Commercial Code (UCC) security note was assigned to one of the company's precursors, Waatle Holdings Corp., by alleged Mad Dog Builders Inc. fraudster David A. Hawkins, Stockwatch has learned. (All amounts are in U.S. dollars.)
Mr. Hawkins, a 67-year-old resident of the Seattle, Wash., area and 71-year-old lawyer Harry Skeins from Blanco, Tex., were arrested in May and indicted for conspiracy and wire fraud in connection with an allegedly fraudulent mortgage scheme on Aug. 16.
Among other things, the scheme allegedly involved invalid liens, purported foreclosures, illegal conveyance, bogus title insurance and fraudulent mortgage applications that netted the pair approximately $1.5-million in loan proceeds.
Mr. Hawkins and Mr. Skeins have both entered pleas of not guilty and, upon the filing of waivers of a speedy trial and a stipulated motion for a continuance, the case is scheduled for trial next February.
While the charges against Mr. Hawkins and Mr. Skeins do not involve Conversion's $310-million UCC note, Stockwatch's investigation of the background to the case, including the review of hundreds of pages of court and county filings, has uncovered matters with significant implications for the company's already highly suspect claims regarding its assets.
As previously reported, on Oct. 24, the U.S. Securities and Exchange Commission (SEC) issued a 10-day suspension against Conversion and filed a fraud lawsuit against the company and its now former chief executive officer Rufus Paul Harris alleging that the company's claims about owning billions of dollars worth of bonds are bogus.
Even after Conversion was booted from the OTC Bulletin Board to the grey market in the wake of the SEC suspension, many of the promotion's cult-like followers insist that the U.S. regulator is mistaken, or corrupt, and cling to the fantasy that the penniless company has $7.3-billion worth of assets.
Other "true longs," casting themselves in the role of "conservative" investors, point to Conversion's dubious audited financial statements covering a period prior to the purported acquisition of the bulk of its bonds as proof that, at the very least, the company had $810-million in assets as of June 30, 2006.
Setting aside any detailed consideration of the arguably slipshod audited financial statements, the purported $810-million in assets as of June 30, 2006, reportedly comprised a $500-million Republic of Venezuela bond and the $310-million UCC note.
In an affidavit by an SEC accountant filed in connection with the lawsuit, the U.S. regulator offers rather compelling evidence that, among other things, Conversion does not own the $500-million Venezuelan bond.
To this point, perhaps understandably satisfied that it can make its fraud case based primarily on the bogus bond claims, the SEC has been silent on the matter of the reported $310-million UCC note, which actually provided the early foundation for the promotion.
In any event, Stockwatch's investigation indicates that the purported $310-million UCC note assigned to Conversion precursor Waatle by Mad Dog principal Mr. Hawkins is probably worthless.
Mad Dog
The intriguing story of Mr. Hawkins and Mad Dog traces back more than two decades to at least the early 1980s.
In 1981, Mr. Hawkins was the developer of a nine-story condominium project overlooking Seattle and Puget Sound. At the time, the Mad Dog project was reportedly appraised at $6-million.
As construction was nearing completion, Queen City Savings and Loan, which was financing the project, withheld several months worth of draws under the loan contract with Mad Dog.
According to Mr. Hawkins, Queen City's actions choked off his company's cash flow and prevented him from making the regular loan payments to the lender.
With the loan in default, Queen City then served a notice of foreclosure, shutting the job down.
Mad Dog filed for bankruptcy in order to obtain a temporary stay of the foreclosure and sale of the condominium project, hoping to get financing from another source.
In May of 1983, however, bankruptcy judge Samuel J. Steiner terminated the stay, clearing the way for Queen City to sell the property.
"Then Queen City sold the building to itself, stealing thereby our investment of capital, labor and materials," Mr. Hawkins later declared in an affidavit. "Our business was destroyed, and the businesses of many of my associates were destroyed or suffered injury."
Mr. Hawkins quickly filed a fraud lawsuit against Queen City, prevailing in a jury trial in which the verdict and jury award was rendered in February of 1984.
According to Mr. Hawkins, however, the jury award "was deliberately, improperly, and unlawfully reported in open court by Judge James McCutcheon" to be $350,000 instead of the $3.5-million actually awarded by the jury.
Indeed, based on the affidavits of the 12 jurors subsequently obtained by Mr. Hawkins, the jury evidently believed that it had made awards of $350,000 and $3.2-million for a total of approximately $3.5-million.
Alas, according to Mr. Hawkins, Superior Court Judge Donald Thompson accepted the allegedly perjured testimony about the matter by Judge McCutcheon and his bailiff and "refused to correct and record the true jury award."
Mr. Hawkins battled on, filing appeals and launching about a dozen civil actions in Washington state and federal courts in addition to lodging complaints with various judicial and administrative bodies.
Over the course of about 10 years, the Mad Dog builder lost the appeals and lawsuits and evidently did not receive any satisfaction from bodies such as the Washington State Commission on Judicial Conduct.
Evidently distraught, to put it mildly, by the perceived misconduct and chicanery of trial and appellate judges, lawyers, bank executives, county officials and others, Mr. Hawkins turned to another strategy in the early 1990s.
By 1994, Mr. Hawkins and Mad Dog began filing non-consensual liens and an "affidavit of obligation" in King county against the property of at least 16 individuals including various judges, lawyers, bank executives and others who he believed had conspired to wrongfully frustrate his civil lawsuits related to the Queen City dispute.
In October of 1994, Mr. Hawkins and Mad Dog assigned their purported interests in the liens to Pacific Beach Mortgage Co. Inc., another entity that he controlled.
On Nov. 1, 1994, however, Superior Court Judge R. Joseph Wesley issued an order striking liens and other documents filed by Mr. Hawkins, Mad Dog and Pacific Beach. Similar orders were entered by the court with respect to actions involving other properties.
The Nov. 1, 1994, court order effectively putting paid to the Mad Dog scheme might have stopped a less determined individual, but Mr. Hawkins barely broke stride.
Indeed, while it evidently took a bit of time, Mr. Hawkins added considerably to his list of purported lien debtors following the issuance of the court order intended to bring his "frivolous" and "malicious" activities to an end.
On a purported $300-million commercial note filed on July 3, 2001, Mr. Hawkins identifies more than 50 principal and accessory lien debtors including the United States of America, seven judges, at least six lawyers, a handful of Washington state and King county officials and a couple of Seattle police officers, among others.
Beginning in about 2000, as part of his efforts to convert the invalid liens into an asset he could use to make money, Mr. Hawkins and his Pacific Beach Mortgage began assigning and transferring interests in purported commercial notes and UCC security notes that ran to billions of dollars in total.
Perhaps the UCC notes scheme was not very lucrative. In any event, at least by early 2003, Mr. Hawkins was busy with a scheme that led to his arrest and subsequent indictment along with Mr. Skeins.
The mortgage scheme
As noted, Mr. Hawkins and Mr. Skeins were arrested on May 3 and indicted on one count of conspiracy to commit wire fraud and two counts of wire fraud on Aug. 16.
According to the government's allegations, on April 18, 2003, Pacific Beach filed quit claim deeds on properties that had been the subject of invalid liens by Mad Dog. The deeds purported to pass title from Pacific Beach to another outfit, PowerStone Ltd.
The U.S. prosecutor claims that there was no lawful authority for the alleged conveyances.
More than two years later, on June 20, 2005, Pacific Beach allegedly filed notices vacating the quit claim deeds to PowerStone, thereby purporting to revert the title back to Mr. Hawkins's Pacific Beach.
At some point in the scheme, Mr. Hawkins and Mr. Skeins allegedly started a bogus title insurance company called the Commercial Title and Escrow Company Inc.
On March 15 of this year, Mr. Hawkins, acting as president of Pacific Beach, entered into purported sale agreements with a "straw buyer" he recruited for the scheme. The buyer is identified only as "B.D." in the indictment.
The straw buyer, armed with allegedly bogus title insurance policies from Commercial Title, then applied for mortgage loans to complete the purchases.
All told, Mr. Hawkins and Mr. Skeins allegedly ended up with approximately $1.5-million from the fraudulent mortgage loan scheme.
According to the indictment, the allegedly fraudulent scheme was the culmination of Mr. Hawkins's efforts to convert the invalid liens he had been filing since at least 1994 "into an asset he could sell, mortgage, or otherwise use to make money."
While the allegedly fraudulent mortgage scheme may well mark the end of Mr. Hawkins's efforts with respect to the invalid liens, particularly given his arrest, his UCC note transfers and assignments arguably deserve some consideration as marking the high point of his efforts, though it is not clear just how much money, if any, he made with that scheme.
The UCC notes
As noted above, Mr. Hawkins and Pacific Beach transferred and assigned commercial and UCC notes totalling billions of dollars.
The largest single UCC note assignment uncovered by Stockwatch amounted to a purported $1-billion that was assigned to Mr. Hawkins and Carl Chuman by Pacific Beach on Dec. 10, 2002.
Pacific Beach made a number smaller assignments including $1-million to Joe Cribbs of Birmingham, Ala., another $1-million to William Webb of Lawrenceville, Ga., and $4-million to Dwayne D. Rudd of West Lake, Ohio. All of those assignments were made on Jan. 13, 2003.
A larger UCC note assignment was recorded on May 14, 2002, when Pacific Beach assigned a purported $150-million interest to the Great Domestic Insurance Company Inc. of the Philippines and Excalibur International Insurance Services.
Interestingly, when Broadband Wireless International Corp. filed a lawsuit as part of its effort to give the boot to Mr. Harris and his two associates, Ben Stanley and John Walsh, the company claimed that they had foisted a purported $100-million, but actually worthless, bond off on them that had been underwritten by two defunct Philippine companies.
It is not clear whether the purported $100-million bond that Mr. Harris brought to Broadband is related to the $150-million UCC note assignment Mr. Hawkins's Pacific Beach issued to Great Domestic and Excalibur.
In any event, it does appear that Mr. Harris's sidekick at Broadband and Conversion, Mr. Stanley, had some previous dealing with Pacific Beach.
Evidently Pacific Beach assigned a $40-million UCC note interest to a company called Progressive Primitive Oaks Inc. some time prior to March of 2000, though that assignment was at least temporarily rescinded for non-performance of whatever contract it entailed on March 16, 2000.
By April of 2003, however the Progressive Primitive Oaks deal, whatever its specific nature, was apparently back on.
A Pacific Beach corporate resolution of April of 2003 gave Mr. Hawkins authority to open chequing accounts and so on, including the specific authority to direct the opening of a bank account by inviduals identified as Ben Stanley and Mike Grabarkiewiez for depositing "the designated net usable cash" tied to the $40-million UCC assignment to Progressive Primitive Oaks.
There is no way of telling just how that turned out, but it certainly appears that at least one subsequent Conversion officer had some relationship with Mr. Hawkins and Pacific Beach predating the UCC note assigned to Waatle that ended up as a Conversion asset.
The Waatle note
It is difficult to tease much in the way of significant details regarding the UCC note acquired by Conversion through its merger with Waatle on June 17, 2005, from any of the company's SEC filings, and Mr. Harris has been far from forthcoming about the matter.
Indeed, when pressed for details about the note by Timothy Miles, one of Conversion's early and sharpest critics, during one of his marathon SupPennyRadio interviews, Mr. Harris simply brushed the questions off by telling Mr. Miles that he should be able to do his own research.
Mr. Harris claimed that all the information about the UCC note was available in Waatle news releases, but Stockwatch has had no more success than Mr. Miles in locating any such news releases.
According to what apparently passes for audited financial statements, Conversion holds a $310-million UCC note obtained by virtue of the Waatle merger.
"The UCC Security Note was properly assigned to Waatle Holdings Corp. (assignee) on April 15, 2004 to be effective on May 27, 2004 from another company (assignor) in exchange for agreed upon consideration," a note to the slipshod financial statements vaguely states.
"The UCC Security Note is free and clear of all liens and encumbrances and the company has clear and marketable title to the assets securing the note," the note adds. "The assignor is a corporation organized and existing under the laws of the State of Washington and in good standing under the laws of such State."
The note to the financial statements goes on to claim that the value components of the UCC note comprise approximately $172.3-million in principal and $137.8-million in interest, which might lead some skeptics to think that the note is badly impaired, given the whopping interest outstanding and the absence of any payment since the company acquired the note.
In any event, the note to the financial statements goes on to disclose that Waatle agreed to pay the unidentified assignor $40-million for the UCC note, with the first payment due within 60 days of May 27, 2004.
The first payment was never made and Conversion still owes the full $40-million for the ballyhooed UCC note.
While the notes to the financial statements do not identify the mystery assignor, Stockwatch can identify the assignor as Pacific Beach, with the certificate of standing executed by Mr. Hawkins in the role of managing director.
Interestingly, the Washington state recorder's cover sheet identifies the assignee as Waatle Holdings LLC with an address in San Diego, Calif.
Also of some interest, the May 27, 2004, filing includes a Pacific Beach corporate resolution authorizing the assignment, then pegged at $250-million, that is signed by Dr. Vijaya Kumar as secretary.
The resolution lists a Scarborough, Ont., address as Pacific Beach's corporate office, while an exhibit identifying Waatle as the assignee lists a different Scarborough address for Pacific Beach.
In any case, a review of the history of Mr. Hawkins and Mad Dog indicates that Conversion's touted $310-million UCC note is every bit as suspect as the company's allegedly bogus bond assets. Indeed, it is probably worthless.
Stockwatch will take a closer look at Conversion's purported bonds in a future article.
Preliminary injunction
In other news, the SEC obtained a preliminary injunction against Mr. Harris and Conversion on Nov. 7.
Mr. Harris consented to the entry of the order without admitting or denying the allegations in the lawsuit filed on Oct. 24.
In spite of being advised that it had to be represented by counsel, Conversion did not bother to appear with a lawyer at the Nov. 7 hearing.
According to the order, Conversion's new chief executive officer Michael Alexander did not oppose the motion for a preliminary injunction.
Basically, the preliminary injunction enjoins the defendants, Mr. Harris and Conversion, from making fraudulent claims and violating securities regulations. The injunction also allows the SEC to continue with expedited discovery.
Now changing hands on the grey market, Conversion shed another eight cents to close at 47 cents on Nov. 9.
Stockwatch will continue to follow developments.
Comments regarding this article may be sent to lwebb@stockwatch.com.
(More information regarding Conversion Solutions Holdings Corp. is available in Stockwatch articles published on Oct. 13, 16, 18, 20, 24 and 26; and Nov. 2, 3 and 7, 2006.)
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