SEC target gives Canadian shell makers a bad name
By: scion
Wed, 21 Apr 10 1:27 PM Msg. 23475 of 24693
SEC target gives Canadian shell makers a bad name
2010-04-21 13:54 ET - Street Wire
Also Street Wire (U-*SEC) U.S. Securities and Exchange Commission
by Janice Shell
stockwatch.com
In stock market circles, Canadians are well known for creating shell companies. Over the years shell making has become a small but high profile industry -- as Canadian as tapping trees for maple syrup, but without the charm. As a result, the shell industry has to work harder at maintaining its good image, and a recent development is cause for concern.
Even before the Vancouver Exchange merged with the Alberta Exchange in 1999 to form first the CDNX and then the TSX Venture Exchange, the easiest way for small companies to go public was to reverse merge with what is called a capital pool company. It still is. CPCs are carefully regulated, so as to give the impression they are genuinely-public public companies, and the eventual merger process requires the approval of the TSX.V. The CPC's original financiers hope their shell, like an adorable puppy, will go to a good home. In fact, the reputation of shell makers, and thus the industry, is all about finding good homes. Little else really matters, as long as the shell's new owners can mount a credible promotion. Shell makers who sell their shells "well" are an asset to the industry; those who do not are a liability. Too many of the latter and the industry will wither.
Some Canadian shell makers, however, regard this process and its responsibilities as tedious, and, rather than bother with it, choose to list their shells on U.S. exchanges, where requirements are lax almost to the point of non-existence. What is worse, these shell makers do not care who they sell to. Any clown will do. Which brings us to Sandy Winick, Besmircher-in-Chief of Canadian shell making.
Sandy Winick
Mr. Winick is a Torontonian, who in 2002 became president of a shell called Adatom.com that had formerly traded on the NASDAQ. He moved the company's incorporation to Ontario, and changed its name to First Canadian American Holding Company. He then spun off an astonishing 59 wholly-owned subsidiaries through unregistered distributions of their shares to FCAH shareholders. He owned 83 percent of FCAH's stock in his own name, and controlled another 16.5 per cent. According to the Securities and Exchange Commission, which is suing, Mr. Winick "used the spinoffs to create a trading market in the stocks of the Subsidiaries without providing the public disclosure that registration requires." Never mind that neither the rigged distribution nor the 59 spinoffs would have been possible on a Canadian exchange. Mr. Winick's greater sin is where those 59 puppies went -- not to good homes. One of the recipients stands out.
So keen was Mr. Winick on seeing his protegee Elvira Gamboa with a company of her own to promote that he gave her one of his shells at no charge, a gift. While Ms. Gamboa's name may not mean much to Canadians, one of her earlier enterprises might. She was once the president of the Dominion of Melchizedek, a nation she dreamt up that existed only in her mind. Except for a few who fell for the tale, most treated it as a sort of giant April Fool's trick, never quite appreciating that Ms. Gamboa was serious. A native of the Philippines, Ms. Gamboa also uses the names Pearlasia, E. Pearlasia, and Bae Katiguman (or Catiguman).
Elvira Gamboa and ZNext Mining
Ms. Gamboa named the new shell she received from Mr. Winick Pearl Asian Mining Industries Inc. It traded first as PAMJF, then PRMN, then PRLGF, then PAIM, and finally ZNXT (for ZNext Mining Corporation). Ms. Gamboa has at one time or another incorporated ZNXT in Ontario, Oregon, the Philippines, Wyoming, and Delaware. Along the way, she has performed a great many corporate actions: reverse splits, spin offs, stock dividends, one cash dividend, and two extremely confusing "mandatory buybacks."
More recently, in March, 2009, what is described by George Faustino Carpio Jr., current CEO and president, as "our group" bought out Ms. Gamboa's controlling interest in ZNXT. According to Mr. Carpio, the Delaware incorporation was dissolved, and the name changed back to Pearl Asian Mining Industries Inc. The "country of jurisdiction" was changed from the U.S. to the Philippines. Yet another corporate action was planned, as a result of which every 50 shares of ZNXT common stock would be exchanged for 75 new commons shares of Pearl Asian Mining. In addition, 10,000 new common shares in Pearl Asian Mining would be exchanged for each share of the company's preferred stock, ZNXPP.
A year later, these corporate actions have not taken place; the company says it is waiting for new stock symbols to be issued, one for ZNXT in the Philippines, and one for ZNXPP in Canada. Mr. Carpio suggests that the delay is largely due to the "false allegations" made by the Securities and Exchange Commission against ZNXT and Ms. Gamboa.
The SEC enforcement action
On June 12, 2009, the SEC sued Ms. Gamboa and ZNext Mining Corporation, the same day it took action against her former mentor, Sandy Winick.
The SEC alleges that Ms. Gamboa and ZNXT made false disclosure about the nature of PAIM/ZNXT's operations and her ownership in the company, disseminated false financial statements, and issued a number of false press releases, examples of which are appended to the complaint.
The ownership issue is of particular importance for shareholders. In many of its press releases, the company claimed that PAIM/ZNXT is a "multi-national" corporation incorporated in both the U.S. and the Philippines. The two companies-PAIM/ZNXT and PAMI, the Philippine firm, are purported to be essentially the same; in financial statements filed with Pinksheets.com, the numbers given for the two companies are identical.
ZNXT's public statements, however, inform readers that because Philippine law limits foreign ownership in Philippine companies, ZNXT is entitled to no more than 40 per cent of the profit or interests of PAMI.
According to the SEC, these claims are entirely untrue: "PAIM has no equity in PAIM Philippines, does not have any claim over PAIM Philippines' mining assets or operations, and is not entitled to receive any of the profit. In fact, PAIM Philippines is a separate company that is 96% owned by Gamboa. Gamboa never disclosed her controlling shareholder interest in PAIM Philippines or the lack of any direct legal relationship between PAIM Philippines and PAIM."
The SEC further alleges that Ms. Gamboa traded fraudulently in her company's stock, and, as the company's sole control person, arranged for the sale of approximately 19 billion shares of purportedly unrestricted stock to a Long Island financing and promotion firm. Total proceeds from the sale were $5.4-million. (All figures in U.S. dollars)
According to the SEC, PAIM/ZNXT received nothing from these stock sales. She remitted less than 50 per cent of the proceeds to PAMI, in the Philippines, and kept the rest of the money for herself.
This does not sound like a good home for a made-in-Canada shell.
The company and its founder react
ZNXT has had plenty to say about the enforcement action. In a recent letter to shareholders, Mr. Carpio claims that "we are addressing and working towards the settlement on the false allegations of the SEC against the past ZNext Mining and the founder."
Ms. Gamboa herself commented on the lawsuit in a Pinksheets.com "filing" from October, 2009, in which she maintains that "Pearl Asian Mining/ZNext Mining is not a scam!" In the course of her rambling narrative, she addresses several of the points made by the SEC, noting, for example, that she "DID NOT issue a steady string of press releases taking up the corporation's 'state-of-the-art gold mill plant facility' nor mentioned about a novel system of refining precious metals that would save the company $10 million per year."
The press releases in question are, as noted, attached to the SEC's complaint.
Describing herself as the "SELFLESS, BENEVOLENT and KIND HEARTED Founder" of the company, Ms. Gamboa goes on to explain that far from misappropriating money, she used some of the proceeds made from stock sales to fund charitable projects in the Philippines.
Motion for default judgment
Despite their earnest and angry protestations of innocence, Ms. Gamboa and ZNXT declined to defend themselves against the SEC.
On March 5, 2010, the agency filed a motion for default judgment against both defendants in the case. The commission asks that ZNext and Ms. Gamboa be enjoined from future violations of SEC anti-fraud regulations, and requests that ZNext and Ms. Gamboa be ordered to pay civil penalties in the amount of $650,000 and $130,000 respectively. In addition, the SEC pleads that Ms. Gamboa be ordered to pay an additional $1-million in disgorgement plus $48,588.48 in prejudgment interest, and that she be subjected to a officer and director ban and a bar against involvement with penny stocks.
A hearing has been set for May 6, 2010, in the U.S. District for the Northern District of California, San Francisco Division.
Mr. Carpio ends his letter on a note of optimism: "Even if the SEC wins its lawsuit, we are determined to protect our shareholders through any and all legal means, and move our company to success. Many companies have survived SEC judgments, and we are determined to succeed!!"
As for shell-maker Winick, the SEC is seeking $3.55-million in penalties against him. The reputational cost to Canadian shell makers is impossible to pin down.
Comments regarding this article may be sent to jshell@stockwatch.com.
(Further information regarding Sandy Winick can be found in a Stockwatch article dated April 7, 2010.)
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