Monday, December 7, 1998
Solv-Ex launches massive lawsuit
Deutsche Bank, fund manager and short sellers sued
By SANDRA RUBIN
The Financial Post
Solv-Ex Corp., long battered by wild stock swings and controversy over its technology to extract oil from Alberta's tar sands, has struck back with a lawsuit attacking Deutsche Bank AG, its cross-dressing star fund manager, and a powerful group of U.S. short sellers.
In a 24-page complaint filed in the U.S., Solv-Ex makes clear for the first time the bitterly opposing market currents that it says left it delisted, discredited, and all but destroyed -- wiping out almost $800-million (all figures in U.S. dollars) in stock market value in the process.
The allegations involve industrial espionage, damning internal e-mails, and manipulation of not just Internet chat groups but some of the world's most prestigious media organizations.
The suit, which charges conspiracy, fraud, breach of contract, and unjust enrichment, seeks "massive" actual and punitive damages and costs.
Solv-Ex, based in Albuquerque, N.M., says it has a cheaper and environmentally friendly way to extract bitumen from the vast Alberta oil sands. Bitumen is a tar-like form of crude oil that can be converted into petroleum.
But the firm was never able to raise enough money to fully put its technology to the test on a commercial basis, it charges because of a "malicious campaign" by short sellers to drive down its share price for their own gain. Shorts profit only when a stock price falls.
In the lawsuit filed late Friday in State Court in Albuquerque, Solv-Ex alleges that a group of three short sellers illegally obtained company secrets after approaching the firm in 1996 posing as potential investors. In fact, the suit says, they had already taken a "large and risky" short position in the company's stock or were working with others who had.
The trio signed confidentiality agreements and were granted full access to all of Solv-Ex's planned projects, operations and business strategies. They were allowed to bring in Vancouver-based Weir-Jones Engineering Consultants Ltd., who interviewed Solv-Ex management about its technology.
The suit alleges the three supposed "investors" shared the information they had gleaned with four other U.S. short sellers, and the group then fed reporters at The Wall Street Journal, CNBC and Barron's magazine misleading and innacurate information about Solv-Ex and its prospects. The lawsuit says the short-sellers, using pseudonyms, also posted misinformation on an Internet chat group for Solv-Ex investors.
The complaint alleges the "centrepiece" of the short sellers' assault was confidential information in the Weir-Jones report that was "formulated with their connivance." The lawsuit says it was leaked to five Canadian stock analysts, three unidentified Canadian media outlets and Danny Dalla-Longa, who was a Calgary MLA. None are named as defendants.
"The objective of their scheme was to undermine Solv-Ex's efforts to locate financing and destroy the value of its stock."
The company was trying to raise money to build an extraction plant in Fort McMurray, Alta., where it had leases on fields containing an estimated four billion barrels of oil.
The complaint quotes a March, 1996, e-mail by one of the short-seller's employees acknowleging "we'd be screwed pretty badly" if Solv-Ex nailed down financing.
The e-mail also noted any delay was "good news for us" because an upcoming Wall Street Journal article the shorts had allegedly instigated "should hopefully be enough to scare any potential lenders off from this company."
It certainly scared off investors. Solv-Ex's share price plunged to $7.38 from $24.38 within two days of the article's publication, forcing the company to renegotiate a $31-million financing on "much less favorable terms."
Even as the short-sellers were hammering away at the stock, Peter Young, a "superstar" fund manager for Deutsche Bank in London, was secretly trying to corner the market in Solv-Ex shares, according to the suit.
Mr. Young, who has been charged with fraud by British authorities and is being sued by Deutsche Bank, poured $70-million into Solv-Ex through two private placements and a debt issue, using offshore shell companies to hide his involvement. The heavy buying artifically inflated the share price, which shot up to $30.44 from $15.50 in a few weeks in early 1996.
It is believed Mr. Young -- who showed up for a recent court appearance dressed as a woman -- hoped to force the U.S. short sellers into buying to cover their position -- and in the process make enough money to offset heavy losses his Deutsche Bank had incurred investing in risky, unlisted European companies.
But the suit says the "inevitable effect" of the upward pressure he exerted and the downward pressure by the shorts was to "whipsaw Solv-Ex in the marketplace, fatally crippling its efforts to finance its business."
The complaint says once Deutsche Bank disclosed Mr. Young's actions, New York short-seller Manuel Asensio, who could not be reached for comment yesterday, issued press releases charging Solv-Ex had paid him to buy its stock.
Mr. Young, Deutsche Bank and a lawyer for Weir-Jones were also unavailable.
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