Rakesh Saxena

[Magda Hassan]

History and mystery

by CHRIS CAREY with JUSTIN MCLACHLAN



(Editor's note: In the course of our investigations, we come across people whose names pop up frequently in connection with questionable companies, or who always seem to have other issues surrounding them. We think that covering in detail the backgrounds of these people will help make investors smarter. We created Sharesleuth.com to introduce you to some of them, and now we are adding a second page, Sharesleuth.com Matrix, to allow you to track them. Starting with this story, we will add summaries of individuals and companies that appear in Sharesleuth stories to a searchable database that readers can use to learn more about them and to see how what links they might have to others in the database.)

In December 2001, the Nasdaq stock exchange delisted the shares of Global Capital Partners Inc., citing its ties to people with serious criminal or regulatory histories.
Nasdaq investigators concluded that two convicted felons, Regis Possino and Sherman Mazur, had acquired a substantial, undisclosed interest in the company, which operated brokerages in the United States and Europe. Global Capital's chairman and chief executive, Martin A. Sumichrast, was a direct participant in the financing deal that led to their involvement.
According to Nasdaq's findings, Sumichrast created a separate entity that bought newly issued shares from Global Capital, using money that ultimately came from companies connected to Possino and Mazur. Global Capital (Pink Sheets: GCPL.PK) later bought millions of dollars of stock in obscure public companies tied to Possino or Mazur. Nasdaq said the brokerage also sold a stake in an online subsidiary to a company headed by one of their associates, another financial felon. In addition, investigators said, Global Capital participated in a dubious $27.5 million divestiture that led it to inflate assets and earnings and to file what it called "materially misleading" financial statements for at least three quarters.
No regulatory charges were filed in connection with the deals. Nor were investors ever told the full reason for the delisting. By appearances, Global Capital's shares were removed solely for failure to meet the exchange's minimum share price.
Global Capital gave up its brokerage license in 2002 and faded from view. Since then, Sumichrast has worked as a consultant for other publicly traded companies. He also led an investor group that packaged four U.S. shell companies for reverse mergers with China-based partners. The first of those shells became China Fire & Security Group Inc., which was the subject of a previous Sharesleuth investigation.
A second shell company, International Imaging Systems Inc., was transformed last fall into China Bio Energy Holding Group Co. (OTCBB: CBEH.OB). A third, Forme Capital Inc., combined in March with a Chinese supermarket chain and has changed its name to QKL Stores Inc. (OTCBB: QKLS.OB). The fourth shell, Southern Sauce Co. (SOSA.OB) announced last month that it had completed a reverse merger with a Chinese company that specializes in ceramic valves and other products.
In our report on China Fire, we noted that some of the investors in the shells had previously been connected to stock manipulation schemes. Since then, we have turned up information linking Sumichrast to a succession of white-collar criminals.
Our research also shows that Sumichrast and several of his partners in the shell and reverse-merger deals have a mutual history at other public companies. One of those is in liquidation, and another is facing delisting from the American Stock Exchange. We think that anyone considering investing in China Bio Energy, QKL Stores or the Chinese valve maker should know the backgrounds of the people who have helped create them.


It's possible that China Fire, China Bio Energy, QKL Stores and the Chinese valve maker are perfectly legitimate companies that had the misfortune of doing business with Americans who have questionable pasts. But we wonder why, if those and other Chinese companies are so promising, they escaped the attention of bigger, more reputable U.S. investment firms. We also wonder why the more we investigate these Chinese reverse-merger deals, the more people we find with criminal or regulatory pasts. We will continue to dig deeper and report on what we find.
(Disclosure: Mark Cuban, the majority member of Sharesleuth.com LLC, has no position in any of the stocks mentioned in this story. Chris Carey, editor of Sharesleuth.com, does not invest in individual stocks and has no position in any of the stocks mentioned here.)


NEW FINDINGS
Sharesleuth's latest reporting found that Sumichrast's ties to past fraud schemes or individuals who committed fraud were more extensive than we first realized. We found that:

• Sumichrast was a director and shareholder of A1 Internet.com Inc., a public company that was one of Global Capital's investment banking clients. A1 and Global Capital also were partners in an online venture designed to link businesses with buyers and investors. A1 Internet's second-largest stockholder, Larry W. Kerschenbaum, pleaded guilty to conspiracy to commit securities fraud in connection with his sale of A1 shares. Federal prosecutors charged that, from 1999 to 2001, he bribed two Global Capital brokers to recommend and sell his shares to their clients. The stock sales began while Sumichrast was on A1 Internet's board and while he was running Global Capital (then called Eastbrokers International Inc.) Three other people associated with A1 Internet, including its chief executive officer, were later convicted or pleaded guilty in a separate fraud case involving sales of the company's stock. ((To read more about Global Capital and A1 Internet, click here))
  
• Sumichrast was one of four people who provided short-term "bridge loan" financing to e-Net Inc. in 1996, just before a planned stock offering underwritten by a corrupt brokerage called Stratton Oakmont Inc. Global Capital's corporate predecessor, Czech Industries Inc., had raised $15 million through that firm the previous year. Stratton Oakmont's owners would later go to prison for a variety of offenses, including manipulating share prices in at least 34 public offerings. The Czech Industries deal was among them. In some of the offerings, Stratton Oakmont's owners and their associates used bridge loans to put shares and warrants in the hands of front people who agreed to sell the securities back to them upon demand. e-Net did not go forward with its stock sale. According to an account in the Washington Post, regulators balked at Stratton Oakmont's involvement, and were concerned that the four bridge lenders were getting securities valued at $7 million for a $1 million loan that was to be repaid in less than a year. e-Net went public the following year in an offering underwritten by Barron Chase Securities Inc., a firm whose president later went to prison for his role in yet another fraudulent stock offering.
  
• Sumichrast appears to have been involved in the creation of a company called American Corp., which filed for a public offering in September 2002. SEC documents show that the major shareholders were Sumichrast's sister-in-law, Stacey L. Rennix; his business partner, Ralph O. Olson; two former Global Capital insiders and Thomas T. Prousalis Jr., the lawyer who acted as securities counsel for e-Net, Czech Industries and a handful of other companies in their Stratton Oakmont offerings. American Corp.'s last SEC filing on its proposed stock sale was in August 2003. Prousalis was indicted five months later in connection with another stock deal - the same one that landed the president of Barron Chase in prison. Prousalis pleaded guilty in the middle of his trial and was sentenced to 57 months. According to coverage of the case in the Washington Post, prosecutors had asked to present evidence that Prousalis was a participant in the planning of six fraudulent public offerings, including the e-Net and Czech Industries deal. They said that Jordan Belfort, one of the founders of Stratton Oakmont, would testify against him.
  

MUTUAL HISTORY
Five members of the group that invested in Sumichrast's Chinese reverse-merger deals were involved in a California company called House of Taylor Jewelry Inc. (Pink Sheets: HOTJ.PK), either as officers, directors, shareholders or investment bankers. The "Taylor'' in the corporate name is actress Elizabeth Taylor, who licensed a line of jewelry to the business and became its biggest shareholder. Former supermodel Kathy Ireland also licensed a line of jewelry to the company.
Lomond International Inc., a company run by Sumichrast and Olson, helped create House of Taylor in May 2005. SEC filings don't specify the role that Lomond played in the company's formation. They do show that Lomond got 900,000 shares of stock, making it the sixth biggest holder. House of Taylor's shares have skidded from a high of $7.50 in January 2006 to less than a penny today. Its stock was delisted from the Nasdaq exchange in April. Taylor and Ireland have terminated their licensing deals with the company, and its main lender is liquidating its assets.
Sharesleuth's investigation found that Lomond International and two other early House of Taylor investors transferred at least 1.6 million of their shares in 2005 to recipients whose names never appeared in the company's SEC filings. They included two people with long ties to Irving Kott, a Canadian financier and stock promoter with two fraud-related convictions. That discovery continued a pattern that we had noted in our earlier story.
Some of those House of Taylor shares also wound up with a company whose signatory was Sumichrast's sister-in-law, and to four inscrutably named limited liability companies - each of which used a drop box at a different Mailboxes Etc. store as its business address.
SEC filings show that a company headed by stock promoter Stephen E. Apolant got shares in House of Taylor a few weeks before its formal creation. At the time, Apolant was a defendant in an SEC fraud case involving a "pump and dump'' scheme at another public company.
At least five members of Sumichrast's investor group also were involved in a company called Recom Managed Systems Inc. The shares of that company, now known as Signalife Inc. (AMEX: SGN), peaked at $8.90 in April 2004 and have been on a long decline ever since. The stock now trades for 18 cents and the company is facing delisting from the American Stock Exchange.
A former chief executive of Recom, Stephen O. Sparks, testified in a court case that Lomond International worked to manipulate Recom's stock. Sparks said that during his time at the company in 2002 and 2003, Lomond International traded in Recom's shares to boost the price and volume, and touted the stock to market makers and other investors.
Lomond International is the same entity that Sumichrast and Olson used to buy stakes in the shell companies they merged with Chinese partners.
Sparks also testified in his deposition that many of Recom's activities were secretly orchestrated by Mitchell J. Stein, a California financier and attorney. He said that Stein - who was not listed among Recom's officers, directors or control persons -- made hiring and spending decisions, represented the company at key business meetings, issued press releases about its activities and directed certain individuals to trade in its shares.
A second company run by Sumichrast and Olson received a consulting contract with Recom in March 2003. SEC filings show that the firm, Crown Reef Holdings Inc., was supposed to advise Recom on strategic planning, marketing and other subjects. It was paid with 800,000 shares of stock, the sale of which generated well over $2 million.
Sharesleuth noted one other common link between House of Taylor and Recom. Both companies had been shells controlled by California businessman Sim Farar or his sons. Farar is a prominent Democratic Party fundraiser who helped raise millions for Sen. Hillary Clinton in her unsuccessful run for the presidential nomination.


THE NETWORK
The members of the investment group that controlled the shells that became China Fire, China Bio Energy and the newly public grocery chain include:

• Sumichrast, a partner in Lomond International and several other investment and consulting companies based in Charlotte, N.C.
  
• Olson, Sumichrast's partner in the investment and consulting companies. He is a former investment banker for Global Capital and was vice president of one of its brokerage subsidiaries in Englewood, Colo.
  
• Raul C. Silvestre Jr., an attorney in Westlake Village, Calif., and president of Castle Bison Inc., an investment company. He previously was secretary and treasurer of Recom, and also served as its securities counsel.
  
• John Scardino, a real estate developer based in Westlake Village. He shares office space with Silvestre.
  
• Ariel Coro, manager of Menlo Venture Partners LLC, an investment company in Agoura Hills, Calif.
  

Vision Capital Advisors LLC, a hedge fund in New York, invested in all four of the group's shell or reverse-merger deals. Its Vision Opportunity China Fund (AIM: VOC.L) put roughly $10 million into both China Bio Energy and QKL Stores, and put more than $15 million into Southern Sauce. Vision declined through its attorney to answer questions posed by Sharesleuth.
SEC filings show that Lawrence Chimerine, an economic consultant and a former director of Global Capital, invested in the first three shells that merged with Chinese companies. So did the wives of Cary W. Sucoff and Harvey R. Kohn, who run Equity Source Partners LLC, a broker-dealer and investment banking firm in Jericho, N.Y. The fourth Chinese company has yet to file the type of SEC form that would show whether those people invested in that deal.
Chimerine also is a director of House of Taylor. He joined its board in September 2005. Sucoff and Kohn provided investment banking services to House of Taylor and helped it raise money through a private placement.
We've created a flow chart that shows how members of this network moved between companies and how some of those companies interacted with one another. To see the chart, click here.


SHARE REGISTRATION
The SEC recently signed off on China Bio Energy's registration statement covering the resale of 2.84 million shares held by Sumichrast's investor group and several other parties that got stock through the reverse merger. China Bio Energy's stock has traded in low volumes on the Over the Counter market. Nevertheless, its share price has risen sharply over the past few months, climbing from a base of $4.25 in early May to a recent peak of $9.25. At Wednesday's closing price of $6.25, the nearly 1.3 million shares and warrants that Sumichrast's investor group held after the reverse merger would have a market value of $8.12 million. The group bought control of the shell for $405,000.
QKL Stores filed a registration statement in May. Its plan covers the sale of roughly 12.2 million shares, including 1.5 million shares originally held by members of Sumichrast's investor group. QKL Stores' stock is lightly traded, but has nearly doubled since May. At Wednesday's closing price of $5.95, the shell group's stake would have market value of $8.92 million. The group bought control of the shell for $650,000.
China Fire started out on the Over the Counter market and moved to the Nasdaq in July 2006. It appears that China Bio Energy and QKL Stores are headed down the same path. Securities and Exchange Commission filings show that the reverse merger deals for each of those companies contain a provision that grants their private placement investors an additional 1 million shares if they fail to gain a listing on the Nasdaq, the American Stock Exchange or the New York Stock Exchange by certain target dates.


MARTIN SUMICHRAST
Our initial story on China Fire noted that Sumichrast had been chief financial officer of Czech Industries at the time when its public offering was used a fraud vehicle by Stratton Oakmont. It also noted that Sumichrast had numerous ties to associates of Irving Kott. One of Kott's criminal convictions involved his secret ownership interest in J.B. Oxford Holdings Inc., a now-defunct brokerage company based in Beverly Hills, Calif.
The 48-count indictment in that case alleged, among other things, that two of Kott's associates were given allotments of stock in Stratton Oakmont's fraudulent offerings in return for J.B. Oxford clearing trades for Stratton Oakmont and several related brokerages. The allotments included shares and warrants in the Czech Industries offering.
Czech Industries originally owned hotels and other businesses in Eastern Europe. The company changed its name to Eastbrokers International Inc. in December 1996, to better reflect a new focus on the securities business. It renamed itself Global Capital in 1998. For the purpose of clarity, we will refer to the company by that name for the rest of this story.


FINANCIAL PARTNERS
After regulators shut down Stratton Oakmont, Global Capital hired two other investment firms to raise capital through stock placements. Those firms were Walsh Manning Securities LLC and JB Sutton Group LLC. The two principals of Walsh Manning - Frank J. Skelly and Craig Gross - had worked at Stratton Oakmont. They would be indicted on fraud charges in 2002 in connection with their activities at Walsh Manning. Authorities also charged Kenneth S. Greene, one of the founders of Stratton Oakmont, along with an employee of JB Sutton and two other men. Prosecutors alleged that, from 1995 to 1997, the men secretly acquired discounted stock in public companies through private placement deals, then sold them at artificially inflated prices through Walsh Manning, JB Sutton and another brokerage.
Although Global Capital was not one of the companies whose shares were covered by the indictment, SEC filings show that Skelly, Gross and another defendant in the case had acquired its stock and warrants through private placements as well. Walsh Manning went out of business. Skelly and Gross were convicted in 2004 and were sentenced to 57 months in prison. Global Capital later bought JB Sutton.


J.B. OXFORD CONNECTIONS
The FBI and the SEC raided J.B. Oxford in the fall of 1997. The brokerage was sold the following year, and its new owners agreed in a $2 million settlement with the Justice Department to cut all ties to Kott, who had been listed in the firm's records as a consultant.
Global Capital maintained relations with some of the old operators, however. When it bought its first U.S. brokerage, its partner in the purchase was John Paul Devito, a vice president of J.B. Oxford. He later became a vice president of Global Capital and a member of its board.
In May 2001, Global Capital hired Stephen M. Rubenstein, who had been J.B. Oxford's chief executive officer. Three months later, Global Capital got a financial consulting contract from Intasys Corp., a Montreal company with ties to Kott.
In September 2001, Global Capital issued a "strong buy" recommendation on Intasys' stock, with a 12-month price target of $8 a share and a 24-month target of $18. At the time, the company's stock was trading for around $2.
In January 2002, Global Capital announced a recapitalization and restructuring led by Sam Luft, one of Intasys' directors. Another Intasys director was slated to become president of the reconstituted company. In March 2002, however, Global Capital gave up its brokerage license, and Sumichrast resigned as chairman and chief executive.
The following month, Lomond International took over Global Capital's consulting deal with Intasys, along with the Intasys stock it had received as payment.
In February 2004, Lomond International participated in a reverse merger deal alongside Harold Wine, a longtime associate of Kott and a onetime investor in J.B. Oxford. They said in a joint filing with the SEC that they had acquired their shares through a "call option" agreement with the owners of the shell company, Tele-Optics Inc.
One of the sellers who signed that agreement was John F. LaSala, a former partner in a south Florida brokerage firm called Sheffield Securities Inc. He pleaded guilty in 1990 to participating in a manipulation of penny stocks. His two co-owners also pleaded guilty.
SEC filings show that LaSala or his wife, Alicia M. Lasala, were shareholders of two of the shell companies that Lomond International used in its Chinese reverse merger deals. Those shells became China Fire and China Bio Energy.
Tele-Optics became Velocity Asset Management Inc. (AMEX:JVI). SEC filings show that when that company later raised capital through a private placement, the investors included Silvestre, Scardino and Marvin H. Fink, a former Recom executive who has invested alongside them in the shells that merged with Chinese companies.
Sumichrast has declined to answer questions submitted by Sharesleuth.. His attorney, Ellyn S. Garofalo, contacted us in early June and said that some of the things we had previously written about her client were incorrect. She warned that any false statements about him could be met with legal action. However, she did not respond to follow up calls requesting clarification on what information she believed was inaccurate.
Garofalo also was Kott's defense attorney in his criminal proceedings.


HOUSE OF TAYLOR
Although the star power of Elizabeth Taylor and Kathy Ireland has helped generate billions of dollars in sales of perfume, clothing and other products, it did little to boost House of Taylor's jewelry business. The company reported sales of $5.61 million in 2005 - its first year in business -- and a net loss of $3.53 million.
House of Taylor's sales jumped to $31.8 million in sales in 2006, the year the stock moved from the Over the Counter market to the Nasdaq. The company formally introduced its Taylor and Ireland lines at trade shows in the spring and summer of that year. However, SEC filings show that $22.4 million of its revenue came from the sale of loose diamonds rather than finished jewelry, and that a single customer was responsible for nearly half of those purchases. The company posted an $8.35 million loss for the year.
House of Taylor has yet to file its annual report with the SEC for 2007. In its request for an extension, it said unaudited figures showed gross revenue of $21.6 million - a decline of more than 30 percent -- and a loss of $14.8. It added that, allowing for returns of $12.5 million and "sales return allowances" of $8.9 million, its net revenue last year was just $200,000.
Other SEC filings show that through the first nine months, loose diamonds still accounted for more than 70 percent of House of Taylor's revenue. Bob Rankin, the company's chief operating officer and chief financial officer, declined to talk to Sharesleuth.


FOLLOWING THE SHARES
When we searched SEC filings to see what became of the House of Taylor shares held by its creators, we found that a large amount of stock appeared to have been transferred to other investors through private transactions. We also found that the account in SEC filings of how House of Taylor was fashioned from a shell company called Nurescell Inc. left out some pertinent details.
Here's our summary, which focuses on a few key dates:
On Feb. 16, 2005, a pair of limited liability companies headed by Justin Farar and Joel Farar paid $500,000 for nearly all of Nurescell's stock. The two entities -- 2FeetCan LLC and 412S LLC -- also provided $70,000 in loans to Nurescell. The loans were repaid on April 25, 2005, with each of the limited liability companies getting 810,038 additional Nurescell shares. After that transaction, they collectively held 2.86 million shares.
Less than a week later, the limited liability companies filed matching forms with the SEC saying that they had entered into "put/call'' agreements covering half their holdings. Put/call agreements give one party the option to sell, or put, shares to another at a predetermined time and price. If the party holding the shares does not exercise that option, the other party still can exercise its right to buy, or call, the shares.
The filings said the option deals were signed May 1, 2005 and became exercisable on Oct. 26, 2005. The price per share was 3.5 cents. At the time, the number of shares covered by the deals equaled 48 percent of the company's outstanding stock. The two limited liability companies provided no information on the other parties to the put/call agreements, nor did anyone else file forms disclosing their participation in them.
On May 20, 2005, Nurescell morphed into House of Taylor. It issued 12 million shares of stock to a company owned by Elizabeth Taylor, 7 million shares to a company owned by Kathy Ireland and just over 8 million shares to members of a Los Angeles family, the Abramovs, who contributed their jewelry manufacturing business to the venture. After the deal, the company had 33.7 million shares of stock outstanding.
Jack Abramov became House of Taylor's chairman and chief executive, and Monty Abramov became vice president and design director. Martin Sumichrast took on the title of advisor to the chairman.
The SEC filing on the reorganization and merger included a list of new House of Taylor stockholders. It showed Lomond International with 900,000 shares and an entity called MAC385 LLC with 600,000 shares. Its Nevada corporation filing lists Sim Farar as managing member. Although Justin Farar and Joel Farar had been Nursecell's biggest shareholders, and had signed the deal that turned that company into House of Taylor, the documents made no mention of the shares that they held in the new entity, or of anyone who had agreed to purchase their shares.
However, subsequent SEC filings by individuals and companies selling House of Taylor shares offer some clues about what happened to that stock.


SURPRISE SELLERS
Crown Reef Holdings, the Sumichrast company that previously had a consulting deal with Recom, reported in February 2007 that it planned to sell 209,538 House of Taylor shares with an estimated market value of $808,816. Crown Reef said in its sale form that it bought the House of Taylor shares on Oct. 26, 2005, from a limited liability company that had acquired them on April 25, 2005. The October date matches the exercise date of the put/call agreement that the Farar brothers' limited liability companies disclosed in their earlier SEC filings. The February date matches the date on which they canceled outstanding debt in exchange for 1.62 million shares of stock.
An entity called Manchester Holdings filed a form in February 2006 disclosing plans to sell 380,000 House of Taylor shares with an estimated value of $1.9 million. Its form listed Sumichrast's sister-in-law, Stacey Rennix, as the signatory. Manchester Holdings said it bought 466,336 shares on Oct. 26, 2005, from a limited liability company that had acquired them on Feb. 16, 2005. The October date matches the exercise date of the put/call agreement, and the February date matches the date when the Farar brothers bought their initial stake in the company.
At the time that Manchester Holdings bought the shares, Rennix was employed as a paralegal. A comparison of the handwriting on Manchester Holdings' initial SEC filing and a Crown Reef filing shows that they were filled out by the same person, and that the writing appears to be Sumichrast's.
Sharesleuth also found forms covering the proposed sale of 275,000 shares filed by a Canadian company called Hareton Sales and Marketing Inc. Hareton's initial filing said it bought its House of Taylor shares on Oct. 26, 2005 from a limited liability company that acquired them on Feb. 16, 2005. Those dates coincide with the exercise date of the put/call agreement and the original acquisition of shares by the Farar brothers.
Hareton's president, Mitchell S.T. Wine, was an investor in J.B. Oxford and served on its board from 1993 to 1998. SEC filings show that, in the mid-1990s, Hareton also purchased shares or convertible notes in Hariston Corp. and Metanetix Corp., later known as Consolidated Pacific and Western Resources Corp. Both companies had close ties to Kott and to J.B. Oxford, which marketed their shares to customers.
Mitchell Wine's mother, Esther Wine, submitted an SEC form covering the sale of 50,000 House of Taylor shares purchased on Oct. 26, 2005. She is married to Harold Wine, who had invested alongside Sumichrast's Lomond International in an earlier reverse merger deal. Harold Wine's history with Irving Kott dates back more than two decades.
In 1983, the Quebec Securities Commission halted trading in the shares of a company called Belgium Standard Ltd. because of concerns that a group of individuals and companies connected to Kott acted improperly in a stock offering that gave them control of Belgum Standard.
Wine was chairman of Belgium Standard's board. The securities commission identified him as one of the participants in the scheme. The other parties cited in the case included Wine's main business, WSP Marketing International Ltd., and Dominique Schittecatte, who was secretary-treasurer of two companies owned by Kott's wife and sons.
According to news accounts, Kott was a consultant to Belgium Standard through a Montreal company called Janus Corp. A securities commission investigator testified in the case that Wine told him he had owned Janus, but sold it to Kott. After a hearing, the securities commission imposed a trading ban on certain shareholders. According to coverage in Toronto's Globe and Mail, the list included Wine, Schittecatte, Kott and companies under their control. The ban was lifted in 1985.
SEC filings show that Harold Wine and WSP were investors in J.B. Oxford in the mid-1990s, at the same time that Kott was working as a purported consultant there. The company providing the consulting services was headed by Schittecatte.
In his criminal case, Kott pleaded guilty to concealing the fact that he provided much of the $6.5 million in financing J.B. Oxford received from a Swiss investor in the mid-1990s. The investor got securities that were convertible into a majority stake in the company. J.B. Oxford documents filed as part of another court case show that Harold Wine provided financing to the brokerage through that same Swiss investor, Felix Oeri. Wine remains chairman of WSP International. Canadian corporation records also list him as a director of Hareton.
Manchester Holdings listed its address as the office of Eugene M. Kennedy, a lawyer in Fort Lauderdale, Fla. He prepared the SEC filing for Lomond and Harold Wine in their Tele-Optics share purchase, and was listed as Lomond's legal representative when it bought a controlling interest in the shell company that became China Bio Energy.


OTHER CONNECTIONS
When House of Taylor expanded its board of directors to five members from two in September 2005, the new appointees included Larry Chimerine and Frank M. Devine, both of whom had been Global Capital directors.
House of Taylor raised nearly $6.5 million in August 2005 in a private placement intended to expand the company's sales, marketing and brand-building. The placement agent for the financing was Laidlaw & Co (UK) Ltd.. SEC filings show that Cary Sucoff was one of Laidlaw's investment bankers and received House of Taylor warrants as compensation for his services.
House of Taylor raised an additional $11.7 million through another placement in May 2006.
Sucoff and a partner, Harvey R .Kohn, left Laidlaw and set up their own firm, Equity Source Partners. It became a consultant to House of Taylor. Sucoff added a note to his registration report with the Financial Industry Regulatory Authority last month, disclosing that it was investigating him for several possible violations, including conducting private securities transactions outside of his regular business activities. He told Sharesleuth the investigation had nothing to do with Sumichrast or any of the companies with which Sumichrast has been associated. Sucoff added that his wife and his partner's wife were passive investors in the shell companies that Sumichrast packaged for reverse mergers with Chinese partners.
Chimerine did not respond to a request for comment.


MYSTERY COMPANIES
Sharesleuth's search for the undisclosed recipients of House of Taylor stock turned up filings that showed 613,836 shares were transferred on Nov. 16, 2005 to four limited liability companies - Acimal Productions LLC, Lopab Investments LLC, Onrose Investments LLC and Nitsaw Company LLC. The four acquired their shares on the same date and almost always filed to sell their shares on the same dates. However, each entity listed a different business address. Sharesleuth determined that all four addresses -- two in New York City, one in South Orange, N.J. and one in South Hills, N.J.- were drop boxes at what were then Mailboxes Etc. locations. None of their SEC filings included the name of a manager or beneficial owner. Each bore only initials on the signature line, and those were illegible.
All four of the limited liability companies were incorporated in Delaware, and all four used the same registered agent to handle their formation. None of the filings in that state included the names of the companies' owners or managers.
The limited liability companies sold their House of Taylor shares through Spencer Edwards Investments Inc., a small brokerage in Englewood, Colo. So did Manchester Holdings, the company headed by Sumichrast's sister-in-law.
We asked Gordon D. Dihle, chairman and chief executive of Spencer Edwards, what steps the firm took to determine the identity and background of the owners of those limited liability companies - a requirement under the Financial Industry Regulatory Authority's so-called "Know Your Customer'' guidelines. He declined to say.
"I really can't comment on customer accounts,'' he said. After a few more questions, he hung up on us.
Spencer Edwards has figured into at least three SEC cases in the past seven years. The SEC brought a cease-and-desist action in September 2004 that included Spencer Edwards, its then-President Edward H. Price and two of its brokers as defendants. The SEC alleged that they enabled four officers of a company called Starnet Communications International Inc. to enrich themselves by selling millions of dollars of stock without registering the shares or making the required disclosures. The SEC found that Price failed to exercise reasonable oversight and barred him from associating with any broker-dealer in a supervisory capacity. The commission found that the brokers, Eugene C. Geiger and Thomas A. Kaufmann, willfully violated federal securities regulations. It barred them from the industry and ordered them to pay nearly $1 million each in disgorgements and fines.
Geiger also was the subject of two other SEC proceedings stemming from alleged securities frauds conducted by his clients while he worked at Spencer Edwards. The public companies at the center of those cases were Golden Eagle International Inc. and AbsoluteFuture.com.


STOCK PROMOTERS
New Century Capital Consultants, the company run by stock promoter Stephen Apolant, said in an SEC filing that it received 62,500 House of Taylor shares on May 1, 2005 as repayment for a debt. A check of the address that New Century Capital listed on its SEC filings showed that it also was a Mailboxes Etc. location.
The SEC filed a civil fraud case against Apolant in 2004, alleging that he participated in a scheme to manipulate the shares of a New Jersey company called Spectrum Brands Corp. (not to be confused with Spectrum Brands Inc., a Fortune 500 company with a similar name). The SEC said Spectrum tried to capitalize on terrorism fears in the fall of 2001 by claiming to market an ultraviolet flashlight that could kill germs, including anthrax, in seconds. The company's shares more than tripled, to a high of $14, after it publicized the product.
The SEC also said in its complaint that Spectrum was secretly controlled by a group that included several convicted felons, one of whom was identified by federal prosecutors as an associate of the Colombo organized crime family.
Apolant is contesting the charges against him. The SEC reached settlements with Spectrum and five other individual defendants in the case, and won judgments against two more. Prosecutors brought criminal charges against four of the defendants, two of whom had already been convicted in a prior racketeering case. All four went to prison.
Another company, CSH Advisors Inc. of Manhasset, N.Y., filed a form with disclosing the planned sale of 62,500 House of Taylor shares. CSH said it bought the shares directly from the company in November 2005. The form was signed by Stephen Schaeffer Jr., CSH Advisors' president. He works from the same offices as New Century Capital, according to an employee there. And a recent SEC filing by another public company listed Schaeffer as a director of New Century Capital, with power over the shares it held.


COMMON DATES
Sharesleuth's analysis of the SEC filings by Manchester Holdings and the four mysterious limited liability companies that got House of Taylor stock showed that they usually submitted notices of planned share sales on the same dates. Manchester and the four limited liability companies first filed sales notices on Feb. 28, 2006. They also filed notices on May 22, 2006, Aug. 17, 2006 and Nov. 13, 2006. The latter three dates came just before the release of House of Taylor's quarterly earnings.
The closing price of the company's stock on Aug. 17, 2006, was $1.18 a share, and the trading volume was 7,400 shares. The following day, the stock rose 42 percent, to $1.61, and volume jumped to 53,000 shares. The next trading day was Aug. 21, 2006. House of Taylor announced earnings, saying that revenue for the first half of the year had doubled, and that the company had made significant progress toward rolling out its branded jewelry to retailers. Its stock closed that day at $2.01, with 109,500 shares changing hands. The price reached $2.25 the next day. Sharesleuth noted that on that day, House of Taylor was featured by three stock promotion websites - Stockguru.com, Bellwetherreport.com and Streetinvesting.com.
When Manchester and the four limited liability companies filed to sell more House of Taylor shares in November 2006, the price again rose, along with the trading volume. In a little more than a week, from Nov. 12 to Nov. 21, the stock went from $1.86 to a high of $2.90.


RECOM MANAGED SYSTEMS
One of Sumichrast's first consulting clients after he left Global Capital was Recom Managed Systems, a small public company that had been in bankruptcy. It emerged as an empty shell in 2001 with the help of a cash infusion from a company run by Sim Farar. That company, Vanguard West LLC, initially held 85 percent of Recom's stock. SEC filings show that some of those shares were later transferred to Farar's sons, Justin and Joel.
In September 2002, Recom acquired the technology for its heart-monitoring device from a company controlled by Mitchell Stein's wife. The sale documents in SEC filings identified her as Tracey Hampton. Her company, ARC Finance Group LLC, got 84.5 percent of Recom's stock, with Vanguard West retaining a 9.75 percent interest.
Stein previously had been a director of another public company called eMedsoft.com Inc. He also headed a limited liability company that was its biggest shareholder. eMedsoft later became Med Diversified Inc. It filed for bankruptcy in 2002, following the collapse of its main lending source, National Century Financial Enterprises Inc. Five former National Century executives were convicted of fraud charges this year. Some of them were among Med Diversified's largest shareholders.
Stephen Sparks became Recom's president and chief executive. Raul Silvestre, one of Sumichrast's partners in the later Chinese reverse-merger deals, was appointed secretary and treasurer. He held those positions only briefly, but continued to function as the company's securities counsel.
Crown Reef Holdings, run by Sumichrast and Ralph Olson, signed a consulting agreement with Recom in March 2003. Its compensation was a warrant to buy 900,000 shares at 50 cents a share (adjusted to reflect a 3-for-1 split in April 2003).
It is unclear what benefit Recom derived from the consulting deal. At the time, the company had no revenue and less than $200,000 in cash. It would report no sales in 2003, 2004, 2005 or the first nine months of 2006, despite claiming to have gained Food and Drug Administration approval to market its heart monitor.
To date, the company has reported just $190,170 in revenue, with all of that coming in the final quarter of 2006.
Recom's stock was trading at a split adjusted price of around $1 a share when the company signed its deal with Crown Reef. The price nearly tripled in the next month, and continued on an upward path, peaking at $8.90 a share in April 2004.
Crown Reef ultimately took possession of 800,000 Recom shares, through a cashless exchange of its warrant. According to SEC filings, it began selling those shares in March 2004.
Stephen Sparks, Recom's former chief executive, testified in his deposition that Olson had been actively trading in the company's stock to support its market price, and that Silvestre was aware of those activities. "Raul made phone calls to me -- when we see his phone records, we'll see this -- many, many, many times a week, sometimes 10, 15 times a week,'' he said in the deposition, a transcript of which was obtained by Sharesleuth. "And it was usually early in the morning and he'd call and he'd say "Watch this. Ralph's in there. Watch, it's going to go up. It will be $2.40." I'd say "Geez, what are you guys doing?"
According to the deposition, Silvestre responded: "Don't worry about it. Everything's cool."
Sparks said he also was alerted to Olson's activities by a broker at one of Recom's market makers, Brookstreet Securities Corp. According to the deposition transcript, the broker referred to the entity doing the trading as Lomond International.
"On many occasions Harry Radie would say 'Lomond's in there propping the stock up,'' he testified. "He'd get a lot of calls from Ralph and he said he refused to even take calls from Ralph anymore because the guy called him almost every day and said 'Last day for cheap stock.' ''


A HIDDEN HAND
Sparks testified in his deposition that Mitchell Stein brought him to Recom as president and chief executive. Sparks said he had been involved in numerous other business ventures with Stein, and that Stein at one point promised to split 8 million shares of Recom's stock with him if he helped make the company a success.
Sparks stepped down as chief executive in September 2002. He was replaced by Marvin Fink, a former aerospace and electronics executive who ran the company until March 2005. Sparks remained on Recom's board of directors for much of 2003, and continued to play an active role in the company's fundraising and development.
Recom sued Sparks in 2004, alleging fraud and extortion. It said he had threatened to cause trouble for the company and demanded additional cash or securities as compensation. Recom's complaint said that Sparks threatened to "go to the regulators" and that he "had notes and information that would not look good for the Company" if his demands weren't met.
Sparks filed a counterclaim, detailing some of his allegations. He said that Stein prepared overly positive press releases to attract investors and to boost Recom's stock. Sparks claimed that some of the releases that Recom issued were not only optimistic but false.
Sparks said in his deposition that Stein issued several press releases about developments at Recom without the advance knowledge of the company's officers or directors, even though they were quoted in them.
The dispute between Sparks and Recom was ultimately settled and the suits were dismissed.
Fink left Recom in early 2005. His departure also ended in litigation. Fink sued the company, Stein, ARC Finance Group and Hampton the following year, alleging that they were blocking his efforts to sell 2.1 million shares of by refusing to remove restrictions on them.


THE CONSULTING CONTRACT
Sparks testified in his deposition that neither he nor Fink ever understood how Crown Reef Holdings came to be hired as a Recom consultant, or what specific services Olson and Sumichrast provided to the company. Sparks said that, in his capacity as a Recom director, he repeatedly tried to learn more abut Olson's activities.
"What does Ralph do? I don't know how many times I asked that question,'' he said in his deposition. "Marvin couldn't answer that question, so we would both ask Raul... The answer was Ralph trades the stock and talks to market makers, and it's perfectly legal what he's doing."
Sparks said Silvestre also traded in Recom's stock, sometimes at the direction of Stein. According to the deposition, Sparks himself got one very specific trading order from Stein - buy 7,500 shares of Recom's stock the next trading day, exactly 31 minutes after the market opened.
Silvestre declined to comment on the claim that Lomond International was involved in the manipulation of Recom's shares. He told Sharesleuth that he didn't know what services Sumichrast and Olson provided the company under their consulting agreement.
"That was between them and the CEO,'' he said.


SELLING SHARES
Sharesleuth found SEC filings by Crown Reef Holdings that list the sale of 500,000 Recom shares it received through its consulting agreement. Two of the filings covering 200,000 shaes included brokerage statements listing the actual trades. They show that Crown Reef steadily sold its Recom stock, usually in lots of 500 to 1,000 shares, from March 2004 to September 2004.
At the start of that period, Recom's stock was trading at around $4.60 a share. By early April, it was over $6, and by mid-April, the shares were above $8. The brokerage statements show that Crown Reef's sale of the 200,000 shares generated proceeds of more than $1.2 million.
Crown Reef did not list proceeds from the sale of the other 300,000 shares. But based on the price during the periods it was selling, that stock would have generated at least $1 million more. We could find no disclosures on the sale of the final 300,000 shares.
In February 2005, Recom awarded a new business advisory contract to Lomond International. The deal gave Lomond or its assignees a warrant to buy 500,000 additional shares at $2 a share. Recom said the warrant was for help in developing strategic relationships with medical device companies that might be interested in its heart-monitoring products.
Recom changed its name to Signalife in November 2005.
SEC filings indicate that ARC Finance disposed of only a small percentage of its shares over the years, even as the price sank. According to a December filing, ARC still owned 22.6 million shares, down from the 22.9 million it held when the stock was at its peak.
Signalife did not respond to numerous requests for comment.


AN UNDISCLOSED LAWSUIT
The heart monitors that Recom and Signalife have marketed are based on the inventions of Budimir S. Drakulic, who was hired as vice president and chief technology officer in October 2002. Court records show that at the time Drakulic joined the company, he was liable for a judgment of $805,900, plus interest, won by a former girlfriend who claimed that he defrauded her and her brother out of money they loaned to him.
According to the lawsuit, he told his then-girlfriend that some of the borrowings were going toward a research project for the Air Force that would bring in millions of dollars over the next decade. The technology on which Recom's heart monitor is based grew out of work that Drakulic did for the Air Force.
Recom and Signalife have never disclosed the judgment against Drakulic in their SEC filings. He remains Signalife's chief technology officer. According to the company's most recent proxy filing, Signalife pays $180,000 a year for his consulting services to another entity called B Technologies Inc, and pays him $70,000 a year directly.
Drakulic has made no payments to the people who won the fraud judgment against him.


GLOBAL CAPITAL AND NASDAQ
After we posted our story on China Fire, we received copies of Nasdaq's letters to letters to Global Capital. They documented additional ties between Sumichrast and people with criminal or regulatory histories. Nasdaq investigators found that Possino and Mazur, the two convicted felons mentioned previously, had likely acquired, "directly or indirectly, a significant undisclosed interest in Global Capital." At one point, that stake was equal to 18 percent of the brokerage company's outstanding common stock.
Global Capital did a $2 million financing transaction in November 1999 in which Belle Holding Inc., a separate company set up by Sumichrast, bought a new series of preferred stock. It got the money by issuing notes to a California company called Corona Corp., headed by lawyer Reid Breitman. Under their deal, the notes could be converted into the stock that Belle Holdings bought.
Global Capital explained in an SEC filing that Sumichrast took a personal stake in the financing at the insistence of Corona, to ensure that management's interests were aligned with Corona's interests.
The Nasdaq letters said Corona raised the cash for its end of the deal by selling its own notes to Corporate Financial Enterprises Inc., a company controlled by Possino, and to American Equities LLC. The latter company also was headed by Breitman, and employed Sherman Mazur.
In March 2000, Global Capital raised another $2 million through the same mechanism. Sumichrast contended in a later lawsuit that Breitman had concealed the true source of Corona's funds. But Nasdaq noted that it was Mazur who had introduced Breitman and Possino to Global Capital.
Mazur had pleaded guilty in 1993 to tax fraud and bankruptcy fraud charges in connection with the collapse of the real-estate investment company he ran. He was sentenced to six years in prison and fined $250,000.
Possino is a disbarred lawyer who was convicted in 1978 of offering to sell 350 pounds of marijuana to undercover police officers. He was convicted in 1995 of one count of wire fraud in connection with a scheme to use inflated stock to help prop up an insurance company's finances.


STOCK PURCHASES
Nasdaq said Global Capital agreed in December 1999 to exchange shares in one of its affiliates, EBOnline.com, for shares of four small public companies. They were: Integrated Communications Networks Inc., eSat Inc., Digs Inc. and ECS Industries Inc. SEC filings show that all four of those companies counted Possino or members of Mazur's family among their biggest shareholders.
Nasdaq said the buyer of the EBOnline shares was a Swiss entity called Forte Ltd. and that the signature on the agreement appeared to be that of Raoul Berthaumieu, who served prison time in the 1990s for a check-kiting scheme.
Sharesleuth's investigation found that on Feb. 10, 2000, an investor relations firm called Access1 Financial issued a "strong buy'' report on Global Capital, with a 6-month price target of $22. At the time, its shares were trading for around $6. SEC filings and state corporation records put Access 1 Financial at the same business address as Possino, Breitman and Mazur. Corona also listed that address, a converted art gallery in Santa Monica, Calif., as its home.
Access 1 Financial was headed by onetime securities analyst Mark Bergman. The SEC later brought fraud charges against Access 1 and Bergman in connection with a glowing but baseless report on another company. Authorities said that report -- issued two weeks after the one on Global Capital -- helped facilitate a $15 million pump-and-dump scheme.
The Nasdaq letters noted that, in March 2000, Global Capital bought more than $5.1 million in stock in Digs, ECS Industries, Omni Nutraceuticals Inc. and Hartcourt Companies Inc. As in the previous transaction, all four companies had ownership ties to Possino or Mazur. Nasdaq said Global Capital bought most, if not all, of the shares in private transactions from sellers linked to Possino, Mazur or Breitman.
The shares of all four companies were nearly worthless by the end of 2000.


A SIGNIFICANT DAY
The Nasdaq letter highlighted a series of transactions that occurred on a single day - March 20, 2000. That was the day that Global Capital bought its shares in Digs, ECS and Hartcourt. It also was the day that Global spent $905,000 for a roughly 50 percent interest in WMP Bank, a brokerage house in Austria. Nasdaq's investigators suspected that Global Capital bought the stake in the Austrian brokerage from a company connected to Possino and a stock promoter named Ramon D'Onofrio, who had at least five criminal convictions related to fraud schemes. The selling company's name was listed as Braemar Management Corp. Nasdaq noted that a British Virgin Islands company called Braemar Management Ltd. was a major shareholder in Hartcourt and another public company with ties to Possino.
The investigators said that on the same date that Global Capital bought its interest in the Austrian brokerage, entities connected to Possino and D'Onofrio purchased 325,000 shares of Global Capital's stock, representing roughly 3 percent of the shares outstanding.
The Nasdaq investigators also raised questions about Global Capital's June 2000 sale of its European brokerage operations, which included the newly purchased interest in WMP Bank. Global Capital received no cash for those businesses. Instead, it got $2 million in shares of an Austrian real estate company that traded on the Vienna Stock Exchange, and $25.5 million in notes. "This transaction resulted in Global including on its balance sheet a major asset - notes received as consideration for the sale - that the staff believes were of no value,'' Nasdaq wrote. "As a result, Global disseminated for three quarters materially misleading financial statements.''
The Nasdaq report found that the three offshore companies listed as the buyers of the European operations had little substance, and were essentially shell companies with no other business operations. Indeed, the purchasers notified Global Capital before the due date for the first payment on the notes that they would default. In the fiscal year that ended March 31, 2001, the company wrote off the full value of the notes.


NO REGULATORY ACTION
Neither the SEC nor the National Association of Securities Dealers took action against Global Capital, its employees or anyone else involved in the activities outlined in the Nasdaq letters. Nasdaq, which has been granted certain self-regulatory powers by the SEC, declined to comment on the specifics behind Global Capital's delisting. It cited a policy against discussing individual companies. Nor would a spokeswoman say whether the findings in the report had been forwarded to the SEC, the NASD or law enforcement agencies.
The Nasdaq report said the sale of Global Capital's European operations provided further evidence of Possino's influence on the company. It said Possino and others with regulatory histories wound up running WMP Bank, rechristened General Commerce Bank.


GENERAL COMMERCE BANK
After the ownership change, General Commerce began cold-calling foreign investors and peddling shares in small U.S. companies, at least two of which were linked to Possino. That prompted regulators in Australia and Belgium to add the company to their warning lists of "boiler-room" style operations offering securities without proper licenses.
The Nasdaq letters identified the other key people involved in the operation of General Commerce as Berthaumieu, Adnan Khashoggi and Rakesh Saxena.
Berthaumieu has more recently been linked to an investment company called Pacific Federal S.A.. Securities regulators in Great Britain, Belgium and Spain warned that Pacific Federal was offering investments in those countries without authorization.
Khashoggi, who made a fortune as an arms dealer, became a defendant in an SEC fraud case in 2006. The complaint alleged that from 1999 to 2001, Khashoggi participated in a $130 million stock-manipulation scheme involving GenesisIntermedia Inc., a company in which he was a major shareholder. The SEC won a default judgment against him.
Saxena is wanted in Thailand on charges that he embezzling more than $80 million from the Bangkok Bank of Commerce, which collapsed in 1996. Saxena fled to Canada. Although he was apprehended, he has been fighting extradition, and is living under house arrest in a high-rise condominium in the Vancouver area.
The Nasdaq letters said Khashoggi agreed in October 2000 to invest $7 million in Global Capital, and that Mazur and Saxena were middlemen in the deal. It added that Global Capital called off the stock sale after it was disclosed prematurely.
General Commerce collapsed in 2001. None of the people mentioned above has been charged with any wrongdoing in connection with its activities, or those of WMP Bank.


James McNair contributed information to this report. SaarResearch.com provided fact checking services.

published July 23, 2008

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