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(Part three of a three-part series. See part one here, and part two here.)

To U.S. investors, buying a piece of a toll road company in one of China's fastest-growing provinces might have seemed like a pretty safe bet.

But the twists and turns at China Infrastructure Investment Ltd. (OTCPK:CIIC) have taken the company from the Nasdaq to the Pink Sheets and wiped out much of its market value, which once topped $400 million.

A Sharesleuth investigation found that certain undisclosed parties nevertheless profited handsomely from the reverse merger that brought the company public, by buying 21.9 million shares from the former chief executive of the U.S. shell it combined with.

Securities and Exchange Commission filings show that the ex-CEO, Fred L. Hall, sold the stock for $72,500 just days after the reverse merger, in February 2008. The sale price translates to less than 0.4 cents a share. At the time, the company's stock was trading on the open market for more than $4.

Whoever got Hall's stock appears to have resold much of it during periodic surges in trading volume in 2009 and 2010. Based on China Infrastructure Investment's share prices in those periods, it's possible that the seller or sellers could have collected $20 million or more.

Our investigation also found that the holding company that owned a majority stake in China Infrastructure Investment at the time it went public might have ended up with some of Hall's stock. SEC filings show that the holding company boosted that stake by more than 13 million shares over a two-year period, without disclosing any changes in its ownership, as required under federal securities law.

A Hidden Hand

As Sharesleuth previously reported, China Infrastructure Investment was one of 11 Chinese companies that gained listings on U.S. exchanges with the help of a stock promoter named S. Paul Kelley.

The 11 companies are:

-- China Infrastructure Investment

-- Winland Ocean Shipping (OTCPK:WLOL)

-- Telestone Technologies Corp. (TSTC)

-- Orsus Xelent Technologies Inc. (OTCPK:ORSX)

-- Kandi Technologies Corp. (KNDI)

-- New Oriental Energy & Chemical Corp. (OTCPK:NOEC)

-- China Auto Logistics Inc. (CALI)

-- Guanwei Recycling Corp. (GPRC)

-- China INSOnline Corp. (OTCPK:CHIO)

-- Chisen Electric Corp. (OTCPK:CIEC)

-- CH Lighting International Corp. (OTC:CHHN)

Although some of the people who packaged or promoted the reverse mergers made millions on the deals, none of the Chinese companies produced lasting gains for ordinary investors.

Four of the companies were delisted from major exchanges in 2011. Two more did reverse splits last year to avoid delisting. And the shares of three others trade for less than 15 cents -- when they trade at all.

Kelley's name did not appear in any of the SEC filings related to the China Infrastructure Investment deal, nor did the names of any of his companies. But the web site for one of them, Asia First Financial Corp., listed China Intrastructure Investment among its holdings.

The Reverse Merger

China Infrastructure Investment became a public company in January 2008 by merging with Learning Quest Technologies Inc., a Utah-based company that had discontinued its effort to develop and market educational products.

SEC filings show that Learning Quest had not generated a single dollar of revenue in its seven-year existence. It ended 2007 with just $408 in cash and less than $3,000 in total assets.

Even so, its shareholders got a 32 percent stake in China Infrastructure Investment, which operates a toll road in Henan Province called the Pinglin Expressway. In most reverse-merger deals, the owners of the shell companies retain far less of the ownership in the combined business -- typically 10 percent to 20 percent.

The remaining 68 percent of China Infrastructure Investment went to Joylink Holdings Ltd., a British Virgin Islands-registered entity that controlled the toll road business. SEC filings show that the Chinese operation had $38.4 million in revenue and $7.5 million in profits in the fiscal year that preceded the merger.

It listed nearly $680 million in total assets, including $165 million in loans due from two other toll-road operations controlled by its chief executive, Li Xipeng.

SEC filings show that Joylink Holdings got 54.4 million shares of China Infrastructure Investment's 80 million shares. Hall got 21.9 million shares and the shell's other owners split the final 3.7 million shares.

Hall reported selling all of his shares in a private transaction four days after the merger. But no one ever reported buying that stock, or even a portion large enough to trigger the SEC's 5 percent disclosure requirement.

Those shares represented most of the initial public float.

Ties to David Nemelka

Learning Quest's SEC filings provided little information about Hall, except to say that he previously operated a restaurant and a sporting goods company. We did some additional digging, and found that Hall had close ties to a Utah financier and stock promoter named David N. Nemelka. So did the majority shareholder of another of the shell companies used in the Chinese reverse mergers. That one became Chisen Electric.

Nemelka, his father and two of their associates pleaded guilty in 2005 to federal criminal charges stemming from an earlier reverse merger between two U.S. companies.

SEC filings show that the sporting goods business that Hall operated was acquired by a small, publicly held company called Sportsman's Wholesale Co. Hall became its majority shareholder, as well as its president and chief executive. He was succeeded in those positions by Nemelka, after Nemelka bought 15 million unregistered shares of the company, or 90 percent of the total, for $10,000. Sportsman's Wholesale then did a reverse merger with another U.S. company.

Hall also was president of a second public company, R & R Ranching Inc., which bred and raised bison. The address listed on the SEC filing disclosing his purchase of a controlling interest corresponded to the address for one of Nemelka's businesses, McKinley Capital Inc.

Like Sportsman's Wholesale, R & R Ranching was used as a reverse-merger vehicle. It became Glotech Industries Inc. in 2003, which in turn became Intra Asia Entertainment Corp. in 2007. That company later became China Transinfo Technology Corp. (formerly CTFO), which recently went private in a management-led buyout.

Public records show that, at the time of the deal that created China Infrastructure Investment, Hall was married to a Utah woman Brenda M. Hall. She too, had been president of a public company connected to Nemelka. According to SEC filings, she also was the trustee of trust set up for the benefit of Nemelka's children.

An Earlier Offense

Nemelka was indicted in 2002 on charges of securities fraud, wire fraud and conspiracy in connection with a scheme to manipulate the shares of another company that went public through a reverse merger.

The grand jury also indicted Nemelka's father, David R. Nemelka, who had previously been sanctioned by the SEC. The other defendents were Kurtis Hughes, an executive at a stock transfer company, and Henry A. Schwartz, who acted as a middleman in the reverse merger and also helped raise money in a private placement.

According to the indictment, Hughes and his father controlled a shell company called Kazmir Kliffs Inc. that was available for use in a reverse merger. Hughes sold shares in Kazmir Kliffs to the Nemelkas in a private deal, with the understanding that he would be paid when the post-merger stock was resold.

After Kazmir Kliffs combined with a company called Lanstar Semiconductor Inc., the four conspirators controlled 90 percent of the stock. The indictment said they manipulated the market by artificially raising Lanstar's share price, and by coordinating their selling to prevent actions that would depress that price.

The indictment said the conspirators also used an offshore company on the Caribbean island of Nevis to buy shares and artificially inflate the market, and to sell some of their original stock. In addition, the indictment said that the defendants offered to sell large blocks of Lanstar stock at half of the public bid price to certain people who could then resell them to retail investors through brokerage houses.

According to the indictment, the SEC was monitoring the scheme through a confidential informant, and halted trading in Lanstar's stock before large numbers of shares were dumped on the market.

David N. Nemelka pleaded guilty in 2005 to a reduced, misdemeanor charge of aiding and abetting false stock transfer request prepared by Hughes. He was sentenced to two years of probation and fined $5,000. He also was ordered not to engage in business transactions with this father, not to engage in nominee trades and not to have control over any foreign bank accounts.

Nemelka did not respond to a list of questions from Sharesleuth.

David R. Nemelka pleaded guilty to a reduced charge of making false statements, and was sentenced to three years of probation. He died last year.

Hughes also pleaded guilty to a reduced charge. Like the others, he got probation. At the time Hughes committed the acts for which he was indicted, he worked at Interwest Transfer Co. in Salt Lake City. He currently is executive vice president of that company.

SEC filings show that Interwest was the transfer agent for China Infrastructure Investment when it went public, and has continued to serve in that capacity.

The U.S Attorney's office in Salt Lake City declined to say why it reduced the charges against all of the defendants. The SEC did not bring charges against Nemelka and the others who were indicted in connection with the Lanstar scheme.

Our research found that Stockton Ltd., a Nevis-registered entity that was alleged to have received Lanstar stock from Hughes, was implicated in another SEC fraud case involving a Utah company called Dynamic American Corp. A judge in that case found that Stockton was created by Kenneth L. Weeks, who later went to prison in connection with a yet another fraud, this one involving a company called PanWorld Minerals International Inc.

Stock Activity

Sharesleuth analyzed the trading in China Infrastructure Investment's shares to determine when the stock that Hall sold after the reverse merger might have been resold, and at what prices.

The company's stock began trading on the Over The Counter Market on Feb. 12, 2008 at $4.50 a share. In the first 10 days of trading, volume totaled 1.25 million shares. Then, it slowed to less than 10,000 shares a day. Trading remained light even after China Infrastructure Investment moved to the Nasdaq in August 2008. Over the next year or so, daily volume topped 100,000 shares just three times, and the price drifted to a range of $1 to $1.50.

An Unusual Surge

In December 2009, trading picked up markedly. On Dec. 22 of that year, nearly 2 million shares changed hands, the highest total since the company went public. The company's shares opened at $1.75 and climbed in intraday trading to their all-time high of $4.75. They closed at $3.32, for a gain of nearly 90 percent.

Our research turned up no press releases or any other material development that would account for that market activity In fact, the company had reported the previous month that its revenue and earnings for the quarter that ended Sept. 30, 2009 were down more than 10 percent from the same period a year earlier.

Roughly 1.8 million shares traded in the remaining days of December, at prices ranging from $2.78 to $3.85. On Jan. 5, 2010, another 1.8 million shares traded, with the price falling to $2.23. A further 3.2 million shares changed hands over the next six sessions, bringing the total for the three-week surge to 8.8 million shares.

Given the distribution of stock in the reverse merger and the fact that China Infrastructure Investment's insiders did not report any selling, it follows that some of the shares being traded were those originally issued to Hall.

On March 1, 2010, volume shot to 1.9 million shares, up from less than 30,00 shares the day before. The stock rose nearly 15 percent, closing at $2.18. An additional 500,000 shares traded the following day.

We found that a stock-promotion service called Emerging Stock Report had announced that it initiated coverage of China Infrastructure Investment. The service -- which later ran afoul of Canadian regulators -- asserted in a disclaimer that it was not compensated for its report.

If the holder or holders of Hall's shares accounted for one-third of the volume on the dates cited above, their sales would have generated nearly $9 million, based on an average of the opening and closing stock prices. If those sellers accounted for half of the volume, the figure would have exceeded $13 million.

As we mentioned in the first story in this series, it's possible that some of the heavy volume in the shares of the Chinese companies was artificial, the result of coordinated buy and sell orders designed to create the appearance of investor demand.

Tout Campaigns Begin

Trading in China Infrastructure Investment's shares surged again in late April 2010, with nearly 12.3 million shares trading hands over three days. On one of those dates, April 28, 2010, volume totaled 8.9 million shares. The stock started at $1.68, rose as high as $2.58, then returned to its original level.

Our research found that on April 27, 2010, a stock-promotion site called OxofWallStreet.com issued a "mega bagger alert'' on China Infrastucture Investment. It suggested that economic growth and rising vehicle ownership could lift the company's revenues into the hundreds of millions of dollars.

Among other things, the report said: "Between fundamentals, industry, management and the fact that CIIC saw a high of $4.75 just four short months ago, we feel that there are few companies out there with this much upside potential!"

SEC filings show that, at the time, China Infrastructure Investment was generating less than $45 million in annual revenue, and less than $3 million in profits.

OxofWallStreet.com did not disclose whether its operators had been compensated for the report.

The Second Wave

Another wave of paid promotion began three months later. On July 27, 2010, several Internet sites that appear to be under common control posted reports suggesting that China Infrastructure Investment's shares were going to "bounce'' after falling 50 percent from their April highs. That touched off a wave of activity that resulted in roughly 13 million shares changing hands in less than two weeks.

Coolpennystocks.com's report started like this:

My new pick is CIIC. This past weekend I did an alert on a bounce play, and it's been bouncing ever since. PCBC, my alert from last night closed the day up 40%!! If you missed any of these alerts put CIIC on your watch list.

I rarely put out alerts on Nasdaq companies but this one needs immediate attention. Nasdaq companies trade on a much bigger exchange than most of my normal alerts so Wall Street may learn about this company soon!!

Another site, Pennyinvest.com, posted a similarly worded note. Coolpennystocks.com and Pennyinvest.com each said in disclosure statements at the bottom of their reports that they had received $90,000 in cash for a one-week advertising and promotion program.

The disclosure statement said the $90,000 came from Medallion Capital Corp. That's the name of the investor-relations firm run by Paul Kelley's father, Stafford P. Kelley. In 2008, the Ontario Securities Commission banned him from serving as an officer or director of a public company for 10 years or from trading in stock, for five years. Regulators alleged that he had helped manipulate the share price and trading volume of a small Canadian mining company.

Paul Kelley was vice president of Medallion Capital before he started packaging the Chinese reverse-merger deals.

Trading records show that nearly 3.1 million shares of China Infrastructure Investment changed hands on July 27. But there was no bounce. Instead, the stock fell more than 20 percent, closing at just over $1. The next day, July 28, 2010, both sites posted new notes, again suggesting that China Infrastructure Investment's stock was likely to move higher.

A third service, Skymark Research, also said it had initiated coverage of China Infrastructure Investment. Although the stock opened a few pennies higher, it ended the day at 89 cents, a 52-week low. Trading that day topped 2.8 million shares.

The Alberta Securities Commission later brought charges against Skymark and its proprietors, alleging that they were part of an illegal pump-and-dump scheme involving two other stocks. Among other things, the securities commission charged that Skymark failed to disclose that it had been compensated to promote those stocks.

Regulators also said that Emerging Stock Report, which had touted China Infrastructure Investment earlier in the year, was an alter ego of Skymark Research. Both are now defunct.

On July 29, two other sites that are part of the same network as Coolpennystocks.com and Pennyinvest.com took over the promotion. Their posts attributed the drop in China Infrastructure Investment's shares to short selling, and predicted that a short squeeze could be in the offing.

Hototc.com's note began:

My new big pick is CIIC. I rarely put out alerts on Nasdaq companies but this one needs immediate attention. CIIC has taken quite a hit this past week, and I`m not sure it`s over yet. I assume it`s being shorted.

These shorts may have to cover their position soon and when they do CIIC may pop big. Put CIIC on your watch list so you can watch for a possible reversal. The reversal may be the start of something called a 'short squeeze,' this means the buying from shorts covering their position coupled with normal buying creates a big rally.

Stockegg.com also predicted a possible reversal. HotOtc.com and Stockegg.com said in the disclosure statements on their posts that they were paid $90,000 by Medallion Capital for one week of advertising services. More than 2.3 million shares traded on July 29, with the price falling to 82 cents.

Our investigation found that that OxofWallStreet.com, the site that initially touted China Infrastructure Investment, has the same Internet protocol address as Coolpennystocks.com, Pennyinvest.com, HotOtcstocks.com and Stockegg.com. That address traces to a hosting company in Germany.

On July 30, yet another paid promotion service called Beacon Equity Research issued a "Hot Stock Alert'' saying China Infrastructure Investment "could be a fast dip and bounce play today!" The report suggested that the stock was oversold and due for a rebound.

Beacon said it had been paid $110,000 by Medallion Capital. Our investigation found that Beacon previously had featured two other Chinese companies that were taken public the some of the same people as China Infrastructure Investment. It touted Orsus Xelent Technologies Inc. (ORS.PK) in 2007, and also issued a note on New Oriental Energy & Chemical Corp. in 2008.

Sharesleuth wrote about both of those companies in the first installment of this series.

Beacon's report on China Infrastructure Investment concluded:

Though highway revenues are clearly increasing -CIIC wants a bigger share of the Chinese money pie. Accordingly, they've announced that they're pursuing additional development opportunities in infrastructure projects, including more expressways, and electricity, water supply, and gas facilities to be placed on its already extensive land holdings. AND, as additional announcements are made concerning the above new development projects - traders could pile into the stock on heavy volume. So HUGE price spikes could clearly be in CIIC's future!

On that day, China Infrastructure Investment's stock rose more than 8 percent. The promotional campaign continued into the following week, with Coolpennystocks.com and its companion sites posting additional notes. More than 2 million shares traded in the first week of August.

By our count, well over 25 million shares changed hands in the surges that began in April and July. That would have allowed the purchasers of Hall's stock and the recipients of the additional stock issued to Learning Quest's owners to liquidate most of their holdings.

A Negative Surprise

Despite the touting, China Infrastructure Investment's shares fell to 76 cents by the end of that week. They continued on a general downward trend for the remainder of 2010 and much of 2011, with the stock hitting a low of 20 cents in August 2011.

That was just after China Infrastructure Investment said $167 million in loans to two other expressway companies controlled by its chief executive had become impaired, and that it would have to write off some or all of the debt.

In September 2011, China Infrastructure Investment said its CEO, Li Xipeng, had transferred an interest in some real estate holdings to cover part of the debt. However, it still took nearly $150 million in provisions for bad debt.

Although China Infrastructure Investment reported that its revenues rose more than 30 percent in fiscal 2011, to almost $56 million, the charge left it with a $137 million loss. The charge also reduced its net worth by more than two-thirds, to roughly $53 million.

Delisting

In September 2011, China Infrastructure Investment said it had received a delisting notice from Nasdaq because its stock had been below the minimum price of $1 a share for more than 30 days. In the three weeks preceding that announcement, the company's shares had staged an extended -- and unlikely -- rally, rising from 22 cents on Aug. 24 to 42 cents on Aug. 26, 88 cents on Aug. 30 and $1.05 on Sept. 2.

The stock reached $1.25 on Sept. 14. We could find no news or market developments to explain this upswing. Although China Infrastructure Investment appealed Nasdaq's delisting decision, its shares fell back below $1, and it moved to the Pink Sheets in November 2011. The current share price is less than 10 cents.

Undisclosed Share Purchases

In reviewing China Infrastructure Investment's SEC filings, we noticed something else unusual. According to stock ownership tables in the company's annual filings, the entity that received the majority of its shares in the reverse merger added to its stake in 2009 and 2010, without disclosing any purchases.

China Infrastructure Investment reported in its annual report for the year ended June 30, 2008 that Joylink Holdings owned 54.4 million shares of its stock -- the same number it received in the merger.

In its annual report for its next fiscal year, it said Joylink owned almost 65 million shares, an increase of 10.5 million. Joylink never filed a Form 13D reporting the purchase of those shares, as required under SEC rules. Nor did China Infrastructure Investment ever announce any other transaction that would explain the increase.

In its annual report for the year that ended June 30, 2010, China Infrastructure Investment listed Joylink's stake at 68.2 million shares. That was an increase of 3.2 million shares, and equaled more than 85 percent of the total outstanding.

In other words, Joylink apparently acquired an additional 13.8 million shares of China Infrastructure Investment between June 30, 2008 and June 30, 2010.

The sheer number of shares that Joylink added to its holdings suggests that it could have been responsible for some of the open-market purchases in that period. But the timing of its reported additions from mid-2008 to mid-2009 does not track with the surge in China Infrastructure Investment's trading. Instead, Joylink appears to have increased its stake prior to the December 2009 jump in volume.

That raises the possibility that it wound up a big chunk of the 21.9 million shares that Hall transferred to unknown parties shortly after the reverse merger. Joylink might have been a participant in the deal, or it might have acquired the shares later.

Regardless of how Joylink acquired the extra stock, those purchases should have been disclosed by China Infrastructure Investment or its CEO, Xipeng. According to SEC filings, he owns 50 percent of Joylink and indirectly holds more than half of the company's shares.

Winland Ocean Shipping

Winland Ocean Shipping Corp. -- another of Kelley's reverse-merger creations -- also has taken investors on a strange trip.

Winland went public in August 2008 through a reverse merger with a Houston-based company called Trip Tech Inc. Shareholders of Trip Tech, which had been seeking to develop an online travel business, emerged with 23.1 million of Winland's 100 million common shares.

Trip Tech had executed two separate stock splits in June of that year, nearly tripling its outstanding shares.

According to SEC filings, Winland's other 76.9 million common shares went to Pioneer Creation Holdings Ltd., a British Virgin Islands-registered entity. It also got preferred stock that could be converted into additional common shares.

Winland is based in Hong Kong and provides shipping and logistics service for customers around the world. At the time of the reverse merger, it operated a fleet of 13 vessels.

S. Gene Thompson, the chief executive of Trip Tech, owned 23.7 million shares before the merger. He surrendered 7.1 million for cancellation, leaving him with 16.6 million shares of the combined company. Other, unidentified Trip Tech shareholders came away from the deal with 6.5 million shares Winland shares.

Thompson's stake represented nearly three-fourths of Winland's public float.

As with some of the other Chinese reverse mergers packaged by Kelley and his associates, the percentage of stock that went to the investors in Trip Tech far exceeded that company's apparent financial contributions. Trip Tech's last quarterly SEC filing before the reverse merger showed that it had recorded just $59 in revenue since its creation in November 2006. Its sole asset at the end of the May 2008 was just under $33,000 in cash.

SEC filings related to the merger said Winland had $70 million in revenue and nearly $18 million in operating income the previous year. It listed total assets of more than $94 million prior to the deal.

Shares Disappear

When Winland filed its initial annual report with the SEC on March 31, 2009, Thompson no longer was listed among the individuals or entities holding 5 percent or more of its common stock. He never reported selling any shares, and Winland's trading volume was so low that he would have been unable to dispose of them in the open market.

Trip Tech's SEC filings offered few details on Thompson's business career or prior relationships, so we searched the filings of other public companies to see if he showed up anywhere else. We discovered that Thompson, like others involved in the Chinese reverse merger network, was an associate of Ruth H. Shepley, who lives in the Houston area and specializes in creating or marketing shell companies.

As we noted in the previous articles in this series, Shepley was an investor in the reverse-merger deals that created Telestone Technologies Corp. and China INSOnline. She also controlled the shell company that became CH Lighting International Corp..

SEC filings show that Thompson previously had been president of another shell, Jordan 1 Holdings Co., that did a reverse merger with a U.S.-based company in 2006. Those filings show that Shepley was the majority owner of Jordan 1.

Shepley's longtime partner, Michael J. Fearnow, orchestrated the Telestone and China INSOnline deals, and also played a behind-the-scenes role in the reverse merger that created Kandi Technologies Corp.

When Sharesleuth asked Thompson what became of his shares in Winland, he referred us to Fearnow - whose name did not appear anywhere in the SEC filings related to that deal.

As we reported in the first two stores in this series, the SEC brought charges against Fearnow in 2000 in connection with his involvement in several earlier reverse mergers. The SEC alleged that he participated in the pricing and structuring of the deals, thus engaging in securities transactions without being registered as a broker/dealer.

SEC filings also show that Siu Choi Fat, a lawyer in Hong Kong, was listed as executive director of one Winland's owners, an entity called Wallis Development Ltd. Our investigation found that Fat was involved in at least four of the other 11 Chinese reverse mergers that Kelley and his associates helped package.

Those companies were China Auto Logistics, New Oriental Energy , China INSONline and CH Lighting.

Downturn in Business

Winland's shipping business declined sharply in 2009, partly because of the global economic crisis. Revenues fell 40 percent, to just over $50 million, and the company posted a loss of $7 million. Winland said revenue rebounded to more than $74 million in 2010, with profits coming in around $3 million.

But investors took little interest in its stock.

Winland said revenue for 2011 was a little less than $61 million, with profits again topping $3 million. The company sold several of its vessels during that year, contributing to the drop in sales. Winland also executed a 1.5-for-1 stock split, boosting the number of outstanding shares to 195 million.

Paid Promotions And a Trading Surge

In Winland's first three years as a public company, fewer than 1.5 million shares changed hands on the open market. Because trading volume was so low, Thompson -- or whoever held the 16.6 million shares reportedly issued to him -- would not have been able to convert many of them to cash. However, one or more people connected to the company financed a $700,000-plus promotional campaign in December 2011 that included tout reports on at least a dozen stock-related websites.

Research Driven Investor LLC, which runs a cluster of stock-promotion sites, featured Winland on most of them. It said in a disclaimer that it was paid $655,000 for a month-long investor relations campaign on Winland's behalf. Research Driven Investor said the money came from Reason Success Ltd., which it described as a "non-affiliated third party.''

From Dec. 1 to Dec. 20, 2011, more than 12.8 million of Winland's shares changed hands. The company's stock price doubled, going from 28 cents to a high of 59 cents.

If whoever held Thompson's original 16.6 million shares was able to unload one-third of those shares at an average price of 40 cents a share, they would have collected more than $2 million.

Winland's total trading volume for the month of December and the first few days of January was roughly 14.5 shares. When the promotional campaign ended, the company's stock price quickly retreated, falling below 25 cents a share.

The other stock promoters who were paid to tout the company included:

-- Jonathan Lebed, who previously settled charges with the SEC stemming from his alleged manipulation of the markets through false and misleading Internet postings.

-- Raymond L. Dirks, who was fined and suspended by the NASD in 2004 for issuing favorable reports on companies that omitted material facts and made false and misleading revenue and price projections.

Lebed said he was paid $20,000 by Wall Street Grand LLC, another stock promotion firm.

Dirks predicted in his Dec. 12 report on Winland that its stock was likely to "quadruple in price within six months to about $1.50 a share." Dirks said he was convinced the stock would climb to $3 within a year, provided the world economy recovered, and could hit $4 by the middle of 2013.

Other sites that touted Winland said they, too, were paid by Research Driven Investor. Pennystockalerts.com said in its disclosure statement that Research Driven Investor had agreed to pay it as much as $40,000 for a two-day campaign. Another site, Pennystockprophet.com, said it expected to receive as much as $35,000 for one-day campaign.

Beacon Equity Research, which had touted Orsus Xelent in 2007, New Oriental Energy in 2008 and China Infrastructure Investment in 2010, said it got $30,000 from Research Driven Investor to promote Winland.

Its report in mid-December was headlined "Traders are Backing Up to Grab WLOL by the Truckload.''

Interest in Winland's stock has since waned, to the point that there is no buying or selling on some days. The company's shares now trade for a nickel. Winland notified the SEC in August that it intended to terminate its securities registration and would cease filing reports with the agency.

Market Intervention

Our research found that early in Winland's existence, a Hong Kong-registered company called Winner International Group Ltd. intervened in the public market to boost the price of Winland's shares.

As we reported in part one and part two of this series, Winner International played a hidden role in the reverse mergers that created four other Chinese companies -- Telestone, Kandi, Orsus Xelent and New Oriental Energy.

Winner International covered the legal, accounting, investor relations and listing expenses for those companies in return for millions of shares of cheap, pre-merger stock.

Paul Kelley, who helped create Winland, was Winner International's vice president from 2002 to 2009. Records show that he opened its U.S. brokerage accounts and had trading authority over them.

A Canadian judge ruled last summer that an associate of Kelley's, Jay Tien Chiang, secretly owned 50 percent of Winner International and another entity that participated in the reverse mergers. Court records show that the stock Winner International held in the first four reverse merger companies -- Telestone, New Oriental Energy, Orsus Xelent and Kandi -- was worth upwards of $20 million.

Testimony in the case showed that Winner International acted to prop up Winland's stock after Jack Tang, the operator of a Chinese affiliate of Medallion Capital Corp. , sold shares and sent the price plunging.

According to that testimony, Tang asked a woman named Liya Wu, who worked with Kelley, if she could find someone to buy shares in the open market to reverse the damage. It appears that when Wu could not find an outside investor to buy shares, Chiang took direct action.

A forensic analysis of the trading in Winland's shares on Nov. 18, 2008 showed that the stock opened at $3.60 and tumbled to 51 cents a share by mid-afternoon. Between 2:48 p.m. and 3:40 p.m., Winner International bought 27,000 shares on the open market at progressively higher prices, lifting the price per share to $3.70.

According to Canadian court documents, Chiang ordered the trades through Winner International's account at E*Trade Securities. Court records show that Tang later sent Winner International the same amount of money it spent to buy the Winland shares.

According to testimony in the case, Chiang was the person who connected Kelley with Tang and played an important middleman role in the first four reverse mergers.

Other Connections

Thompson, who headed the shell company that became Winland, currently is executive vice president of an Arkansas real estate company called Holiday Island Development Corp. It has created a planned community on Table Rock Lake, near Eureka Springs.

Holiday Island also has been home to Roger D. Lockhart, a former stockbroker, and his wife, Davina S. Lockhart. They invested in at least two of the other Chinese reverse-merger companies.

Our research found that the Lockharts, like Thompson, previously invested in domestic reverse-merger deals alongside Shepley and Fearnow.

We also noticed one more unusual connection: The home page for the Holiday Island Development site featuring Thompson's profile also included a paragraph describing an offshore company called Hong Kong Alliance Fund Ltd.

When we took a closer look, we found that two of the people behind Hong Kong Alliance fund were Jeffery S. Stone, a convicted felon and recidivist securities-law violator, and his wife, Janette Diller Stone.

The SEC obtained judgments against both of the Stones in 2009 in connection with the manipulation of a penny-stock company called WebSky Inc. The Stones were ordered to pay $462,247 in disgorgement and interest and $180,000 in penalties.

But they moved to Japan before satisfying the judgment, and Jeffery Stone said in an interview with Reuters that he had "no intention of ever paying."

SEC filings show that Jeffery Stone's Crescent Fund LLC -- which was implicated in the fraud case against him -- once provided funding to a shell company where Thompson was president and Shepley was the majority owner.

We also found a press release from last year announcing that Thompson had been appointed interim chief financial officer at Chatterbox Call Centers Ltd. (OTCPK:CXLLE), a company that was involved with another entity connected to the Stones, Wakabayashi Fund LLC.

China Auto Logistics

China Auto Logistics Inc. was created in November 2008 through a reverse merger with Fresh Ideas Media Inc., a Colorado company that had marketed greeting cards and school folders.

China Auto Logistics sells and trades imported vehicles from the United States, Europe and other nations. The Tianjin-based company also helps buyers with financing and shipping, and operates websites that feature vehicles and services.

Bright Praise Enterprises Ltd., a British Virgin Islands holding company, got 11.7 million shares of China Auto Logistics, or nearly 65 percent of the total outstanding after the merger.

SEC filings show that Fresh Ideas Media had just $125 in cash at the end of September 2008, and a little more than $23,000 in total assets. Still, its owners got nearly one third of the stock in the post-merger company.

They came away from the deal with 6.4 million shares. China Auto Logistics said it had $81 million of revenue in the first six months of 2008, and a little over $2 million in profits.

Share Transfers

The two main shareholders of Fresh Ideas Media were Philip E. Ray and Ruth Daily. Together, they held nearly 3 million of its 7.5 million shares. In connection with the reverse merger, they surrendered 1.1 million shares for cancellation, leaving them with 1.8 million shares.

The owners of Fresh Ideas Media's other 4.6 million shares were not identified in the merger filings.

SEC filings show that on Sept. 19, 2008, Ray and Daily each sold 50,000 of their shares, at $4.63 a share. There was no public market for Fresh Ideas media's stock at the time, so the sales had to have been private. The buyers were not identified.

Like many of the other shell companies used in the Chinese reverse mergers, Fresh Ideas Media split its stock in the weeks leading up to the deal. On Sept. 25, the company executed a 5-for-1 forward split, creating nearly 7 million new shares.

A Familiar Name

The reverse merger was completed on Nov. 10. As part of the transaction, a Toronto area accountant named Howard S. Barth was appointed to China Auto Logistics' board of directors.

Barth is a longtime associate of Paul Kelley's father, Stafford Kelley, the promoter who had been barred by Ontario Securities regualtors. Barth also sat on the boards of three other Chinese companies that gained U.S. listings through reverse mergers packaged by Paul Kelley.

Those companies were Orsus Xelent, New Oriental Energy and Guanwei Recycling Corp.

Barth was chairman of the audit committee at all four companies, giving him oversight of their financial reporting and other regulatory-compliance issues.

More Share Transactions

SEC filings show that 10 days after the reverse merger was completed, Ray and Daily each sold 682,500 additional shares for 0.6 cents a share. The transfers left Ray with 552,500 shares and Daily with 2,500 shares.

At the time, the company's stock was trading on the open market for more than $2 a share. The individuals or entities that bought the stock from Ray and Daily wound up with nearly 1.9 million shares, or just over 10 percent of China Auto Logistics, at an average price of 25 cents a share.

The day after the reverse merger was completed, shares of the combined company rose 25 percent, to $2.50. The next day, they rose a further 18 percent, to $2.95. More than 400,000 shares changed hands in the first two days of trading.

Over the next two weeks, the stock climbed to nearly $4 a share, albeit on much lower volume.

Roughly 1 million shares of China Auto Logistics' stock changed hands in its first two months as a public company. Trading dropped significantly after that, to fewer than 100,000 shares a month.

Nasdaq Listing

On June 30, 2009. China Auto Logistics moved to the Nasdaq market. In the 10 days leading up to that listing, about 500,000 shares traded, bringing the cumulative volume to 1.7 million shares.

Like many of the other Chinese reverse-merger companies we scrutinized, the shares of China Auto Logistics had a number of unusual swings in trading volume and price.

On Sept. 18, 2009, for example, China Auto Logistics' stock jumped 26 percent, to $4.98. We could find no news release or market development to explain the jump.

Over the next three trading sessions, the shares climbed to $6, with total volume topping 475,000 shares. On Sept. 23, the company announced that it had expanded its online auto network to Shanghai, Chengdu and Guangzhou.

China Auto Logistics' stock peaked at $6.35 on Sept. 29, 2009. Over the next month, the price sank back to $5. In late October, China Auto Logistics' stock fell more than 20 percent over a three-day period, on heavy volume but no news. They ended the month at a little over $4.

China Auto Logistics' trading volume picked up noticeably in December 2009, and its share price rose as well. On Dec. 2, more than 346,000 shares changed hands, the highest total since the company went public. On Dec. 9, China Auto Logistics' daily volume topped 486,000 shares. The company's stock climbed as high as $5.13 that day, but fell sharply by the close, ending the day at $4.54.

By Dec. 16, the stock had risen 20 percent, to $5.45. In that two-week period, nearly 1.9 million shares changed hands.

China Auto Logistics had another wave of 100,000-plus volume days in January 2010, around the time its stock was elevated to the Nasdaq Global market. In the first two weeks of the year, more than 1.6 million shares traded, with the price rising as high as $6.25. After that, volume dropped to an average of 40,000 shares a day or less.

Possible Proceeds

By February 2010, cumulative trading since the reverse merger had topped 8 million shares. That would have allowed the people who bought stock from Ray and Daily to cash out at least some of their holdings.

If they sold half of their 1.86 million shares, at a midpoint price of $5, the sales would have generated more than $4.6 million. If they sold all of their shares, the proceeds would have topped $9 million.

Other unidentified investors got just over 4 million shares through the reverse merger. When the company's stock moved to the Nasdaq and became more liquid, they would have been holding share worth more than $20 million.

In searching for the identities of people who got shares via the reverse merger, we turned up an Internal Revenue Service filing by a charitable foundation set up by Roger and Davina Lockhart.

As we noted in the first article in this series, Davina Lockhart bought 100,000 shares of one of the Chinese reverse merger companies, New Oriental Energy, shortly after that deal was completed.

She said in an SEC filing that she bought those shares in a private transaction from Winner International.

The IRS filing for the Roger & Davina Lockhart Foundation shows that it was funded in part by 10,000 shares of China Auto Logistics stock. The filing said the stock was sold in December 2009 for just under $50,000.

Business Booms, Stock Declines

In March 2010, China Auto Logistics announced revenue of $215.2 million for 2009, up more than 13 percent from the previous year. It said profits totaled $5.5 million, up 39 percent.

Although the company reported sales and earnings gains of more than 30 percent in each of the next few quarters, its shares attracted little interest from investors. The stock was down to $4 by early May 2010, and ended 2010 at $3.

A Timely Distributions

The decline in China Auto Logistics' stock continued in the first half of 2011. China Auto Logistics' share price fell below $2 in April, and was down to $1.50 by mid-June.

On June 10, 2011, an SEC filing shows, Bright Praise Enterprises reduced its holdings by distributing 1.8 million of the 11.7 million shares it got in the reverse merger.

The recipients of those shares were three entities that had never been mentioned in any of China Auto Logistics' previous SEC filings: Tourmaline Evolution Co. Ltd., Stone Technologies Co. Ltd., and Easy Fame Asia Investment Ltd.

Bright Praise said in a 13D filing that Tourmaline Evolution and Stone Technologies each got 724,464 shares, and Easy Fame Asia got 362,232.

That filing was not submitted until November, in apparent violation of SEC rules. It did not identify any of the control persons for the three entities that received the stock distributions.

On July 7, 2011, China Auto Logistics announced that certain unidentified investors had agreed to buy 3 million new shares in a private placement for $5.25 million, or $1.75 a share.

The company highlighted the above-market placement price in a press release.

Chairman Tong Shiping was quoted as saying that the investors "clearly appreciate the strength and growth potential of our company, which has been masked by the unprecedented current predicament of Chinese stocks in the U.S."

China Auto Logistics did not identify the investors who bought the stock.

The company's shares more than tripled in intraday trading, hitting a high of $3.80. They closed at $2.07, up 78 percent, with 2.2 million shares changing hands.

The next day, the shares rose as high as $2.40, before ending at $2.06. Volume totaled 1.1 million shares. An additional 800,000 shares traded in the following week, lifting the total volume in the wake of the announcement above 4 million shares.

Neither Bright Praise nor China Auto Logistics offered an explanation for the distribution of shares to Tourmaline Evolution, Stone Technologies and Easy Fame Asia.

If those three entities were able to sell half of that stock during the surge in trading, at a midpoint price of $2.70 a share, they would have received more than $2.4 million. If they were able to sell three-fourths of their stock, they would have collected more than $3 million.

By the end of the July, China Auto Logistics' shares were again below $1.50. By the end of October, they were below $1.

On Nov. 14, 2011, the company reported that revenue for the first nine months of the year was up 72 percent, to $304 million, thanks to increased sales of high-end automobiles. It said net income rose almost 22 percent, to $6.8 million. But China Auto Logistics' stock price rose only slightly in the week that followed.

China Auto Logistics' shares slipped back below $1 in December 2011, then continued sinking. The company announced last May that it had received a delisting notice from Nasdaq, and its stock fell from 70 cents to 50 cents.

In July, China Auto Logistics announced that its chief operating officer had resigned, along with three members of its board of directors.

In October, the company executed a 1-for-6 reverse stock split, which lifted its share price to more than $1.70 , well above the level needed to maintain its Nasdaq listing.

On Nov. 14, China Auto Logistics' stock shot from $1.57 to $4.24, after the company announced the revenue for the first nine months of the year had risen more than 78 percent, to $170 million.

The next day, its shares rose as high as $7.48, and closed at $5.66.

Since China Auto Logistics put out its earnings release, more than 13.5 million shares have changed hands. The company's stock has fallen more than 50 percent from its recent high, and now trades for a little over $3.

China INSonline

China INSonline went public in 2007 through a reverse merger with Dexterity Surgical Inc., a Texas-based company that was reorganizing in bankruptcy court.

The deal was patterned after an earlier one that created Telestone. Both were orchestrated by Fearnow, through a company called Focus Tech Investments Inc.

According to court documents and SEC filings, Dexterity Surgical received $175,000 in financing to aid its bankruptcy reorganization, with $125,000 allocated for creditors and $50,000 for administrative expenses.

Although those documents referred to Fearnow, Focus Tech and the providers of the company's debtor-in-possession financing as "an investment banking group," none of the listed participants was registered to conduct securities transactions.

Dexterity issued 25 million new shares for the $125,000 used to pay creditors. Court records show that the majority of those shares were canceled in the final reorganization. The investors who put up the remaining $50,000 got promissory notes that were convertible to 6 million shares of stock.

Neither the bankruptcy documents nor China INSOnline's SEC filings show how the shares were allocated. But one filing did identify seven parties that were to receive the 6 million shares. They included one of Paul Kelley's companies, MCC Group USA Inc.; Fearnow's partner Shepley, and Keen Merit Investments Ltd., a Hong Kong entity that also invested in Telestone and New Oriental Energy.

The group also included two other entities, Intellect Goal Investments Ltd. and Future Expert Investments Ltd., that had participated in the Telestone deal.

SEC filings show that Newise Century Inc., the holding company for the Chinese businesses that made up China INSOnline, received 26.4 million shares of the merged company, or almost 74 percent of the total.

The filing said a U.S. company called Rosetta Granite Inc. held 7.54 million shares, or roughly 21 percent of the total outstanding. It appears that Rosetta Granite was the entity formed to fund settlements with Dexterity's creditors.

Most of the remaining shares went to the providers of the $50,000 used to pay administrative expenses. SEC filings show that they initially got 1.76 million of the 6 million shares they were to receive. They rest were issued the following year.

The Business

China INSOnline was set up as an Internet portal to link Chinese consumers with insurance companies, and to serve as a source of news, information, advertising. It also operated its own online vehicle, property and life insurance agency.

The company reported in its SEC filings that its revenue grew from $2.2 million in fiscal 2007 to $14 million in 2008 and $18 million in 2009, with net profit margins exceeding 50 percent in each of those years.

Its share price peaked at $6 a share in January 2008, at a time when trading volume was just a few hundred shares a day. Trading in China INSONline's shares never reached the level of Telestone, Orsus Xelent or the other companies whose deals we analyzed. That means Kelley, Shepley and the others who got shares in its reverse merger would have been able to sell only a modest portion of their holdings on the open market.

China INSOnline reported $8.7 million in revenue for the first half of its 2010 fiscal year, down slightly from the same period a year earlier. Its sales plummeted after that, for reasons it never adequately explained.

The company reported less than $700,000 in sales for the third quarter, then sold off all of its insurance businesses, recording a loss from discontinued operations of more than $20 million.

China INSOnline later sold its interest in Ever Trend Investment Ltd. -- the holding company for its online insurance agency and several Internet and software businesses -- to a California company for less than $1.

Our research found that two of the principals of that company, Topology Capital Investment Corp., are or were officers of China North East Petroleum Holdings Ltd., (AMEX: NEP).

Jiang Chao, one of the two officers of Topology, is China North East's finance director and secretary. He also was involved in the creation of a second reverse-merger company, U.S. China Mining Group Inc. (SGZH.).

Shares of China North East, another reverse-merger company, were halted for more than three months later year because of regulatory noncompliance.

The Securities and Exchange Commission brought fraud charges last month against China North East; its chief executive, Wang Hongjun; his mother, Ju Guizhi; and Chao.

The SEC alleged that China North East, through Chao, diverted nearly $7 million in proceeds from stock offerings to the personal accounts of company insiders and their relatives. The complaint said $900,000 of that money went to Chao's father.

The SEC also alleged that China North East and its insiders engaged in at least 176 undisclosed, related-party transactions totaling $59 million.

Another Deal

After unloading its insurance businesses, ChinaINSOnline's next move was to do another reverse merger. It transformed itself at the end of 2010 into China Bio-Energy Corp., and now makes and distributes biodiesel.

The company said in an SEC filing last December that Chao acted as an adviser to its management in the acquisition of the biodiesel business.

China Bio-Energy disclosed in an SEC filing in April that its auditor had discovered accounting irregularities. The auditor concluded that one of China Bio-Energy's purported customers did not conduct the transactions recorded on the company's books. The company's chief executive, Xinfeng Nie, resigned. The company's stock now trades in small lots at around 15 cents a share.

Chisen Electric

Chisen Electric Corp. was created in November 2008 through a reverse merger between World Trophy Outfitters Inc., a Nevada-based shell company, and Fast More Ltd., a Hong Kong-based holding company.

Fast More got 35 million shares in the combined company, representing 70 percent of the total. According to SEC filings, 32.9 million of those shares were allocated to entity called Cheer Gold Development Ltd., incorporated in Samoa, while the other 2.1 million went to Floster Investment Ltd., also incorporated in Samoa.

Chisen is based in Changxing and makes lead-acid batteries for electric bicycles, electric cars and other vehicles.

SEC filings show that seven months before the merger, a man named Mathew Evans bought 9.5 million shares of World Trophy Outfitters' stock from founder Donald Peay, giving him nearly 85 percent of the pre-merger shell.

World Trophy Outfitters had been in the business of packaging big-game hunting trips.

About a week before the merger, the company declared a stock dividend, issuing two new shares for each outstanding share. That boosted Evans' holdings to 28.5 million shares, and lifted the total number outstanding to more than 33 million.

The SEC filing covering the reverse merger said that Evans cancelled 18.7 million of his shares prior to the closing of the deal, leaving him with 9.8 million shares of the combined company

Evans reported in an SEC filing that he sold those shares for $40,000 the day after the reverse merger was completed. The filing did not identify the buyer or buyers of the shares, which amounted to nearly 20 percent of Chisen Electric's stock.

No individual holder besides Fast More ever reported owning 5 percent or more of the company's shares.

World Trophy Outfitters' SEC filings described Evans as a planning consultant for the city of Pasadena, Calif., and as a current or previous executive at several other Utah-based shell companies.

Our research found that he is the brother-in-law of David N. Nemelka, the Utah financier and stock promoter who pleaded guilty to criminal charges in connection with an earlier scheme involving a reverse-merger company.

As we noted earlier in this story, another person with ties to Nemelka controlled the shell company that became China Infrastructure Investment.

SEC filings show that Evans previously was involved with members of the Nemelka family in other public companies. He now is a planning official in Park City, Utah.

Chisen Electric's SEC filings did not identify any of the investors who held the other 5.2 million shares of World Trophy Outfitters that were in public hands prior to the reverse merger.

Little Trading

Chisen Electric's shares trade on the Over the Counter Market. Total trading over the past three years was less than 1.5 million shares, with daily volume seldom topping 10,000 shares.

The company's stock began trading at $3.90 and stayed in the $4 to $5 range until November 2009. Then, the stock moved up to $8, on a volume of fewer than 5,000 shares a day.

Chisen Electric's shares never gained traction with investors. They fell to $5 by end of 2010 and were down to $1 by late last year. Then, the company executed a 10-for-1 stock split, boosting the total shares outstanding to 500 million.

The stock now trades infrequently, for around 5 cents a share. Given the lack of activity in the stock, we believe the architects of the reverse merger have made little money on this deal.

CH Lighting

CH Lighting International went public in July 2008 through a reverse merger between Sino-Biotics Inc., a shell company, and KEG International Ltd., a holding company incorporated in Hong Kong.

CH Lighting is based in Shangyu City and makes light bulbs, lamps and lighting products. KEG International got 93 million shares of the combined company, or 77.5 percent of the total outstanding.

Familiar Names

Sino-Biotic's biggest shareholder was an entity called Venture Fund I Inc. It got 23.9 million shares of CH Lighting, or nearly 20 percent of the combined company.

SEC filings listed James Ditanna as Venture Fund's president. But earlier filings for several other companies with financial ties to Venture Fund I listed Ruth Shepley as its owner.

Our research found that Ditanna once was president of Dexterity Surgical, the shell used in the reverse merger that created China INSOnline. The address listed for Venture Fund I corresponded to the law offices of John Heskett, an Oklahoma lawyer who also was involved with the shell companies that became Telestone and China INSOnline.

SEC filings list KEG International's address as the law offices of Chui & Lau, a small firm based in Hong Kong. One of its attorneys, Siu Choi Fat, was involved in four of the other Chinese reverse mergers covered in our reports.

The filings related to the CH Lighting deal do not mention either of Kelley's firms, MCC Group USA or Asia First Financial. But a section of Asia First Financial's website, now removed, identified CH Lighting as one of its investments.

CH Lighting's stock is listed on the Pink Sheets and trades only sporadically. The current share price is around 15 cents. Because of the lack of trading volume, this is another deal that has yet to generate any payoff for the reverse merger network.

Rick Feldman and Gregory Stevens provided fact-checking services for this report.

Disclaimer: Mark Cuban, majority owner of Sharesleuth.com LLC, has no position in the shares of any of the companies mentioned in this report. Chris Carey, editor of Sharesleuth.com and the author of this story, does not invest in individual stocks and has no position in the shares of any of the companies mentioned. Nor does anyone associated with Sharesleuth or involved in the creation of this report.

Source: 2 Strange Trips: China Infrastructure Investment And Winland Ocean - Part III