A financial felon who owned millions of shares in an energy company whose stock soared and then plummeted now is one of the funders of a heavily touted gold-mining venture.
Samuel DelPresto -- a former brokerage executive who pleaded guilty to conspiracy charges in connection with a 1990s fraud scheme -- has provided more than $500,000 to Southern USA Resources Inc. (OTC:SUSA).
Southern USA Resources went public through a reverse merger last April. It says it is developing a gold mine in Alabama, a state that has had no commercial gold production for decades.
Southern USA Resources is the focus of a promotional campaign that began earlier this month and has a budget of at least $900,000. Our investigation found that the amount being spent to tout the company is seven times greater than the amount of cash and other current assets it listed in its latest quarterly financial report. It also is only slightly lower than the carrying value of all of the company's assets, including its land, minerals and mining equipment.
Securities and Exchange Commission filings show that DelPresto and four other funders are bankrolling Southern USA Resources in return for notes that can be converted to stock at a fraction of the current market price.
Southern USA Resources' stock began this week at $1.66 a share. At that price, the company had a market capitalization of almost $50 million. The shares underlying the $2.6 million in convertible notes that Southern USA Resources has issued to DelPresto and the other funders since the reverse merger were worth an additional $22 million.
Over the past four days, the shares have fallen to $1.10, reducing the market cap and the potential value of the notes by more than 30 percent.
Athough the SEC barred DelPresto from associating with any securities broker or dealer, the order did not prohibit him from financing or promoting public companies.
MESA ENERGY HOLDINGS
Mesa Energy was the focus of a similar $700,000 promotional campaign three years ago. Its shares more than tripled during that push, peaking at $3.50. After Sharesleuth and others wrote articles on the company, its shares quickly sank below $1.
The company later announced that it was the subject of an SEC investigation. One of DelPresto's partners in the Mesa Energy deal -- a stock promoter named Nathan B. Montgomery -- subsequently was hit with civil and criminal charges in connection with fraud schemes involving two other public companies. Montgomery was found guilty of conspiracy to commit mail fraud, securities fraud and wire fraud and sentenced to 40 months in prison.
Mesa Energy's stock now trades for around 15 cents.
(Disclosure: No one associated with Sharesleuth.com has a position, short or long, in the shares of any of the companies mentioned in this report)
THE CURRENT CAMPAIGN
A promotional flyer touting Southern USA Resources began arriving in investors' mailboxes a few weeks ago. Among other things, the flyer claimed that the company's property in Clay County, Ala. could hold billions of dollars worth of gold, and could generate annual profits of $98 million or more.
A headline at the top of the document suggested that Southern USA Resources' shares could be "on the fast track to $65."
Southern USA Resources also was the subject of a favorable report this month by Caprock Risk Management LLC, which produces research profiles for a cash fee. Caprock issued a "strong buy" rating on the company's stock, with a 12-month price target of $4.
The promotional flyer that was mailed to investors was produced by Rising Stock Advisor, which operates a subscription-based recommendation service. It asserted that Southern USA Resources did not need any financing to start operations or production at the Alabama mine, and that it should reach $1 million in gold sales by Valentine's Day.
"This company HAS gold - and the production to prove it!" it said. "They're already mining at a breakneck pace - and are looking to take things to the next level - which is why they made the decision to go public.''
Southern USA Resources, however, has made no mention of any output or sales from its primary mine, dubbed the SUSAR No. 1. In a press release last week, the company said only that it had been "running its equipment and making modifications to prepare for its gold production in 2013.''
Rising Stock Advisor said in a disclaimer that an entity called Core International Co. Ltd. had provided $900,000 for the campaign. It said Core International received funding from shareholders of Southern USA Resources. It added that those shareholders, who were not identified, "will sell their shares of SUSA at or about the time of this mailing."
SEC filings show that nearly all of Southern USA Resources' stock is concentrated in the hands of just a few holders. Its chief executive, Charles H. Merchant Sr., held 29 million of the 29.8 million shares outstanding in early November.
Merchant reported in a filing last week that he sold almost 3.8 million of his shares for a fraction of a penny per share, or less than $400 Since the promotional campaign began, more than 2 million Southern USA Resources shares have changed hands on the open market.
According to SEC filings, DelPresto and the other investors providing financing to the company hold notes that could be converted to roughly 30 million shares. They also have warrants to buy at least 535,714 additional shares at 4 cents a share.
The investors backing Southern USA Resources are:
--DPIT 5 LLC, a New Jersey-based entity controlled by DelPresto.
--Alpha Capital Anstalt, which has headquarters in Liechtenstein.
-- Whalehaven Capital Fund Ltd., which has headquarters in New York City.
-- Adventure Ventures LLC, which is based in New York.
--OJA LLC, which listed an address in Delray Beach, Fla.
Adventure Ventures shares the same address and manager as Osher Capital Partners LLC, which frequently invests alongside Alpha Capital and Whalehaven.
Alpha Capital and Whalehaven are familiar names for those who track the funding of speculative penny-stock companies. SEC filings show that those two entities, plus Adventure Ventures, also provided financing to Southern USA Resources' predecessor, Atlantic Green Power Holding Co.
Our research showed that Whalehaven was one of Mesa Energy's funders as well.
We also noted that Caprock Research, the firm that recently recommended Southern USA Resources, also produced research reports for Mesa Energy. Last January, it issued a "strong buy" rating on that company's stock, setting a 12-month target price of $1 a share. In May, it upped the target to $1.15.
Caprock said it was paid $15,000 for the Southern USA Resources report. It disclosed in the Mesa Energy reports that it was being paid $4,000 a month under a year-long contract to initiate and maintain research on that company.
THE REVERSE MERGER
Southern Resources USA previously was known as Atlantic Green Power. According to SEC filings, the predecessor company was pursuing a solar-energy generation project in New Jersey.
Prior to the reverse merger, the company executed a 1-for-1,000 reverse split of its stock, reducing the total number of shares outstanding to 43,525. It then issued 29 million shares to Merchant for mining equipment to be used at the Alabama property. SEC filings show that cost basis for that equipment was $355,262.
On the same day, the company completed the purchase of two parcels of land, totaling 52 acres, for $438,447. To help finance its acquisitions, Southern Resources USA also sold convertible notes with a principal amount of $1.92 million to DelPresto and the other four investors.
Since then, those investors have purchased additional notes, bringing the total principal amount to $2.6 million. SEC filings show that those notes can be converted to stock at prices ranging from 15 cents to 25 cents a share. Some of the financing agreements also included provisions calling for a 25 percent reduction in the conversion price if Southern USA Resources failed to deliver 700 ounces of gold by Dec. 31, 2012.
It is unclear whether the company met that deadline.
It appears from SEC filings that the conversion features of the notes that Alpha Capital, Adventure Ventures and Whalehaven held in Atlantic Green Power were not affected by the reverse split. Those filings indicate that the older notes can be exchanged for 18.7 million shares in Southern USA Resources, at a price of 4 cents a share.
SEC filings show that Alpha Capital and Adventure Ventures also got warrants to buy 535,714 additional shares, at 4 cents a share.
THE MESA DEAL
As Sharesleuth previously reported, DelPresto, Montgomery and two other investors received 14 million shares of Mesa Energy when it did a reverse merger with a company called Mesquite Mining Inc. The merger transaction was unusual in that Mesa Energy already was a public company at the time of the deal.
SEC filings showed that DelPresto and the others each got 4.5 million shares of Mesa Energy -- which amounted to matching 9 percent stakes in the company -- from the Mesquite Mining side of the transaction.
Another of the investors, New York attorney and financier Adam S. Gottbetter, helped arrange for the placement of $1.95 million of notes, which were convertible to stock at $1.50 a share.
Mesa Energy's annual SEC filing in April 2010 did not list DelPresto or the others as holding 5 percent or more of the company's stock. If the ownership information in that filing was correct, then each would have needed to sell at least 1.5 million shares to fall below the disclosure threshold.
Mesa Energy's focus after the reverse merger was the development of oil and gas properties at the upper end of the Marcellus Shale formation, a long and promising basin stretching from New York to Virginia. To aid its efforts in New York, the company appointed several influential politicians as advisors. The list included former Gov. George E. Pataki and former state senator Nicholoas A. Spano. However, the state imposed a moratorium on wells that use hydraulic fracturing, which essentially stalled Mesa Energy's project there.
Mesa Energy disclosed in August 2010 that the SEC was conducting a formal investigation into the company and its predecessor, Mesquite Mining. Last year, the SEC brought charges against the people who created Mesquite Mining. The complaint alleged that they formed that company and 14 other purported mining companies with the intention of using them as shells for reverse mergers, rather than for pursuing actual mining ventures.
The SEC said the defendants made false or misleading representations to gain public listings for the shells, and made nearly $6 million by selling them in connection with reverse-merger deals.
DelPresto (whose name sometimes appears in SEC filings as Del Presto) was barred from working in the securities industry for his role in a fraud and manipulation scheme that cost investors more than $100 million.
DelPresto worked in the 1990s for two notorious boiler-room brokerages, Hibbard Brown & Co. and L.C. Wegard Inc. Federal authorities said both firms were secretly controlled by Robert E. Brennan, who served nearly 10 years in prison for bankruptcy fraud, money laundering and obstruction of justice.
DelPresto was one of eight L.C. Wegard managers and brokers indicted in November 1997 on charges that they defrauded customers by using high-pressure tactics to sell them high-risk stocks whose prices were being manipulated.
Sixteen people ultimately were charged in connection with the scheme. DelPresto, who was a broker and assistant branch manager, pleaded guilty to a reduced charge of conspiracy to commit securities fraud and agreed to cooperate with authorities.
He was sentenced in 2000 to six months of home confinement and three years' probation.
ANOTHER ALABAMA PROMOTION
We noted in our research that another public company with a nascent mining operation in Clay County, Ala., has been the focus of an even more expensive promotional campaign.
That company, Graphite Corp. (OTCQB:GRPH), was featured last fall in a report by the Bottom-Line Newsletter. That report called graphite "the new gold'' and projected that the company's stock could rise to $6 or more.
The report said a third-party, Greenstone Media LLC, was managing a $2.5 million budget for an advertising campaign designed to build investor awareness. Graphite Corp.'s most recent quarterly SEC filing, for the three months that ended Sept. 30, show that the company had no revenue. According to the filing, the company had roughly $315,000 in cash, and less than $690,000 in total assets.
Its stock currently trades for around 40 cents, giving the company a market capitalization of $12 million.
In December, Graphite Corp. announced that it had appointed Roger W. Szelmeczka to its advisory board. It said he would be compensated with options to buy 250,000 shares at 70 cents a share.
Szelmeczka also is listed on Southern USA Resources' web site as its director of operations. Although that connection could be innocent, we plan to investigate to determine whether there is any additional overlap in the companies or promotions.
Additional disclosure: No one associated with Sharesleuth.com has any position, short or long, in the companies mentioned in this report.