One of the problems with stock spam, is that it preys on the 'get rich quick' mentality. Investors are encouraged to act right away and to take claims at face value. I’ve never been opposed to investing in high risk investments, but you can bet that I do my homework before I jump in.
Unfortunately, too many investors don’t take the time to read the SEC filings before making an investment and when the hype dies down, they get hurt.
Another problem with stock spam is that sometimes the companies being promoted are as much a victim of the fraud as investors. Some microcap companies will even issue press releases warning investors that spamming is going on. Even though these companies temporarily benefit from the attention, for legitimate businesses the volatility can create real problems in the long term execution of a business plan.
Because GrowthStockGuru was willing to pay bulk postage rates just to get my attention, I wanted to take a closer look at the people behind Guangzhou Global Telecom (GZGT.OB), just to make sure they weren’t a victim, in all of this. The deeper I dug, the more ugly things looked.
It All Started With $100
In order to better understand the prospects for GZGT to succeed, you need to look at the qualifications of the key players behind the business. Because the company was formed as part of a reverse merger, it’s important to look at the pieces that make up this puzzle before the company merged. Even though GZGT is being promoted as a Chinese stock market play, a Florida real estate company named Avalon Development Enterprises played a more important role in creating the company.
Avalon was first formed in 1999, after Charles Godels, invested $100 in the company and filed the appropriate paperwork. Shortly thereafter, his wife, Marguerite Godels, also purchased 100 shares for $100. Between Aug. 2004 and Feb. 05, the company must have needed more capital because it had another underwriting where it sold 3 shares a piece at a $1 valuation and brought in 44 more investors.
On 12/5/05, the company did a forward stock split of 4500:1 and overnight, investors saw their 332 shares turn into 1,494,000. It also filed a registration, that would allow it to sell its shares at .50 cents a piece to other investors. At this valuation, it meant that on a split adjusted basis, their $1 share price was now closer to $2,250.
On 01/08/07, Charles P. Godels, Diane J. Harrison, Madanna Yovino, Michael T. Jones, and David E. Dunn all resigned from Avalon’s board of directors. At that time, Allen S. Greenberg officially took over as the company’s president. Two days later, they entered into their merger transaction.
In the footnotes of the 8k filing announcing the resignations, I noticed something about Mr. Greenberg’s biography that raises some interesting questions about where the money is going to.
“From 2005 until the present, Mr. Greenberg served as the Operations and Customer Service Manager for Global Administrative Provider in Costa Rica. In that capacity, he was the client service contact for all investment advisory firms, was responsible for setting up offshore investment structures for clients, oversaw all incoming and outgoing wires via international custodian banks, and oversaw all company invoicing.”
Avalon was supposed to be a local Florida Real Estate company and yet, it brought Mr. Greenberg’s in, in order to set up offshore investment structures from Costa Rica? As a Chinese company, I can understand why there would be some need for this, but while doing my research I found several offshore accounts, that can be connected to different players behind Avalon Development. I also found an alarming amount of small shell companies, that are either currently trying to get listed or who have tried, but failed to go public. If GZGT really is a once in a lifetime opportunity, why have so many investors utilized accounts, that are beyond the immediate reach of the U.S. Government?
Investors Cool To Hurricane Real Estate, China Gets Bubble Fever
Investors were tuning out Real Estate, so if Avalon wanted to make a splash it needed access to a hot sexy growth market that investors like right now. It decided on a Chinese phone card company and agreed to buy it out with stock. In order to get access to Global Telecom Holding Limited (herein referred to as GTHL), Avalon issued 39,817,500 of restricted common stock, in exchange for 100% of the company. During the merger, the company also executed another forward split, this time at 8.75 - 1.
After completing the merger, it had 52,890,000 shares outstanding and could authorize up to 75,000,000. Based on Friday’s closing price of $1.95, this means that on a split adjusted basis, the original $1 per share investment is now worth $77,000 per share. Mr. Godels' initial $100 investment is now worth $7.6 million or $15.2 million if you include his wife’s shares (assuming that he hasn’t sold anything along the way, of course). Not a bad return, given that Avalon admits that Florida real estate wasn’t much of a business in its 10KSB filing.
There isn’t a lot of information about GTHL, in the SEC’s database, but we do know that GZGT’s CEO Yankuan Li was by and large the largest beneficiary of the acquisition. He ended up with about 12.3 million shares (about $23 million based on Friday’s close). When all the dust settled, GTHL ended up with 51% of the company, but a lot of it was in restricted shares.
Investors Get Caught In PacificNet’s (PINK:PACT-OLD) Tidal Wave
In Mr. Li’s bio, it’s disclosed that he worked at PacificNet from 2004 until 2005. During that time, the company experienced unusually high trading volume and went from $2.50 a share to as high as $13, before crashing back down again to $7 per share. These gains occurred largely in late October of 2004. According to Bloomberg, Sept 04′ was the highest activity of insider buying, in PACT’s history. Currently, PACT is delinquent in its SEC filings due to backdating issues, which occurred during Mr. Li’s employment with the company. I do not believe that this will end up being a slap on the wrist, as there was a lot of insider selling at the top. The company has claimed that it relied on the advice of its auditor, Clancy and Co., P.L.L.C., who has since been forced to withdraw its certifications from that time.
Three months before PACT saw its share price spike and then drop, the Public Company Accounting Oversight Board [PCAOB] performed an audit of Clancy and Co. During that audit, it reviewed 6 of Clancy and Co’s 15 clients. I don’t know if PACT was one of those clients selected, but the PCAOB’s review did find 14 serious issues with its auditor, including “failure to properly perform procedures related to consideration of the possibility of material misstatement due to fraud.” None of this suggests that Mr. Li was personally involved in any shenanigans, but it does raise some important questions about the corporate culture at his previous employer.
The Bankers, The Bean Counters And The Ambulance Chasers
In order to be able to underwrite stock to the public, there are a few key pieces you need in place, namely bankers, attorneys and most importantly, the auditor. Information about GZGT’s banking relationships are scarce, but there is a SEC filing that references a company named Zenith Capital Management, who has agreed to buy 200,000 shares at a price of $2.50 per share. It only committed part of the money up front, which for me would raise questions about Zenith’s credibility and its intentions to make good on these pledges, especially if GZGT falls apart before it can get back to $2.50.
When Avalon did its 4500:1 forward stock split, Diane J. Harrison was the attorney who wrote the consenting legal opinion. Charles Godels audited the books himself (under small business rules that allowed him to avoid an independent audit), and later on, the company brought in Randall N. Drake as its official auditor.
Mr Drake’s name shows up as the auditor in many of the companies mentioned in this article. In 2001, he audited the books of Mobile Area Networks Inc. [MANW.OB]. Investors may have been hoping that MANW would make them rich, but it turned out to be a belly flop. After MANW went public, it briefly kissed $4.87 before it came crashing down to $1.00 over the next month. Today, the stock is at $0.10.
Of all of the characters in this bizarre story, Diane Harrison is the one that raises the most eyebrows. She is the attorney. She helped create Avalon. She has been involved, either as an investor or as legal counsel, in many different penny stocks that can be linked to Godels or his partners. On 10/27/06, the Secretary of Avalon resigned and Harrison was officially brought in as the new Secretary and as a Director. Her role at GZGT is unclear, but two days before Avalon’s merger, she resigned from the board. In 1999, her husband, Michael J. Daniels, was convicted of securities fraud and spent 6 months under house arrest and 3 years on probation. He is now officially classified as a stock promoter under the SEC rules.
Daniels has had no direct affiliation with GZGT, but he can be connected to Godels through an auditing relationship with Godels, Solomon, Barber & Company, L.L.C. Before Avalon, Daniels tried to raise financing for a company called MCFTY National. The company was originally a mailbox etc. type business, but later tried to cash in on the vitamin water craze and changed its name to the International White Tea company. When Daniels and Harrison started the company, they also brought in Steven A. Sanders and Robert Bedore. Both Sanders and Bedore have also been classified as stock promoters by the SEC.
Over the last several years, Ms. Harrison has helped to set up several other companies with Godels and/or his partners. These include WES Consulting, Ivecon, Harcom Products, Technology Resources Inc. (herein referred to as TRI), and Contracted Services Inc.
What is interesting about all of these companies is the number of related transactions between the different individuals involved. They would not only hire each other’s employees, but there was also money changing hands between various companies. At one point, Godels' CPA practice was a significant contributor to Avalon’s revenue. Even after studying the SEC documents on these companies, I still cannot sort out all of the different players involved.
If you look at the shareholders of these investments, there does appear to be another layer to this mystery, but for now, these players are beyond the scope of my discussion on GZGT’s business.
In trying to unravel this complex piece of financial engineering, it didn’t take me long to figure out that everything always ends up coming back to the Godels. Whether it’s the high number of family members who were shareholders of Avalon, or tracing the cash from the different related transactions, the Godels’ family name keeps popping up. It’s as if they are trying to build a dynasty for the entire family. Interestingly enough, in the GrowthStockGuru newsletter, the anonymous author who wrote the report hints that a family may be behind GZGT’s marketing attempts, by using the name Aharon Bronfman.
The Bronfman family is a famous name on Wall St. In the 1920’s, they made their fortune selling bootleg liquor to the Northern United States. After prohibition ended, the Bronfman family distilleries were some of the most profitable in Canada. Later they would buy Segrams from the Segrams family and made a killing off the whiskey. The family’s history has always been checkered with allegations that its fortune was linked to the mob.
There is no way to know for sure whether or not the Godels are connected to Mr. Bronfman’s marketing campaign, but the subtle undertones of the alias raise suspicions that Mr. Bronfman might be working on behalf of a family that is willing to do whatever it takes for them to build their own dynasty.
Electro Energy Shocks Investors
Given the level of sophistication involved in this sort of transaction, it came as no surprise when I learned that this wasn’t the Godels' first reverse merger. They got their first taste of the profits that could be made when they first set up MCG Diversified Inc. The company was created by the same players who keep popping up again and again. Diane Harrison wrote the legal opinion on the common stock and Randall Drake provided the auditing.
MCG was supposed to be a human resources company. A lot of its revenue came directly from Avalon. Human resource companies seemed to be a common theme among the various public filings. On most of the filings they do not include information about partnerships, but it appears that some of the recruiting going on was just individuals shuffling from one company to another.
Marguerite Godels owned 50% of MCG and from the filings you can sense that she was eager to cash out. Things were on track for MCG, but they almost ran into a disaster when Mr. Drake made a mistake that almost scuttled their plans.
Somehow, he had managed to let his registration with the PCAOB lapse, but still filed audit reports for Technology Resources Inc. and for MCG, at that time. The PCAOB denied his application for a new license, after he agreed to a settlement, where he would be allowed to get his license back in another year.
Frustrated with their attempts to get listed on the bulletin boards, the Godels turned their sights to the white hot alternative energy market and in 2004, they executed a reverse merger with Electro Energy (EEEI). In exchange for access to income statements with real revenue, MCG was forced to take a 30% position, following the completion of the merger. Even at 30%, it still realized obscene profits, considering how little it had actually contributed to MCG’s capital. When EEEI announced its change of auditors, it never mentioned that Mr. Drake’s license was no longer current.
After the reverse merger launched, stock promoters immediately jumped in. Had you invested at the first trading price, you would still be down 79%, but if you listened to the hype, you would have lost even more money faster. On 10/11/04, Stockwire issued a press release advertising EEEI’s stock. If you jumped in then, you’d be down 84%. On 11/04/04, Capital Investor Forum Growth suggested that you look at the stock. Had you taken its advice you would be down 90% right now. A year later, a firm that that continues to pop up on my radar, WallSt.Net, issued a press release showcasing EEEI. Had you listened to WallSt.net’s analysis, you would be down 72%.
During this sharp run up, EEEI insiders took advantage and sold out. According to SEC form 4 filings, between 10/19/04 and 11/01/04, Assari Farhad sold a significant amount of stock and options. Given the question marks surrounding the promotional activities going on while he was selling, I thought that it was notable that his form 4 filing reporting the sales was not filed until 12/04/04.
Perhaps the strangest part of this whole story isn’t that someone would want to sell inflated stock, it’s how Mr. Bronfman is going about generating the hype behind this bubble. Instead of the traditional email spam, it has been targeting investors by advertising in respected business magazines. On the Friday that the Investor’s Business Daily ran its ad, the stock jumped very sharply before seeing heavy selling at the end of the day. IBD should be ashamed of itself for not researching the company further. Its readers trust it to provide excellent financial advice and yet, it's willing to take money from a reverse merger penny stock without hesitation. If IBD does not issue an apology, then it has lost all credibility in my book.
So far, the only mainstream media outlet to pick up on GZGT’s innovative marketing attempts, has been Kiplingers. When the company was first approached, it knew something didn’t look right and took steps to warn itsir readers. Unfortunately, other business publications seem to be more than willing to sell out. Business Week and Forbes have both agreed to run the ads, regardless of how questionable this might be ethically. I would encourage both publications to take a closer look at GZGT, instead of their advertising revenue, before putting the company in front of their readers.
Just because the bulletin boards are the wild west of the investing world, doesn’t mean you still can’t arm yourself with a six shooter. Six months ago, digging through these SEC files would have been much more difficult, but thankfully, the SEC has recently released a full text search feature on its website. It didn’t getting any buzz from the press, but by building the search tool, the SEC has turned over an exponential amount of data to the public. It is a powerful tool and an important development in making sure that the public has access to good data. There is a tremendous amount of information out there, but you need to read it, especially if you are acting on a tip that someone paid money in order to give you.
In Mr. Bronfman’s report on GZGT, he says that GZGT’s management has a tremendous track record, but when I look at the track records of the investors involved in them going public, I see a very different picture. Many of the companies that they have been involved with have turned into a pile of rubble, after the promotions die down and the stock has been diluted. If investors want to play with high risk investments, that is OK, but just remember to do your homework before jumping in.
(Click on the links to see larger images of the slides: Cover, Avalon, Global Telcom Holding Ltd, Godels, Solomon, Barber & Co., International Tea Company, Technology Resources Inc., WES Consulting, Contracted Services, Inc, MCG Diversified Inc., Electro Energy, Ivecon, Diane Harrison, Randall Drake)
Disclosures - I have no positions in any company listed in this article. To the best of my knowledge, no one that I have ever come into contact with has ever invested in or shorted any company mentioned in this article.