In the first 2 articles of my series on Legend Oil and Gas (OTCQB:LOGL), available here and here, I argued that the men leading Legend are corrupt individuals concerned not with enhancing shareholder value but with lining their own pockets. This was supported by substantial evidence of management's previous involvement in 4 separate Pump and Dump schemes utilizing numerous paid stock touts. In all 4 cases, these companies stood at between 87-95% below the peak prices realized during the "Pump" stage of the schemes.
Part 3 of the series focused on Legend Oil itself, how management created millions of dollars on paper for themselves via slick corporate transactions and how they continue to use the public entity, LOGL, like an ATM machine: extracting unreasonable salaries and "consulting fees" with no real oversight from the board of directors - which consisted only of management. Part 3 also provided a detailed examination of Legend Oil's marginal business activities and illustrated that the intrinsic value of Legend Oil is approximately $0.20 per share and falling due to continued extraction of cash by management and steadily declining production from their recently acquired properties. For those who are unfamiliar with the arguments contained in my original articles I strongly suggest reading them as the fundamental situation at Legend remains substantially unchanged in the 3 months that have passed since the articles were released.
This article will examine a number of until-now unexplored supporting evidence that Legend Oil is the subject of a Pump and Dump scheme, a scheme that has recently been aggressively re-activated and continues to lure in unsuspecting investors with the promise of quick riches. I contend that Legend Oil's management is directly involved in this scheme, and will illustrate that they are fraudulently misleading investors through a series of false press releases and deliberate material misstatements about business activities to the SEC. Furthermore, if the past is any guide, the corporate malfeasance at Legend Oil to date is sufficient to warrant an SEC trading halt or suit against company management.
Additional, Aggressive Paid Stock Promotion Following the Release of Initial Articles Exposing the Company
In the months following my original articles examining Legend in depth, the individuals involved in touting Legend's stock have responded by releasing additional paid promotional pieces. Paid stock promoter Don McShane has been a key figure in this campaign, releasing a number of promotional pieces which openly admit in fine-print disclaimers that they are paid-advertisements for Legend's stock. These pieces read like high pressure sales pitches with claims such as buying Legend's shares "could quickly double, even triple your money!" Important to note is the information contained disclaimer of the most recent such piece available here:
"The company featured in this issue, appears as paid advertising. Darvin Consult SA has paid two hundred thousand dollars for the dissemination of this info to enhance public awareness for LOGL… Don McShane has received a $4,000 a month fee for this advertising effort."
Another paid promotional piece and email blast from January is documented here and outlines further promotional funds paid and money received by Mr. McShane:
"Darvin Consult SA has paid one hundred five thousand dollars for the dissemination of this info to enhance public awareness for LOGL…Don McShane has received a $40,000 fee for this advertising effort."
Mr. McShane also appears to have been sending out physical mailers in late February promoting Legend's Stock as documented here. The price tag for these services is even higher, with the disclaimer revealing that:
"Darvin Consult SA has paid eight hundred fifty eight thousand dollars for the dissemination of this information to enhance public awareness for LOGL…Don McShane has received a twenty four thousand dollar fee for this advertising effort."
Finally, another stock touting service, the Penny Stock Professor, was employed as recently as February 22 to send out additional email blasts promoting Legend Oil's stock, and is documented here. Again, reading the disclaimer reveals that the Penny Stock Professor received $10,000 in compensation from a "third-party non-affiliate" to push the stock.
As one can see by tallying up all the figures, during 2012, over $1 million has been spent on promoting Legend Oil's stock. The current rise in stock price is most likely due to the frequency and substantial financial resources devoted to recent promotional activity as there has been an absence of major material business developments at the company itself to justify the stock's recent buoyancy. Stock promotions like this can cause short-term price gains but do absolutely nothing to enhance the long-term value of a company. Such paid promotions are also a major indication of stock fraud, as outlined by the SEC here.
Amid all this promotional activity, a burning question remains: Who exactly is Darvin Consult SA? One piece of information can be gleaned from their name itself, which ends in the suffix SA. As examined here, the suffix indicates that this is a foreign corporate entity operating outside the jurisdiction of the US.
Undisclosed Parties Exercise Substantial Control Over Legend's Common Shares
In conjunction with the transactions outlined in Part 3 that Legend's CFO James Vandeberg and CEO Marshall Diamond-Goldberg used to create vast wealth on paper for themselves, millions shares of LOGL stock was gifted to 3 mysterious and undisclosed parties.
Based on information from Legend's 2010 10-K: "Mr. Vandeberg also gifted a total of 548,800 shares of restricted common stock of the Company to three other persons."
This transfer took place prior to the November 29, 2011 20-for-1 forward split, therefore the amount of gifted stock post-split equalled 10,960,000 shares. Based on the current price per share of $1.40, this represents over $15 million dollars of stock.
Who are these individuals, and why were they gifted millions of dollars-worth of stock without making any material or disclosed contributions to the company? If Mr. Vandeberg didn't want the shares for himself, why not simply return them to the company treasury and cancel them? That would have been the action which would have best served shareholder value and potentially helped the company to raise funds in the future. The transaction as it occurred simply doesn't make sense within the context of legitimate business. None of the 3 have ever submitted any SC 13G filing to the SEC, thus their identities and current ownership stakes continue to be mysteries. It certainly begs the question: Might one of these undisclosed parties be the puppet-master behind Darvin Consult SA?
Investors should be extremely wary of such a transaction based on the lack of a compelling legitimate reason for its occurrence and in light of the numerous promotional activities conducted at the supposed behest of "non-affiliated third-parties".
Significant Number of Regulation S Placements Indicative of a Pump and Dump Scheme - Potentially Catastrophic Liability Looms
According to their 10-Q for Q3 2011, Legend Oil has completed several Regulation S financing at prices significantly below the market or with extremely unfavourable covenants for Legend stockholders. As highlighted by the SEC here, placements of stock under Regulation S are often indicative of an off-shore scam:
"The Off-Shore Scam: Under a rule known as "Regulation S," companies do not have to register stock they sell outside the United States to foreign or "off-shore" investors. In the typical off-shore scam, an unscrupulous microcap company sells unregistered Reg S stock at a deep discount to fraudsters posing as foreign investors. These fraudsters then sell the stock to U.S. investors at inflated prices, pocketing huge profits that they share with the microcap company insiders."
The gifting of stock examined earlier may also be a type of variation on this off-shore scam as it represents unregistered stock essentially placed with the 3 mysterious individuals at zero cost.
According to the Q3 10-Q, on February 2, 2011 Legend:
"completed an offering and sale of 300,000 units at $0.50 per unit, for a total of $150,000 in gross proceeds, to one foreign investor residing outside of the United States. Each unit consisted of one share of restricted common stock and one warrant to purchase an additional share of common stock of the Company at $0.50 per share with a term of three years. This offering was exempt from registration pursuant to Regulation S under the Securities Act of 1933"
There is no record of Legend's stock trading prior to March 15, 2011 but considering that on that date it closed at $1.45 per share, it seems that this private placement of stock and long-term warrants completed a month earlier at just $0.50 fits the bill of a Regulation S placement at a "deep discount".
Also according to the same Q3 10-Q, on February 2, 2011, Legend:
"completed an offering and sale of 250,000 units at $1.00 per unit, for a total of $250,000 in gross proceeds, to one foreign investor residing outside of the United States. Each unit consisted of one share of restricted common stock and one warrant to purchase an additional share of common stock at $1.00 per share with a term of three years. This offering was exempt from registration pursuant to Regulation S under the Securities Act of 1933"
On April 28th, the closing price of Legend Oil's stock was $2.20, thus the Regulation S private placement of stock and warrants was at a deep 55% discount to the market price.
The identity of the purchaser(s) of the stock and warrants covered under the placements has not been revealed by the company, however it seems that there is a reasonable chance that given the offshore nature of the placements and what we already know about Darvin Consult SA, that these placements may have been to parties connected with that entity.
Finally, according to the 10-Q on August 10, 2011, Legend completed another Regulation S placement:
"an offering and sale of 2,300,000 units at $2.00 per unit, for a total of $4,600,000 in gross proceeds. Each unit consists of one share of restricted convertible preferred stock and a warrant to purchase one share of restricted common stock. The convertible preferred stock is convertible into one share of restricted common stock, subject to customary adjustment for stock splits or similar events. The warrants are exercisable at $2.00 per share over a period of three years from the date of issuance. The offering was conducted under the exemption from registration provided pursuant to Regulation S under the U.S. Securities Act of 1933"
While this placement was not conducted at such a deep discount to the market, the stock closed at $2.27 on that day, Legend did include a clause which opened the company up to significant risk and may soon prove to be disastrous for shareholders:
"The holders of shares of convertible preferred stock have a put right to require us to repurchase such shares for a price of $2.00 per share in the event that our common stock is not listed for trading or otherwise quoted on the NYSE, AMEX, NASDAQ or any other market more senior than the OTC Bulletin Board on or before March 31, 2012."
It is the beginning of March 2012 and Legend is still trading on the OTCBB, so this clause may soon come into play. This clause will concurrently come into effect at the same time as the put option (aka off-balance sheet liability) granted with the shares issued to International Sovereign Energy Corp. (OTCPK:ISEC) which was examined in Part 3 of the series. Summing it all up, after March 31, 2012, Legend may be forced to repurchase 5,852,516 million shares of its stock at $2.00/share. As of Q3 2011, Legend had a cash position of $4.2 million, but according to their 8K/A subsequently paid $3,505,031 of this cash to acquire the ISEC assets. As explored in Part 3, they are also generating only negligible cash from operations. Therefore it is highly unlikely that Legend's current cash position exceeds $1 million. Contrast this to the potential required cash outflow of $11.7 million based on the redemption of the 5.8 million shares at $2.00/share and one can immediately see that Legend could very quickly find itself bankrupted if it is unable to attain listing on a senior board by the end of the month or an additional $11+ million in financing to repay the notes. Considering the questionable nature of the company and its marginal business activities and assets, achieving either of these scenarios seems unlikely.
Engagement of an Investment Bank with a History of Placements in Suspected Pump and Dump Schemes
The Q3 2010 10-Q also reveals that Legend has entered into an agreement with an investment bank with an unsavoury reputation of association with Pump and Dump schemes and failed penny stock outfits:
"On September 28, 2011, we entered into a retainer letter agreement with Midsouth Capital Inc., an investment banking firm, to provide investment banking services in connection with a possible future best efforts private placement offering by us to raise additional capital. As part of the compensation to be paid to Midsouth, we issued 10,000 shares of restricted common stock to Midsouth. This issuance of shares of common stock was exempt from registration in the United States pursuant to Section 4(2) under the Securities Act of 1933, as amended."
A history of financing transactions sponsored by Midsouth over the past several years can be viewed on their website here. Let's take a look at the charts of companies that had major financings looking at prices as of the date of the financings until today:
- Health Discovery Corp (OTCQB:HDVY) - Raised $5.75 million - December 1, 2009
- NXT Nutritionals (OTCPK:NXTH) - Raised $6.15 million - February 17, 2010
- Global Health Ventures, now called Kedem Pharmaceuticals (KDMP) - Raised $4.2 million in an initial transaction on March 19, 2010 and another $24.3 million subsequently
- Mabcure (OTCPK:MBCI) - Raised $10 million - January 20, 2011
All of these stocks proved to be disastrous for investors and have charts indicative of Pump and Dump schemes, with NXT Nutritionals actually being the subject of articles that exposed it as such, two of which can be viewed here and here.
If Legend really has such exciting prospects, why are they engaging an investment bank like Midsouth, as opposed to a more reputable organization with experience and networks in banking for the oil industry? I suspect it is because Midsouth's abilities in raising money for questionable penny stocks are more useful for Legend's purposes.
Why the SEC Should Look to Halt Legend Oil and Gas
While all of the arguments outlined in my pieces to date are reasons that investors should avoid Legend Oil, strictly speaking, many of those issues may not justify a trading halt. For example, it is not illegal for insiders to award themselves extraordinarily high salaries when their company is barely producing cash flow; it is just dishonest and ill-advised. There are, however, at least 3 substantive reasons why the SEC should halt Legend Oil and Gas.
Reason 1: False and/or Misleading Statements Regarding Exploration and Drilling Activities in a 10-Q
Although the company claimed to have completed drilling 3 wells and recompleted drilling on a 4th in Q3 2011, there is no associated capital spending. If Legend didn't spend any money to drill the wells, then how exactly did they manage to initiate and complete work on 4 wells during the quarter? In fact, according to their Q3 10-Q, Legend did no capital spending of its own in the first 9 months of the year. Looking at the cash flow statement for the first 9 months, there is absolutely no spending on capital investment. The only item in the cash flow statement under cash flows from investing is a $243,194 entry labelled as purchase of oil and gas properties. Yet in the same 10-Q, during the period June 30 - September 30, 2011 Legend claims to have:
"drilled three additional wells on the Orth-Gillespie leased property… In addition to the drilling of these wells, we also re-completed a standing well located on an adjacent lease in the Squirrel reservoir zone. All four wells are currently producing oil."
Any capital spending on these wells cannot have been included in the entry "purchase of oil and gas properties" because the drilling was supposed to have taken place on Legend Oil's Piqua, Kansas property which Legend Oil has owned and been producing small amounts of oil from since October 29, 2010 with no additional disclosed purchases of acreage there in the interim.
The same point can be proven by looking at the entries for:
- Purchase of Oil and Gas Properties - Cash Flow Statement - $243,194
- Depreciation, Depletion and Amortization - Income Statement - $49,103
- Total Oil and Gas Properties, Dec 31, 2010 - Balance Sheet - $628,600
- Total Oil and Gas Properties, Sept 30, 2011 - Balance Sheet - $822,691
Total oil and gas properties as of Dec 31, 2010 was $628,600, subtracting the depreciation of $49,103 and adding the purchase entry of $243,194, gives you $822,691, the exact value that Legend discloses is the book value of Oil and Gas Properties as of Sept 30, 2011. This proves that there was no additional capital spending on the 3 new wells. If there had been, then the entry on the balance sheet as of September 30, 2011 would have to be higher in order to account for the additional CAPEX.
Without any capital expenditures, how can Legend Oil have actually drilled any wells? In the 10-Q it is disclosed that such new wells cost approximately $30k per well. This should mean they would have to spend approximately $90k to drill the 3 new wells. Yet as I illustrated, based on their SEC filings, LOGL had no additional capital expenditures on exploration and development during 2011. Based on the total lack of any associated capital spending, I question Legend's assertion that 3 new wells were actually drilled on the Piqua property and suspect that the company is misleading investors in its 10-Qs as to its actual exploration and development activities. Such activities would constitute serious fraud, above and beyond the corporate offences examined thus far.
This should be of particular concern to investors in the wake of the Uniontown Energy halt mentioned in Part 2 of this series. The SEC halted trading in Uniontown stating the reason for the halt as: "questions regarding the accuracy of assertions by the company, and by others, including in press releases to investors concerning, among other things: the acquisition and exploration of oil properties."
If the Uniontown halt serves as a guide, then major inconsistencies such as those reported by Legend Oil in their 10-Qs should be viewed as extremely troubling since such halts usually result in catastrophic losses in share price.
Reason 2: Demonstrably False and Misleading Statements in an Official Press Release
Legend Oil and Gas lied to investors and the public at large in an official press release. After my initial articles about the corruption of management were published, the officers of Legend have further implicated themselves by issuing blatant fabrications in response to my accusations. I refer to the following, excerpted from Legend's November 23, 2011 press release, available here.
"Our officers and directors have never participated in any paid-for reports or promotional items for any companies they are currently, or have been associated with."
As I highlighted in Part 1 of my report, James Vandeberg has previously held CFO and director positions at a number of public companies. One of these companies is Regi US (OTCQB:RGUS), which is a partially owned subsidiary of another company where Vandeberg continues in his role as the CFO, Reg Technologies (OTCQB:REGRF). On November 7, 2006, a bullish, paid-for promotional/research piece on Regi US was published as can be seen here. Note the disclaimer:
"Bridge IR Group, Inc. has been compensated twenty six thousand dollars by Regi US Inc to publish this report."
In this particular case, it was Regi US, the public company that directly paid for the promotional piece, not a third party with whom the company can later deny an association. During the third quarter of 2006, James Vandeberg was the CFO of Regi US as can be verified by his certification of the Q3 10-Q here. Also verifiable, via the 10-Q is the fact that Regi US spent more money on this single promotional piece than on their entire research and development for the quarter, which amounted to $21,029. This is simply astounding for a company which is purportedly a technology company. Furthermore, it is beyond belief that in his role as CFO and director of Regi US, James Vandeberg did not participate in commissioning this report, or at the very least participate in approving such a proportionally large business expense. Additionally, as outlined in in Part 1, the promotional pieces for Linux Gold while Vandeberg was CFO and director of that company were also paid for directly by the company, not a third party. Therefore, statement that LOGL "officers and directors have never participated in any paid-for reports or promotional items for any companies they are currently, or have been associated with" is demonstrably false, and I suggest that this lie is deliberately intended to mislead investors and the public.
Reason 3: Substantial Insider Selling of Recently Manufactured Shares Concurrent with an Alleged "3rd-party" Stock Promotion Campaigns
In the aforementioned press release Legend Oil and Gas sought to distance itself from the paid stock promoters touting its stock stating:
"Neither of our officers and directors, Mr. Marshall Diamond-Goldberg and Mr. James Vandeberg, nor anyone else acting on our behalf hired or paid for any such stock promotion articles (including these three specific articles), nor do we know or have any relationship, directly or indirectly with Darvin Consult SA , James Rapholz, Eric Dany, or Don McShane."
However, when examined more carefully, this assertion does not appear to be credible, particularly in light of the aforementioned lie in the same press release. Moreover an impeccably timed 144 filing by Marlin Consulting, an entity wholly-owned by Mr. Diamond-Goldberg to sell 470,200 shares on September 1, 2011, in the midst of an email promotional campaign as well as a conventional mailer campaign documented here and here raises further doubts that management had no involvement in the large-scale promotion of the stock. Based on the September 1, 2011 closing price of $2.50, such a sale would have netted Mr. Diamond Goldberg $1,175,500.
The planned sale of stock by President Marshall Diamond-Goldberg concurrent with the major promotional campaign of his stock is unlikely to be a coincidence. I suggest based on the history of the players involved, management is complicit in the promotional campaign. At the very least, Diamond-Goldberg is unethically taking advantage of the artificial demand created by a large scale stock promotion in order to sell shares that were essentially created by himself and Mr. Vandeberg not even one-year earlier.
This series of articles has made a number of serious assertions against Legend Oil and Gas. I do not make any of these allegations lightly, and they are all supported by significant evidence from the public domain. Based on the all the evidence presented, it seems crystal clear that Legend Oil and Gas is the subject of a pump and dump scheme and is being used as a vehicle for fraud. The management of Legend Oil has committed significant corporate offenses during its tenure at the helm of the company, serious enough to justify an SEC trading halt of the stock.
The company has negligible business activities and an intrinsic value of no more than about 15% of the current market capitalization. Additionally, the company faces a potentially catastrophic liability that could bankrupt it by the end of the month. Perhaps this is the reason for the recent flurry of promotional material, as those in the know seek to exit ahead of this date. Regardless, investors in the company should be extremely troubled by the corporate actions, both past and present. With so many attractive opportunities available in the oil patch today, investing in a company like Legend Oil and Gas seems like a choice that will inevitably lead to radical portfolio underperformance and should therefore be avoided.