After exposing numerous Chinese reverse merger frauds we recently added to our focus the identification of U.S. companies that may be misrepresenting their stories to investors. Our piece on Raystream (OTC:RAYS) was our inaugural U.S. Pump & Dump (P&D) fraud report. We highlighted our RAYS expose on 12/08/2011 at $1.75 and followed up with a 40 page report on 12/29/2011. The stock now trades under $0.40. There are now new issues regarding the RAYS story including our findings that the company has collapsed its German operating subsidiary, yet to be disclosed in U.S. filings. Has Raystream written its final epitaph?
Our curiosity is now piqued by Sefe (OTC:SEFE).
We view SEFE no differently than any other Pump & Dump that use exaggerations of the truth and sexy story lines for which promoters at times spend millions of dollars to orchestrate massive pump moves. The stock has risen from $0.64 on 2/24/ 2012, reaching a high of $2.96 on 3/25/2012.
The pump and dump universe is just a game of who will be the greater fool holding the bag? And we bet the promoters who get paid in stock will not be those fools. Neither will large holders of SEFE stock as is evident by a schedule D filed on April 13, 2012 revealing that investors, including insiders, registered to sell $8 million worth of shares.
"Third parties" have spent at least five million dollars to peddle this story to unsuspecting investors by utilizing some of the most notorious promotional organizations out there such as Stocks Digest Magazine (received $2.5 million in cash and $2.5 million in shares), Stock Hunter, The Stock Detective and Awesomestocks.
SEFE is being promoted by the same outfits that successfully pumped the Sunpeaks Ventures (SNPK.OB) story. However, in just one day SNPK gave back nearly all of its massive gains and now trades at around $0.50. SNPK pumped from $0.42 on 3/8/2012 to $2.40 on 4/18/2012 before experiencing its first massive dump on the same day, reaching a low of $0.55.
On April 18, 2012 SEFE was also eager to announce that it had signed a term sheet for $2 million in financing with its financial partner, Riverbend, LLC. The company stated:
"it has signed a term sheet for $2 million in financing through a nonconvertible preferred debenture. A debt structure was chosen rather than equity financing in order to preserve shareholder value and avoid dilution."
What SEFE failed to mention in the press release was that they issued Riverbend warrants to purchase 500,000 shares of stock at $1.00. Management only later discloses this fact in an 8k filed on April, 25 2012.
Notice that we have not even mentioned what SEFE does yet. That is because we do not believe it matters. We could stop writing the article at this point since all investors really need to know is that legitimate companies will likely not find themselves associated with what many consider pump and dump outfits. Furthermore, from our point of view, with 50 million shares outstanding and no revenues, the capital structure makes this story a no go from the get go when you consider the funds this development stage company will have to raise to generate revenues, if you want to even believe they have a legitimate operation. But let's move on.
History Reveals More Red Flags
SEFE was incorporated in the State of Nevada on September 24, 2004 under the name, Midnight Candle Co., a failed business venture. On July 16, 2010 Midnight Candle purchased intellectual property rights, via the issuance of 30 million shares, to a firm called SEFE, Inc. Thus, SEFE the public company was born. Since this transaction, the company has raised $637,000 from stock offerings and amassed around $600,000 in debt in from July 16, 2010 through March 11, 2011. The July 16 asset acquisition included a related party transaction:
"Pursuant to the July 16, 2010 Intellectual Property Assignment Agreement, the Company assumed liabilities totaling $250,000 in the form of convertible notes payable, due equitably to two holders, one of which is a related party entity."
All told, two of the debt obligations from July 16, 2010 through March 11, 2011 originated from related party transactions and were eventually sold to "other individuals" and were converted into 9 million shares (to settle "defaults").
Predictably, as of December 31, 2011 the company had already converted $370,000 of defaulted debt into 11.8 million shares of SEFE stock to settle its debts. At December's 31, 2011 closing price these shares were worth $5.9 million. At SEFE's peak price of $2.96 on March 25, 2011, the shares were worth $35 million. As gleaned from the 2011 10k, all told the company:
"will have arranged with our note holders to convert $590,000 of our bridge notes, into 17,999,998 shares of our common stock"
What does SEFE have to show for these fund raising activities?
- Zero revenue
- Defaults on all five debt instruments issued from July 16, 2010 through March 11, 2011.
- Some investors that have likely made a handsome sum of money from a company that has yet to generate one penny of revenues.
Are We Starting to See a Reason for a Pump and Dump Campaign?
So what is this business plan that has yielded no revenues and numerous defaults on debt?
All we had to do was read SEFE's description to postulate that something is not right:
"SEFE focuses on pushing the boundaries of what's possible, embracing innovation and employing the cutting-edge to solve problems, and offering sustainable solutions to a world hungry for invention, direction and leadership. SEFE is technology- and solutions-driven, focusing on developing inventions that provide a real-world impact and true profitability. So, success is measured by both a sustainable return on investment, as well as a project's sustainability from an environmental perspective."
We had no idea what this meant, so we continued to probe into SEFE's business plan.
SEFE has produced a video that can be viewed directly on its website which gives a general overview of the concepts regarding how the technology would work. The premise of the technology is to float some sort of tethered balloon in the lower atmosphere, capable of collecting electrostatic energy that would be sold to utility and mining companies.
The company is not explicit on how much energy could be produced. Furthermore, SEFE's Director of engineering, Michael Hurowitz, poses a serious question in the video that, on the surface, seems to raise some doubt in the viability of the company's technology:
"The big question for us? Can we design a system to harness this high voltage electrostatic energy in a significant way?"
Are you telling us that this stock is worth tens of millions of dollars ($153 million market cap at a peak price of $2.96) on a system with a rather large QUESTION MARK?
The 2011 10k issued on March 29, 2012 confirms that the company has no product to market:
"We currently have no marketable units and therefore have not begun to distribute any products."
And even if we wanted to believe that SEFE was on the cusp of some ground breaking technology we presume it could take years before it would be able to bring a product to market. Although we are by no means experts in the arena of harnessing power from unproven methods, we can still assume that regulatory approval would likely first be needed from the likes of the Department of Energy (DOE) or the Federal Aviation Administration since an object would be permanently floating in the sky.
The Characters Involved
What about the characters tied to this SEFE story? Posts from around the web reveal information regarding some of the names involved:
Given our findings we were surprised to see a Market Wire press release issued by Grass Roots Research that helped inspire a massive multi-day run in SEFE shares from $1.65 on April 23, 2012 to $2.96 in mid-day trading on April 25, 2012. Grass Roots research dubs themselves as the #1 small cap research firm. On April 23, 2012 they issued the paid-for bullish report (for which they received $15,000) on SEFE with a price target of $5.95.
We urge investors to visit Grass Roots website and decide for themselves if this "research" outfit follows impressive small cap companies.
Grass Roots offers up an impressive looking financial model that predicts SEFE will see its revenues explode from $1.6 million in 2013 to $279.8 million in 2019 with pretax margins ranging from 41% to 56%. Grass Roots estimates that this enviable growth will be accomplished by issuing no debt and just $5 million worth of stock. What they may have failed to do is read SEFE's 2011 10K which states the following:
"We are actively raising additional capital by conducting additional issuances of our equity and debt securities for cash."
There are other reasons to believe that Grass Roots did not pay close enough attention to SEFE's filings. The firm estimates that total operating expenses will amount to $600,000 in 2013 and just $1.2 million in 2014. Yet, the 2011 10K shows that SEFE incurred operating expenses of $900,00 on zero sales, before even "ramping" up alleged operations. Is it logical that operating expenses will go down as SEFE spends dollars to test, develop and market their product? We view the Grass Roots report as a fluff piece to push shares that the firm may own higher (the company is sometimes paid for commercial advertisements and distribution in cash, stock, Rule 144 stock warrants, options or other securities)
GeoInvesting would like to pay homage to the memory of Nikola Tesla, the man who invented the alternating current (NYSE:AC) that ushered in the modern day era. Several parts of SEFE's video showed one of his great inventions called the "Plasma Lamp". Tesla died broke in a hotel room in New York. I'm sure if he were alive today he would be thinking, "These bozos haven't even designed anything yet and they are already multi-millionaires". He must have be rolling over in his grave as this charade plays out.
We conclude that SEFE is an ideal pump and dump candidate that will surely end badly for those who don't sell before the inevitable dump. Remember this is all a game. The promoters and others involved in pump and dump schemes who receive stock need to eventually sell their stock. It is that simple. It is always just a matter of timing. At that point, it does not even matter if the story has legs. Have fun on the way up, but sleep with one eye open as the stock is already breaking down.
For the record, we will not stop at SEFE. Our pipeline of brazen pump and dump stocks is growing, and we will pounce at any opportunity to spread the truth about some of the largest schemes that ultimately bilk investors out of millions of dollars.