Since publishing our first research report on Seeking Alpha last month we have exposed three micro cap scams and one frothy Nasdaq Company that defied all valuation metrics. All told, the track record has recorded 4 out of 4 wins with the average company declining by nearly 57% from the time our research was distributed.
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Price On Date
In this report we focus on Clear System Recycling Inc. (CLSR.OB) a company that has yet again managed to redefine our already murky view of the OTCBB microcap world. After investigating for several weeks and conducting extensive background checks on the principals we discovered that the CEO and founder of the company merging into CLSR has a serious criminal background having been convicted in the 1980s and early 1990s for "Counterfeiting US Currency" and "Building and Detonating Explosives". The CEO, Mark Ghighlieri (who now appears to be an art dealer and also goes by the name of Marco Selvaggia) has spent hard-time in jail for crimes that are so serious they are unheard of even for the OTCBB world.
While we are still scratching our heads as to how security regulators and gatekeepers have let this slip, Mr. Ghiglieri has been busy promoting the shares of CLSR to a valuation which is now approaching $400 million. As with all pump and dumps there are nearly 12 million undisclosed shares that were secretly purchased for $.004 a share (less than half of one penny) and are being sold into the unsuspecting retail investor at $5.50 a share through a little known broker in Toronto, Canada.
CLSR Capital Structure & Fundamentals*
*All data is Pro Forma based on the Closing Date of September 30th for the Transaction with Masterpiece Investments
Shares Outstanding (Pro Forma Merger)
Most Recent Share Price (9/21/2012)
Cash as of June 30,2012
Debts & Liabilities as of June 30,2012
Shareholder Equity as of June 30,2012
Revenues as of June 30,2012
Undisclosed Shares in Float
Value of Undisclosed Shares in Float
The Business (Planned)
CLSR is currently nothing more than a publicly traded shell with no business to speak of. However on August, 23 2012 the company announced a merger with Masterpiece Investments a purported art dealer out of Wilsonville, Ore. Since then shares of have been manipulated from an already artificial price of $2.00 per share to $5.50 today reaching an unimaginable valuation of $400 million dollars. For nearly half a billion bucks investors purchasing shares of today own a company that has yet to make any public disclosures of its finances leaving nothing but an ambiguous website to rely on. The only thing concrete we have been able to dig up on has been the extensive criminal and civil record of its founder as well as an association with a company sued by the SEC in 2011 for operating a ponzi scheme.
The "Set Up"
Readers of our research should now be familiar that every microcap scam has a setup whereby the stock scammers position themselves with millions of free trading shares that can be sold into the unsuspecting public. Let us briefly review the set up for CLSR chronologically:
On July 12, 2011 Clear System Recycling went public via form S-1 by selling:
- 2,000,000 Restricted shares @ $.005 for $10,000
- 940,000 Free Trading Float shares @ $.05 for $47,000
- Total O/S: 2,940,000
At this point the company became a publicly traded company listing on the OTCBB under the symbol (CLSR).
On March 26, 2012 the 2,000,000 restricted shares were sold to a fellow by the name of Min Zou for $120,000 but don't pay too much attention to this figure as it is irrelevant in the grand scheme of things and if anything is meant as a sort of diversion. Stay focused on the 940,000 shares as those are the only ones that matter. With the acquisition of the shares Zou becomes the new CEO/Director of CLSR.
On May 29, 2012 Zou resigns as CEO/Director and appoints a John Carter as the new CEO/Director. The 2,000,000 shares remain with Zou.
On June 13, 2012 the most important step is taken: CLSR effectuates a 12.5-for-1 Forward Stock Split. Remember, forward splits are used by stock scammers to lower their already low average cost by multiplying the amount of shares they own. By conducting a 12.5-for-1 forward stock split the capital structure of CLSR now looked like this:
- Min Zou - 25,000,000 (2,000,000 x 12.5) @ a cost of $.0048 cents
- Undisclosed Free Trading Float - 11,750,000 (940,000 x 12.5) @ a cost of $.004 cents
- Total O/S Post Split: 36,750,000
Now that the vehicle has been setup with nearly 12 million undisclosed free trading shares at a cost of $.004 cents per share it is no surprise that a merger is announced on August 23, 2012:
As part of the merger CLSR acquires Masterpiece Investments headed by Mark Ghiglieri by issuing Mark 53,884,130 new shares of CLSR. As part of the merger the pawn Min Zou will cancel 23 of his 25 million shares. Let us review the new capital structure following the merger:
- Min Zou - 2,000,000 @ a cost of $.06 cents
- Mark Ghiglieri Group- 53,884,130 shares issued for acquisition of Masterpiece
- Undisclosed Free Trading Float - 11,750,000 @ a cost of $.004 cents
- Total O/S Post Merger: 67,634,132
Again, the only thing that matters when it comes to these OTCBB scams is the free trading float shares. These are the shares that can actually be bought and sold by investors and are entirely owned by the scammers behind the companies. In this case after filtering through all the noise we are left with 11,750,000 shares that were purchased by someone for $.004 and are currently being sold at $5.50 right now. Put differently, undisclosed free trading shares that cost $47,000 are now worth $64,625,000.
Mark Ghiglieri's Criminal and Civil Record Highlights Significant Red Flags
Mark A. Ghiglieri AKA Marco Selvaggia is a convicted criminal of proportions we have yet to encounter on the public markets. As far as we know there has never been a CEO of a public company with such a terrible criminal record. It is imperative to stress that these are not white collar crimes here these are the types of crimes that normal law abiding citizens only hear about or experience in the movies perpetuated by antagonists.
We have been so taken back by the list of crimes that we had to check and recheck nearly a dozen times to make sure this was in fact the same individual. Unfortunately for investors in CLSR we were able to confirm that it was the same person from several sources including a local journalist in Oregon.
A Track Record of Serious Crimes and Questionable Ethics
1987 - Through a search of the National Archives we discovered a court filing that disclosed a conviction in 1987 for "Conspiracy to Make Counterfeit Currency". Ghiglieri was sentenced to three years of confinement.
This crime is confirmed in an expose by the Willamette Week newspaper written by Nigel Jaquiss in January of 2001.
1992- Through the same research in the National Archives as well as court records we discovered that on December 30th, 1992 Mark A. Ghiglieri detonated an explosive near Lake Oswego Oregon. Following an extensive investigation by the ATF they discovered that Ghiglieri had detonated at least 6 other explosives previously and bragged that he would never be caught because "he used a very long fuse which allows him time to get away".
As a result of these crimes on June 28th 1993, Judge Malcolm F. Marsh sentenced Mark Ghiglieri to 18 months in prison with 3 years of supervised release for "Attempted destruction of property with explosive device"
From Counterfeiting Money to Counterfeiting Art
The next time we hear about Ghiglieri is in 2001 in an article entitled: In The Name Of The Father by the Willamette Week. In it Ghiglieri is described as a Ferrari driving art dealer who in 1998 formed a company called Provenance Fine Arts to pitch non profits "donated" art pieces that would be sold to charity bidders with the proceeds being split 50/50 between Ghiglieri and the nonprofits. These profit sharing agreements were for the most part undisclosed to charity bidders who unsuspectingly thought they were purchasing a piece of vintage art from a collector donating it for a good cause. As Ron Brake, president of the children's hospital foundation said at the time:
"In the 12 years I've been volunteering at Doernbecher, it's the first time I've ever seen a split of the proceeds--it's very unusual"
Worst of all was that the pieces being sold were actually produced by Ghiglieri's brother Laran who claimed in the article that his true passion was producing art for comic books. An investigation by the journalist at the time found that Laran's only public display of art was at a strip club in Portland Oregon dubbed "The Dolphin".
The article goes on to detail a shady relationship between Provenance and a relatively obscure appraisal firm that was used to certify the value of the artwork as part of the scheme. Unfortunately, purchasers of the artwork later came forward complaining that the appraisals were unreliable and that the art had no resale value.
The end of the article describes Ghiglieri touting a new venture "Viogenix" which would be an anti aging elixir. Our investigation discovered that Viogenix has an outstanding Tax Lien from the IRS from 2008 as well as having been sued by NugenFX in 2004.
In 2006 a second expose by the Willamette Week entitled The Conned Artist describes yet another instance where Ghiglieri is involved in shady dealings and questionable ethics. The article goes on to tell the story of "Marco Selvaggia" an unknown artist of Italian heritage who was exclusively represented by Ghiglieri. Only in 2004 a fellow from Oregon by the name of Joel Benson sued Ghiglieri in court claiming that he was hired by Ghiglieri to paint modern abstracts signing them "Selvaggia". The lawsuit claimed that Ghiglieri would market the paintings to high net worth collectors and give Benson up to 25% of the proceeds.
What is interesting is that Ghiglieri now claims on his own bio that he uses the pseudonym "Marco Selvaggia" to "experiment with the abstract". It is our opinion that the inclusion of Marco Selvaggia in his bio is meant to mislead investors from finding the Willamette Week article. As we learned in our previous research for (CHMR) criminals are beginning to wise up to how search engine algorithms work. By including this term in all of his bio's we suspect that Ghiglieri is hoping that a search of "Mark Ghiglieri Marco Selvaggia" will return the results he wants you to see as opposed to the facts uncovered by his local newspaper.
Ghiglieri and Masterpiece Investments Relationship with an SEC Halted Ponzi Scheme
On November 13, 2011, the SEC announced litigation against a Houston businessman named Albert Fase Kaleta for operating a classic ponzi scheme to the tune of $10 million dollars. The SEC alleged that Kaleta raised $10 million dollars from 50 investors and then turned around and leaned nearly $7 million of those funds to entities controlled by him and his associates while using $1.5 million of those monies to pay "personal expenses".
After Kaleta was charged with operating the scheme a receiver was appointed to try and salvage whatever was left of the money raised. This is no different than what is going on with the Madoff case currently. Searching through court filings we found this status report from the receiver documenting an investment made by Kaleta to Ghiglieri and Masterpiece Investments on page 6 paragraph 4:
4. Masterpiece Investments
In a series of poorly documented transactions, $300,000 in KCM funds had been transferred to Masterpiece Investments in the form of a loan to Masterpiece, payment for a number of Masterpiece sculptures and payment for shares of common stock in Masterpiece. In settlement, Masterpiece has agreed to repay KCM the amount of $100,000 (of which $60,000 has been received to date). In addition, as part of the settlement with Masterpiece, the shares of Masterpiece stock were cancelled without payment by KCM and Masterpiece has agreed to re-sell the Masterpiece sculptures within the possession of the Receivership Estate in its gallery in Naples, Florida. Masterpiece will market those sculptures at no charge to the Estate and all proceeds from sale of the sculptures will be paid into the Receivership Estate.
What in the world was Kaleta doing investing in Masterpiece of all things? As the SEC outlined, investments weren't really made by Kaleta unless there was some type of a personal gain to be had. Given Ghiglieri's track record we are not surprised to see his company associated with something like this and can think of a lot of reasons why Kaleta would have used the services of Ghiglieri though we are making no accusations as we have no proof other than what was disclosed in the receiver report. That being said this is yet another example of something that doesn't pass the smell test.
What is Masterpiece Investments Worth?
Ultimately our job as investors is to assess the potential valuation of the enterprise we are investing in. With Masterpiece there is very little quantitative data to work with as the company has yet to make any disclosures of their financials. As a shell (which is what CLSR currently is) there is no doubt in our minds that the valuation is ridiculous given the company has no cash, and negative equity of $24,000! An argument might be made as to the valuation of Masterpiece investments. As we have yet to see any filings or financial disclosures from Masterpiece it is very difficult to make an estimate of value.
That being said we believe there are enough qualitative red flags to make the case that Masterpiece investments is not worth anywhere near $400 million. Our logic is guided by the simple understanding that a company attaining such a valuation would have to earn at least $5-10 million a year in net income with the figure more likely reaching $15-20 million. Based on the various pieces of the puzzle we have been able to put together we cannot fathom Masterpiece as having any meaningful earnings power at all let alone in the 8 figure range:
- If Masterpiece Investments was a multi-million dollar earning enterprise why would they pursue a reverse merger with 11.75 million undisclosed free trading shares worth $65 million?
- If Masterpiece Investments was so profitable why raise just $300,000 in a loan from a known ponzi schemer?
- If Masterpiece Investments was so profitable why go public at all? And especially on the OTCBB? In an industry as boring and low tech as fabricating artwork it would make more sense to stay private as a high multiple on earnings could not be achieved in the public markets let alone the wild west of OTCBB penny stocks with little to no regulation and liquidity that is for the most part driven by unscrupulous activity.
- If Masterpiece Investments was so profitable why does Ghiglieri have outstanding tax liens from his other ventures?
At the current valuation of $372 million with nearly $65 million in undisclosed free trading shares we believe that investors are in for a very rude awakening once Masterpiece actually files its financials. We estimate that the business figures will be very humble at best with little to no operating profits.
A Little Known Toronto Based Broker Liquidating CLSR Shares
In order to keep this report light we did not expand on the Canadian roots of the CLSR shell or the second individual used as part of the scheme: John Arthur Carter (whose personal residence at 73 Raymar Place Oakville Ontario, Canada is the company's official address).
But there is a connection to Canada that cannot be overlooked. Using our OTCBB liquidity tool, we see that the most active market maker in the shares of CLSR has been a little known brokerage house in Toronto named Mercator Associates, LLC. The firm is small and appears to have only three principals: Fabrizio Lentini, Darren O brien, and Marilyn Pianelli. What is most unnerving is that this firm appears to be internationally run out of Toronto, Canada (outside of the regulatory umbrella of the SEC or FINRA) through some type of loophole. Looking through FINRA filings we discovered a regulatory action against the firm for liquidating millions of dollars worth of shares, charging unexplainable commissions of up to 30% of the transaction value, and then wiring the proceeds to British Virgin Islands and Cayman Islands account without proper anti-money laundering documentation:
Specifically, Mercator, acting through Lentini, sent a series of 27 wire transfers totaling approximately $3,973,662 USD to a bank account in the name of BS, a BVI entity.
In addition, on February 17 and March 2,2010, Mercator, acting through Lentini, sent two wire transfers totaling approximately $304,078 USD to a bank account in the name of PF, a Cayman Islands entity.
Moreover, during 2009, one Mercator account wired out funds in excess of $3,000 on 37 separate occasions. The firm failed to retain information regarding those wires, including the name, address and account number of the recipient and the identity of the recipient's financial institution.
Clearly the association of this firm is yet another reason to stay away from CLSR shares as the owners of the 11,750,000 undisclosed shares are most probably using another layer of secrecy that will make them difficult to track. Needless to say we are once again disappointed to see offshore charlatans taking advantage of US retail investors through US capital markets.
Let us be very clear. No legitimate company would ever go public the way Masterpiece has chosen to with 11.75 million shares that are undisclosed (20% of the company) worth $65 million. Either Ghiglieri has a direct stake in those shares (whether disclosed or not) or Masterpiece investments isn't worth anywhere near the current market valuation making this route to access capital still worth it for Ghiglieri. It is however inconceivable that Ghiglieri would leave the most profitable piece of the pie in the hands of a third party unless he had something to gain. Unfortunately for investors buying CLSR shares at a $400 million valuation both explanations do not bode well for the future as we predict the shares will follow the typical lifecycle of a pump and dump ending with gains for the charlatans and losses for the duped investors that purchased artificially priced shares.
Ghiglieri comes off as someone that should not be trusted as being a steward of others capital and the plethora of red flags we highlighted suggest to us that this is yet another scheme in the string of schemes he has operated in the past leaving a trail of losses for investors.
For these reasons we urge long investors to stay away from CLSR shares as the inherent value is most likely closer to zero.
Disclosure: I am short CLSR.OB.