Even by microcap standards PacWest Equities, Inc. (OTC:PWEI) is an outlier. Since August 8, 2012, we have written no less than seven research reports highlighting alleged fraud, folly, or hype, and yet we can say with utmost confidence that PWEI is the biggest hunk of malarkey we have seen. Moreover, we believe that every single free trading share in circulation has been illegally issued, which means that PWEI could be subject to an imminent trading halt by regulators. We urge all investors both long and short, but specifically retail investors to stay away from this stock, as we will present a very strong case that PWEI in its current form cannot legally exist.
Shares Outstanding as of June 30, 2012
Most Recent Share Price (10/15/2012)
Cash as of June 30, 2012
$0.00 (Not One Dollar)
Debts & Liabilities as of June 30, 2012
Revenues or Sales as of June 30, 2012
Shareholder Equity as of June 30, 2012
$354,736 (Comprised of "Other Assets such as Goodwill"
Undisclosed Shares in Float
Value of Undisclosed Shares in Float
Tangible Book Value Per Share on June 30, 2012
PWEI does not have a corporate office. Instead this one third of a billion dollar company publicly discloses that a P.O Box serves as its headquarters.
Click to enlarge
A Primer on the Pink Sheets
Thus far all of our targets were registered with the SEC allowing us to sift through standardized financials and regulatory disclosures, but PWEI trades on the pink sheets - a market that is home to mostly bankrupt companies and foreign issuers that are subject to SEC comparable regulatory scrutiny in their home nations. We have nothing against the pink sheets only because as investors specializing in esoteric securities, we understand the genuine need for this market - which is to provide a trading solution for legitimate issuers that do not wish to be registered with the SEC.
Contrary to what investors may believe the pink sheet market is not a haven for perpetrators to conduct pump and dumps schemes. Led by Cromwell Coulson, the Pinks have carved out a niche as a specialized market for foreign issuers, depository receipts, warrants, distressed securities and other esoteric instruments all of which are legitimate.
This was not always the case. The fundamental shift in the direction of the market came after Mr. Coulson acquired control of the pinks and began a crusade that involved working closely with the SEC to clean house. This highly concentrated effort (covered by the WSJ in this article) culminated in the implementation of new rules in 2008, making it technically impossible to orchestrate a pump and dump on the pink sheets.
Therein lies the crux of this research report: On February 15, 2008 the SEC implemented clear rules aimed at preventing companies like PWEI from existing on the pink sheets by outlawing the reliance of Rule 144 to unrestrict securities of shell companies. Simply put, as of February 2008, no shares of a pink sheet shell can be unrestricted and sold into the market unless they are registered with the SEC. This monumental shift in policy is a welcomed example of our regulators doing their job by clearly defining what is legal and what is not.
The next question that naturally follows is this one: "How was PWEI able to free up 155,000,000 shares in reliance on Rule 144?" We will get into all those details in the next section. Before we do we would like to reiterate and drive this point further by highlighting the difference between all the previous companies we have covered to date and PWEI.
Readers may remember our last report on PRTN whereby we made some recommendations for new rules on the OTCBB. We want readers to understand that on the OTCBB the scams occur because the rules allow the purchase of sub-penny freely trading shares, making it easy for pump and dumpers to acquire a large block of shares for nearly no money down. The perpetrators of the OTCBB pump and dumps are obviously committing violations, however these violations do not occur on the purchase of the shares. With OTCBB pump and dumps the violations are ones that relate to a lack of ownership disclosure or the subsequent manipulation of the securities.
But what we have with PWEI is a situation that is totally different one where the rules clearly say that a pink sheet shell cannot have free trading shares and yet somehow the perpetrators behind PWEI have been able to free up a block of 155,000,000 worthless shares now valued at over $110 million dollars at yesterday's price of $.70 cents.
In these next few sections, we will document several red flags which together highlight how PWEI was setup in order to circumvent crystal clear SEC guidelines implemented specifically to prevent the type of fraud that is being perpetuated by the offshore charlatans behind PWEI.
Red Flag #1 - No Way to Reconcile 155,000,000 Free Trading Shares If Relying on Rule 144
To understand how PWEI pulled this off, investors need to be familiarized with US regulatory philosophy as it relates to regulating capital markets. This philosophy is predicated on the implementation of rules deemed necessary to the marketplace followed by the enforcement of violations to those rules. This is different from the approach of other countries whereby the regulators scrutinize every corporate action to see if it violates a rule. In our view the US method works because it harnesses the power of distributed legal professionals who interpret the rules and enforce them upon their clients. Some call it laissez-faire, but others who are participants in the market realize this method lends itself to more open capital markets that in turn are more fluid and serve their primary purpose of capital origination.
Unfortunately, this philosophy leaves cracks in the system whereby unscrupulous lawyers and stock scammers can violate a rule even as clear as the one implemented by the SEC on February 15, 2008. This is exactly what occurred with PWEI - a pink sheet shell that is so obviously a shell only an unscrupulous lawyer would author an opinion otherwise. Let us review the process which has allowed the perpetrators of PWEI to hijack a pink sheet shell company and turn it into a weapon of mass destruction:
- Reverse Split Retail Investors Out - On May 7, 2010 in preparation of the pump and dump PWEI conducted a 1 for 1,000 reverse split. This meant that any shareholder holding 1,000 shares or less would no longer own shares of the company, while any shareholder owning 1,000 shares or more would own their previous amount divided by 1,000. An owner of 50,000 shares would now only own 50 shares. This aggressive action defies economics or logic and serves only one purpose: it cleans out the actual investors who paid market prices for their shares by crystallizing their losses and getting them out of the way.
- Create Free Trading Block - The reverse split is not illegal. The SEC realized that unscrupulous people could implement such techniques in order to prepare for a pump and dump. But by implementing the February 15, 2008 rules the SEC essentially made it impossible to free up any shares on a pink sheet shell after a reverse split. In essence, this second step is no longer legal on the pink sheets (it still is on the OTCBB). We stress this because what the perpetrators behind PWEI did was fly in the face of the SEC and rely on Rule 144 to create and free up a 155,000,000 block of shares. But this isn't even the worst of it. Even if relying on a sham Rule 144 Opinion Letter, we still cannot reconcile how in the world PWEI was able to free up 155,000,000 shares that were issued in April of 2012. Let us explain: On April 24, 2012 PWEI "Acquired" the company World Eco Source for 155,000,000 newly issued shares. Below we have a screenshot from the pink sheet filings disclosing this issuance:
There are a lot of red flags here. First, this filing is from August 18, 2012 for the period ending June 30, 2012. It claims that there were at the time ended June 30, 2012 - 155,000,000 free trading shares. Even if relying on rule 144 (assuming PWEI is not a shell) the hold period must be 6 months for reporting companies and 1 year for non-reporting. This means that even if PWEI was trying to illegally take advantage of the cracks in the rule it could have never relied on Rule 144 to free up those 155,000,000 shares until April 24, 2013 (1 year) or if they were really playing dumb October 24, 2012 (6 months). This is very unnerving, as we have now established that there are 155,000,000 shares in circulation that have been purchased and sold by thousands of investors and that were most probably illegally deposited and introduced into the marketplace by the perpetrators.
Because PWEI is a pink sheet, we had to work with very limited information. For example, the company never disclosed the exact date on which they issued those shares. Through the Nevada corporate filings, we were able to find out that on April 24, 2012 there was a merger. Piecing that bit of information with the disclosure on the financial statements on pink sheets which state that 155,000,000 shares were issued for an Acquisition in April of 2012 we establish that those shares were issued on April 24, 2012. We then know that those shares became free trading most probably by June 30, 2012 but most definitely by October 9, 2012 (the day PWEI traded over 90 million shares after an email spam campaign was launched). Both dates confirm that something is terribly wrong here, as the June 30 date would mean the shares were unrestricted only two months after issuance, while October 9th is only five months from the issuance date.
If this isn't a smoking gun, we don't know what is. This is why we reiterate that investors should stay away from this stock. This is not a case where we are just advocating overvaluation or unscrupulous promotion; this is much worse, as we cannot reconcile the legality of these shares in the first place and that is why we believe the regulators may halt shares of PWEI without any prior warning. Take this case in May where the SEC halted 379 pink sheet companies before they could be per the SEC's own words: "hijacked by fraudsters and used to harm investors through reverse mergers or pump-and-dump schemes".
Red Flag #2 - Even If Relying on Rule 144 PWEI Shares Are Still Illegal as PWEI is a Pink Sheet Shell Making Rule 144 Unavailable to the Issuer
In the previous section, we established that there are several red flags with respect to the issuance of the 155,000,000 free trading shares in PWEI. In this section we will explore the Rule 144 method in detail in order to prove that even this method if used was illegal to the issuer.
Occam's razor dictates that the path most probably chosen by the perpetrators was reliance on Rule 144 to free up the 155,000,000 shares of PWEI. We say this because there are several hints in the minimal disclosures the company made with pink sheets that PWEI tried to establish itself as "NOT a shell". Moreover, it would have been the path of least resistance given that the only hurdle with this route would be an opinion letter by an SEC licensed attorney. In other words, if the company could create an appearance that it was not a shell, the perpetrators could find a lawyer to write an opinion letter saying the shares were eligible for Rule 144. This flawed logic would still not explain how the shares were issued prior to any Rule 144 hold periods, but we will nevertheless explore this route for the purpose of demonstrating that it too results in the issuance of 155,000,000 illegal shares:
Below is a compilation of three relevant screenshots. The first section on top is a screenshot from PWEI's most recent disclosure to the pink sheets whereby the company claims it has "never been a shell company". The second screenshot is from a disclosure filed on pink sheets by PWEI in 2009. Note the clear shell language. The third screenshot is from the SEC's own website and highlights the language in the February 2008 Rule making it illegal to rely on Rule 144 for shell companies unless a registration statement is filed with the SEC.
What is a "Shell"?
The entire argument rests on the definition of a shell company. We thought it would be important to know what the SEC's definition of a shell company is so that we could see for ourselves whether PWEI fit that definition or whether we were wrong and it was in fact "never a shell" as it claimed in its own fillings:
SEC's Own Definition of a Shell:
Rule 144(i) (1) defines a shell company as a company that is now or at any time previously has been an issuer, that has:
(A) No or nominal operations; and
(1) No or nominal assets;
(2) Assets consisting solely of cash and cash equivalents; or
(3) Assets consisting of any amount of cash and cash equivalents and nominal other assets;
With these clear definitions, it should be child's play to discern between what is and what isn't a shell. We gave it a shot and reviewed the most recent financials for PWEI as of June 30th, 2012. Below find both the balance sheet and income statement for this $330,000,000 company:
Both the Balance Sheet and Income Statement have shell written all over them! All kidding aside, even a 5 year-old could glance at these financials and know they match the SEC mandated guidelines for what is considered a shell. No Cash… Check. Nominal to No Operations…Check. No Revenues…Check. PWEI was and has always been a shell that has been setup for a pump and dump. Which brings us back to our original point: What lawyer in their right mind would write an opinion letter recommending that 155,000,000 restricted shares be freed up in reliance on Rule 144 for a company that is clearly a shell? Enter Mr. Andrew Coldicutt.
Red Flag #3 - The Corporate Counsel for PWEI Hails From a Family of Repeat Offenders Sued by the SEC in August 2012 for Engaging in a "Shell Factory Scheme"
In what is yet another smoking gun, the corporate counsel for PWEI is none other than Mr. Andrew Coldicutt, son of Thomas Coldicutt of Shell Factory fame. In what was an obvious family affair, Thomas and his wife Elizabeth were charged by the SEC less than two months ago for operating a Shell Factory whereby they created 15 publicly traded shells that were later used by pump and dump artists to wreak havoc on the investing public. The Coldicutt's generated over $6 million in profits, while the shells were subsequently used by unscrupulous promoters to generate tens of millions more in proceeds.
We believe that Andrew Coldicutt was the lawyer who wrote the opinion letter that removed the restrictive legend on the 155,000,000 shares of PWEI illegally relying on Rule 144, while knowing full well that PWEI was a pink sheet shell and was not eligible for the rule. We cannot confirm that Mr. Coldicutt in fact wrote the opinion letter because PWEI did not disclose this to the public. But we do know that he is the corporate counsel for the company, suggesting that he is most probably the lawyer that the perpetrators used. Even more unnerving is that Andrew Coldicutt was the corporate counsel for VLNX.PK, another pink sheet scam that was operated by the APS Cartel and which ended in 99% investor losses.
To summarize, the lawyer for PWEI is the son of a notorious penny stock fixture that was specifically involved in the creation and sale of publicly traded shells to stock scammers. Makes you feel very warm and fuzzy inside doesn't it?
Red Flag #4 Did PWEI Fabricate Its Financial Disclosures?
In what is yet another enigma, we cannot seem to reconcile whether PWEI has had revenues or not. PWEI filed unaudited financials with the pink sheets website claiming it had $352,000 in revenues for the year ended December 2011. We believe that the demonstration of revenues may have been another effort on the part of the perpetrators to rely on Rule 144 in order to free up those 155,000,000 shares. Below find two screenshots from the financials as filed with pink sheets. Note the dilemma in trying to reconcile these figures:
Only the SEC can get to the bottom of this with its subpoena power. We consider ourselves experts in security analysis, yet we are stumped by this puzzle.
Red Flag #5 - The SEC Previously Halted ACT Clean Technologies (PWEI's Largest Shareholder)
According to filings with the pink sheets website, PWEI's largest shareholder is Act Clean Technologies another pink sheet listed issuer that trades under the symbol ACLH. Most interesting of all is that ACLH was halted by the SEC in May of 2010 for making false statements about its products being used in the BP Gulf of Mexico Oil Spill.
What is it they say about the company you keep?
Conclusion of Part I
Due to the large volume of data we uncovered, we chose to release our research report in two parts. The first part published today covers the most pressing matters that we wanted to get out into the public domain. The second part will cover the history of the perpetrators behind this scam, as well as the connection between PWEI and the APS cartel. We will also take a look at the CEO of PWEI and document details of his alleged involvement that make him an easy target for regulators.
We will also cover more ground on the gatekeepers involved, specifically the email services that are being used by the scammers to circumvent spam filters. These companies based in the US should be responsible enough to shut down this unlawful activity.
Since publishing a tweet on Friday, saying we would be writing a report on PWEI, we received three anonymous threats. We referred those threats as well as a large data file we have compiled to both the FBI and DOJ. We will not sit idle while a cartel of criminals attempts to intimidate us, as they steal millions upon millions from hard working American investors.
We urge all investors both long and short to stay away from PWEI. We believe that it is only a matter of time before regulators halt trading in this security, as they realize that nearly every share in circulation was improperly introduced into the float.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.