stock ticker: FOUR

Who gets them first SEC or IRS?

As much as Citron has been attempting to avoid OTC Stocks, occasionally one comes along that is so absurd that we can not help commenting on it. Enter 4C Controls. This $400 million company has spun a tale that leaves us with the daunting question:

What is worse about this company: “The Tale or the Truth” ?

The Tale

4C Controls would like Wall Street to believe that they are a “Leading international security and surveillance group”. Based in prestigious Rockefeller Center, their website shows that they offer a host of products including but not limited to:

• High resolution satellites for earths observation
• High Perfromance radar for intrusion protection
• Other proprietary security security products.

These products can be used for airport security and border control.

http://www.4ccontrols.com/

The company is majority owned by Rudana Investment Group. Rudana is a secretive business entity operating out of a Swiss bank that is controlled, as stated to Citron by a company representative by “secretive European and Middle Eastern investors”.

Furthermore, the company’s funding is apparently coming from another entity called Arimathea, which is another secretive company based out of the Isle of Man.

Just yesterday, investors were informed that the company allegedly completed its first round of private financing – a $20 million tranche. We say alleged because the details of the PR mince words carefully – it states it has received “commitment subscriptions” and is “in process” of receiving the funds. One wonders what is the hurry? This funding is coming from Arimathea . In FOUR’s last 10-K they mention that Arimathea has agreed to fund up to $70 million, in alignment with yesterday’s release.

http://www.4ccontrols.com/news/13Aug08.pdf

So, what the company would like us to believe is that there is a major security and satellite company who is using the NASDAQ to validate themselves and raise funds. They are owned by secretive Middle Eastern investors who are funded by Swiss Bank Accounts and unknown entities from the Isle of Man……not a real comforting tale.

Now Lets Us Look at the truth on 4C Controls

1. As of last filing 4C Controls has $25K in the bank
2. Company revenues are 0
3. New York City address is nothing more than a mail drop
4. The company currently has 0 operating products
5. Rudana has 3 operating shells (including 4C) that all have this mysterious funding from Arimathea.

The lack of any real business or revenues reveals that their entire website has been designed to deceive potential investors. But we have not yet begun to expose the players.

CEO Olivier De Vergnies?

De Vergnies became the CEO of FOUR on July 1, 2008. His prior employment was a Vice President at Dexia Private Bank, Switzerland. This bank was recently implicated in the outing of a big client list of Julius Baer. That is the famous whistleblower case where the IRS went after UBS. It is the opinion of Citron that De Vergenies expertise in privacy laws was more crucial to this job than his expertise in security products.

http://wikileaks.org/wiki/Bank_Julius_Baer:_Grand_Larceny_via_Grand_Cayman

The Canadian Stock Promoter with cheap stock.

2,259,470 shares at .23 cents

For those of who you follow the world of OTC stocks, it should be as no surprise that one Canadian stock promoter is sitting on a mountain of cheap stock.

According to an SEC form 13D filed by FOUR on 7/28/08, we see the following:

“Black Sea Trading acquired 2,259,470 shares of the Company’s common stock on July 2, 2008 in consideration of $505,000. The shares were acquired through the open market.”
Robert Jarva, President, Black Sea Trading, Inc.

This is fraudulent. FOUR did not trade 2,259,470 shares on July 2, it traded 65,500 shares. In fact, it did not trade 2 million shares in all of July 2008. There is only a single day in its entire trading history that FOUR’s stock (actually it was predecessor ticker AMEC) printed that many shares. It was Oct 22, 2007 at 23c. When asked about this transaction, the company representative responded about Black Sea: “They are a long time and long term investor who has bought at market price over the course of time.”

This is not true. The filing said they bought on one day and the company states that he has acquired over time. Either way, Mr. Jarva owns this stock at .23 cents. And either way, his entity Black Sea Trading, is based in the Marshall Islands, which sits in Micronesia. The US Department of the Treasury doesn’t need the geography lesson.

http://www.fincen.gov/news_room/rp/advisory/html/advis20.html
It appears that much like Amirathea, Jarva is also in the other stocks controlled by Rudana. By running Jarva’s name through an SEC database, here is a history of the other stocks this promoter has been involved with and where they are currently trading.

Ticker	Recent Price
PRPL	.11
EQST	.32
CRJI	1.10
BLKC	.09
LXES	.016
NOVO	.08
DSKA	.16
TPLM	.61
SGNE	.08

Conclusion

Has anyone ever heard of the Patriot Act, let alone Securities disclosure laws? So we have secret Middle-Eastern investors organizing a company to put up spy satellites, using the public trading facilities of the Nasdaq to raise money from the public? $70 million in investments from S-8 offshore stock sales propping up a company with a purported $400 million market cap, sloshing through tax havens in the Marshall Islands, the Isle of Man, and Swiss Bank accounts, courtesy of the NASDAQ? Is this even remotely OK ? Fortunately, Citron believes the risk of real security satellites ever being launched by this company is low, but this stock is just as dangerous to any investor who buys into the story.

Cautious investing to all.

stock ticker: AMED

Better get a Second Opinion….

Citron Research was first drawn to research Arthrocare because one division was running margins that wildly outperformed all their competitors.  After working countless hours with private investigators and reviewing hundreds of documents, we were able to draw a line to what we believe explained the extreme outperformance:  fraud on the insurance reimbursement system.  Well… here we go again.

(Citron notes that within the last month alone, two companies — ARTC and BWTR both formerly reported by Citron — were forced to restate previous earnings, and their shares were cut in half.)

Introducing Amedisys

Amedisys has been getting a lot of attention on Wall Street recently.  Its provides services in the relatively low-tech field of home health care services – hospice, wound care, diabetes and heart disease care, surgery recovery, stroke recovery and various specific rehabilitative programs.  This business model is basically a massive temp agency for health care workers making home visits.  The company has been on an aggressive acquisition strategy, while claiming their proprietary software to be their competitive edge.  Its stock has doubled since March.

It is the opinion of Citron that this “proprietary software” or, as we will refer to it, their “secret sauce”, is the tool Amedisys relies upon to out-earn their competition in a traditionally low margin, non-sexy business; or at least that’s how they justify their competitive edge to Wall Street.

Amedisys has been growing fast — rolling up competitors, growing revenues rapidly through acquisition.  All the while it’s been growing margins, too.  Amedisys claims its computer systems for submitting and tracking claims gives it a huge competitive advantage in its business.  Considering nearly 90% of their business is Medicare reimbursement, it is really hard to “out-Medicare” your competition – its kinda like selling to Wal-Mart.

Questions, Questions and Questions

Amedisys recently reported and filed a 10-Q, which left many unanswered questions for those trying to assess the long term viability of their business model.

1) Within the last year, the company began reserving for uncollectible receivables.   Unless managed with great transparency, reserves against receivables opens a huge can of worms from an accounting standpoint – creating an irresistible potential for “cookie jar” accounting.  (Citron is very familiar with the pitfalls of receivables reserves from the IIG era.)

2) Amedisys is running huge receivables, which have grown 20% in the last year.   However, Amedisys’s receivable reserves have been varying widely since they started declaring them.  In the most recent quarter, while receivables aging (measured by DSO) actually increased, the company reduced its reserve percentage by over 20%, without explanation.  This stroke of the pen alone was responsible for .12 to .15c of the company’s earnings for the quarter – which was the difference between their reported “blowout” quarter, and a very tepid, inline one.

3) Amedisys does not break out what part of their business is internal growth and what is growth by acquisition.  If the growth is better than everyone else’s then the stock is typically awarded a better multiple. In this case, in the second quarter, for example, AMED had about the same growth in admissions, slightly better growth in revenue per episode but TWICE the growth in total internal revenue as everyone else.   We believe that is because their revenue per admission soared…which might be explained lower in the report.

4) The unavailability of growth metrics raises concerns that Medicare reimbursement for current work may be falling, cloaked by the growth in revenues from acquisitions.

All of that leaves plenty of reason to wonder just how Amedisys maintains gross profit margins that run way ahead of everyone else in the industry?

But here is where it gets interesting…

Who Knows Best?

Citron has been interviewing Amedisys’s former employees in an attempt to confirm or disprove the implications of these accounting red flags.  (All of the interviews conducted were done by a licensed private investigator who asked a standardized series of questions to former employees.  The interviewees did not know why they were being asked the questions, nor did any of them have a position in the stock.

These individuals were found because Amedisys appears in their employment histories.  The power of the internet makes many of these individuals locatable on websites like HotJobs.com and Monster.com.

The results were startling.  These are some points that were consistently reported by former employees:

• Amedisys pressured employees to manipulate OASIS scores in order to increase billings
• Local offices would receive calls from headquarters to influence the scores on Medicare patients. (to justify higher billing)
• According to one former management employee, who left the company in 2008 and was interviewed on August 4th : “Our old receivables were real high and were a real mess.  But no one at corporate would let us try and straighten up the mess.  The billing system is set up for failure and there are no checks and balances.  “

Of equivalent concern was the consistency of these findings.  Our survey didn’t find any former employees who didn’t mirror these concerns in their interview.

Citron wants to emphasize that it is not yet concluding that Amedisys is committing Medicare fraud, but there are many indications that this inquiry needs deeper scrutiny.  (Further documentation is anticipated.)  Due to these concerns, Amedisys’s near total dependence upon Medicare for its revenues has to be factored as a business risk.

So Why Now?

Because Amedisys is a roll up strategy, there are an increasing number of former employees who know the workings of the company.

There is an additional built-in business risk when relying on Medicare as a primary payer.  Because it is an agency of the government, reporting of intentional misconduct is subject to various whistleblower protections including the legal principle of Qui Tam – whistleblowers are able to sue Government contractors and payees on behalf of the government, and participate financially in the recoveries of funds fraudulently billed.  The government has been aggressive in pursuing these cases and in 2006 alone these actions resulted in $140 million awards to whistleblowers.

http://www.whistleblowerlawyerblog.com/2008/02/qui_tam_whistleblowers_awarded_2.html

Here is how the roof fell in on HealthSouth:

http://query.nytimes.com/gst/fullpage.html?res=9D0DE2DD133BF932A2575AC0A9659C8B63

http://www.uow.edu.au/arts/sts/bmartin/dissent/documents/health/healthsouth_medfrd.html

A key point of concern is what we would call the “management paranoia factor”.  This in retrospect was among the most glaring red flags at HealthSouth.  If management tries to control employees who believe something is amiss, look out.

This is why the following quote from an Amedisys former employee commands our attention:

“if you questioned Amedisys about anything, they would push you out and label you as a troublemaker…”
– former Amedisys employee

Would Amedisys management do such a thing ?

Fair question.  Especially considering the accounting uncertainties described above, management’s credibility has to be considered in creating an objective assessment of the company’s value.  Arthrocare had a case of “seven-year itch” with accounting issues — its current problems can be seen in the context of overly aggressive accounting and restatements by the same management a number of years ago.

That is the context in which Citron points to AMED’s 2001 restatements due to “discrepancies” in its Medicare billings:  http://findarticles.com/p/articles/mi_m0EIN/is_2001_Oct_4/ai_78904181  Same CEO, same set of issues.  Fool me once…

Conclusion

This brings us back to the “secret sauce”.  What portion of Amedisys’s margins can be attributed to legitimate efficiencies from its proprietary information system ?  And how much of its margins come from increasing management pressure to push the envelope harder and harder to game the Medicare billing system?

Much like Arthrocare wanted Wall St. to believe that Discocare had a proprietary model of billing (remember the much-touted “algorithm”) that gave it a strategic advantage, so too does Amedisys.  In this company’s case, however, that is all predicated on being able to out-Medicare the next guy.

As the company grows by acquisition and in turn puts the acquired companies on their proprietary billing system, they create many more “weak links in the chain” who can potentially come forward and blow the whistle on questionable business practices.  Medicare moves slowly, but when they move, it is with an iron fist.

Cautious investing to all.

stock ticker: AMSC

What is a Power Module Company Really Worth?

For the past two months, Citron has maintained its opinion that the business of selling power modules to the wind industry does not classify a company as a “wind play”, but more accurately an industrial commodity.  Meanwhile, sell side analysts have ignored all warnings, as well as large insider selling and questionable SEC confidentiality requests cloaking the company’s single largest piece of projected business.  Citron will now put forth the one piece of evidence that shareholders cannot afford to ignore.  As for the analysts, ignoring things is standard practice.

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stock ticker: HEV

Ener1 management has to learn the difference between vague promises and bankable commitments.  As the company is currently on the road attempting to raise money, Citron encourages management to deliver a more accurate representation of their current “contract” with Th!nk Global to potential investors.

In a previous report, we explained how Delphi sold their 19.5% stake in EnerDel for $27 million in cash and stock, pegging EnerDel’s value at around $1 a share.  And note that, in selling it to Ener1, we note an absence of any other strategic buyers at a higher price.  Yet, even $1 a share is inflated compared to the mountains of cheap stock that management has been able to acquire in the company over the years, the cost basis of which Citron believes to be at well under .50 a share.

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stock ticker: HEV

You don’t need a PhD in chemistry – just a high school diploma in common sense.

So here is the story in a nutshell (or the trunk of a Prius). It is Citron’s opinion that Ener1 is just a corporate shell company with a long history of failed businesses based on exaggerated promises. Management has tried everything from video games to visualization software to set top boxes for television. All of these businesses have failed — miniscule revenues and never a penny of profit delivered to investors. They purchased Delphi’s years-old attempt to get a lithium battery business going, and got a sublease on a manufacturing plant in Indianapolis. Since then we haven’t seen a single sign of a viable business.

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stock ticker: PDO

Yes we know that crude oil prices are trading 40% this year, and no we do not want to call a top to the oil market, yet speculation in crude oil prices has only been outdone by speculation in small oil stocks, to this we call your attention to Pyramid Oil (PDO). With $1.6 million in Q1 Revs and $27 mil in P1 reserves, PDO trading at $44 a share in our opinion would be as if oil was trading at $400 a barrel. 

To see what this company has to offer look at www.pyramidoil.com

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stock ticker: ARTC

Could this be the final straw in the “Discocare Model”?

Just last week in the 17th Judicial Court in Broward County Florida a, judge made a determination in a contempt hearing that implicates Arthrocare executive and former Discocare director Michael Denker.

June 12 Court Doc (PDF)

This was a contempt hearing for Mr. Denker amongst others for not answering a deposition in the Islam personal injury case.  This case directly challenged the “Discocare model” as shown here:

http://www.citronresearch.com/wp-content/uploads/2008/04/new_problems_at_arthrocare.pdf

On June 12, the court record states:

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