stock ticker: SCOK

Flash forward a few years later and Home Solutions is now delisted –  yes, trading at 0.0006,  Its officers were indicted for accounting fraud, exactly as Citron reported. . 

http://www.sec.gov/litigation/litreleases/2009/lr21314.htm

Here You Go

Now they’re back with a new girl — an ugly duckling Chinese coal deal with an utterly improbably rise and ridiculously unsustainable run-up on the premise that $6 PIPE investors (plus warrants at $12) with a six-month lockup have a bought “great deal”.  It’s like a horse race with a donkey where the donkey is started with a one-lap lead.

Citron finds it inconceivable that Rodman isn’t required to do a little more due diligence on these things, and suggests that readers do what Rodman doesn’t:  follow the money. 
“SinoCoking’s President, Chief Executive Officer and Chairman, Mr. Jianhua Lv, does not hold any shares of Top Favour, however, Mr. Lv has the right to potentially acquire up to 51% of Top Favour. On July 6, 2009, Mr. Jianhua Lv transferred his shares of Top Favour to Honour Express Limited, a British Virgin Islands international business company which is solely owned by Mr. Shaohua Tan, a Singapore citizen. As a result of the share issuance and share transfer, Top Favour (BVI) has 10,000 ordinary shares outstanding, 51% of which is held by Honour Express Limited.”

Meet the Puppetmaster

Mr. Shaohua Tan appears to be a penny stock jockey with filings in GHII, JGBO. and LTUS.  He operates BVI holding companies out of Singapore with names like “Top Favour” and “Honour Express”. 

Looking at filings to try to gain a sense of his track record, we find:

JGBO : a thinly traded  Chinese pharma covered only by Brean Murray and Dutton (paid-for coverage),
http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=jgbo&sid=0&o_symb=jgbo&freq=2&time=13

LTUS is a $1 Chinese pharma company,
http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=ghii&sid=0&o_symb=ghii&freq=2&time=12

and GHII is a .12c OTCBB Chinese design-build company

http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=LTUS&sid=0&o_symb=LTUS&freq=2&time=13&x=0&y=0

Then there’s BOPH, purportedly a Chinese pharmaceutical, “quote unavailable”…

Tan was appointed Director and “Leader” of Genesis Technology Group (OTCBB:GTEC)  in 2005 which was rolled into JGBO (NOTE: It is NOT the current NASDAQ:GTEC.)

http://findarticles.com/p/articles/mi_pwwi/is_200502/ai_n9778301/

Despite years of wild promises of future wealth from international deals, Citron notes that the most tangible outcome of all this furious burst of business is ….. a lawsuit.

Further, Mr. Tan is reportedly the operator of Genesis Equity Partners, LLP which was organized, according to announcements filed by a plaintiff attorney,

” In 2006, Genesis Technology Group, Inc. (GTEC), China West, LLC and Joshua Tan, a director of Genesis, formed GENESIS EQUITY PARTNERS LLC (GEP), a Florida limited liability company, for the purpose of completing private-to- public reverse merger programs for Chinese companies. GTEC owned 51%, China West owned 25% and Tan owned 24% of GEP.”

He’s now the subject of at least $13 million in arbitration claims for failing to close and deliver on equity transactions, and for diluting its partners by 500% share issuance.

The plaintiff?  Capital Research Group which operates stock tout-for-free-shares site TheSubway.com !!!  Yes the ones who were charged for fraud by the SEC

http://www.sec.gov/litigation/litreleases/lr18286.htm
http://findarticles.com/p/articles/mi_pwwi/is_200809/ai_n28121655/
http://www.prnewswire.com/news-releases/china-west-llc–china-west-ii-llc-arbitrations-against-genesis-pharmaceuticals-now-total-135-million-65438452.html

You Own What?

What is undisclosed is the real terms by which Mr. Tan and Mr. Lv acquired their interest in these Chinese coking plants, which is only disclosed to be in the form of “contracts” stated above. 
From recent filings, we see :

The following excerpts taken from filings describe the twisted relationships that give rise to the ownership in these Chinese assets.

“Top Favour’s relationships with Hongli Group and its owners are governed by a series of contractual arrangements, through which Top Favour holds and exercises ownership and management rights over the Hongli Group.  Neither Top Favour nor Hongyuan owns any direct equity interest in Hongli Group.  According to a legal opinion issued by PRC counsel to SinoCoking, the contractual arrangements constitute valid and binding obligations of the parties to such agreements, and are enforceable and valid in accordance with the laws of the PRC.”

“Pursuant to the operating agreement, Hongyuan provides guidance and instructions on each Hongli Group company’s daily operations, financial management and employment issues.  In addition, Hongyuan agrees to guarantee the performance of each Hongli Group company under any agreements or arrangements relating to its business arrangements with any third party.  In return, the owners of Hongli Group must designate Hongyuan’s candidates as their representatives on each Hongli Group company’s board of directors, and Hongyuan has the right to appoint senior executives of each Hongli Group company.  Additionally, each Hongli Group company agrees to pledge its accounts receivable and all of its assets to Hongyuan. ”

“Under the equity pledge agreement, the owners of Hongli Group pledged all of their equity interests in Hongli Group to Hongyuan to guarantee each Hongli Group company’s performance of its obligations under the consulting services agreement.  If a Hongli Group company or the owners breach their respective contractual obligations, Hongyuan, as pledgee, will be entitled to certain rights, including, but not limited to, the right to vote with, control and sell the pledged equity interests.  The owners of Hongli Group also agreed that upon occurrence of any event of default, Hongyuan shall be granted an exclusive, irrevocable power of attorney to take actions in the place and stead of the owners to carry out the security provisions of the equity pledge agreement, and take any action and execute any instrument as required by Hongyuan to accomplish the purposes of the agreement.  The owners of Hongli Group agreed not to dispose of the pledged equity interests or take any actions that would prejudice Hongyuan’s interest.  This agreement will expire two years from the fulfillment of Hongli Group’s obligations under the consulting services agreement.”

http://www.sec.gov/Archives/edgar/data/1099290/000141188609000049/defin14a.htm

To which Citron observes, if (and when) something goes wrong, and investors seek legal recourse with regard to the actual profitmaking hard assets  … GOOD LUCK!

The Old Shell Game

And of course, our favorite:

“SinoCoking’s management decided that it was in SinoCoking’s best interest to become a publicly traded company in the U.S. to better position the company to raise capital from outside sources. ”

This disclosure, made with a straight face, in the wake of record financing amounts flowing like rivers out of Chinese banks the last year or two to support every conceivable venture needing capital … but somehow accessing the US capital markets by reverse merger “better positions the company to raise capital from outside sources.” 

Conclusion

Sharesleuth.com correctly points out that investors should heed a red flag when any company, especially one in a heavily commoditized industry, and extra-especially if its Chinese based, projects gross margins that are out of line with all its competitors.

Add to that an incomprehensible shell ownership structure, threaded through privacy and tax havens, and you’ve got a recipe for a predictable outcome.

Cautious investing to all.

stock ticker: SA

“Look around the table.  If you don’t see a sucker, get up, because you’re the sucker” – Amarillo Slim

Dreams of Gold vs Reality of Share Prices

Seabridge’s explicitly advertised and promoted investment premise is that it is a “call option” on the future price of gold.  Citron believes this premise is utterly false.
Aside from all the background noise about stock promotions, Seabridge investors invest in the stock because they hope it will rise in value as the price of gold rises.  As the company has told them, it is a levered play on gold.

But the price of Seabridge stock is not tied to the price of gold, it is tied only to the supply and demand for Seabridge shares.  That places shareholder returns squarely dependent not upon the price of gold, but upon the actions of management and insiders.  This is precisely why the past activities of Seabridge’s insiders are so troubling.  However, the proof is in the pricing.

If we look at the price of Seabridge stock over the last five years, we can see a huge run-up coincident with the bull market in 2007 when gold went from 700 an ounce to 1000, and also with Agoracom’s paid promotion of Seabridge stock.  But for the vast majority of current Seabridge investors who purchased the stock since 2007, their returns are negative relative to gold.

Citron believes the real factors behind these negative returns are the increasing dilution the stock experiences over time as insiders liquidate positions they acquired at very low prices, and more stock enters the public float.

stock ticker: SA

However, there aren’t many with zero gold reserves and a billion dollar market cap.

And then there’s Seabridge Gold. (AMEX:SA)

Seabridge claims that its KSM prospect is sitting on “one of the five largest undeveloped gold projects in the world”…. sound good?  [  http://www.seabridgegold.net/projects.php  ] In this report, Citron will explore why no major mining companies have partnered with them and test the credibility of their claims.

Seabridge is a junior mining company whose stock has been jacked up since 2005 on a series of clever promotions and hype.  In the opinion of Citron it is all based upon a premise that is fraudulent to US investors.

While much has been published on Seabridge over the years, in a series of articles Citron will put forward the definitive piece of research that will prove what the major companies already know about Seabridge:  it is a bridge to nowhere.

The Big Kahuna - KSM

Seabridge acquired KSM from Placer Dome for just hundreds of thousand of dollar in stock in 2001.  This prospect had been owned and poked by many of the majors going back to 1961.  Enter Seabridge, which then enlists the following players, ups its estimates, pays some promoters and off to the races it goes.

Michael Lechner:  The Billion Dollar Man

The resource analysis of the Seabridge Gold’s KSM project is headed by Michael Lechner of Resource Modeling Inc (RMI) of Tucson Arizona.  It is important to note that Seabridge has increased KSM’s resource “estimates” by over 1300% during Lechner’s engagement, even though they have only drilled only 40% of the holes on the project, which has been poked by many of the majors as early as 1961.  So who is RMI?  A picture is worth a 1000 words.

The address for Mr. Lechner’s operation on filings was 1960 W. Muirhead Loop, Tucson AZ.   We encourage shareholders to look at the office of RMI and see where these billion dollar claims are coming from.

http://www.zillow.com/homes/1960-W.-Muirhead-Loop,-Tucson-AZ.—_rb/

Yes, this is the world headquarters of Resource Modeling Inc.

When analyzing a potential gold find, the feasibility study is as important as the resource estimate in determining the economic value of the resource.  There’s lots of gold and other minerals in places where the cost of extraction simply renders it uneconomical.  Seabridge’s reassuring message to investors describes how KSM is located in safe and predictable Canada, not some foreign country.  What it doesn’t state is that the property is extremely remote and largely located under a glacier.  The capital investment needed to extract any gold from the site is daunting indeed – the price tag is in the billions.  Extraction would require them to drill miles-long underground tunnels just to gain access the site, plus hydroelectric dams and roads…and that’s before establishing the mining and milling facilities.

The feasibility study for KSM was produced by a company named Moose Mountain.  There is not much record of Moose Mountain before 2007, as they went by their old name:  GR Technical Services.  GR was involved in one of the largest feasibility study flops ever in the gross underestimate of a notorious project called Galore Creek.  After shareholder lawsuits and serious damage to its reputation, GR did the obvious thing….they changed their name. 

In May of 2007, Novagold partnered with a Teck Cominco on a potentially huge mine – Galore Creek — based on work done by GR Technical.  In August of 07, GR Technical changed its operating name to Moose Mountain and in November of 07, the new feasibility study done by the big-business partner found that GR grossly underestimated costs at Galore Creek – so much so that the project was cancelled.  Shares of Novagold tanked — but who cares?  By then, they were already Moose Mountain……needless to say Lechner’s estimates were also involved in this debacle.

The possible reason Seabridge has not found a partners is that the majors are becoming a lot more skeptical of feasibility studies by juniors and their one-man shop consultants, as many large projects have been misrepresented during the recent gold rush.

Abullah Arik- Is this kosher??

In their most recent offering, Seabridge stated that it was raising money in order to develop their project at Courageous Lake (easier than going back to the KSM story).  The study at Courageous Lake was done according to filings by “Michael Lechner and Abdullah Arik who are both independent of Seabridge.” 

http://edgar.brand.edgar-online.com/EFX_dll/EDGARpro.dll?FetchFilingOrig1?SessionID=jhWQjmmKL9Jga2Z&ID=3953926

But wait …we have never seen Arik work with Lechner before — only on this project.  So who does he really work for??  Concurrently in other SEC filings we see that Arik’s real employer is Mintec, where he still works.  Mintec’s CEO is none other than Fred Banfield — a director and a significant shareholder of Seabridge.  This type of shenanigan is normally reserved for OTC stocks … but if you don’t get caught, that makes it legal?  The National Instrument 43-101 is a strict guideline for how public companies can disclose scientific and technical information about mineral projects on bourses supervised by the Canadian Securities Administrators.  NI 43-101 clearly describes independent qualified persons and when they are required.  Here is the link to the regulations:
 
http://www.bcsc.bc.ca/uploadedFiles/NI43-101(1).pdf

The Promotion

Seabridge claims that it is has more gold ownership per share than any listed company.  This claim is at the basis of their whole promotion of Seabridge’s stock.  This claim is ILLEGAL.

US Securities law strictly specifies the rules under which companies can claim the asset value of in-the-ground resources Yet, on its website, and promotional TV advertisements produced for the company and broadcast on US investors, it has flaunted the law in the most misleading way imaginable, without any disclaimer whatsoever.

Seabridge’s “proven reserves”, the only term legal to claim value of an in-ground resource to US investors, is zero.  This is not a technicality!  The company has never done sufficient work either on the resource (asset) or feasibility (cost) side to claim extractable resources with certainty to meet the legal standard.   

The company has been so blatant in committing this deception on investors that they even took a commercial on CNBC (so typical of a stock promotion) making that misleading and fraudulent claim.

http://www.youtube.com/watch?v=s7UugsDIBNI

Due to the lack of independent analyst coverage, Seabridge has been largely dependent on promotional companies to get stock sold to investors.  One of their largest promoters has been Stansberry Investment Research, who has written a multitude of promotions on Seabridge for the past 4 years.
http://www.google.com/search?q=stansberry+research+seabridge&hl=en&sourceid=gd&rlz=1D1GGLD_enUS366US366

It should be noted that the SEC has sued Porter Stansberry, and its parent Agora for engaging and an “ongoing scheme to defraud public investors by disseminating false information in several internet newsletters…”
http://www.sec.gov/litigation/litreleases/lr18090.htm

Seabridge’s promotional claim extends to EVERY single piece of marketing material put forward by the company which reiterates that one line so prevalent that it is the company’s tag line “More Gold Ownership Per Share”.  This line is false and fraudulent by its very nature.  Ever since people were selling shares in the Brooklyn Bridge, securities laws have required companies to demonstrate that an asset is monetizable to claim an asset value.  Seabridge’s corporate presentation of itself has gone for years in laughing in the regulators faces as they claim ownership in something that is nothing more than an inferred resource.  CEO Rudi Fronk knows what the company is doing is wrong as he told Forbes Magazine in 2007 that the SEC has “forced” the company to state that they have no knows reserves. 
http://www.forbes.com/forbes/2007/0813/034.html

With that, we ask Wall St. and the SEC, ”How many companies do you know whose corporate slogan is an illegal claim to investors?”

As of now, no one has “bought” this story except shareholders as they still don’t have a JV, buyout, or any respectable Wall St. coverage.

Is the gig finally up?

Seabridge CEO Rudi Fronk and the company’s mouthpieces have for years talked about a partnership or buyout.  It goes back to as far as 2006 when gold was in the $600s per ounce and Agora touted Seabridge in June of 2006:

“It plans to partner with a major mining firm, who will take the financial risk. Seabridge Gold couldn’t identify who that partner is, but it said it has confidentiality agreements with four majors for this project (sic) The major mining firms wouldn’t be interested unless this is potentially a major gold mine.”

http://www.dailywealth.com/archive/2006/jun/seabridge-gold.asp

Fronk also told Bloomberg in 2008 that he seeks a sale or a partnership with another gold company.  http://www.bloomberg.com/apps/news?pid=20601082&sid=a0oBONaTFZnw&refer=canada

And in a last ditch effort before he had to go to the street for more money, Fronk begs in TheStreet.com in 2009  “Somebody Take Us Out”
http://www.thestreet.com/story/10666360/seabridge-gold-ceo-take-us-out.html

We are now in 2010 — and still no partner or buyout.  This leads us to believe that the majors think the same thing as Citron — that the resource at KSM is uneconomical regardless of what the claims company might tell shareholders.  Please, there is no reason for the company  or any of their mouth pieces to go into the various media outlets and defend the company….all they have to do is get a partner….we won’t be holding our breaths.

We’ll have more to say about this story at is unfolds.