While federal investigators are investigating DraftKings and FanDuel, and taking down insider traders, they might find it easier to investigate publicly traded companies that are sending them reports every quarter. If you think DraftKings is promoting a game of chance, at least there is some "chance" involved in winning unlike in some of the stocks in the Over The Counter market. It is no secret that investing in the OTC is risky, even the Securities and Exchange Commission has a list of the common scams that await investors who wade into these investments.
There are over 10,000 companies listed on the OTC and some of these are mere shells of corporations that mostly attract investors hoping that the idea pitched by the company will become a reality, though few ever do. The truth is, the money raised by selling stock to investors usually goes into the pockets of other shareholders who are getting paid for pitching the stock or who early investors selling their shares. The operations of the company receive little if any of funds from those transactions and from looking at a few of these companies, some may wonder why the SEC (FBI) is not asking a few questions.
Seeking Alpha contributor Bart van Velzen wrote an article back September about 10 stocks that seem to have a network of common owners, management, legal advisers and a link to ownership in Panama. Van Velzen referred to them as The Titanic 10 because of the fact that their stock prices have sunk to near zero over the past year. These companies:
Aristocrat Group (OTCQB:ASCC) - Markets and sells RWB Ultra Premium Handcrafted Vodka ... with its three employees. Sounds like a liquor store with a single product.
Changing Technologies (OTCQB: CHGT) - It was originally formed, in 2013, to develop apps primarily focused on improving personal and business productivity ... then in 2014 it went into 3D Printing ... which it does with its single employee. I guess when the "employee" is not doing 3D printing he/she is submitting disclosures to the SEC.
First Titan (OTCQB:FTTN) - Oil and gas exploration and drilling ... In June the company reported that "we did not maintain effective controls over financial statement disclosure. Specifically, controls were not designed and in place to ensure that all disclosures required were originally addressed in our financial statements. Accordingly, management has determined that this control deficiency constitutes a material weakness". Is this like self reporting a fraud?
Green Technology (OTCQB:GTSO) - The company has a noble purpose of, "... trying to keep the world a greener place to live" while maintaining "The corporate mission is to support the health and wellness sub-market of medical cannabis." Part of the popular "green" movement.
MyGo Games (OTCQB:MYGG) - Originally set up in 2012 to sell a women's line of jeans called "Obscene Brand" then got into computer gaming involving hunting wildlife. In September 2014, the chairman and CEO and the COO were removed for violations of the Company's Code of Business and Ethical Conduct.
Neutra Corp (OTCQB:NTRR) - Company INTENDS to "... participate in the new thriving cannabis market."
On The Move Systems (OTCPK:OMVS) - Think Uber for truck drivers.
Rainbow Coral (OTCQB:RBCC) - Hoping to build coral farms as the worlds ocean corals are dying .. but now it is looking at a new drug delivery system. Its subsidiary, Father Fish, seems to be the primary source of income for the company.
StemGen (OTCQB:SGNI) - Currently, the company is seeking funds to implement its business plan ... there is no information on what the business plan might be.
Taylor Consulting (OTCBQB:TAYO) - As of this year, the company discontinued its basketball consulting business and will now pursue real estate opportunities. Really.
From the small write-up above one would think the SEC should at least show up to ring the buzzer to see if anyone is really home.
According to van Velzen's analysis, based on filings that are submitted to the SEC, each of these ten stocks obtains loans from a known third party to pay the bills for things like advertising the stock , accounting (or perception of accounting), filing various forms with the SEC (not cheap, even for scammers) and various office expenses to keep up appearances. The loans are convertible to stock, steeply discounted to the current stock price, at a fixed conversion price per share. Then the companies, all of them, do a reverse stock split, the third party coverts to equity, sells it shares and new investors are sold these shares while many of the existing investors see the value of their stock go to zero. While these stocks are all selling for pennies (after the reverses they may get to a few dollars), van Velzen calculated that some of these third party debt holders make over $2 million in just one month.
Since these are publicly traded companies, there should be a board of directors overlooking transactions like these ... an you would be correct. However, these ten companies share more than just a penchant for reverse splits to pay off debt holders, they also have a bullpen of the same executives running them. Van Velzen listed 14 individuals that move between the companies in various executive roles ... he even tracked their interactions as friends on Facebook!
When one looks at 8-Ks for the companies, an SEC filing used by public companies to announce significant changes in the operations, there are recent announcements that accounting firms are dropping representation of Aristrocrat, Rainbow Coral, Changing Technologies, One The Move and Taylor Consulting. What is more interesting is that other accounting firms are actually picking them up!
Each of the 10 companies also aligns itself with a private company, entity, based out of Panama, where information on directors and owners can be kept confidential ... and they are pretty confidential on these ten. Each of the ten listed on the OTC is linked to a Panama company that owns a controlling shares.
To be sure, the plate at the SEC is full but while they use resources to chase higher profile cases like insider trading and on-line fantasy sports, small investors are getting sucked into investments that are disguised as legitimate by simply filing forms that the SEC requires. Does the SEC even read these? Maybe they should read that Neutra Corp. filed an 8-K in September announcing that it was doing a 50:1 reverse stock split and authorizing the distribution of preferred shares. The lawyer whose name appears throughout filings for all these companies, including Neutra, is Kathleen Delaney who serves as general counsel for most of the companies. Maybe the SEC should give her call to see how things are going.
Everyone knows, or should know, that these are high risk stocks. However, theses companies should also feel like they are being watched by someone ... anyone. Is anyone watching? At least van Velzen is trying!
