Thursday, October 7, 2010

Article in Vancouver Sun about questionable character associated with IOC

Recent lender of funds at extremely high rates to IOC

Swiss fiduciary again avoids regulatory scrutiny over dubious stock


Local broker faces significant fines for non-disclosure of commission-sharing arrangements

I have much regard for the Investment Industry Regulatory Organization of Canada, the disciplinary body for Canadian stockbrokers. But I sometimes feel they don't get to the heart of the matter.
The disciplinary action against now-defunct Blackmont Capital Inc. and one of its former brokers, Dean Duke, is a case in point.
At the heart of this case is Carlo Civelli, a Swiss fiduciary who over the last 25 years has been involved in dozens, if not hundreds, of controversial Vancouver junior issues, and more recently, stocks listed on the dreadful OTC Bulletin Board in the United States.
As dubious as his business is, it is so remunerative that many local brokers can't quite resist dealing with him. One of those brokers was Duke.
Duke met Civelli in 1999 when he was working at Yorkton Securities (which subsequently morphed into Blackmont). He offered his trade execution services to Civelli and his private portfolio management firm, Clarion Finanz AG.
Clarion acted as an "external asset manager" for seven banks that were located in Switzerland or Liechtenstein. They were Centrum Bank, Bank Sal Oppenheim Jr., Bank Sarasin, Maerki Bauman & Co, VP Bank, ABM Amro Bank and Hypo Alpe-Adria Bank.
These banks have been investors in extremely questionable companies listed on the old Vancouver Stock Exchange and its successor, the TSX Venture Exchange, and/or the OTC Bulletin Board in the United States.
While it all looks prosperous on the surface, the public has no way of knowing who these banks are trading for. The end clients could, for all we know, be insiders of the very companies whose shares are being traded. They could be dealing through these banks to hide manipulative trading, or to secretly dump stock.
But it's not just the public that doesn't know. Even more disconcerting, the Vancouver brokerage firms who trade for these banks often don't know who's behind the accounts.
In 2006 and 2007, for example, 11 Vancouver brokerage firms -- including Blackmont -- opened accounts for Hypo Bank, and traded millions of dollars of essentially worthless bulletin board stock through those accounts.
None of the brokerage firms -- despite the cardinal know-your-client rule -- knew who was behind these accounts. When the B.C. Securities Commission asked Hypo Bank, the bank refused to say (ostensibly due to Liechtenstein confidentiality laws). So the commission banned them from the B.C. securities market.
In this case, Duke and Blackmont traded stock for the seven Swiss and Liechtenstein banks on Civelli's instructions, without knowing who beneficially owned that stock.
But this was not the issue that IIROC investigators were pursuing. They were more interested in a commission kickback arrangement involving Duke, Blackmont and Civelli.
Under that arrangement, Blackmont kept 50 per cent of the commissions paid by Civelli's clients (whoever they were). Duke kept 20 per cent and the remaining 30 per cent was remitted to Civelli's private management company, Professional Trading Services SA.
This was no small matter. From January 2007 to October 2007, the banks paid Duke and Blackmont $2.8 million in gross commissions, presumably on behalf of their clients.
Of this amount, Blackmont kicked back $697,739 to Civelli's company. Another $166,060 was owed to Civelli's company, but for reasons that were not explained, Blackmont paid this money to Duke.
Such commission-sharing arrangements are not illegal, if they are disclosed to the client. In this case, Blackmont had no documentation to show that the banks' clients were aware of this arrangement or had approved it.
In November 2007, IIROC insisted that Civelli get the bank's clients to sign disclosure and consent forms, but he refused. So Blackmont was obliged to terminate the commission-sharing arrangement. With Civelli no longer able to get his 30-per-cent share, trading volume in the banks' accounts plunged by 50 to 80 per cent.
When the matter came to hearing in June, the lawyers for Blackmont and Duke, Nigel Campbell of Toronto and Ron Pelletier of Vancouver, argued that the documentary deficiencies were inadvertent. But the IIROC panel, headed by retired lawyer John Rogers, noted that, with such a lucrative commission-sharing arrangement, Civelli should have been most anxious to remedy those deficiencies, but had declined to do so.
This strongly suggests that Civelli's clients were either not aware of this arrangement, or didn't want their identities disclosed. Either possibility is alarming.
The IIROC case focused on these and other documentary deficiencies. It did not address the elephant in the room: what stock was being traded, and why was Civelli trading it through these offshore banks at Vancouver brokerage firms.
Warren Funt, IIROC's vice-president of Western Canada, declined to identify specific stocks that were traded (that information was not tendered at the hearing), but he allowed that the "majority was junior, more risky stocks" including some traded on the OTC Bulletin Board.
One thing we do know: Civelli traded a lot of stock through these accounts. If, for example, the $2.8 million in commissions represented two per cent of trading value, the total trading value would have been $140 million.
So while IIROC deserves credit for busting up this illicit arrangement, we will never know who traded these shares, and for what purpose.
Blackmont has since morphed into Macquarie Capital Markets. Duke moved from Macquarie to Canaccord Genius in January 2009, then left the industry altogether in January of this year.
The panel will determine an appropriate penalty for Blackmont and Duke at a yet-to-be-determined date. Both face significant fines.
Civelli, meanwhile, has been able to slip away with his reputation as the archetypal Swiss fiduciary -- faithfully executing orders for clients behind the shelter of offshore confidentiality laws -- firmly intact.

Read more:

InterOil, Tilson, Minkow and the SEC – What An Adventure !

A gurufocus article referring to the Tilson/Minkow connection

Tuesday, October 5, 2010

SEC Probe Into Minkow Continues

NEW YORK -(Dow Jones)- Former fraudster turned self-styled fraud investigator Barry Minkow said he and his firm, Fraud Discovery Institute, are the subject of a probe by the U.S. Securities and Exchange Commission.
The SEC in January sent subpoenas to Minkow, FDI and other parties thought to have ties to Minkow and his firm. Minkow said he is the target of the investigation, though the SEC doesn't make this clear in communications accompanying the subpoenas.
The SEC states the "investigation is a non-public, fact-finding inquiry," intended "to determine whether there have been any violations of the federal securities laws," according to copies of three of the subpoenas and related materials reviewed by Dow Jones Newswires.
An SEC spokesman declined to discuss the matter. In the subpoenas, the SEC says the investigation, titled "In the Matter of Fraud Discovery Institute," doesn't mean that it has concluded that the subpoena recipients "or anyone else" has broken the law, nor does it mean that the agency has a "negative opinion of any person, entity or security."
Minkow has been a vocal critic of several public companies, and has issued scathing reports on the FDI website that have prompted some target companies to both sue Minkow and press the SEC to investigate him. These companies claim Minkow spreads false information to harm the price of their shares, which enriches Minkow and his cohorts via short positions they place in hopes that the securities fall in value.
Minkow acknowledges that he takes short positions in some of the companies he criticizes, and said he shared with the SEC his trading account names and passwords so the agency has a complete record of all his transactions.
Minkow served seven years in prison for the fraud that was his ZZZZ Best Co. carpet-cleaning business, which collapsed about 23 years ago. He became a Christian minister in prison and then became an independent fraud investigator following his incarceration.
The subpoenas also ask, among other things, for all communications regarding six companies FDI has criticized: InterOil Corp. (IOC), Lennar Corp. (LEN, LENB) , Pre-Paid Legal Services Inc. (PPD), Medifast Inc. (MED), Herbalife Ltd. (HLF) and Usana Health Sciences Inc. (USNA).
Aside from those subpoenaed, the SEC wants information on all contacts the recipients had with more than two dozen other people, including two journalists with Dow Jones Newswires, Ben Dummett in Toronto and Michael Rapoport in New York, who have both covered InterOil. Neither of the two journalists has received any subpoenas or other requests from the SEC related to the Fraud Discovery investigation, nor has Dow Jones Newswires.
The SEC also wants to know, according to the subpoenas, about Minkow's involvement with Whitney Tilson, who runs a $135-millionNew York hedge fund. Tilson declined to reveal whether he had been subpoenaed, but said he has known Minkow for years, has paid him for his services and believes there is "no one more qualified" to uncover the kinds of frauds that help investors feel secure that their negative bets on companies are well founded.
Tilson said there is a fine line between the SEC investigating legitimate potential wrongdoing and the agency being used by companies. He said he is "very confident Barry Minkow will be exonerated."
Michael Tanczyn, Medifast general counsel, said Medifast did complain to the SEC about Minkow and FDI, but "it is our understanding that the SEC does not or will not tell us what they're doing." He said Medifast conducted its own investigation of Minkow's allegations against it and determined they were " false, misleading and without merit."
The other five companies either declined to comment or didn't respond to interview requests.
Minkow said he has complied with the subpoenas, including submitting a lengthy narrative explaining his actions in detail. He calls the investigation an attempt by the companies he has attacked to use regulators to muzzle him. The SEC will see he and his firm have broken no securities laws, Minkow said, and he hopes afterward the SEC will turn its attention to the companies pressing for this investigation.
In a post last Friday on his FDI website, Minkow acknowledged the investigation, and said it is coming to light only recently because the office of Rep. Anthony Weiner (D., N.Y.) leaked the information to the press. Weiner, whose office denies any involvement in alerting the media to the situation, recently criticized gold-coin company Goldline International, and Minkow issued a report defending Goldline.
Goldline issued two press releases taking issue with the congressman's findings, and said it wasn't given the opportunity to "correct the misstatements in his report." Goldline said it complies with all applicable laws, noted its " A+" rating with the Better Business Bureau and 50-year history, and said it has "the most comprehensive written disclosures in the precious metals industry."
Minkow, who takes credit for uncovering some $1.8 billion in frauds, calls Weiner's report a politically motivated shot, as Goldline is a sponsor of conservative radio and television host Glenn Beck, a fierce critic of Democrats. Beck has a show on the Fox News Channel, which like this newswire is owned by News Corp. (NWS, NWSA

One short who has lost his shirt on InterOil

Found this VIC recommendation to short IOC in 2006 at $22. Ouch.  Here was the thesis which is very similar to Tilson's:

I recommend a short position in InterOil Corporation (Ticker: IOC) and believe the stock could be worth $0-3/share over the next 12 months vs. its current $22 share price. This post is a follow-on to an original VIC posting I made on InterOil in August 2005.  The original posting was extremely detailed and I encourage readers to refer to the original posting as a starting point if they are unfamiliar with the InterOil story.  This post will update that original analysis for current events. 
IOC’s stock price has once again popped up on speculation about a natural gas find, taking IOC’s enterprise value back to $1.0 billion.  However, consider what has transpired since my last posting:
-    IOC burned $4/share in cash ($135mm) over the last 12 months (average ~$34mm/qtr)
-    Net debt has risen to $230mm at Q3 2006 from $95mm a year ago (Q3 2005)
-    The refinery results (negative EBITDA) have proven our thesis that the asset has little value and I believe it is likely that the company will need to write-down the value
-    The company has $31mm in cash left as of 9/30/06 versus its $30-35mm/qtr average cash burn rate, implying it will likely have to attempt an equity deal to remain solvent
-    IOC is committed to drilling 8 wells for the investors who funded $125mm drilling joint venture in Q1 2005.  IOC has only drilled 3 of these wells but has burned through around $90-100mm in capex in 2005-2006 YTD (this implies the average well is costing ~$30mm/well).  And they only have $30mm in cash remaining.  How are they going to fund the remaining obligation they have to the JV investors?  And furthermore, how are they going to raise capital when any new dollars coming in have to go to funding the remainder of IOC’s commitment to the joint venture investors?  Who is going to want to pay for someone else’s wells?  (IOC discusses this issue in their MD&A from Q3 2006, p. 21 of 24). 
-    IOC drilled another dry hole (Triceratops), worsening the company’s drilling success rate to 0 for 8 (before the Elk well they are currently testing)
-    IOC’s recent Elk well (their 9th attempt) is likely uneconomic – after taking 9 months to drill the well and spending $36mm year-to-date, IOC claims they have found natural gas (the well flowed natural gas over a very short test period that lasted a couple of days).  However, as we all know, the world is awash in stranded natural gas that has no market (and PNG already has over 10 trillion cubic feet of it sitting in the western part of the country that has been there for over 10 years because there is no market).  IOC is proposing building a $3 billion liquefied natural gas (LNG) facility to monetize the gas, which is absurdly premature given how little they know about the reservoir they might have encountered (see details below). 
-    The CFO resigned in August and an Audit Committee Director resigned in October
-    To justify IOC’s $1.0 billion enterprise value, they would now need to find at least 750 million barrels of oil equivalent (up from 500 million barrels of oil equivalent at the time of my last posting)
Summary of the original short thesis (from the August 2005 posting):  For all of the details, refer to my post from August 2005, but here’s the quick summary: 
Investors (based on management’s guidance) believed that IOC’s refinery would earn $60mm in EBITDA and was worth $15-$20/share, so you were getting a “free option” on exploration upside on IOC’s 8mm acreage position in the eastern region of Papua New Guinea.  Investors believed this acreage position had significant potential upside.
In contrast to management’s claims, our analysis concluded that the refinery had minimal earnings power and therefore little to no value (we estimated $0-$3/share at the time).  The bottom line is the refinery was a bad investment and the product pricing arrangement IOC had with the state implied the refinery would not earn anything near what management had promised investors. 
Backing out the $0-3/share of value for the refinery, the $25/share stock price at the time implied IOC’s E&P business was worth $22-25/share ($730-$820mm).  To justify that kind of valuation, we estimated that IOC would have to find around 500mm barrels of oil equivalent, which is highly unlikely given:  1) IOC’s abysmal drilling record (8 straight dry holes before their most recent Elk-1 well, which they are claiming is commercial);  and 2) the lack of any commercial discoveries in Eastern PNG (where IOC’s acreage is) despite 50+ years of drilling in the area by major oil companies all of whom have since abandoned the province (all of the discoveries made in PNG were in the western part of the country). 
Updates on the original short thesis
Update #1:  Refinery continues to lose money
The refinery has continued to lose money for IOC as we originally predicted.  YTD EBITDA from the refinery:
Q1:   $0.2mm
Q2:  -$8.3mm
Q3:  -$2.8mm (backs out $4.1mm in one-time foreign-exchange gains booked in SG&A, page 11 of 24 in the Q3 2006 MD&A)
Management’s promised revamp of the refinery hasn’t worked.  The revamp was completed at the beginning of Q3 2006 and the refinery still had negative -$3mm of EBITDA in the quarter.  Management is now saying that the reason they lost money is because the refinery was down for 25 days in the quarter (to finish the revamp).  However, this is a disingenuous explanation:  the refinery operated at 14,000 barrels/day in the quarter (vs. its capacity of 36,500 barrels/day).  However, management says total PNG demand is only 16,000-18,000 barrels/day (see Q3 2006 MD&A for detail), so unless the refinery can export product (which is uneconomic as we proved and management now admits in their MD&A) then the refinery will only operate 45-50% utilization going forward (in other words, it will produce no more than domestic demand).  This means that in any given quarter, the refinery will only need to run for 45 of the 90 days in the quarter to meet domestic demand. 
Furthermore, refinery inventories increased slightly to $103mm from $102mm despite a significant decline in crude oil prices in the quarter (crude fell 18% from the end of Q2 to the end of Q3).  Why would inventories be increasing if the refinery was underutilized in the quarter and prices fell?   (Note:  IOC marks-to-market their inventory using the lower of cost or market)
Update #2:  Cash position continues to deteriorate – IOC needs to raise equity
When I originally posted this idea, net debt for IOC was $95mm (Q3 2005).  This number has ballooned to $230mm as of Q3 2006, implying a $135mm cash burn over the last twelve months (average = ~$34mm/quarter):
                                          Q3 2005        Q4 2005        Q1 2006        Q2 2006        Q3 2006
IOC Net Debt                    $95mm          $113mm         $126mm         $176mm        $230mm
Quarterly Cash Burn             --                 $18mm           $13mm           $50mm          $54mm
IOC has fully-pledged all of its existing assets (working capital, refinery) and only has $12mm left on its unsecured facility (of which they have drawn down all $12mm in Q4 as per the MD&A).  It doesn’t appear to me that the company has any financing capacity remaining. 
Also as noted above, IOC has only drilled 3 of the 8 wells it is on the hook for to its joint venture investors and it has spent $90-100mm to drill those 3 wells ($54mm in 2005 on the Black Bass and Triceratops dry holes, and $36mm through 9/30/06 on Elk-1) despite management’s claim back in January that Elk would only cost $9mm (see attached link, page 7:  IOC discusses this 5 well liability in their Q3 2006 6-F (MD&A page 21 of 24). 
So any financing IOC raises from here (equity or debt) is going to have to go to funding the remaining 5 wells IOC owes its joint venture investors.  Who is going to want to finance this company so they can go and drill wells for the benefit of someone else? 
Update #3:  Does the Elk well really have any value?  I don’t think so
Management claims it has a major natural gas discovery at its recent Elk well.  They started drilling the Elk well in February (original targeted depth was 9,800’) but 9 months later they only made it to 6,500’ before the well started to collapse and they stopped drilling.  They recently tested the well over a two-day period and it flowed 22 million cubic feet per day (mmcf/d) of gas.  Remember this well cost them $36mm to drill ($3mm spend in 2005, $33mm spent YTD as of 9/30/06). 
Let’s take a step back:  stranded natural gas in the middle of nowhere with no access to a market has no value.  The world has tons of natural gas that has no market.  This well might have some value if it was drilled in Texas (where gas sells for $7-8), but in the middle of the Papua New Guinean jungle it has no value. 
But IOC is claiming they are going to build an LNG facility to monetize their gas, right?  And didn’t they sign Merrill Lynch as a partner?  A few thoughts:
-     IOC has refused to discuss the details of the terms of the Merrill Lynch relationship or disclose the contract in their filings.  Is Merrill actually funding the development expense, or is IOC simply allowing them to invest (or just market the gas) if the LNG project is developed (in other words, leaving IOC with all of the development risk and giving Merrill a free option)?  IOC won’t say.  Merrill Lynch is quoted (in a Bloomberg article dated 11/21/06) as saying they are in discussions with all of the PNG gas producers including Oil Search and not just IOC – so how committed are they to an IOC-operated project?  Or is this one way of getting involved in Oil Search’s LNG initiative (see below)? 
-     An LNG facility could NEVER be financed with out significant reserves behind the facility.  Oil Search has > 10 trillion cubic feet of known reserves in western PNG that have been stranded for 10+ years (see below for more discussion of Oil Search)
For lenders to ever contemplate committing $3 billion to a new LNG facility, they would need to see significant reliable reserves to ensure the facility had adequate gas supply.  So how reliable are IOC’s reserves?  This gets to the heart of the reason why all of the majors abandoned eastern PNG.  This is a somewhat technical discussion but I’ll keep it high level and if anyone wants to follow-up on specifics they can ask questions:
-     The reservoirs in eastern PNG (where IOC’s acreage is) are what are known as “fractured limestone” reservoirs.  What this means is that the reservoir rock has very low porosity (ability to hold oil/gas within the rock) and instead oil/gas exists in channels (fractures) that run through the rock.  Think of a really hard, impermeable rock (like a tombstone) with veins running throughout the rock – that’s what a fractured reservoir is like.  Oil/gas resides in the veins.
-     Contrast this with the sandstone reservoirs in western PNG where all of the country’s production currently comes from.  The reservoirs in western PNG are all highly porous sandstone reservoirs.  This means that the actual reservoir rock is saturated with oil/gas (the oil/gas resides throughout the rock vs. in fractures/veins).  The Hides field in western PNG (this is the big stranded gas field) for example has a porosity of 15%.  Compare this with the 1% estimate IOC management gave on the last conference call.  That’s the difference between a fractured limestone and a sandstone reservoir. 
-    What this all means:  when you drill a fractured reservoir, you often have very high initial flow rates (as the fractures drain and oil/flows very quickly to the well) but the wells then “can collapse to zero over dinner” (as one of my geologist friends likes to say).   This is the key reason I’ve been told that all the majors left eastern PNG and the key reason that Oil Search (see below) won’t drill there.  The “discovery” wells in eastern PNG ended up not being able to sustain production (for example:  IOC themselves cited on the last call a well drilled years back that was 16km to the north of them that flowed 1,600 barrels/day but then “depleted on test”).  This has been the story of all of the eastern PNG discoveries from the 1950’s onward – that’s why no one but InterOil drills there anymore, and that is why there is no commercial oil or gas production in eastern PNG.  The geology simply doesn’t work. 
Bottom line:  Given the fractured limestone reservoirs of eastern PNG, its hard to even say if IOC has a sustainable hydrocarbon find, not to mention the fact that it has little to no value because it’s natural gas.  In any case, it will take them multiple appraisal wells, long-run production tests, and significant capital to determine if they had a producible reservoir and enough gas to support an LNG project, and in a best case scenario the project wouldn’t come online for 6+ years.  So what is it worth today?  You do the math but the answer is very little. 
Update #4:  Valuation – how much oil & gas would IOC need to find to justify its $22/share value?
By my analysis, in order to justify its current valuation IOC would now need to find between 750 million and 1.5 billion barrels of oil equivalent vs. 500 million barrels at the time of my last report.  Here’s how I get there: 
The market is currently valuing IOC at a $1.0 billion enterprise value ($22.00/share x 34mm fully-diluted shares = $750mm market capitalization plus $230mm of net debt at Q3 2006). 
Oil Search (Ticker:  OSH AU, trades in Australia) is 20% owned by the government of PNG and produces 100% of PNG’s commercial production (current production is around 27,000 barrels/day).  Oil Search has an enterprise value of US$2.3 billion.  However, in contrast to IOC, Oil Search actually has real oil & gas reserves and is producing >$500mm in EBITDA.  At 12/31/05, Oil Search had 1.2 billion barrels of oil equivalent in total resource (made up of 250 million barrels of oil and 5 trillion cubic feet of gas).  So Oil Search trades at $2.00/barrel of oil equivalent (and remember its producing $500mm of EBITDA already).  In addition, Oil Search has three initiatives to monetize its stranded gas:
1)      Pipeline to Australia (partner:  ExxonMobil, Australian Gas and Light)
2)      LNG facility (partner:  British Gas)
3)      Petrochemical plants (partners:  Japanese companies Itochu and Mitsubishi Gas)
Let’s first take a step back and ask the simplest question:  How in the world can IOC be worth $1.0B when Oil Search is worth $2.3B (with 1.2B barrels of resource, $500mm in EBITDA, and three PNG gas monetization initiatives with highly reputable partners)?
We now value IOC’s refinery at $115mm (50% of invested capital), which could still be considered generous given that net working capital is only $65mm and the refinery is structurally cash flow negative (so perhaps its really a liability)?  When you add $50mm for IOC’s retail business, I come up with a total valuation of $165mm for IOC’s non-E&P assets. 
So the implied value of the E&P business is now $800mm ($1.0B EV less $165mm refinery/retail value).  Oil Search trades at $2.00/BOE and is producing $500mm in EBITDA with three (very real) gas monetization initiatives underway.  So being generous and giving IOC Oil Search’s multiple (a stretch for obvious reasons but let’s go with it for now), IOC would have to find at least 400mm BOE of net resource to justify its value.  But here’s where the story gets even more interesting.  For every barrel you find in PNG, the government immediately gets 22.5% of it in royalties.  In addition, IOC has also “pre-sold” 32% of the reserves they find to existing investors (through the drilling joint ventures) over the past few years to raise cash.  So out of the box, 47% of the reserves they find are someone else’s reserves.  So in order for IOC to have the minimum 400mm BOE it would need to justify its valuation, it would actually have to find 750mm BOE (400mm / (1-.47) = 750mm). 
But $2.00/BOE is probably way too generous given that Oil Search has already invested large amounts of capital in reserve development and is producing $500mm in EBITDA.  If we assume $1.00/BOE (50% of Oil Search’s multiple), then IOC would have to find 1.5 billion BOE to justify its value. 
As IOC continues to burn cash and destroy shareholder value, the hole gets deeper and deeper.  At some point, investors will realize “the emperor has no clothes.”  My expectation is that the date is sooner rather than later. 

Antar - Is InterOil another Crazy Eddie ?

iBusiness Reporting investigative blogger William Lobdell has published the first installment in a series of reports detailing undisclosed, shady related party transactions by InterOil (NYSE: IOC) insiders that apparently include such favorable terms to enrich their relatives at the expense of company shareholders.

In an accompanying press release, Fraud Discovery Institute (co-founded by convicted felon turned fraud buster Barry Minkow) compared InterOil's related party transactions to another well known fraud involving Tyco years ago. Fraud Discovery is asking the Securities and Exchange Commission to investigate the company for possible misconduct. The undisclosed InterOil related party transactions detailed by Lobdell remind me of how the Antar family treated Crazy Eddie as a personal piggy bank, back in my criminal CFO days.

Note: iBusiness Reporting is a division of Fraud Discovery Institute. Both Barry Minkow and William Lobdell have publicly disclosed holding short positions in InterOil securities. I do research for Fraud Discovery on InterOil, but I do not own any securities in InterOil, long or short.

In March 2010, William Lobdell went to a Texas courthouse to examine documents filed in a certain litigation by the original investors of InterOil against CEO Phil Mulacek alleging fraud by him dating as far back as 1997. In his first report, Lobdell found documents backing up allegations by investors of InterOil CEO Phil Mulacek engaging in "self-dealing and secret alliances" to enrich himself and other family members at the expense of InterOil's original investors. Details of Lobdell's follow up reports can be found here and here.

In his first part of a new three part series, William Lobdell describes the lurid details of five shady undisclosed related party transactions involving InterOil insiders and their family members from 2001 to 2004 (full details of Lobdell's report here).

Undisclosed Related Party Transactions

Fraud Discovery's press release summarizes certain related party transactions and reminds us of the infamous Tyco fraud:
...iBusiness Reporting unwinds four InterOil transactions involving the relatives of director Gaylen Byker which include a multi-million-dollar deal with an investment group headed by Byker’s brother and a two-month loan from Byker’s brother that was repaid with what penciled out to be 67.5% annual interest.
The report also includes a $12.3 million investment from a mysterious company based in the Barbados that used the same mailing address and attorney as InterOil Corp.


“The information shows a clear pattern of fraud by InterOil,” said Barry Minkow, co-founder of the Fraud Discovery Institute. “Once or twice might be generously characterized as an honest mistake. But iBusiness Reporting has collected many blatant examples of undisclosed nepotism by InterOil.

“In our opinion, there is no difference between Frank Walsh, who plead guilty to securities fraud, wrongly receiving a $20 million payment from Tyco while serving on the board as an independent director and Gaylen Byker’s self dealing at Interoil.”
Other Troubling Financial Reporting Issues at InterOil

In my June 2009 blog post entitled, "InterOil, John Thomas Financial, and Clarion Finanz: Anatomy of a Stock Market Manipulation Scheme," I detailed how InterOil filed a false report with the Securities and Exchange Commission claiming that the company paid no fees for a private placement $95 million convertible debt offering. However, documents submitted in another court case reveal that Clarion Finanz (a major shareholder of InterOil) had in fact received $5.7 million in fees, contrary to InterOil's SEC filings.
InterOil CEO Phil Mulacek

In another blog post, entitled, "Did InterOil Commit Securities Fraud?" I detailed how CEO Phil Mulacek made sworn statements in that court case which conflicted with InterOil's financial disclosures to investors. In his sworn court testimony, Mulacek claimed that a $50 million judgment against InterOil would bankrupt the company, while InterOil's financial disclosures to investors claimed that a judgment in excess of $125 million would have a material adverse impact on the company.
In both of the situations cited above, InterOil told one story to investors in its SEC filings and financial reports and its management told a conflicting story to the courts in sworn statements. If one story is true, the other story simply cannot be true. In each of the cases cited above, InterOil misrepresented or omitted material information in its financial reports to investors, as evidenced by its management's conflicting disclosures to the courts.

Closing Comments
Beware of fraud, whenever public company insiders deceptively treat their company's resources as a personal piggy bank at the expense of other shareholders and their company has a consistent pattern of contradictory financial disclosures. Phil Mulacek and his cronies at InterOil remind me more and more of the Antar family, including myself, in the infamous Crazy Eddie fraud.