Offshore Maelstrom

New York Post
By Christopher Byron
January 13, 2003

We’ve been pounding the table for quite a while now, arguing that the offshore hedge fund business is a $400 billion time bomb waiting to explode. This is a business in which nearly half a trillion dollars moves in and out of U.S. capital markets with almost no regulation or oversight, attracting exactly the sorts of people you wouldn't want your daughter to bring home for dinner.

Now, no less savvy a Wall Street operator than Ron "The Finagle King" Perelman has become entangled in the brambles of offshore finance. Evidence of his predicament surfaced just before Christmas in a Securities and Exchange Commission filing by a company in which Perelman and colleagues are calling the shots as controlling investors.

The company in question, which bears the name Nephros Inc., is a biotech startup in the field of kidney disease. The New York-based outfit is typical of many such biotech startups in that it's an itty-bitty operation with grand plans for the future. Best evidence: the company's microscopic revenues of less than $300,000 over its entire six years of life, as against cumulative losses of more than $13 million during the same period.

With numbers like those, it's usually just a matter of time before such a company turns hat in hand to Wall Street and the IPO market for the capital to stay in business. And since it's easier to sell stock in a company that already has some cash showing on the balance sheet, these IPOs are typically preceded by recapitalizations designed to prettify things up a bit with the financial equivalent of lipstick and rouge.

It was under those circumstances, back in the summer of 2002, that King Finagle and his finaglettes began tarting up Nephros Inc. for an IPO. And in a decision they've all now clearly come to regret, they did so by inviting in some money from the world of offshore finance - in this case, from an offshore hedge fund group with a name that regular readers of this column may well recognize.

Back in September, we told you the story of Michael Lauer and his Lancer group of hedge funds, with its "Lancer Offshore Fund" as the group's centerpiece operation. In that story, Lauer claimed his Lancer Offshore Fund alone had "a billion bucks" under management, though we questioned whether the stocks in all the group's combined portfolios were worth much of anything.

A search of SEC records turned up dozens of illiquid, thinly traded and easily manipulated penny stocks in which various Lancer group funds had lately held shares. The majority of them proved to be worthless "pink sheet" stocks - the sub-basement of the over-the-counter market - with offering prices of fractions of a penny per share.

This was the reality that lurked behind Lauer's operation when he showed up on King Finagle's doorstep, offering to make an investment in Nephros.

And there were other facts that could also have been uncovered easily enough, had the Perelman group been curious regarding the sources of Lauer's money.

For starters, SEC filings show that at least seven of Lauer's investments involved penny-stock companies backed by a legendary Wall Street swindler and ex-con named Abraham Salaman. A search of recent news stories would have revealed that in March of 2000, Salaman was arrested, along with several organized crime figures in New York, and charged with a $60 million penny stock swindle.

Nor was Salaman the only shady fellow with whom Lauer was involved. One of the Lancer Fund holdings is a pink-sheets company called Neurocorp Inc., in which Salaman was a founding investor back in 1994. One of the early investors in Neurocorp, along with Salaman, was a money man named Jay Botchman, who bailed out by selling his stake to Lauer. Botchman himself was, in turn, a recent business partner of a man named John Peter Galanis, who by then was doing time in federal prison for a series of savings-and-loan swindles in the 1980s. Botchman also appears in court testimony as a financial backer of a mob-infested carpet cleaning company named ZZZZ Best Inc.

Botchman's name has now surfaced, once again, in connection with Lauer and the Lancer funds - this time as a result of his controlling 40.3 percent stake in a sub-prime lender named Credit Store Inc. Lauer and the Lancer group are the company's second-largest shareholders, with a collective 23.7 percent stake.

A late 1999 SEC filing shows the Galanis family was involved as well, at least for a time: An individual named Derek Galanis was listed as company president until early 2000, when his name simply disappeared from SEC filings. Forbes magazine subsequently identified Derek as John Peter Galanis's son. In October 2001, Derek Galanis and his brother Jason were arrested by federal agents and charged with involvement in an alleged drug smuggling ring out of Kosovo. Both have pleaded not guilty.

Want more? Then let's turn to something called Automotive Performance Group Inc. SEC filings show that, as of late 1998, the Lancer group was the company's second-largest shareholder. The company's largest shareholder - with a controlling 77.5 percent of the company's stock - was one Andrew L. Evans. An earlier and close friend of Microsoft Corp. co-founder Bill Gates, who is the godfather to three Evans children, Evans also turns out to be an ex-con who spent six months in prison in the mid-1980s for swindling a Seattle bank out of $500,000 on a loan application.

And that's not all the Finagle King was unwittingly buying into. In February 2002, the Lancer Offshore Fund's two directors resigned for "business reasons," and were replaced by two new men. One replacement is a fellow named John W. Bendall Jr., who heads a penny-stock investment firm named Hermitage Capital Corp. Hermitage is a major investor in a variety of Lancer deals, including Automotive Performance, which hasn't traded in a year and is currently in the pink sheets at one cent per share. The other new director, Richard Geist, is described in various press releases as the president of the Institute of Psychology of Investing. But he is also a penny-stock promoter who publishes a newsletter entitled "Richard Geist's Strategic Investing."

It would be interesting to hear what the above-mentioned individuals have to say about all this. But Geist, Bendall and Lauer all declined requests for interviews on the matter. At week's end Lauer's office faxed me a copy of a two-page letter he had distributed to his investors following our September story, dismissing the column as mere "negative press."

The King of All Finagles would doubtless like to hear some plain speaking on the matter as well. That's because scarcely had Lauer met with various of the King's finaglettes last August and agreed to a $3 million stock-and-warrants investment in Nephros Inc., than he ponied up only the first $1.5 million and promptly welshed on the other half. A top finaglette in the Sun King's court says the reason Lauer offered was that Lancer was being hit with redemptions and that he didn't have the money.

Hmm. A "billion bucks" fund that can't cut a check for a mere $1.5 million? Sounds rather finaglish to me - which is apparently how it struck His Highness as well. In a Nephros Inc. registration statement filed with the SEC on Dec. 23 is a plain English warning of what awaits any mortal so bold as to finagle the King: "If we are not able to resolve this matter in a manner that is satisfactory to us, then we intend to pursue vigorously all available legal remedies against Lancer Offshore, Inc."

Fair warning for the folks at the Lancer group, to be sure. But what about for everyone else? How many more such problems must develop before regulators realize that offshore hedge funds simply can no longer go unregulated?

To be granted access to the capital markets of America, these funds need to answer some basic questions - like who's behind them, what they're investing in, who's auditing them, and where one can go to inspect their financial accounts. Only when the disinfecting sunlight of full disclosure is turned on this industry will its odor begin to go away.

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