Pink Sheets Bluster

By Christopher Byron
New York Post
October 11, 2004

Back in August we dropped by for an uninvited visit with an eight-week-old company called Concorde America, Inc. that claimed to be in the international labor staffing business.

Concorde had caught our eye as a fine example of the sort of penny stock rip-offs that are now spreading like a plague across Wall Street, and that the Securities and Exchange Commission ought to be stopping but isn't.

This week, we'll bring you yet another example of a ten-digit penny stock ploy — this one involving several Texas-based companies and a promoter named Patrick J. Arnett, who one way or another appears linked to them all.

The stocks themselves — representing equity stakes in seemingly worthless shell companies that were all set up as public vehicles this year — are trading at a combined market value of more than $1.3 billion on the so-called pink sheets market, where Concorde America is likewise still trading just as pretty as you please.

But before getting into any of that, first an update on the situation at Concorde America, which had soared on the wings of a misleading press release to a market value of roughly $1 billion even though the company itself consisted of nothing but an answering machine in the Boca Raton, Fla. home of a 75-year-old ex-stockbroker who'd been barred from the industry for the past 30 years.

Well, just so you know how the SEC is spending your tax dollars, the agency promptly, and dutifully, opened an "investigation" into trading in Concorde America's uber-hyped shares, while bizarrely permitting the shares themselves to continue to trade — an arrangement not terribly different from walking into a liquor store in the process of being robbed, and dealing with it by launching an investigation into whether a robbery was in fact taking place.

Eight weeks later and, predictably enough, nothing has happened — except of course that the price of Concorde's stock, the target of an apparent pump-and-dump effort by somebody, somewhere, has collapsed from $10 to $2.42, while the SEC has retreated behind that smothering wall of "no comment" that descends every time the agency begins one of its so-called investigations.

This isn't law enforcement, it's a ringing dinner bell for every white collar hustler on earth, for stock scams — like mushrooms from the Brandywine Valley — flourish best when they are left alone to grow, unsupervised and unattended, on piles of manure in the dark.

Yet nowhere is over sight more needed — and less actually being provided — than in the penny stock market, where promoters can legally sell stock to the public from companies so small, obscure and financially troubled that they never issue information about themselves, financial or otherwise, to the SEC, the public, or anyone else.

The hyping is done by promoters who are typically paid thousands of shares of stock to write up "research reports" on one company or another, praising its prospects to the moon.

Then the stock starts to climb, and the insiders start to sell out, eventually causing the price to collapse, which is why the scam is referred to as a "pump and dump."

The newest example of all this — or at least let us say the "pumping" phase of the operation — involves a group of Texas companies that revolve around a promoter named Patrick J. Arnett.

The current star performer in Arnett's pink sheets constellation goes by the name of CDC Systems, Inc. The company's only known address consists of a P.O. box in Bloomfield, New Mexico. New Mexico state corporate records show that CDC Systems began doing business in New Mexico in August of this year.

Shortly thereafter, press releases began pouring forth from a stock promotion Web site called Stockcomm.com. Most of the site's links are nonfunctioning, and none of those that do work identify any named individuals as being associated with Stockcomm.

But the press releases were all signed by an individual bearing the name Patrick Arnett of Stockcomm's "Corporate Communications Dept."

The very first of the releases, dated Sept. 24, stated that CDC Systems was in the business of developing compressors for the natural gas industry, which has reached the boiling point because of soaring energy prices worldwide, and said that the company's newest compressor — the so-called S1 — was now available to the public.

Yet a search of computer records at the D&B credit rating agency, a standard reference source on small companies, showed no entries for CDC Systems.

Nonetheless, subsequent releases portrayed CDC as gearing up to fill the large-scale orders for compressors that were beginning to pour in — and not just for the so-called S1 compressor but for a separate model, referred to the M1, as well. According to the releases, CDC's new clients even included a New York Stock Exchange company with "$8 billion" in revenues.

Yet CDC declined to name its Big Board sugar daddy — and one of the companies that it has cited by name in a release now says it hasn't agreed to buy any compressors at all, while two other companies named in the releases turn out to be affiliated entities that share a common top manager.

So who is the man named Patrick Arnettt, who has apparently been stirring up all the excitement? A search of old news clips offers a clue. It comes by way of a 12-year-old story from the Houston Business Journal identifying one "Pat Arnett" as a broker for private placements to financially distressed wildcatters in the Houston oil patch.

Other recent Stockcomm promotions have involved another Houston-based oil company in the pink sheets: Franklin Mining, Inc., listing Arnett as the contact man. Between October and November of last year, this stock soared on press release hype from 1/10,000th of a cent to 60 cents per share, giving the company a brief but spectacular market value of close to $200 million.

Thereafter the stock collapsed and is now selling for roughly half a cent per share.

There's more. In July, Stockcomm began issuing press releases under Arnett's name for a Dallas company calling itself Auction Mills, Inc. which quickly soared from two cents per share to $1.15, creating a market value of $373 million on the company's claim of business ties to eBay.com, the online auction powerhouse.

Though such a relationship may in fact exist, a search of the eBay Web site failed to turn up evidence of it.

Because these companies — and all the others like them — are non-reporting companies that trade in the pink sheets, there is no way to verify whether any of the claims being made on their behalf are accurate, grossly exaggerated, or outright lies.

But there they are, trading in the public market, making a complete joke of the very core principle that supposedly underpins the market itself — that investors can trust what they're told about a company because on Wall Street, as well as everywhere, you're supposed to tell the truth.

 

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