OSC Targets Toronto Transfer Agent's Pinky Players

by Lee M. Webb
Canada StockWatch
June 11, 2007

The Ontario Securities Commission (OSC) has extended its temporary cease trade orders against Toronto-based transfer agent Select American Transfer Co., six associated individuals and 10 companies allegedly linked to corporate identity theft traded on the largely unregulated U.S. pink sheets.

The temporary orders issued against the respondents on May 18 and May 22 have been extended until the OSC reconvenes its hearing into the corporate identity theft allegations on June 25.

In addition to the transfer agent Select American, the companies named in the OSC proceeding include The Bighub.Com Inc., Advanced Growing Systems Inc., LeaseSmart Inc., Cambridge Resources Corp., NutriOne Corp., International Energy Ltd., Universal Seismic Associates Inc., Pocketop Corp., Asia Telecom Ltd. and Pharm Control Ltd.

Among the individual respondents are four alleged principals or former principals of Select American including Amy Giles, Nathan Rogers, David Watson and Jason Wong.

The Ontario regulator also identifies Kervin Findlay and John Sparrow as participants in the allegedly fraudulent scheme.

According to the OSC allegations, the corporate identities of the pink sheet companies were hijacked with the help of Select American, its principals, former principals and others including Mr. Findlay and Mr. Sparrow.

The regulator claims that, as part of the scheme, Select American, "acting as the transfer agent to these companies, may have issued false certificates for trading in securities of these issuers."

The OSC further alleges that it appears that Select American and the individual respondents may have breached Ontario securities law and engaged in "acts, practices or courses of conduct" that "resulted in or contributed to a misleading appearance of trading activity in, or an artificial price for, the securities."

After issuing a notice of hearing on May 22 in connection with its two temporary cease trade orders, the OSC convened a hearing on June 1.

According to the OSC, nobody appeared for BigHub, Advanced Growing Systems, LeaseSmart, Cambridge Resources, NutriOne, International Energy, Universal Seismic, Pocketop or Asia Telecom.

Submissions of some sort were reportedly made on behalf of Mr. Wong, NutriOne and Select American and a lawyer did appear for Pharm Control. All of those respondents consented to an extension of the temporary orders until June 25.

As noted in the first article in this series, because of Canada's patchwork of provincial securities regulators and because those regulators do not have any jurisdiction over the U.S. pink sheets trading venue, the OSC's temporary orders only have effect in Ontario.

For the most part, trading in the respondent companies continues unabated on the mighty pinks.

Before returning to a review of the pink sheet companies identified in the OSC notice of hearing, Stockwatch will provide some background regarding Canadian regulatory actions involving companies that trade in the U.S.

For the most part, those actions have little effect beyond the provincial boundaries of the regulatory agency that institutes them.

Not in my backyard

There is nothing new about Canadian regulators tending to their own backyards and issuing orders that effectively create "stuckholders" within provincial jurisdictions while trading, often including transactions by principals and promoters of the targeted issuers, continues on the scandal-ridden pink sheets and equally lively OTC Bulletin Board.

For example, Stockwatch readers may recall the case of Medical Services International Inc., a Canadian-based pink sheet promotion headed by Alberta resident Robert Talbot.

Medical Services, which has been touting rapid test kits for HIV and a number of other diseases for years, was listed as a reporting issuer in Ontario. Indeed, the company actually used the fact that it was filing financial statements with the OSC as part of its promotional pitch.

Alas, at least with respect to any promotional mileage, Medical Services became delinquent with its dubious financial reporting and the OSC issued a cease trade order against the company on Nov. 25, 2003.

The 2003 OSC order against Medical Services is still in effect, though it certainly has not hindered trading by Mr. Talbot or anyone else outside of Ontario.

Medical Services continues to change hands on the mighty pinks, though it has been deep into the subpenny range for several years.

With 9.8 million shares changing hands, the stock closed at one-100th of a U.S. cent on June 6.

Of course Ontario is not the only provincial jurisdiction that issues cease trade orders that have little, if any, noticeable impact on OTC-BB and pink sheet trading.

Beautiful British Columbia

While British Columbia's provincial motto is "splendor without diminishment," the province's vehicle licence plates are emblazoned with "Beautiful British Columbia."

Over the years, many stock promoters, perhaps drawn at least as much by the perceived beauty of the provincial regulatory regime as any undiminished splendor or natural beauty, have made B.C., particularly Vancouver, their home.

The British Columbia Securities Commission (BCSC), after chest-thumping about its role in cleaning up the local market formerly sullied by promotions on the former Vancouver Stock Exchange (VSE) and its successors, the Canadian Venture Exchange and then the TSX Venture Exchange, has made tackling smelly OTC-BB and pink sheet promotions one of its key priorities.

That, at least, has been the BCSC's claim dating back a number of years in annual reports and service plans in which the regulator identifies abusive junior market practices as the first of three key risks affecting the market.

By the B.C. regulator's count, more than 400 OTC-BB listings representing approximately 10 per cent of the companies quoted on that trading venue have connections to B.C.

"Securities regulators and exchanges have made great progress in cleaning up the Canadian venture capital markets," the B.C. regulator boasted in a service plan published in 2005. "Yet, a small number of individuals in British Columbia have continued carrying out abusive stock promotions through markets outside Canada.

"They move from market to market to avoid regulatory scrutiny or because they have been banned from particular markets.

"Any misconduct originating from British Columbia threatens our junior markets and the reputation of British Columbia as a good place to invest and raise capital. So we must pursue misconduct based here regardless of what market it occurs on or where the victims live.

"The US Over-The-Counter Bulletin Board (OTCBB) has become the market of choice for much of this abusive activity.

"Therefore, we need to strengthen detection of OTCBB activity connected to British Columbia and look for opportunities to break the chain of abusive promotion of junior companies."

Much the same rhetoric appeared in service plans published in 2006 and 2007.

Interestingly, the website for the Canadian Securities Administrators, which hosts a database of cease trade orders issued by nine Canadian regulators, identifies B.C. as the only jurisdiction where, in some cases, residents can sell cease-traded shares into foreign markets.

Meanwhile, the Vancouver Sun's award-winning financial journalist David Baines has been vigorously prodding the B.C. regulator to get on with the job of rooting out Vancouver-spawned OTC-BB and pink sheet promotions that continue to bring disrepute to the province's capital markets.

When the BCSC issued its annual report for the year ending March 31, 2006, it reported that it expected to see tangible results from its efforts to curb abusive stock promotions within the following year.

To this point, the BCSC's expected "tangible results" might charitably be characterized as modest, though the regulator has been acknowledged for providing assistance to the U.S. Securities and Exchange Commission (SEC) in enforcement actions such as "Operation Spamalot."

In that action, the SEC, which probably ranks as the securities watchdog most respected by Canadians, suspended trading in 38 pink sheet companies, at least 12 of which had ties to Vancouver.

More recently, the BCSC has launched a copycat initiative called SpamWatch.

On May 18, the B.C. regulator notched its first modest SpamWatch coup by halting trading in Compliance Systems Corp., a New York spam stock with B.C. investors that burst onto the OTC-BB on May 7.

By the time the BCSC halted trading in Compliance Systems by British Columbians just 11 days after its debut on the OTC-BB, the stock had plummeted from $1.55 per share to 17 cents per share. (All amounts are in U.S. dollars.)

The stock recorded its highest volume the day before the BCSC stepped in, with more than 1.1 million shares changing hands on May 17.

"The Executive Director considers that circumstances exist that could result in other than an orderly trading of Compliance Systems Corporation's securities," the BCSC order noted after tagging the stock as the subject of a promotional e-mail campaign in B.C.

When contacted by Stockwatch, the BCSC's director of corporate finance, Martin Eady, declined to identify the Vancouver brokerage that had been on the sell side for trades originating in B.C. Mr. Eady also remarked that no particular B.C. investors had caught the regulator's attention.

It is not clear how the BCSC halt, which only lasted for three trading sessions and did not stop OTC-BB trading in Compliance Systems by anyone with an account outside of B.C., might have had some impact on circumstances "that could result in other than an orderly trading" of the shares.

In any event, in the wake of the BCSC halt, Compliance Systems's share price has bounced around between 2.5 cents and 12 cents and the daily trading volume has swung wildly between a meagre 1,140 shares and a more substantial 807,377 shares.

With only 11,300 shares changing hands in three trades, Compliance Systems closed at seven cents on June 6.

Mother of all diluters

CMKM Diamonds Inc., Saskatchewan native Urban Casavant's now revoked pink sheet dog of dogs, offers another fine example of a provincial regulator's limited reach.

Mr. Casavant, whose experience includes jobs as a Prince George prison guard and operator of a small Saskatchewan U-Haul outlet, cut his promotional teeth in the 1990s with junior mining companies listed on the former Alberta Stock Exchange (ASE) and VSE.

Some of Mr. Casavant's early promotional exploits did not pass unnoticed by Canadian regulators, though they were remarkably quiet with respect to any public claims about those promotions.

In 1996, for example, he was either pushed or jumped from Petro Plus Inc. after an 11-month stint as president of the junior mining company.

During his tenure, Petro Plus issued a number of fluffy news releases including chatter about "visible gold" in drill samples from one of the company's properties.

At the time of Mr. Casavant's surprising and abrupt departure on Oct. 25, 1996, Petro Plus was halted by the ASE, though the regulator did not make any specific public claims about the company's touting president.

Trading did not resume until almost a month later, after Petro Plus hammered out a deal that included severing all ties to Mr. Casavant and certain members of his family.

The Petro Plus affair marked the end of Mr. Casavant's involvement as an officer or director of a public company for several years, but a number of subsequent Saskatchewan lawsuits against him, along with members of his family and several business associates, indicate that he continued to hone his promotional skills with other junior companies.

With the lawsuits piling up, Mr. Casavant assembled a package of Saskatchewan moose pasture and headed to Las Vegas, Nev., where he folded the mineral rights deals into a public shell that he took over in November of 2002.

In the early days, CMKM was little more than a garden-variety mining promotion churning out some rather laughable news releases and hiring tout sheets to spread the word of its purportedly immense Saskatchewan diamond mining potential.

As the promotion ramped up, however, Mr. Casavant took pink sheet paper hanging to an entirely new level, peeling off hundreds of billions of shares that were issued to himself, family members, friends and business associates while attracting a large, gullible, cult-like following to sponge up the massive dilution.

By early 2004, CMKM was regularly notching daily trading volumes of billions of subpenny shares and frequently exceeding the daily share volumes of all the major exchanges in the world combined.

On Oct. 26, 2004, the Saskatchewan Financial Services Commission (SFSC), perhaps alerted in part by the fact that the SEC was sniffing around some of CMKM's shady deals, issued a cease trade order against the company, Mr. Casavant and two associated individuals.

Many of CMKM's cultish followers brushed the Saskatchewan regulatory action off as insignificant, if not entirely irrelevant.

The respondents, including Mr. Casavant who was then living in a $3.5-million house in Las Vegas, did not even bother to request a hearing regarding the cease trade order, which is still outstanding.

Apart from trapping many Saskatchewan investors and possibly effectively removing many billions of shares from circulation in the process, arguably a boon to the paper-hanging promoters including Mr. Casavant, the SFSC cease trade order had little, if any, effect on CMKM's pink sheet trading.

In fact, naive investors continued to sop up billions of CMKM shares on a daily basis.

On Dec. 9, 2004, just over six weeks after the SFSC issued its cease trade order, CMKM recorded its highest trading volume ever as a staggering 36.9 billion shares changed hands.

In spite of the fact that Stockwatch had been reporting since at least Oct. 1, 2004, that CMKM had issued almost 780 billion shares, the company's starry-eyed Internet followers, many of whom believed that Mr. Casavant had bought up all the outstanding shares, clung to the fantasy that only naked short selling could account for the whopping trading volumes.

On Dec. 18, 2004, CMKM announced that it had "repurchased" 75 billion shares that had been issued to an associated company six months earlier.

On March 3, 2005, the SEC finally stepped in and suspended trading in CMKM.

The following day, CMKM belatedly got around to disclosing the massive dilution that Stockwatch had been reporting for months, acknowledging that the company had more than 703.5 billion shares issued and outstanding.

The SEC followed up with an administrative proceeding against CMKM that resulted in a hearing where Mr. Casavant asserted his Fifth Amendment privilege and refused to answer any questions.

After Judge Brenda Murray issued a ruling against CMKM on July 12, 2005, the company managed to drag things out until Oct. 28, 2005, when the SEC entered a final order revoking the pink sheet woofer's stock registration.

That finally marked the end of CMKM's trading, though not the end of the story, which is still unfolding.

Earlier this year, Mr. Casavant handed control of the company off to a previous cultish follower and former Las Vegas houseguest, Kevin West.

Apparently Mr. West, who previously served up estimates of CMKM's value ranging from $64-billion to $1-trillion and proclaimed that Mr. Casavant was a godly man doing God's work in redistributing the wealth of the world, has experienced at least a partial epiphany.

Mr. West is now directing a CMKM lawsuit against Mr. Casavant and other key players for allegedly looting at least $200-million from the company coffers.

Mr. Casavant has scurried back to Saskatchewan where he is reportedly busy working on another promotion and dodging service of the Nevada lawsuit.

Given that Mr. West, after getting possession of some boxes of company documents, discovered an unanswered Wells Notice from the SEC, frequently the harbinger of an imminent civil action by the regulator, Mr. Casavant may soon be dodging another process server.

In any event, returning to the OSC's temporary orders and notice of hearing against Select American and its coterie of pink sheet companies and associated players, it does not seem likely that the Ontario regulator's actions will have much effect on those companies' mighty pink sheet trading.

Moreover, given the different jurisdictions and the apparent complexity of some of the issues involving the respondents, it is far from assured that the OSC investigation will shed much public light on the whole mess.

At some point, however, the SEC might step in with its own regulatory action.

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