Conversion Solutions Case Gathers Dust in Georgia Court
by Lee M. Webb
April 2, 2008
Conversion Solutions Holdings Corp.'s legal tussle with the U.S. Securities and Exchange Commission (SEC) is gathering dust in a Georgia court more than 17 months after the regulator filed a securities fraud lawsuit against the smelly promotion and its founder, Rufus Paul Harris.
Neither Conversion nor Mr. Harris is represented by a lawyer, but a crowded court calendar and some perhaps mildly entertaining, if legally shaky, pro se motions filed by the blame-shifting Georgia promoter have combined to delay resolution of the SEC fraud suit.
Apart from the matter of civil penalties that would probably go unpaid in any event, many disillusioned shareholders and other observers have little, if any, doubt about the ultimate outcome of the lawsuit.
While many of those familiar with the case expect that the SEC will prevail, a few of the remaining gullible Conversion zealots who congregate on an Internet message board controlled by Mr. Harris insist that their revered leader will emerge triumphant, making shareholders fabulously wealthy and restructuring the financial markets in the process.
Evidently some of Conversion's cultish followers have a rather remarkable ability to engage in prolonged suspension of disbelief, abandon common sense and ignore facts regarding the collapsed promotion and the SEC lawsuit.
Stockwatch examined Conversion's outrageous promotional high jinks in detail in earlier articles, but will provide a refresher before turning to an update and review of the outstanding motions in the SEC lawsuit.
Mr. Harris prepared some of the groundwork for Conversion's promotion early in 2005, shortly after being turfed from International Broadband Wireless Inc., another promotional debacle he briefly headed after providing the company with a purported $100-million "insurance guarantee bond" that turned out to be worthless. (All amounts are in U.S. dollars.)
In June of 2005, Mr. Harris announced a merger between Conversion Solutions Inc. and Waatle Holdings Corp., both of which he conveniently headed.
Neither company had any cash, but Waatle claimed to have a Uniform Commercial Code (UCC) security note that Conversion went on to value at $310-million.
As previously reported, Stockwatch traced the purported $310-million note back to David Alan Hawkins, who is currently awaiting sentencing after being convicted of conspiracy and wire fraud. The touted UCC note is, and always was, worthless.
The next notable development occurred in April of 2006 when Conversion announced the acquisition of a purported $500-million Republic of Venezuela bond under an agreement with Ismet Paez of the Caracas Group.
There is no evidence that the so-called Caracas Group even exists as a legal entity and, behind the muddled legalese, the documentation for the deal reads like an advance fee scheme.
A Stockwatch investigation tracked Mr. Paez to a Miami mail drop and telephone service provided by Alexander Major, who was discharged from bankruptcy just days before the touted $500-million deal was inked.
Mr. Paez, who evidently never received the $400,000 fee called for under the shady deal, refused to provide any substantive responses to Stockwatch's queries.
The SEC later determined that there was no evidence that Conversion owned any of the Republic of Venezuela bond issue, which is not surprising, given that there is no evidence that Mr. Paez or the mysterious Caracas Group ever held the $500-million worth of bonds in the first place. The bond deal was bogus.
Incredibly, both the worthless UCC note and the bogus bond deal later passed scrutiny in a slip-shod audit performed by Thomas Benson, who was moonlighting from his day job as chief internal auditor for Michigan's Department of Natural Resources.
The Public Company Accounting Oversight Board subsequently yanked Mr. Benson's registration after a scathing review of the grossly deficient audit, but that was long after the damage was done.
On July 12, 2006, with $810-million in bogus assets in place, Conversion announced a merger with the FrontHaul Group Inc., an insolvent OTC Bulletin Board outfit that had been changing hands for less than 10 cents per share. A week later, FrontHaul was trading above $1 per share.
Following the merger announcement, Mr. Harris ramped up the promotion. He also attracted a fairly substantial cult-like following, apparently bolstered by his goofy postings on Internet chat sites and frequent appearances on an Internet radio talk show where he nattered away telling whoppers into the wee hours of the morning.
On Aug. 18, 2006, Conversion announced the acquisition of a $579-million Lehman Brothers Holdings PLC note, courtesy of an agreement with the grandly named Humanitarian & Scientific World Foundation Ltd. (HSWF).
Six days later, Conversion reported an "additional deposit" from HSWF in the form of a Republic of Finland bond with a converted value of $938-million.
Stockwatch's research into HSWF revealed some rather interesting information about the operation's three players.
It turned out that HSWF's Craig M. Cason had filed for bankruptcy several times; Steven O. Canady was a repeat securities violator who was subsequently sanctioned for a Ponzi scheme after Stockwatch's first report; and shadowy kingpin Adnan Sakli had been involved in other dubious bond deals that ended badly.
The U.S. regulator later found no evidence that Conversion owned any of the Lehman note or Republic of Finland bond. Again, that is not surprising, given that there is no evidence that HSWF ever held the approximately $1.5-billion worth of securities in the first place. The ballyhooed HSWF deals were just more promotional malarkey.
The SEC was already nosing around Conversion by the time the company announced its second deal with HSWF, but Mr. Harris brazenly carried on with his wild promotion while dodging questions, stalling in providing requested documents and missing appointments with the regulator.
On Sept. 27, 2006, Conversion issued a news release announcing the addition of another $6.25-billion worth of Republic of Venezuela bonds to its asset portfolio. The following day, the stock briefly touched an all-time high of $4 per share as more than 14 million shares changed hands.
On Oct. 16, 2006, Conversion filed its overdue annual report, an atrociously deficient cut-and-paste concoction "created" by Mr. Harris.
On the same day, Conversion issued a fluffy news release proclaiming, among other things, that the company had an asset portfolio worth approximately $7.3-billion and a book value of $70.71 per share.
The market evidently disagreed with Conversion's wacky valuation. While still overvalued, the stock price dropped below $2 per share.
The U.S. regulator was not impressed with the company's promotional puffery, either.
On Oct. 24, 2006, the SEC issued a 10-day trading suspension against Conversion and filed a securities fraud lawsuit against the company and Mr. Harris in the U.S. District Court for the Northern District of Georgia.
In its Oct. 24, 2006, complaint, the SEC alleged that Conversion and Mr. Harris violated a number of securities laws by filing fraudulent regulatory reports and issuing false and misleading press releases claiming that the company controlled billions of dollars worth of bonds.
Mr. Harris did not bother hiring an attorney to represent the purported multibillion-dollar company and neither defendant filed a timely answer to the SEC complaint.
By the end of November of 2006, a preliminary injunction was in place and defaults were entered with respect to both Mr. Harris and Conversion.
Mr. Harris also faced some embarrassing corporate setbacks during November of 2006. Early in the month he was ousted as chief executive officer and chairman in favour of Michael Alexander, the former head of FrontHaul.
Mr. Alexander only lasted a couple of weeks before handing the mess back to Mr. Harris on Nov. 14.
Before the month was out, however, Mr. Harris was given the boot again. This time he was replaced by John Arlitt, a Vancouver promoter and Internet tout who had been pumping the bloated promotion on a chat site popular with Conversion shareholders.
Mr. Arlitt hung on for three months before bailing out at the end of February of 2007. In his farewell announcement, Mr. Arlitt turned the company back over to Mr. Harris, who had spent most of January in jail after being arrested for a probation violation.
Meanwhile, there was no activity in the SEC fraud suit until April 24, 2007, when Mr. Harris filed a very belated and confused answer to the complaint.
On May 11, 2007, the U.S. regulator moved to strike the late, sloppy answer filed by Mr. Harris.
On May 15, 2007, Mr. Harris filed a slightly less garbled answer and moved that the entry of default be set aside.
More than five months passed before Judge Clarence Cooper ruled on the outstanding motions.
On Oct. 30, 2007, Judge Cooper denied Mr. Harris's motion to set aside the entries of default and granted the SEC's motion to strike his answer to the complaint.
A week after the judge issued the order that effectively cleared the way for the SEC to seek a default judgment, Mr. Harris filed the first of a series of motions that remain outstanding.
On Nov. 7, 2007, Mr. Harris submitted a motion for reconsideration of the Oct. 30 order and a related motion for enlargement of time to file supplemental affidavits.
Mr. Harris claims that the Oct. 30 order should be vacated because he has been denied due process of law and hindered in answering the complaint by unethical practices, many of them attributable to the SEC.
After lamenting that he did not have the money "to employ an attorney versed in securities law," the Georgia promoter goes on to claim that he was illegally removed as an officer and director of Conversion and was unable to access the records necessary to formulate a proper defence and counterclaim to the SEC's complaint.
In the wake of his ousters during the Keystone corporate shuffles in November of 2006, Mr. Harris claims that the SEC "seized the records from those individuals who had control of said records" and, again, he had no access to the records needed to prepare an answer to the complaint.
Among other things, Mr. Harris says that he co-operated with the SEC in every way "and was given a false sense that the plaintiff would subpoena the documents necessary for the defendant to defend this action," but no documents were supplied and the regulator sneakily obtained an entry of default against him.
According to Mr. Harris, his failure to file a timely answer "is due to excusable neglect which was caused by the unethical actions of the plaintiff and its attorneys."
"The plaintiff does not have clean hands in dealing with this defendant, has committed a breach of ethics and has had a severe conflict of interest by withholding exculpatory evidence and records from the defendant, thus denying the defendant due process in this action," Mr. Harris claims.
No good cause
On Nov. 16, 2007, SEC attorney Alana R. Black filed a brief opposing Mr. Harris's motions.
Laying out the SEC's opposition in two pages that actually warrant the term "brief," Ms. Black claims that each of Mr. Harris's arguments "rests either on a misunderstanding of the relevant law, a misstatement of the relevant facts, or both."
Ms. Black points out that Mr. Harris's argument that he did not have the money to hire a lawyer is unpersuasive because there is no right to the services of an attorney in a civil suit.
Turning to the Georgia promoter's claim that he was illegally stripped of his status as Conversion's chief executive officer, Ms. Black says that the circumstances surrounding the several changes in officers are such a muddle that "it remains unclear who is currently an officer of Conversion" and the SEC has avoided taking any position on the matter.
The U.S. regulator argues that even if it is true that Mr. Harris was illegally ousted from Conversion, he has made no showing that it prevented him from filing a timely answer to the complaint.
Ms. Black says that Mr. Harris's allegation that the SEC "seized" corporate records from unidentified individuals and then kept him from accessing them "is completely baseless."
"All of the scant corporate records that plaintiff has been able to obtain were obtained pursuant to subpoena, with defendant Harris being provided notice of each subpoena," the SEC attorney claims.
According to Ms. Black, Mr. Harris's claims that he co-operated with the SEC, that the regulator promised to obtain discovery material on his behalf and then tricked him by obtaining an entry of default while settlement negotiations were in progress are all false.
The SEC says that Mr. Harris can show no good cause for either of his motions, so they should be denied.
Architect of fraud
On the same day it filed its opposition to Mr. Harris's motions, the SEC submitted a motion for default judgment against both defendants. The U.S. regulator also requested a hearing to present evidence on the appropriate amount of civil penalties.
Almost half of the SEC's 21-page motion is given over to a recitation of the allegations in the original complaint. Inasmuch as neither Conversion nor Mr. Harris filed a timely answer and the court clerk entered defaults against them, the allegations in the complaint, apart from those relating to damages, are taken as true.
Accordingly, the SEC says that the press releases and periodic regulatory filings related to the bonds and other promotional puffery all fraudulently overstated Conversion's assets. In fact, Conversion did not have billions of dollars worth of assets.
The defendants committed securities fraud, violated reporting provisions and, among other things, Mr. Harris falsely certified fraudulent financial statements.
"The repeated and outlandish nature of the misleading statements by Conversion and Harris shows recklessness, if not outright knowledge of the falsity of their claims," the regulator states.
The SEC wants Mr. Harris permanently banned from acting as an officer or director of any issuer.
"Still in his thirties and with no apparent means of support but for future fraudulent activity, Harris poses a significant danger of additional violations," the SEC warns.
In light of the enormous losses suffered by investors, the U.S. regulator is also asking for substantial civil penalties against Conversion and Mr. Harris.
"Harris was the chief architect of Conversion's fraud, and the person it acted through in making every misrepresentation charged in the complaint," the SEC states.
The regulator says that it will present testimony from victims who lost substantial amounts of money by purchasing Conversion shares at tremendously inflated prices after relying on the fraudulent claims made by the defendants.
Civil penalties could range up to $130,000 for Mr. Harris and $650,000 for Conversion or, if larger, the amount of ill-gotten gains.
Given that the SEC claims that it will present evidence of Mr. Harris's "plan to enrich himself and his family members through stock sales during his fraudulent manipulation" rather than claiming it will present evidence of his ill-gotten gains, there is considerable doubt about whether the chief architect of the fraud managed to make good on his plan.
Whether civil penalties of any amount could ever be collected from the penniless company or Mr. Harris remains something of an open question, though that possibility seems highly unlikely to many observers.
In a following article, Stockwatch will continue its review of the outstanding pleadings in the case, including Mr. Harris's motion to compel discovery and motion for sanctions against the SEC.
Meanwhile, Conversion registered less than $25 worth of trades on April Fool's Day, as 18,700 shares changed hands and the stock closed at 15/100ths of a penny.
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