A Day of Reckoning for Blank-Check IPOs June 24, 2005 *** Big Ideas, Strong Debates and Excellent Shrimp Salad Irwin Greenstein reports from Baltimore, where locals like to say, "You should've been here when..." *** The monthly editorial meeting of Agora Financial on Thursday was definitely the most exciting that I can recall. The ideas were big. The debates were strong. The shrimp salad was excellent. As usual, we convened in the lavish conference room of our 19th-century mansion in the Mt. Vernon district. The conference room is on the second floor, and climbing the sweeping staircase from the regal first-floor parlor is an absolute joy. It only gets better once seated among so many brilliant people. Your Penny Sleuth sat right next to our editorial director, Addison Wiggin. Along with Agora founder Bill Bonner, Addison co-authored The New York Times best seller Financial Reckoning Day: Surviving the Soft Depression of the 21st Century. He was furiously making final edits on one of his two upcoming books, this one titled The Demise of the Dollar…And Why It's Great for Your Investments. It will be a must-read when it hits the streets in July. In it, Addison discusses the frightening slide of the dollar…and how you can profit from it. Expect a top-down view that will rock your world and open your eyes to ingenious investments. By the way, check out Financial Reckoning Day: Surviving the Soft Depression of the 21st Century at www.dailyreckoning.com. Addison was one of the founders of the free Daily Reckoning newsletter, and most recently, he worked on it with Tom Dyson. Tom then moved on to The Rude Awakening -- the morning edition of The Daily Reckoning. Now, Tom is about to launch a breakthrough newsletter that will change the face of financial reportage. Called The Bull Hunter, it's a follow-on to Dan Denning's new book by the same name. While Dan traveled the world to track the flow of capital and investment trends, Tom is literally hitting the tracks. Tom is going to be hopping freight trains -- traveling in the great hobo tradition to find the best regions for investments. He'll talk to everyone from bartenders to bankers to get a While many of us found the idea of hopping freights downright frightening, Jonathan Kolber of The Emerging Capital Report easily topped it. He scared the wits out of us. He discussed a virus will make SARS look like the common cold. In his upcoming issue, he divulges a tiny company that may be humanity's last hope in halting a pandemic that has a 72% mortality rate. For more on Jonathan's groundbreaking discoveries, click here: Kevin Kerr of Resource Trader Alert was high on sugar. He referred to a study that correlated fear with increased sugar consumption. In an age of terror, unemployment and debt, Kevin believes that sugar is a safe bet. Sugar is now trading at about 10 cents per pound -- a psychological barrier that he compared with $60 oil. Once oil breaks through $60, it's much easier for it to reach $70. Likewise for sugar at 10 cents. Kevin thinks it will hit 15 cents -- and that will be the next resistance level. Frankly, my money is on Kevin. Of the 16 trades he's made this year, all have been profitable. To make money trading commodity options, click here: http://www.agora-inc.com/reports/RTA/WRTAF107. Byron King, who writes about economics, history and geology for Whiskey & Gunpowder, told us about a small Canadian company whose revenues have been growing 40% per annum. The company holds a vault full of patents on analyzing core samples for oil drillers. In addition to making oil exploration more efficient and profitable, the company has expanded into the field of reservoir management -- shorthand for the outsourcing of oil-field logistics. Byron said that the company is on a stock buyback spree -- a reliable bullish indicator. Sign up for the free Whiskey & Gunpowder at www.whiskeyandgunpowder.com. Justice Litle of Outstanding Investments shed some light on why the Chinese are suddenly interested in the likes of Unocal and Maytag. As Justice explained it, you have to think of the Chinese government as a huge investment bank that holds some $600 billion in reserves -- half of it in U.S. bonds. The Chinese now find themselves in a bit of a quandary. If they liquidate those bonds, they'll flood the market and devalue their holdings. Instead, the Chinese have figured out that it makes more sense to use that money to buy American businesses. The irony is that we have made the Chinese rich through buying the stupid junk they make, and they in turn use that money to take over American industry. Find out more here: http://www.agora-inc.com/reports/OST/bookF474/. Carl (The GRIPPER) Waynberg brought us up to date on the annual biotech conference that takes place in the City of Brotherly Love. He found a newly public microcap that has discovered a way to administer drugs to targeted areas without many of those nasty side effects. Think of chemotherapy without the nausea and hair loss, for instance. Carl said the company boasts an impressive roster of insiders. When he talked about it with two top-tier investment bankers, they wondered how it could be off their radar screens. Well, that's what Carl does best. Check out his Web site at www.the-gripper.com. *** Kevin Kerr and I finally got together for that dinner he's owed me for the past three months. We were joined by Justice Litle. We dined at The Brass Elephant, a block away from Penny Sleuth Central. Over great food and a few bottles of Napa sauvignon blanc, we talked about the real-estate bubble, robots and America's emerging underground economy.What may finally pop that ubiquitous real estate bubble is robots. For example, as General Motors sinks under the weight of union pensions and enormous health benefits, it will push With those jobs made obsolete by robots, workers in the regions will lose their houses and, in turn, be forced into an underground economy of drugs, cottage industries and day labor. Welcome to America's emerging Third World. So as our economic fears are focused on the likes of China, India and other white-collar threats that the media enjoys covering for the Volvo set, we should, in fact, be terrified of the robots that will displace legions of blue-collar Americans. It was a great evening at The Brass Elephant, and in my opinion, Kevin and Justice are both brilliant. Find out more about Kevin and his incredible track record by clicking here: http://www.agora-inc.com/reports/RTA/WRTAF107. And here is where you can find out about Justice's stock-picking methodology: http://www.agora-inc.com/reports/OST/bookF474/. *** Rather than read about all these wonderful writers, you can meet them all firsthand in Vancouver at the Agora Wealth Symposium. From Aug. 10-13, the finest global investment analysts in the world will show you what to look for, what to invest in and what countries provide the biggest opportunities for predictable gains. And if you sign up before July 15, you can save $50 off the price of admission. Sign up now at http://www.awsymposium.com/psleuth/. *** By the way, there's one more guy you should know about: Gino Carlucci. But that isn't his real name. Read on... Our "Maniac" Trader's LOWEST gain was 23%. He's embarrassed about that... But, he's taken recent gains of 270%, 178%, and 120%… His last 16 trades were winners - averaging 90.7% gains per trade. Click here to learn how to profit from this "Maniac Trader"... http://www.agora-inc.com/reports/RTA/WRTAF603 ______________________________________________________ A Day of Reckoning for Blank-Check IPOs If something sounds too good to be true, it usually is. And that's why when the SEC meets on June 29, it may hammer the so-called blank-check IPOs that promise instant riches to small-cap and microcap investors -- potentially obliterating the valuations of companies that used reverse mergers to go public. A new SEC ruling could force blank-check IPO companies to be more accountable by closing disclosure loopholes. Blank-check IPOs -- which also go by the aliases of shell companies, reverse mergers or reverse takeovers (RTO) -- have become fertile ground for stock scams, attracting the scrutiny of the SEC. Look no further than Diversified Financial Resources Corp. (DFRC), which is listed on the Over-the-Counter Bulletin Board exchange. The company operates as a real estate holding operation. But it was originally incorporated under the name Vaxcel, Inc. in 1993, then changed its name to eLocity Networks, Inc. in 2000. Sound complicated? It gets more hairy. There was another shell called Cybergate, Inc. that enabled Mortgage Financial Link.com, Inc. go public. But Mortgage Financial Link became a subsidiary of DFRC. And remember eLocity Networks? It was cited by the SEC, along with Cybergate, on June 8, 2004, for not having filed periodic reports since 2001. There's more... Go to the one-page Web site of DFRC, and you'll read that the company "hopes to combine companies in different industrial business sectors and provide a business platform with a wide diversity of profit sources creating a good spread of investor risk." The company shows seven subsidiaries in completely different business segments. The four-page annual report for DFRC of April 20, 2005 showed revenues of $61,082 for the year ended Dec. 31, 2004, compared to revenues of $64,967 for fiscal 2003. Under the heading "Ability to Continue as a Going Concern," the company states "DFRC's ability to continue as a going concern is in doubt." Maybe that's because in 2004, the SEC alleged in a lawsuit that convicted felon Gino Carlucci hyped DFRC through a boiler-room operation in Laos to investors in Britain, Australia and New Zealand. And by the way... Gino Carlucci's real name is Gene D. Odice. He assumed the alias in the mid-1990s after multiple restraining orders for felony stalking. And DFRC? Its stock was last trading at 0.0001 cents per share. It's because of blank-check IPO scams like DFRC that your judicious Penny Sleuth warned small-cap investors against blank-check IPOs in the April 22 issue (http://www.pennysleuth.com/alertholder/04.22.05). Since then, that story has been picked up by BusinessWeek, National Public Radio and other major media outlets. Following these national stories, my colleague Carl (The GRIPPER) Waynberg wrote a three-part series in his newsletter The GRIP (www.the-gripper.com) that argued in favor of reverse mergers. In his 3,637-word tract, the GRIPPER cited extensive historical data to make a convincing case. But your devoted Penny Sleuth respectfully disagrees. Because in the pursuit of justice, the SEC and other agencies on the front lines of enforcement blow through lengthy empirical arguments to protect small-cap and microcap investors from the get-rich-quick schemes associated with blank-check IPOs. The crisis and the proposed loophole mends are detailed in an SEC document titled "Use of Form S-8 and Form 8-K by Shell Companies." As written in the SEC document: "Our proposed definition of the term 'shell company' is not intended to imply that all shell companies are fraudulent. Rather, the proposals in this release target regulatory problems that we have identified where shell companies have been used as vehicles to commit fraud and abuse our regulatory processes." The North American Securities Administrators Association supports the SEC anti-fraud proposals for blank-check IPOs. A North American Securities Administrators Association (NASAA) comment dated June 22, 2004, says, "Similar to the experience of the SEC described in the proposal, the states have seen a steady stream of fraud and misconduct in the distribution and manipulation of shares of shell companies and the companies that Blank-check IPOs are perfectly legal under SEC guidelines. These dormant public companies are typically formed without assets or employees to act as hosts for companies that want to go public, but for various reasons choose to bypass established channels for an offering. The process of going public through a blank-check IPO is called a reverse merger. With a reverse merger, a fully operational private company combines with the public shell, triggering demand for stock that is often traded on microcap exchanges such as the Over-the-Counter Bulletin Board or Pink Sheets. By comparison, a traditional IPO entails a rigorous filtering process by qualified experts who collectively determine the initial stock price. In extreme cases, an IPO may be scrapped if Wall Street gives the company a black eye. With a blank-check IPO, these experts are scoffed at. As part of its crackdown, the SEC has proposed changes that would make companies that have already conducted a reverse merger adhere to existing reporting standards. The proposals could become law on June 29. In particular, the SEC wants to amend the use of Form 8-K and Form S-8 to file material changes in stock ownership and merger activity. This is the latest attempt by the SEC to regulate blank-check IPOs. The SEC's 1992 adoption of Securities Act Rule 419 got to the nub of the blank-check IPO. It granted investors an opportunity to withdraw their money from an escrow account once the shell company combined with another company. The assumption was that the shell company would merge with a functioning company and give investors concrete information on which to base an intelligent decision. New problems arose when the combined companies began filing mandatory SEC disclosures that were legal, but treacherous in the wrong hands. Operating in a regulatory limbo, promoters, hucksters and scam artists saw a chance to exploit SEC loopholes -- and bilk investors -- primarily through Form 8-K and Form S-8. Here's how they do it... Form 8-K must be filed within a month of any material event that might affect a What troubles the SEC about Form 8-K IPO disclosures is "these filings often do not contain much of the information useful to investors in making informed decisions about investing in the company." By evading a Form S-1 disclosure, companies that have something to hide can suppress otherwise required information, such as audited balance sheets, financial projections and probable risks. In addition, public offerings disclosed through Form S-1 comply with a so-called "quiet period." It covers the time between the signing of a letter of intent and 90 days after the actual offering starts. During this juncture, publicity concerning the company is severely restricted. Not so with a Form 8-K disclosure... Because it also gives unscrupulous promoters a 71-day window in which to pump and dump the offering. The SEC states: "During this time, the market may have difficulty pricing the securities because of the lack of adequate information. Investors who purchased the securities at artificially high prices while adequate information is unavailable typically lose money when specific and reliable information becomes available, the promotional activities stop and prices drop." Form S-8 is another vehicle for swindling investors through a reverse merger. The true intent of Form S-8 is to enable the fast and simple registration of securities issued under employee benefit plans. When used in a reverse merger, a shady promoter can actually avoid filing a thorough prospectus that would otherwise be required in a traditional IPO. Form S-8 is also employed in reverse-merger pump-and-dump schemes. Form S-8 can be manipulated to allocate shares to consultants, family members and dodgy analysts who hawk the offering without divulging their holdings. In the June 29 meeting, the SEC intends to cut these practices to deter fraud. The SEC cites, "Many of the abusive schemes we have seen involve multiple filings of registration statements on Form S-8." Combined, the misuse of Form 8-K and Form S-8 has abided cons of international proportions. In its comment to the SEC, the NASAA refers to a popular Asian hoax... "Most recently, the enforcement units of state securities divisions have received Under the pending SEC proposal, shell companies would be prohibited from using Form S-8 and instead be required to use the more stringent Form SB-2 or Form S-1. Proposed modifications to Form 8-K call for fuller disclosures. The change would be dramatic. The SEC estimates that its proposed Form 8-K revamp would increase disclosures by 6,284 hours at an extra cost to the company of $628,425. As part of the fix, the 71-day window would be reduced to four days. The financial burden of the Form 8-K overhaul could sink many legitimate blank-check IPOs -- just like Sarbanes-Oxley has purged the small-cap market of companies that lacked the financial resources to comply with that sweeping anti-fraud legislation. But June 29 would also be a day of reckoning for blank-check IPO scam artists. Think fast: unload your blank-check IPO shares now? Happy investing, Irwin Greenstein ______________________________________________________ The Day the Buying Stopped |