Goliath v. David

At this point, this little blog has had about as much readership as a small-town high school newspaper on the last week of school before summer. Apparently, that was a bit too much publicity for Vertrue, aka Memberworks, aka CardMember Publishing, owner of Adaptive Marketing (current owner of the Freescore.com trademark and former owner of freescore.com). I can’t imagine why a company that has changed its name three times would be so interested in hiding its past . . .

But, lo and behold, Adaptive Marketing has pulled out the big guns for me when it filed this application for bill of discovery in Connecticut state court, alleging “defamation, trade libel, and tortious interference with contractual relations and business expectancies.”

Or maybe it’s the small guns? C’mon, didn’t you want to spring for one of those white shoe law firms handling your class action cases to do a little abuse of the subpoena power? (Reminder to the litigious types, this is an opinion.)

Here is a response from Paul Levy of the Public Citizen Litigation Group, with his local counsel Kathryn Emmett of the law firm Emmett & Glander.

To recap for those of you following along at home: Felix Salmon wrote about Ben Stein advertising for Freescore. I wrote a follow up using publicly available information about Freescore’s legal and corporate history. The New York Times fired Ben Stein, and Felix Salmon celebrated at the Oyster Bar, Grand Central Terminal, NYC.

After that, I stopped paying attention to Freescore et al. But since they hadn’t stopped paying attention to me (and not in a good way), I did a little more constitutionally protected research. Here are some other interesting things that have come out since I wrote my entry:

• The Wall Street Journal online wrote some not-so-flattering things about freescore.com.
• CBS Money Watch reported with a good description of what Freescore.com has to offer.
• The Senate Commerce Committee subpoenaed Vertrue.
• A Senate Commerce aide is not so pleased with Vertrue.
• Business journalist Gary Weiss wrote about some of the same issues I covered.
• Vertrue, using the same law firm as my case, sued Wikipedia. I’ve not seen the filings in this case, but the history of amendments to their Wikipedia article looks interesting.

And some stuff I missed the first time around:

• Here is a good historical outline of Vertrue by Consumeraffairs.com.
• The Washington Post article that I linked to in the original post, but without the pay wall.
• Archived version of the Minnesota Attorney General’s case against MemberWorks and the settlement.
• Iowa Attorney General suit against MemberWorks.

Seems to me they should have let my post and my blog die the quiet death it had settled into. I guess we shall see . . .

PS: Felix Salmon covers my legal troubles!

Update: Ben Stein works for Yahoo? I can’t keep track of the guy.  Also, more from Paul Levy on his Consumer Law & Policy blog.

Update 2: More coverage from techdirt.

Update 3: Salon here.

Base Fodder

For several years, political direct-marketing firm Base Connect, Inc. has helped organize and solicit funds from mostly individual donors for political campaigns and PACs. According to several articles, though, it’s been keeping a majority of the money for itself and its affiliated companies. Its activities fall into a regulatory grey area, somewhere amid the purview of the FEC, the FTC and state consumer protection agencies.

Base Connect, originally named BMW Direct, was first examined by the Boston Globe during the 2006 campaign season, when it ostensibly raised funds for Republican candidates in staunchly democratic districts, but kept almost all of the funds. For example, Charles A. Morse ran a half-hearted campaign against Barney Frank. More than $700,000 was raised for Morse, but only $30,000 ever went directly to the campaign. Instead, a large portion of it went to BMW Direct and its affiliate companies. (The Boston Globe articles can be seen here, here and here, the TPM Muckraker follow-up posts can all be seen here, and Pro Publica’s story is here.) Recently, the firm showed up in the media again under its new name, when the Boston Phoenix discussed the money to be made by Republican-related groups as the most conservative of conservatives became marginalized in the last election cycle.

What’s not really discussed by the above articles is Base Connect’s connection to a direct marketing firm that has been questioned for similar activities as far back as the 1970s. According to Base Connect’s website, its president, Kimberly Bellissimo, worked for Bruce W. Eberle’s Eberle Direct Marketing Group (now Eberle Communications Group, Inc.) from 1988 until 2002.

HISTORY OF EBERLE

As early as 1978, the Washington Post wrote about Eberle raising $317,408 for the Fund for a Conservative Majority. In that instance, the fund gave only $22,400 to candidates. (The post archive is pay only so if you want to find the article look for “Little in ‘New Right’ War Chest Finding Its Way to Candidates; Hopefuls Get Few ‘New Right’ Dollars.”)

In 1981, the Post again wrote about an Eberle client:

The national Taxpayers Investigative Fund was created a year ago for the purpose of ferreting out waste and fraud in government. Since then, the organization has been so busy raising money from contributors around the country that it hasn’t had any time to look for waste and fraud.

(This Post article is titled, “Fund to Unearth Waste Unearths Money Instead.”)

Eberle was also questioned by the US Senate Select Committee on P.O.W/M.I.A. Affairs at the end of 1992 for his role in soliciting money for alleged POW rescue group Operation Rescue, Inc. (See the NY Times article here.) Most of the money spent went to fundraising activities. The committee had a copy of an internal memo from Eberle, where he designed a fundraising letter purporting to be written by the group’s organizer, Jack Bailey, while he was on the deck of his rescue ship in the south China seas. This boat had not left its dock in two years when the letter was sent. (The committee report excerpt about Eberle is here. A summary of the report is here, and the entire report can be downloaded here.)

In 1998, Bruce W. Eberle & Associates Inc. (now Eberle Associates, Inc.) was reportedly hired by Paula Jones to raise funds for her legal case against President Clinton. Once again, the money raised by Eberle was not actually going to the foundation that sponsored the lawsuit. According to the Washington Post,

Jones signed a contract in November with Bruce W. Eberle & Associates Inc., which guaranteed her a minimum of $ 300,000 as long as the firm could make its own profit from the fund-raising campaign, according to a copy of the document obtained yesterday. About $ 100,000 has already been sent directly to Jones, said a source familiar with the effort.

(The Post article is titled “Firm Raising Money for Jones But Funds Don’t Go to Lawyers.”)

BASE CONNECT & EBERLE MODERN DAY

Base Connect’s FEC compliance officer and accountant, Scott B. Mackenzie, has been listed as the treasurer for eight PACs, including the Americans Against Illegal Immigration PAC. This PAC (you guessed it) paid a large portion of the money it raised to companies affiliated to Eberle or at least his business address. The PAC brought in and spent $1.7 million during the 2006 and 2008 election cycles. It gave $2,792 to candidates, and the rest went to expenses. Roughly $600,000 was spent on companies related to Bruce W. Eberle: Campaign Funding Direct, Inc., Omega List Company, Eberle Communications Group, Inc., RPA Limited Partners, CP Direct, and ECG Data Center. (I did not see any incorporation paperwork for RPA Limited Partners, CP Direct or ECG Data Center, but in FEC filings, their addresses are listed as the same address for the incorporated Eberle companies.)

As a side note, the FEC conducted an audit of Americans Against Illegal Immigration for not properly disclosing the occupation and name of employer for some of its contributors. The audit report of the PAC is here.

Given the above, I think I’ll take my chances with liberal elitism over conservative elitism. It’s been argued that liberal elites think the American people are too stupid to make their own decisions. But apparently, conservative elites see their stupidity as a business opportunity.

The Vancouver Connection

(updates in italics)

Through business journalist Gary Weiss’s blog, I found this Seattle Times article discussing some interesting events in the world of penny stocks. Attorney Faiyaz A. Dean, based in Seattle and Vancouver, has been the putting together IPOs for several Ukraine-based, small-cap companies with vague and absurd business plans. As the article describes,

Green Bikes Rental Corp. of Ternopil, Ukraine, raised $50,830 in its initial stock offering, only to abandon its business plan months later because “our marketing research showed that in [Kiev, Ukraine’s capital,] roads are not designed to have bicycle traffic.”

The obvious concern with companies like Green Bikes is that they were created and taken public purely so stock promoters and company owners can hype the stock and make a quick profit at the expense of gullible and or uneducated investors—the pump and dump. As it turns out, there was some hyping of Green Bikes after it changed its name to Affinity Mediaworks (ticker symbol AFFW). As further evidence of the nefarious motivation for this company’s IPO, the Vancouver Sun learned that the current president of Affinity, Scott Cramer, once worked at a financial services firm owned by the family that was shut down by the British Columbia Securities Commission (press release here).

From what I currently know, I don’t think Dean’s role with these companies is necessarily criminal. Who is he to decide what companies should be allowed to raise money? But his relationship to them is a good example of how you can look at the connections between people and organizations as a way to monitor and prevent fraud.

Both Dean and his former boss, Penny Green, have a dizzying array of connections with several companies that may not be entirely on the up-and-up.

DEAN’s WORK WITH PENNY “Stock” GREEN

Before starting his own law firm, Dean worked for Bacchus Corporate and Securities Law, which you can see from an archive of the firm’s website. Bacchus’s founder is Penelope Olga Green who usually goes by Penny Green. (I hope she sees the irony in using a shortened version of her first name, given her chosen legal specialty.) Dean both owned stock in and was the filing attorney for Bacchus-related penny stock registrations.

For example, while at Bacchus, Dean worked on an SEC filing for penny stock company Avalon Energy Corporation. Avalon started out as Venture Investments Inc. in 1983, went through several name changes, and then lay dormant for several years. At the time of this 2006 filing, Avalon had “no revenue generating operations” and a debt of $41,000. It even had a tenuous Ukrainian connection. In 2003, the company signed a letter of intent to acquire a mineral property in the Odessa region of the Ukraine. The company changed its name two more times after the IPO and is now called Organa Gardens International Inc. It is now “focused on vertical hydroponic farming.”

David Baines of the Vancouver Sun (and author of many of the articles I’ve linked too) pointed out that Avalon shareholder May Joan Liu (aka May Joan Yee) was previously blackballed from the Vancouver Stock Exchange. See the Vancouver Sun stories here and here and a notice from the exchange about her blackballing  here.

PENNY GREEN—TECTON

Green and Bacchus have a history of registering companies that have been used in stock manipulation. Green was the filing attorney for minerals exploration company Tecton, Inc. In 2009, Jason Jadidian was given probation for three years and fined $10,000 for paying an undercover FBI agent to purchase shares of Tecton Corp. (The criminal complaint is here and the Vancouver Sun article about it is here). The president of Tecton, Norman Meier, is also the CEO of Hemis Corp. Green did the filings for it too.

PENNY GREEN—NOVORI

In 2005, Green helped to take Surrey, B.C., based online retailer Novori Inc. public (the filing is here and the Vancouver Sun articles about it are here, here and here). At the time of the filing, the company had been in business for about a year and had a lost $163,485. Its accountant issued a going concern opinion. In 2008, stock promoters Aarif Jamani, Scott Lower and Bozidar Vukovich allegedly provided secret payments to an undercover FBI agent to purchase Novori shares—presumable to get some upward movement in the stock price. Lower and several of Jamani’s relatives were listed as shareholders in the company prior to the public offering.

PENNY GREEN AND DEAN—MANTRA VENTURE

Green is listed on the 2007 SEC filings for alternative energy company Mantra Venture Group Ltd. Mantra and Novori share at least one investor in common, and Faiyaz Dean owned 10,000 pre-IPO shares.

In 2003, Mantra’s president Larry Kristof was physically present in a minivan when Bellingham, Wash., police seized $29,000 from it. The money was suspected to be the proceeds of drug trafficking. (The civil forfeiture proceeds can be found here and Vancouver Sun article about it is here.) Note that the Vancouver Sun says this is the same guy, even though they spell his name differently.

Additionally, Kristof was previously the president for Lexington Energy Services Inc., whose filing was also done by Green. Green was also an option holder in this company. It too has shareholders in common with Novori, including Scott Lower (who was accused of the Novori stock hype).

Dean and Kristof were also pre-IPO shareholders in Park Place Energy Corp. This company started out as a website “which sold video clips of tennis lessons” and then turned into natural resources exploration company. One of its former directors, Oxana Avdasseva aka Advasseva aka Avdaseva was a pre-IPO shareholder in Mantra, Novori and Lexington. Oxana Avdasseva is believed to be related to Elena Avdasseva who was also a Park Place owner and as Vancouver Sun reported, worked for Scott Lower.  (Her recently terminated dealer registration is here.)

Kristof also shows up in a subscription agreement attached to the initial registration for Green Bikes, the Dean-registered company that had to abandon its initial business proposal because it didn’t realize that potholes and bikes don’t mix.

DEAN AND GREEN—BLINK COUTURE

Dean, Green and Norvori, with Lexington investor Robert Jarva, owned pre-IPO shares in Blink Couture Inc. (It was actually Jarva’s company, 689719 B.C. Ltd, that owned the shares in these companies.) Green was the SEC filing attorney, majority shareholder, and director for Blink. Blink had only recently begun business operation when it filed the prospectus and intended to “generate revenues from the sale of clothing, jewelry, and accessories sold on our website.” Eight months after going public, Green was appointed president, CEO, Secretary, CFO, Treasurer, and Chief Accounting Officer of the company. Seven months after that Green left the company and sold her stake for $500,000 cash. Just a week earlier, the company was operating at a loss with total assets of $3,836, which included $1,767 of cash. Around the time Green left, the company abandoned the online jewelry business and, “the company’s business plan now consists of exploring potential targets for a business combination through the purchase of assets, share purchase or exchange, merger or similar type of transaction.”

DEAN, THE UKRAINIANS and MANTRA VENTURE AGAIN

(I know this is getting boring, but just stick with me a little longer. This gets slightly interesting.)

Just this week Dean filed an amended registration for a Ukraine-based company named Loran Connection Corporation. Loran wants to organize group tourism in the Ukraine. It raised around $20,000 from private investors and proposes to raise another $37,800 in the IPO. Its legal, audit and filing fees cost $10,000. If you’re a legitimate firm trying to raise legitimate funds, why would you spend $10,000 to raise $37,800 for a tourist company?

Here are some of the connections:

Loran’s website is registered to a Vancouver resident, Alexander Balykin. (The website has been updated recently and, apart from being vague with some stilted language, it’s pretty impressive.) Alexander Balykin, his wife, daughter, Oxana Avdasseva and Elena Avdasseva were initial shareholders in Vancouver-based party promotion corporation Tag Events Corp. His son, Artiom Balykin, was the president. Artiom Balykin along with Oxana Avdasseva were initial shareholders in Mantra Venture Group Ltd.

Deep breath . . .

• Mantra’s security offering was filed by Penny Green, Faiyaz Dean’s old boss.
• It has common shareholders with Novori, the subject of a stock hyping scam.
• Faiyaz Dean owned pre-IPO shares in the company.
• Its president was caught in a money seizure case (according to the Vancouver Sun)

So we’ve got these two lawyers registering and owning pre-IPO shares in multiple penny stock corporations, some of which have been used stock manipulation scams. There are plenty of connections among and between the owners and directors of the companies, with Dean and Green as the main connections. With a DIY look at a couple of degrees of separation in past corporate filings, it’s easy to find incestuous relationships between potential scammers. I hope the SEC is doing a more sophisticated version of this.

For the continuing series on Dean in the Vancouver Sun, look here.

Update:

New Vancouver Sun article here.

Puzzle vs. Mystery

Business gurus Malcolm Gladwell and Chris Anderson have been in a bit of spat lately. They both put out books this year. Gladwell reviewed Anderson’s in the New Yorker. Anderson responded. Those of us with too much time on our hands and a cheap or free medium to express ourselves put in our two cents. Though not as cool a brawl is as Salman Rushdie vs. John le Carré or even Jay-Z vs. the Game, it does give me an opportunity to bring up an old Gladwell article of that’s a good read for investigators.

My favorite Gladwell article – fraud-related – is “Open Secrets—Enron, intelligence, and the perils of too much information.” In it, he discusses the difference between solving a puzzle and solving a mystery: In a puzzle, you need one more key piece of data to figure out an answer; with a mystery, you have too much data and must interpret it to find the outcome. He uses Enron as the example of a mystery, in that the company’s malfeasance was available in public records. Enron wasn’t hiding its accounting fraud, other than trusting that the excess of data about its operations would obscure the true actions behind them.

It’s a compelling construct for an investigator. Are you looking at a puzzle or a mystery?

I had minor beef with the article. Gladwell leaves the reader, or at least this reader, believing that there is as clear a way to solve mysteries, as there is to solve puzzles. I think a mystery is ambiguous and conclusions about a mystery are chock full of opinions.

To look at a modern case of fraud— the Madoff case was a mystery. The Madoff whistle blower, Harry Markopolos, didn’t stumble upon some sort of internal Madoff documents that proved the fraud. He did a detailed analysis based in part on fact-finding but mostly on his knowledge of finance and investing. He relied on financial models. Financial models are based on assumptions. Markopolos was solving a mystery and using opinions to do it. (More on this in a following post when I’ve got these ideas a little better organized).

Anyways, back to Galdwell’s article. The article ends with a discussion of a paper about Enron written by a group of Cornell MBA students for a finance class. The students made the argument that the company stock was overvalued back in 1998—several years before it finally collapsed. Gladwell wrote, “there were clear signs that ‘Enron may be manipulating its earnings.’ ” If anyone had bothered to read the 23-page paper, which was posted on the school website, they would have known there was something wrong with Enron. It was the amount of information and the ability to process it that mattered.

As with any mystery, there is no clear-cut conclusion. The students made a great analysis that also happened to be right. They did it using tools that are subject to interpretation. For example, the students used the Beneish model, which uses financial ratios and variables to determine if companies have manipulated earnings. Enron’s score was higher than the standard, which pointed to possible manipulation. This, by itself or with any of the other ratios or models used by the students, did not prove the case. Beneish himself says that, while the model is useful, “it can classify a firm as a non-manipulator when it manipulates and it can classify a firm as a manipulator when it does not manipulate.”

Classifying fraud as either puzzle or mystery is a good place to start. But when you have a mystery there is no certainty, it’s all just opinion until you do get your hands on the same facts that you need to solve a puzzle.