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Could Big Bear Mining Investors Get Caught in a Trap?

by Melissa Davis - 4/26/2010 7:29:38 AM

Four years ago, regulatory filings show, Aaron Hall – the founder and largest stockholder of Big Bear Mining (OTC: BGBR.OB) – worked as a security guard at a Vancouver nightclub while dabbling in mineral claims on the side. When BGBR’s stock soared this month on paid promotions, however, the young Canadian suddenly found himself worth $175 million before the company found a single ounce of gold.

If Hall sold his 72-percent stake in BGBR, still valued at $121 million despite a hit to the stock last week, the 33-year-old Canadian could afford to retire right now as a very rich man whether the company ever strikes gold or not. According to BGBR, however, Hall has agreed to walk away from that fortune instead. (BGBR refused to provide Hall’s phone number, so The Street Sweeper could not call him about his decision.)

Hall paid just $2,000 for his massive stake in BGBR when the company first surfaced as a new, but idle, mining operation back in 2006. He wound up with 100 million of BGBR’s 138.95 million outstanding shares in the process. Although the value of his meager investment has since skyrocketed by 6 million percent, Hall has generously decided to part with most of that stock – transferring 3 million shares to an investor and 66.75 million shares to the company’s treasury (with the remaining 30 million shares apparently going to the new CEO) – while keeping just 250,000 shares for himself.

Meanwhile, ordinary investors keep buying the stock instead. Thanks to that activity, powered by a well-orchestrated publicity campaign, BGBR now boasts a market value of $167.43 million as a result. 

Based on information contained in BGBR’s regulatory filings, however, the company appears to be worth far less. In its own words, in fact, BGBR has described itself as “one of the smallest exploration companies in existence” and “an infinitely small participant in the gold mining market.” BGBR also admits that it possesses “no known ore reserves” and, furthermore, that it relied on no expert advice when selecting the property that it has decided to mine. BGBR lists just $1,317 in cash as the only asset on its balance sheet, although the company has since raised $200,000 – less than enough to cover one-third of its estimated expenses for the year – by selling cheap stock through a private financing deal.

BGBR counts Steve Rix, its newly appointed president, as the company’s only employee. Although BGBR portrays Rix as an accomplished entrepreneur, he was unemployed – and filing for bankruptcy over failed business ventures – just one year ago. Rix listed almost $5.8 million in liabilities and only $13,400 in assets, including the $50 in his wallet, in that bankruptcy filing.

Meanwhile, with limited resources of its own, BGBR has relied on a tainted transfer agent and a suspect auditing firmcited for significant deficiencies by the industry’s oversight board – for stock and accounting services. BGBR shares an address with yet another firm connected to suspected scams as well.

Since BGBR still classifies itself as a shell company – and has yet to begin actively mining for gold – the stock has obviously relied on outside sources for fuel. Paid promoters began aggressively touting BGBR this month with remarkable results. Just two months ago, the Pink Sheets website shows, BGBR began trading on miniscule volume for 15 cents a share. Today, however, BGBR ranks as one of the most active and volatile stocks on the entire OTC Bulletin Board exchange.

So far, roughly 75 million shares of BGBR – almost double the entire float – have changed hands this month alone. The stock price has rocketed, soaring from 74 cents to $1.21 a share, during that same time period.

Even so, stock promoters have forecasted more explosive gains ahead. Last week, with BGBR already sitting at $1.28 a share, Michael Cohen of DoublingStocks.com predicted that the company would soon become “one of the biggest stock plays” of 2010 and personally selected it as his favorite stock pick of the year.

“If BGBR does not triple in price over the next four weeks,” Cohen vowed in a recent email blast, “I will RETIRE as a stock picker.”

In a formal disclaimer, however, DoublingStocks revealed that it had been paid to promote BGBR for a six-week span that includes the timeframe covered in that projected rally. Moreover, DoublingStocks disclosed that it may trade the stock – potentially selling the shares at any time – without reporting those transactions. It also noted that the financer behind its promotion, a mysterious firm called Mennen Creative Limited, may choose to do the same.

DoublingStocks did not respond to an email seeking input for this story.

While some BGBR promoters collected far more for their services, with one newsletter publisher charging $900,000 for its tout, DoublingStocks found a way to stand out from the crowd. Pulling off a creative stunt, DoublingStocks managed to build suspense for its big promotion with a movie-like trailer that features ordinary people weeping with joy over their newfound fortune. The trailer ends with promises of a new stock pick on Earth Day – a date already associated with saving the world – although DoublingStocks surprised the market by identifying BGBR as its big investment idea a couple of days early. 

BGBR has undergone violent stock swings ever since, with 17.31 million shares trading at prices ranging from 98 cents to $1.68 last Wednesday alone. BGBR ended the week at $1.21, its momentum weakened by a Forbes article that portrayed the stock as “fool’s gold,” but the company still boasts a market value that looks remarkably generous to some.

Dark Secrets

BGBR’s latest annual report, filed during that big run-up, offers no reasons for the rally. 

According to that filing, BGBR has no plans to hire any workers – or purchase any significant mining equipment, for that matter – over the course of the upcoming year. BGBR does indicate that it will begin exploration activities within a matter of months, but the company made similar claims – without following through – when filing its original registration statement four years ago.

BGBR remained virtually dormant, in fact, until this year’s sudden flurry of activity. In late January, BGBR kicked things off by executing a 1:50 forward stock split that suddenly left the company with almost 140 million shares. Armed with that huge share count, BGBR officially began trading on the OTC Bulletin Board a few weeks later. Volume in the stock, while initially thin, soon skyrocketed after the company began laying out its grand plans this spring.

First, in mid-March, BGBR announced that the company had hired Rix to serve as its new president. When doing so, BGBR introduced its new 45-year-old leader as an accomplished businessman with a quarter-century of valuable experience spanning across multiple industries. 

On his website, Rix himself offers a few more telling details. Specifically, he lists the following among his biggest accomplishments: implementing a modified training program for an outbound call center focused on magazine renewals; operating a successful scuba store and helping others to do the same; launching and “almost taking public” several startup companies; and working for Pre-Paid Legal Services (NYSE: PPD) – the target of an escalating government probe – and other multilevel marketing companies that peddle get-rich-quick opportunities.

If Rix himself managed to get rich on those schemes, he failed to stay that way. According to his bankruptcy filing, Rix had little cash in his wallet and just $100 in the bank – far less than necessary to cover $2,200 in overdraft fees – after racking up millions of dollars worth of unpaid debts on doomed business ventures. He claimed that Blu Financial Network, a firm highlighted in his official BGBR bio, “probably has a negative net value” that made it essentially worthless. Meanwhile, he calculated debts associated with yet another troubled firm at a whopping $4.7 million.

“I worked across a number of different industry sectors and was fortunate enough to have a lot of success starting new companies and accelerating the growth of existing companies,” Rix told The Street Sweeper last week. But “with the economy’s collapse, I had business dealings that couldn’t survive the fallout – like many other companies in America.”

Still, in BGBR’s recent annual report, the company indicates that Rix never led any firms that filed for bankruptcy at all. When asked about this omission last week, Rix said that BGBR’s securities attorney had deemed his bankruptcy immaterial and therefore exempt from disclosure rules.

BGBR has since revealed Rix’s compensation plan, however. Rix will collect an annual salary of $48,000 – a modest sum but still better than the $27,500 in income he reported for the past two years combined – as president of the company. Even better, Rix will receive 30 million shares of restricted stock that are worth $36.3 million at current prices.

Meanwhile, with his history of failure of concealed, Rix has already enjoyed a warm welcome from BGBR investors who seemed cheered by his arrival. Before BGBR hired Rix, fewer than 40,000 shares of BGBR had changed hands – in total – since the company first went public. On the day that BGBR introduced Rix as its new leader, however, trading volume suddenly surged to a record 194,000 shares.

Shady Connections

That record looks almost quaint, of course, compared to the explosive volume that followed.

Trading really began to intensify on April 5, when BGBR announced that it had purchased a Canadian mine located in “the most prolific gold-producing region in the entire country.” That day, volume in the stock shot past the 1 million-share mark – a level it had never before reached – to pass 2 million shares. The stock topped $1 a share for the first time ever on even heavier volume the very next day. Volume has remained high, peaking above 17 million shares, ever since.

“The news is not that impressive,” HotStocksEveryDay.com admitted following a BGBR press release last week. Instead, “this is being highly publicized by paid websites.

“Facts and figures are highly twisted to make them sound extremely great,” the website added, so BGBR is “good for a quick day trade but not to hold.” 

With paid promoters touting BGBR’s upside, investors must hunt for red flags on their own. They can find plenty through a careful review of the company’s regulatory filings.

To start, BGBR has identified Empire Stock Transfer as its official transfer agent. That name has already caught the attention of some BGBR skeptics, who’ve linked Empire to several troubling controversies in the past.

Empire also served as the transfer agent for Turan Petroleum (OTC: TURP.PK), for example, which sued its former leaders for allegedly scheming to defraud the company by obtaining millions of free shares of its stock. Last year, Turan voted to add Empire as a defendant in that complaint after concluding that the firm “may have participated in, or facilitated through omission or commission” with the suspected fraud.

In addition, BGBR lists LBB (formerly Lopez, Blevins, Bork) as its official auditor. Following a 2007 inspection of LBB’s paperwork, the Public Company Accounting Oversight Board reported audit deficiencies “of such significance that it appeared to the inspection team that the firm did not obtain sufficient competent evidential matter to support its opinion on the issuer’s financial statements.” Notably, just a few years earlier, LBB had become the auditor of choice for multiple penny-stock companies scrambling to replace troubled Malone & Bailey as their accounting firm.

“Malone & Bailey (has) been associated with many dubious Bulletin Board issuers,” The Vancouver Sun noted last year. “In most cases, these companies present themselves as earnest explorers then quickly morph into something else … It’s a recipe for grief” for investors.

BGBR also claims a curious address. In its regulatory filings, BGBR says that its corporate office is housed in Suite 160 of a building located at 15111 N. Hayden Road in Scottsdale, Ariz. Interestingly, Domains by Proxy – a firm that specializes in registering websites for parties that like to keep their identities unknown – lists the very same address.

Paid promoters gloss over such details, however, if they even bother to look for them at all. They consistently stick to much rosier stories, with a heavy focus on stock price, when touting the company instead.

Fine Print

In a newsletter that landed in investor mailboxes last week, for example, James DiGeorgia – a longtime gold fan with a checkered past – predicted that BGBR would rocket more than 400% to $11 a share in just 60 short days. He urged investors to buy BGBR quickly, suggesting that even a two-week wait would cost them serious gains.

DiGeorgia treated the risky OTC Bulletin Board, which is littered with dubious stocks, as a potential gold mine for ordinary investors in the process.

“The Nasdaq OTCBB market is the only place where the little guy can still get rich,” he proclaimed. “It is the only exchange where a stock can advance 600% and no one bats an eyeball.

“Yes, it’s risky,” he conceded. “But if you have the right amount of courage pumping through your veins – and you pick your spots – the risk can be minimized and the gains speak for themselves.”

Offering to help, DiGeorgia pointed to BGBR as “the best way to play the 2010 gold craze” and his “hottest stock pick in years.” DiGeorgia himself has yet to pounce on the stock, however, revealing in a fine-print disclaimer (literally read by The Street Sweeper with a magnifying glass) that he owns no shares in the company. Instead, the disclaimer suggests, DiGeorgia’s firm charged $900,000 to cover costs associated with creating and distributing the cheap-looking photocopied newsletter.

Notably, past news reports indicate, DiGeorgia has already come under fire for allegedly burning investors in the past. In 1991, The San Francisco Chronicle reported, DiGeorgia and his business partners (including a convicted felon and a past target of securities regulators) agreed to pay $2.75 million to settle charges that they had bilked investors through a gold coin scheme. Despite that costly deal with the Federal Trade Commission, however, DiGeorgia still maintains his innocence to this day.

“During the civil suit (which lasted just a few short months), the FTC took the position that my prediction was a deceptive business practice,” DiGeorgia explained in an email to The Street Sweeper. But “they were never able to present a single expert witness for deposition and instead relied on freezing the business accounts of the company and appointing a temporary receiver who, along with an accounting firm and our lawyers, proceeded to bill millions of dollars.

“Facing that reality,” he added, “my partners (I owned less than 15%) settled the case swiftly, not admitting any wrongdoing.”

Regardless, the Chronicle noted, DiGeorgia ultimately left the gold coin business and started covering gold investments in a newsletter instead. Since then, Factiva’s news database shows, DiGeorgia has gone on to promote risky penny stocks that have attracted scrutiny from the government and media alike. 

Interestingly, before the Chronicle exposed DiGeorgia’s alleged transgressions, he actually enjoyed a reputation as a fraud fighter himself. Even in that story, in fact, DiGeorgia’s former boss praised his record of “uncovering the scams and exposing the crooked dealers in the industry.” 

In a related article, however, DiGeorgia seemed to criticize the same types of potential conflicts that he has apparently gone on to accept. Specifically, the Chronicle reported, DiGeorgia fretted over stock pickers who were “raking in big bucks” under lucrative deals that could prevent the honest recommendations investors need for a real chance at profits.

Meanwhile, sensing possible signs of manipulation, some BGBR investors have already decided to take their gains and run.

“I knew to get in decent and get out quick,” one BGBR investor stated in an online chat room last week. “Did that yesterday and made $500 in about three hours.

“But the stock,” he concluded, “is a dog, dog, dog.” 

* To contact Melissa Davis, the author of this story, please send an email to editor@thestreetsweeper.org.

 

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