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Miller Energy: Is This Hot 'Alaska' Stock about to Melt?

by Melissa Davis and Janice Shell - 8/23/2011 4:34:29 PM

Before Miller Energy Resources (NYSE: MILL) purchased some abandoned assets in Alaska for $4.5 million – or barely half the price that its CEO paid for his sprawling Tennessee mansion – and then pegged the value of those assets at more than $350 million on its books, the company spent years fruitlessly trying to escape from the penny-stock arena through smaller deals that often wound up backfiring instead.

Those previous deals triggered serious legal disputes, with one of them crippling Miller for years and another – while touted as a “huge victory” for the company at the time – since quietly reversed this May on appeal. Miller could face potentially significant liabilities, far exceeding its modest cash resources, if the company fails to overcome that recent courtroom setback. Meanwhile, Miller has been slapped with a brand-new lawsuit – this one related to the Alaska deal itself – seeking piles of warrants for dirt-cheap stock from the company as well.  

Despite that alarming track record, however, Miller has managed to convince investors that the company finally hit the jackpot – by snagging valuable assets that its previous owners (now bankrupt) initially could not sell – this time around. Miller’s stock, which fetched mere pennies on the lowly Pink Sheets just a few short years ago, now commands $7 a share after snagging a coveted spot on the premiere New York Stock Exchange. The company currently boasts a handsome market value of $280 million, almost 12 times its prior-year sales, even though it relied on a gigantic gain on its new Alaskan assets for the only dramatic profit that it has ever recorded since going public through a reverse merger almost 15 years ago.

But experts contacted by TheStreetSweeper, including skeptics in both the energy and financial sectors, have expressed clear doubt about those numbers. For example, an executive at Nabors Industries (NYSE: NBR) -- a $7.6 billion energy giant that decided against buying those assets for itself -- estimated that Miller actually wound up with just $25 million to $30 worth of assets, offset by $40 million worth of liabilities, through that transaction instead.

"That deal had been on the Street for over a year; everybody and their brother had looked at it. I'm a geologist, with 54 years of experience, and I can't see how anybody can write that up on their books for $350 million . There are not $350 million worth of assets there."
-- Jordan "Digger" Smith
    Nabors Industries

“That deal had been on the Street for over a year; everybody and their brother had looked at it,” said  Jordan “Digger” Smith who manages energy projects for Nabors – which actually operated Miller’s new properties – all across the country. “I’m a geologist, with 54 years of experience, and I can’t see how anybody can write that up on their books for $350 million … There are not $350 million worth of assets there.”  

Miller did not respond to messages from TheStreetSweeper, including an email with a detailed list of questions, seeking input for this story.

So far, Miller has yet to supply audited financial statements showing that KPMG – a respected Big Four firm hired almost six full months ago – has verified the hefty valuation that the company placed on its new assets and the impressive profit that resulted from the enormous gain that it recorded on that acquisition deal. Miller is still relying on the blessing from its prior auditor Sherb & Co., notorious for approving the books of dubious Chinese reverse-merger companies, to lend credibility to those figures instead. 

China Integrated Energy (OTC: CBEH.PK), once among the largest of those clients, actually replaced Sherb with KPMG itself before Miller did the same. Although CBEH boosted investor confidence with the move and initially secured a clean audit opinion from KPMG, The New York Times recently noted, the company soon found itself hunting for a new auditor after the Big Four firm disavowed its favorable review and fled – in the “perhaps most embarrassing” resignation of the year – less than two months later. Long portrayed by critics as an outright fraud, CBEH has since moved from the Nasdaq to the scam-riddled Pink Sheets and, this week, resorted to using Sherb as its auditor once again.

Miller’s own audit committee actually reported some “accounting errors” in the company’s financial statements this March  -- the month after hiring KPMG – when it warned of a likely restatement, adjusted for increases in both expenses and losses, going forward. Miller has gone on to miss the deadline for filing audited financials since that time, quietly violating a covenant in a new credit agreement and technically defaulting on the terms of that $100 million funding deal in the process.

If its lenders decide to play hardball, Miller could pay a very high price for any ongoing delay. Following a default, the credit agreement indicates, Miller faces an even steeper interest rate – set to jump from a minimum of 9.5% to credit-card levels of at least 16.5% instead – and could lose access to additional funds, with demands to repay the millions it has already borrowed, as well.

Power and Greed

At least one of the three lenders supplying those funds – the firm that, in fact, brokered the deal – has evidently delivered some painful blows to its clients in the past. 

Bristol, a firm led by Paul Kessler that caters to obscure penny-stock companies, has regularly provided welcome cash to desperate microcap players that wind up in serious pain. They often face the threat of massive dilution or, if dogged by accusations of outright fraud, can go completely bankrupt instead. Their shares may sink to mere pennies (or even lower), history shows, with regulators sometimes stepping in to block them from trading at all. 

But Miller has inked multiple deals with Bristol regardless. Indeed, Miller has not only relied on Bristol for financing and consulting services, records suggest, but the company has also used the firm to score one of its favorite toys as well. 

Miller purchased an airplane partially owned by Bristol late last year, records indicate, using its stock to pay for that aircraft and then flying it to some rather curious locations. For starters, records show, Miller’s new airplane has flown to or from a small town in Delaware – located near the home of the CEO’s girlfriend – eight different times in the past few months alone. It has also flown to or from the beach in Florida more than a dozen times during that brief period, records show, while visiting faraway Alaska – the key source of the company’s much-touted growth -- just once over the course of that same timeframe. 

Miller CEO Scott Boruff has purchased one of the “most lavish homes” in Knoxville (a full hour from the office) along the way, the local newspaper revealed, paying $8.5 million for that “mega mansion’ – or 90% more than Miller paid to secure its prized assets in Alaska – and another $1 million to furnish the place. That 36,720-square-foot mansion dwarfs some of the largest homes purchased by Hollywood celebrities, records indicate, a sprawling estate that’s almost as big as the gigantic houses owned by Barbara Streisand, Cher and Jerry Seinfeld combined. Known as “Villa Collina,” the Knoxville News Sentinel reported, Boruff’s new home (originally listed at $21 million) boasts the following features: eight bedroom suites, 11 full bathrooms, a tri-level library, an elevator that services all three floors, indoor and outdoor swimming pools, an in-home fitness center, a seven-car garage and a 3,000-square-foot wine cellar.

Under a standard mortgage deal (with 20%, or $1.7 million, down and a 30-year term), records indicate, Boruff would face house payments totaling $544,000 a year – a sum that exceeds his entire $500,000 base salary – and almost $120,00 in annual taxes to boot. Late last year, however, Miller granted Boruff a generous bonus that will at least double – and potentially quadruple -- his cash compensation to between $1 million and $2 million, while offering him more stock on top of past stock options (priced at just 33 cents a share) that he can sell in a pinch down the road.

Miller justified that handsome payout as a well-earned reward for Boruff’s recent accomplishments at the company, particularly the expansion into Alaska and the remarkable performance of the company’s stock, but later admitted in its proxy statement that it “did not consult with any experts or other third parties” (beyond an unnamed attorney) before inking that deal. Likewise, corporate filings indicate, the company sought no expert guidance when establishing the hefty compensation plan afforded to its past president – who left with 1 million cheap stock options after barely seven months on the job – or the sweetheart deal that it promised to the insider who just replaced that executive, either.

Give and Take

Although former Miller President Ford Graham spent little time at that post, records indicate, he played a crucial role in reshaping the company.

In fact, as the founding general partner of Vulcan Capital in New York City – a position he apparently continued to hold while doubling as president of Miller (some 750 miles away) – Graham helped arrange the company’s celebrated expansion into Alaska before he officially joined its senior management team. Back in October of 2009, records show, Graham’s New York firm agreed to supply Miller with $5.5 million worth of funding so that it could acquire Alaskan assets recently abandoned by debt-burdened Pacific Energy Resources after that company filed for bankruptcy. The Lazard investment banking firm had by then futilely sought buyers for those assets, records show, which soon fetched a winning bid of just $875,000 – a minute fraction of the value that Miller has since assigned to those same properties – when auctioned off to Cook Inlet Energy (CIE), a future subsidiary of Miller, the first time around.

“The abandoned assets had incurred significant losses and were unable to generate sufficient positive cash flow to sustain ongoing operations,” Pacific noted in court filings related to the case. So “as a result of the debtors’ marketing efforts, the debtors believe that the buyer’s offer has been fully tested by the market and thus constitutes fair and reasonable consideration for the sold assets.”

The following month, records show, Vulcan inked a much larger financing agreement that promised Miller $36.5 million in funds – with more than $5 million of that placed in a special account to close the acquisition – ahead of a second auction for the Alaskan assets. This time, records show, Graham found himself bidding for CIE against the investment arm of a multibillion-dollar energy corporation that capped its own offer just above the $2 million mark.  

Ramshorn Investments, a subsidiary of Nabors Industries, repeatedly suggested that CIE lacked the cash necessary to close the deal along the way -- despite assurances to the contrary – and then ultimately walked away, refusing to match CIE’s final offer, in the end. 

With $4 billion in annual revenue and almost $650 million sitting in its bank account, records indicate, Nabors clearly boasted the resources necessary to beat CIE’s winning offer – especially if it could score more than $325 million worth of assets at a fraction of that price – but it chose to back away before the bid ever reached $5 million (including government-related fees) instead.

CIE officially closed the deal the following month, records show, immediately selling itself to Miller that same day. At that point, records show, Miller formally introduced Graham as its president and touted the “instrumental” role he had played in securing the company’s new assets. 

According to corporate filings, Graham scored a $200,000 signing bonus when taking the job – a sum equal to his entire annual salary for serving as president – and warrants to purchase 1 million shares of stock, almost half of them at just a penny a share, as well. The company never asked compensation experts to help determine his pay, records show, or sought prior approval from shareholders to issue the huge block of cheap warrants that he received.

Graham resigned from that post seven months later, due to “conflicting business and personal time commitments,” and took all of those cheap warrants along with him. He could have exercised every one of those warrants for barely $600,000, records indicate, and received company stock worth about $7.5 million – for a 10,000% gain – on the day that he departed. While Miller reported no insider sales during that time period, records show, the company’s stock traded almost 3 million shares – or 10 times the average volume for the rest of that month – on the very day that Graham vacated his post.

Meanwhile, as it turns out, Vulcan never even provided the funds that it had promised to Miller for the Alaska deal. Vulcan transferred that cash to another account, corporate filings show, with Miller settling for alternative financing – at a higher interest rate – after losing access to those funds instead.

Truth and Consequences

Miller has allegedly broken a few important promises of its own since Boruff first arrived on the scene.

Boruff spent most of his career in the real estate business, his corporate bio indicates, before shifting his focus to investment banking and then going on to replace his father-in-law as CEO of Miller about three years ago. He landed his first job in the securities arena at GunnAllen Financial, industry records show, a long-sullied firm finally shuttered by regulators in March of last year.

“They’ve hired a lot of shady brokers,” one recruiter told a trade publication shortly before Boruff joined the firm. “If you’re on the cusp of sloppiness, you could have a place at GunnAllen.”

Miller nevertheless relied on GunnAllen to arrange a critical joint-venture deal –with the brokerage firm and Boruff promised a combined 5.6% stake in the company for their services – and likely came to regret that transaction. Aided by GunnAllen, records indicate, Miller convinced Wind City Oil & Gas to buy $4.35 million worth of company stock and then allegedly blocked its partner from exercising an option that would allow it to reverse that deal. Wind City sued shortly after Boruff left GunnAllen to work at Cresta Capital, records show, with Miller soon hiring a Cresta subsidiary (Consoleum) to work on settling the complaint.

Miller wound up demoted from the OTC Bulletin Board to the dreaded Pink Sheets in the meantime, records show, where its stock steadily faded to an all-time low of just 2 cents a share.

In mid-2008, some two-and-a-half years after Miller forged that doomed partnership, the company finally negotiated a deal that promised to end its costly legal woes. With the assistance of Cresta and its own future CEO, records show, Miller raised $19.625 million by assigning some Tennessee leases to a larger energy company and gave Wind City $10.65 million of that – more than double the cash it had received from its former partner in the first place – so that it could put the dispute to rest.

“This is a huge deal,” Boroff told the local newspaper at the time. “The company has been literally tied up in litigation for years.”

That month, records show, Boruff left Cresta – which would go on to become the investment banker for fraud-riddled SpongeTech Delivery Systems (OTC: SPNGQ.PK) – and landed his current job shortly after that. Boruff officially became CEO of Miller in August of 2008, records show, when the company carried out another notable change as well.

At that point, records show, Miller retained Sherb as its independent auditing firm. Six months later, armed with audited financial statements, Miller escaped from the Pink Sheets and returned to the OTC Bulletin Board once again.

“One of the first orders of business when I became CEO,” Boruff proclaimed at the time, “was to put in place the systems and relationships to assure that Miller always meet (regulatory) filing deadlines.”

Miller recently fell short of that promised goal, however, when the company missed the most critical filing deadline that it has faced since upgrading to a respectable auditing firm. The company never filed an 8-K disclosing a recent legal setback, potentially material in nature, either. 

The month before Miller raised the cash that funded its big Wind City settlement, records indicate, the company allegedly promised to sell the leasing rights that it had just signed away to another firm called CNG Gas – at a much lower price – instead. Miller soon faced a new lawsuit filed by CNX as a result, records show, but actually scored a legal victory for a change when a trial court agreed in late 2008 to dismiss that complaint.

CNX overcame that ruling this May, however, when an appeals court reversed the original decision and set the case on a path toward future trial. Although Miller loudly celebrated its “huge” victory when it won that early round, the company buried news of its recent setback near the end of a 100-page attachment to an 8-K filing – easily overlooked by even astute investors – instead.

Meanwhile, Miller has long since rewarded Boruff for arranging the rival deal that triggered that lawsuit. The company named him as its top executive just two months after it inked that controversial transaction, records show, paying him a sign-on bonus of $300,000 that actually exceeded his entire $250,000 base salary for his first year. The company also granted him 250,000 shares of restricted stock and options to purchase another 250,000 – at just 33 cents a share – as well. 

Miller then threw in an even bigger reward for Boruff’s “extraordinary efforts” in settling the Wind City case, corporate filings show, issuing him 2.5 million shares of restricted stock to compensate him for the “significant” payout he sacrificed when leaving Cresta to join the company. But Miller had by then already paid off Cresta itself, records indicate, giving the firm a combination of cash and warrants before showering its new CEO with a much larger stock-based award for related (if not identical) services.

Miller has painted an awfully impressive picture of Boruff in the meantime, portraying him as a veteran real estate broker – responsible for developing golf courses, convention centers, hotels and condominiums – who “created several start-up ventures that grew into multimillion-dollar companies” before he ever began his lengthy real estate career.TheStreetSweeper searched an extensive news database for evidence of those projects, however, and came away almost empty-handed in the end. 

Boruff showed up on a list of players involved in a couple of real estate developments more than a decade ago, but he generated no coverage for larger projects – such as golf courses or convention centers – at all. He failed to attract media attention for the “multimillion-dollar companies” that he reportedly launched, either, although court records show that he did file for bankruptcy when doing business as CeeBee’s Rock ‘n Roll Café back in 1994 and wound up slapped with numerous liens in the years that followed.

Friends and Foes

Miller employs another key executive tarnished by a past bankruptcy as well.

The month after Miller installed Boruff as its new CEO (and Sherb as its independent auditing firm), records show, the company hired Paul Boyd to serve as its finance chief. Boyd clearly needed the job, records indicate, since his former employer – where he served as CFO for the previous seven years – had just filed for bankruptcy protection four months earlier.

More recently, Miller hired a new president to fill the post abruptly vacated by Graham in the middle of last year. David Voyticky assumed that position in June, records show, with his generous salary eclipsing that set for the Vulcan leader he replaced

Specifically, records show, Miller has agreed to pay Voyticky a base salary of $475,000 a year (more than double the sum promised to Graham) and a potential bonus that could reach three times that amount. All told, records indicate, Voyticky could pocket $1.9 million – or more than half of the total cash listed on Miller’s most recent balance sheet – for one year of service to the company.

Miller actually welcomed Voyticky to the company in the spring of last year, records show, when it appointed him to its board and assigned him a seat on its audit committee. But the company hired Voyticky’s consulting firm to help it with financing activities a few months later, records show, so it gave another director (who met independence requirements) that committee assignment instead.

The better part of a year passed before Miller finally landed a new funding deal, records show, with Voyticky – like his predecessor before him – credited for the “instrumental” role he played in securing fresh resources for the company and winning a job as its new president in the process. Although Miller wound up with a $100 million credit line, records show, the company had to secure that loan with “substantially all” of its assets -- valued at $500 million (on its official balance sheet) to more $1.2 billion (in a particularly generous review of its Alaska prize) -- and agree to pay steep interest rates and sizable brokerage fees in return.

Under the terms of that deal, corporate filings show, Miller must give Bristol up to $3 million – on top of the $10 million in principal, plus interest, it must repay to that Kessler-led firm – in consulting fees for the credit line that the company publicly applauded (and richly rewarded) its new president for arranging instead. As it turns out, company records indicate, Keller and Voyticky have actually teamed up on other occasions and share ties – through a notorious player in the penny-stock arena -- that extend well beyond Miller itself.

Earlier this month, records show, a microcap company led by Anthony “Tony” Cataldo – a name connected to Kessler for years – appointed Voyticky to serve on its board. Both Cataldo and Kessler previously surfaced at a doomed penny-stock outfit known as VoIP, records show, before that company – later targeted by regulators, along with its auditor, for allegedly engaging in fraud – wound up forced into involuntary bankruptcy under a pile of unpaid bills.

A former finance manager at VoIP blamed both Cataldo and the company’s biggest financial backers, including Kessler himself, for that disaster and the pain that it ultimately caused.

“How could a group of intelligent, experienced men such as yourselves allow a business enterprise to self-destruct and cause so much human suffering?” Monique Costantino, the company’s former treasury manager, challenged in a letter to Kessler and other big VoIP stakeholders a few years ago. “You now have rooms full of paper, equipment and furniture … but no human resources, other than the two least experienced employees: Tony Cataldo and his son. It doesn’t sound very promising.”

Cataldo now serves as chairman and CEO of Genesis Biopharma (OTC: GNBP.OB), a microcap company – viewed as a likely “scam” by online critics of its controversial leader – that just welcomed Voyticky as the newest member of its board. Voyticky serves as a director of Best Energy Services (OTC: BEYSQ.PK), an obscure penny-stock company (with a disabled website) that counts Kessler among its largest shareholders, as well. That stock currently trades on the Pink Sheets for a fraction of a penny a share.

Like Boruff before him, however, Voyticky sounded like a prize catch upon his arrival to the Miller executive suite. When the company introduced Voyticky as its new president, records show, it portrayed him as an accomplished investment banker – who actually served as vice president of Wall Street heavyweight Goldman Sachs (NYSE: GS) in the past – and never mentioned any ties to the penny-stock world, where Miller had spent most of its own life, at all.

Aches and Pains

In fairness, Miller has also installed some actual veterans of the energy industry to help it run the show.

When Miller purchased CIE -- issuing warrants for 3.5 million shares of stock, priced at a penny to $2 a share, as payment -- the company also hired CIE’s top three executives as part of that celebrated deal. Miller awarded all of them multi-year contracts with six-figure salaries, records show, but terminated the CFO Troy Stafford barely five months later.

According to court documents, Stafford arranged a key consulting agreement with an outfit known as VAI that ultimately led to the acquisition deal. In recent months, records show, both Stafford and VAI have sued Miller for allegedly failing to honor its obligations after that acquisition closed. 

Stafford sued the company in May, seeking more than $650,000 in cash (for wages and severance) and warrants valued at roughly $2.7 million at the time. He may need those funds, records indicate, since he faces a default judgment in a separate case that accuses him of swindling an investor – by selling 20% of a bogus seafood company – to raise money for his own 20% stake in CIE ahead of its lucrative sale.

The month after Stafford sued Miller, records show, VAI filed an even bigger lawsuit against the company. According to that complaint, VAI played a critical role in Miller’s acquisition of CIE but -- despite written agreements in advance – never received any payment for its services. VAI is now seeking court-ordered enforcement of those alleged agreements, with demands for warrants to purchase 1.75 million shares of Miller stock (the equivalent of 4.4% of the company’s outstanding share count) priced at just a penny a share.

Meanwhile, Miller has appointed two directors to its board – Jonathan Gross and Don Turkleson -- who lost their jobs at Cheniere Energy (NYSE: LNG) when that company almost collapsed a few years ago under a staggering mountain of debt. Gross became the first major Cheneire executive terminated during that crisis, a trade publication noted at the time, with a once-bullish analyst slashing his former $20 target price on the company’s stock to just $1 a share right before Gross walked out the door.

Turkleson hit the exit the following year, records show, resigning from his longtime post as the company’s CFO with just a single month of severance pay and some restricted stock that he could not unload during a well-timed insider selling spree. Turkleson personally sold more than $5 million worth of Cheniere stock at double-digit prices during that massive insider dump, records show, prompting at least one nervous analyst to recommend that ordinary investors shed their own stock in the company – as it continued a hairy march all the way below $1 – as well

“There are so many fine energy companies,” Bernard Picchi of Wall Street Access told the Houston Chronicle at the time. “Why would you want to mess with this one?”

Although Cheniere has rebounded off the dismal lows it set after Gross and Turkleson departed, the company – still burdened by an onerous debt load -- never fully recovered and in fact landed on a list of possible bankruptcy candidates as recently as February of this year.

Meanwhile, despite its stunning gains, Miller has since lost some analyst support of its own. C.K. Cooper downgraded Miller from buy to hold in March, records show, and then followed up this week – shortly after the company missed the deadline to file its audited financials -- by dropping coverage of the name altogether.

Notably, on the very day that Miller reported a delay in filing that crucial report, The Motley Fool sounded its own alarm about the company’s stock. It portrayed Miller as a risky highflier – its shares boosted by possible accounting games -- that could soon find itself spiraling back to earth.

“Since the purchase (of its Alaskan) assets and subsequent one-time gain, Miller’s stock has nearly tripled,” The Motley Fool observed about two weeks ago. “But is this warranted? I’d say no …

“Miller Energy Resources continues to work its slight-of-hand tricks on paper,” the Fool declared, “but it’s not fooling me!”

* Important Disclosure: TheStreetSweeper, through its members, began establishing a short position in Miller Energy Resources (MILL) on June 24 and has now shorted a total of 129,431 shares of the company’s stock at an average price of $7.07 a share. It expects to profit on future declines in the stock by covering its short position at a lower price and will fully disclose the details of its transactions as they occur.

Update: TheStreetSweeper covered 39,500 shares of MILL on July 28 at $5.42 a share. It covered the remaining 89,931 shares of its short position in MILL on July 28 at $3.76 a share and no longer has a position in the company's stock. TheStreetSweeper may choose to establish a new short position in MILL in the future and will promptly disclose the details of any additional transactions in the company's stock if and when they occur.

As a matter of policy, TheStreetSweeper prohibits members of its editorial staff from taking financial positions in the companies that they cover. To contact Melissa Davis, the editor of this website and the primary author of this story, please send an email to editor@thestreetsweeper.org. 

 

 

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