The Promoter behind TSTC and Other Chinese Stocks
by Chris Carey and Justin McLachlan - 1/25/2011 9:09:12 AM
A Sharesleuth investigation found that Kelley and several equally anonymous partners helped create a string of U.S.-listed Chinese companies, including Telestone Technologies (Nasdaq: TSTC) and Kandi Technologies (Nasdaq:KNDI). Documents show that Kelley and his partners packaged the Chinese companies for reverse mergers with shell companies, paved the way for their listings on U.S. exchanges and promoted their stock afterward. One of the partners even fronted the legal and accounting bills for some of the companies.
In return for their assistance, Kelley and the other participants in the venture got millions of shares of stock at low, pre-market prices. Their roles were not discussed in those companies' SEC filings; nor were their share deals disclosed.
The SEC has taken the position in previous enforcement actions that anyone who is compensated for acting as a finder or facilitator in a reverse-merger transaction must be registered as a broker/dealer. Sharesleuth could not find anyone who participated in Kelley's Chinese deals who met that requirement. In fact, one person who was involved in at least three of the reverse mergers was previously charged by the SEC with violating that rule.
A Secret Partner
One of Kelley's partners was Jay Tien Chiang, a Canadian businessman who was found to have defrauded a computer company of nearly $10 million in the 1990s.
Chiang has spent more than 12 years trying to avoid the financial judgments against him. His personal bankruptcy case – which includes allegations that he stashed a small fortune with family and friends before claiming insolvency – ranks as one of the longest and most contentious in Canadian history.
Documents uncovered in the case link Kelley and Chiang to a Hong Kong company called Winner International Group, which played a central role in the creation of Telestone, Kandi, New Oriental Energy & Chemical (Nasdaq: NOEC) and Orsus Xelenet Technologies (AMEX: ORS). The documents show that Winner International may have reaped more than $20 million from those deals, without ever appearing on the radar screens of securities regulators or other investors.
The testimony and records assembled after the initial discovery by a private investigator offer a rare and revealing look into the often opaque world of Chinese reverse mergers.
Sharesleuth stumbled onto the bankruptcy case while researching Kelley's activities. We went to Toronto and reviewed thousands of pages of documents, including copies of brokerage statements, emails, depositions and other testimony. We then compared that information against SEC filings, corporation filings and other records to piece together additional elements of the reverse-merger network.
Although most of the Chinese companies that Kelley and his associates brought to the United States saw brief spikes in their share prices, nearly all have become long-term losers.
Kelley has helped at least 11 Chinese companies go public through reverse mergers. They are:
* Telestone (Nasdaq: TSTC). Telestone sells wireless communications equipment and network access packages, primarily to China's three main mobile phone companies. The Beijing-based company went public in 2004 by merging with a U.S. shell that had just reorganized in bankruptcy court.
* Orsus Xelent (AMEX: ORS). The company, which also has headquarters in Beijing, manufactures and distributes cellular telephones. Kelley helped the company gain a U.S. listing in 2005.
* New Oriental Energy (Nasdaq: NOEC). The company is based in Xinyang and makes fertilizer and chemical products. It went public in 2006.
* Kandi (Nasdaq: KNDI). The company, which currently has headquarters in Jinhua, makes all-terrain vehicles and go carts, and is developing its own line of electric cars. Kandi became a public company in 2007.
* China INSOnline (Pink Sheets: CHIO.PK). The Beijing-based company once operated a web portal offering information on insurance services. Kelley helped bring the company public in 2007. Its shares were delisted from the Nasdaq in November and now trade on the Pink Sheets.
* China Auto Logistics (Nasdaq: CALI). The company, which has headquarters in Tianjin, imports and sells cars. It went public through a reverse merger in 2008.
* China Infrastructure Investment (Nasdaq: CIIC). The company has headquarters in Zhengzhou and owns and operates a toll road called the Pinglin Expressway. Kelley helped it get a U.S. listing in 2008.
* Guanwei Recycling (Nasdaq: GPRC). Guanwei is based in Fuqing City and recycles plastic waste from Europe into polyethylene for use by Chinese manufacturers. It went public through a reverse merger last year.
* Winland Online Shipping (OTCBB: WLOL.OB). The Hong Kong company operates a fleet of oceangoing vessels and offers shipping and logistics services. It became a public company in 2008.
* CH Lighting International (Pink Sheets: CHHN.PK). CH Lighting is based in Shangyu City and makes fluorescent bulbs, lamps and other lighting products. The company, which once traded on the Over-the-Counter market, became public in 2008.
* Chisen Electric (OTCBB: CIEC.OB). The Changxing-based company makes batteries for electric bicycles, motorcycles and cars. It became a public company in 2008.
Sharesleuth has identified a handful of additional Chinese reverse-merger companies that have connections to some of the players in the deals listed above. We'll have more on them in part two of this story next week.
A Financial Middleman
Although it's not apparent from SEC filings, Winner International was the key financial middleman in the reverse mergers that turned Telestone, Kandi, New Oriental Energy and Orsus Xelent into publicly traded companies.
Court documents say that Winner International paid the legal, accounting and other compliance expenses for those four companies, in advance of their reverse mergers and for as many as two years afterward. Those outlays totaled $2 million to $3 million per company, and were never listed as a financial obligation in the companies' SEC filings.
Kelley was vice president of Winner International from 2002 to 2009, and set up the U.S. brokerage accounts it used to sell much of the stock it received in the reverse-merger deals. Winner said in a legal filing that it authorized Kelley or his employees to trade the shares on its behalf.
A financial summary prepared by a forensic accountant shows that at least $11.4 million in cash was transferred from those brokerage accounts, mostly to Winner International's bank account in Hong Kong. Because of the lack of public disclosure surrounding the share allotments in the reverse mergers, it was nearly impossible for ordinary investors to know when the people who had created – and touted – the Chinese companies were cashing out.
One of Winner International's U.S. brokerage accounts, at E*Trade Securities, was frozen last year by a Canadian judge who concluded that Chiang secretly controlled it. As of February, that account was worth an additional $9.4 million, much of it in the shares of Telestone, Kandi and New Oriental Energy.
Court records show that Winner International's bank account in Hong Kong was emptied in February and March of 2009, while Chiang's creditors were trying to get a court to enforce a freeze order there. An admitted money launderer in Toronto testified that he had previously helped route money to Chiang from that account, at HSBC Bank, doing his best to ensure that the transfers went undocumented.
Kelley and Winner International have been named as defendants in a California case related to the original judgment against Chiang. They are alleged to have participated in the fraudulent conveyance of assets by helping him hide money. The trustee overseeing Chiang's bankruptcy also has named Winner International as a defendant in that case, again claiming fraudulent conveyance.
A trial is scheduled for next week in Toronto to determine the true owner of Winner International's frozen E*Trade account.
Sharesleuth is not alleging that any of the companies that Kelley and Chiang helped take public were complicit in any of the above financial transactions. But we think that people who have made, or are considering, investments in those companies might want to know more about their behind-the-scenes partners. We also think the failure of those companies and their top executives to disclose the connections to Kelley, Chiang and Winner International, and the compensation they received, raises questions about their credibility on other corporate issues.
* Disclosure: Mark Cuban, majority owner of Sharesleuth.com LLC, has no position in the shares of any of the companies mentioned in this report. Chris Carey, editor of Sharesleuth.com, does not invest in individual stocks and has no position in any of the companies mentioned, nor does Justin McLachlan, co-author of this story.
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