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Technology Stocks : XYBR - Xybernaut

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To: Roy F who wrote (5255)12/19/2002 5:42:43 PM
From: StockDung   of 6847
Turbodyne: The Missing Banker, the Phony U.N. Guy, and the Engine Thingy That Was Going to Save the World

Turbodyne Technologies, Inc. (OTC:TRBD), suffered by far the single largest one-day plunge of all our initial short-sell advisories - on unprecedented volume of over 11 million shares - and was delisted just 169 days after our report, but that's not what makes it so memorable. No, it's the convoluted story behind this stock's rise and fall that makes it one of the most weirdly compelling schemes I have ever encountered. Turbodyne is also one of the four companies that have had the nerve to sue me. And it maintained in lawsuit long after both the ESDAQ and the NASD charged the company with issuing misleading press releases, long after a six-month suspension from trading was imposed by regulators in the United States and Europe.

The company was claiming to possess an add-on that lowered a diesel engine's emissions, and made it more fuel efficient. But even if you did no analysis of this company's technology, the genesis of Turbodyne certified it as a no-doubt, "put it in the freezer 'cause it's ice," slam-dunk, $700 million short when we found it. It began on Vancouver's Howe Street, where penny stocks abound and charismatic scammers are celebrated as much as reviled.

Turbodyne began as a shell company called Clear View Ventures, who's shares traded on the Vancouver Stock Exchange (VSE) in January 1993 at 4 Canadian cents. The man who controlled Clear View Ventures was Harry Moll. Mull was a legend among legends, involved in more Canadian stock promotion schemes than you can shake a hockey stick at. My favorite Harry Moll scam was Cross Pacific Pearls. According to the Vancouver Sun, Moll said this company was breeding clams capable of producing pearls "larger than a fivepin bowling ball.'

The VSE eventually banned Moll. His current whereabouts are officially unknown, but he is thought to be living not especially frugally in the Cayman Islands. Among other deals, Moll was involved in Dynamic Associates (OTC Bulletin Brand: DYAS).

On March 15, 1994, Clear View underwent a reverse takeover by California-based Turbodyne Systems, in which Turbodyne gained a listing on the VSE by letting itself be taken over by Clear View. Edward Halimi of Turbodyne became the new CEO of Clear View, which changed its name to ... Turbodyne. According to the Vancouver Sun, Moll passed control of Turbodyne to his longtime associate Logan Anderson, who in turn passed control to Leon Nowek. Nowek had been associated with Moll in Northfork Ventures Ltd., which ran into regulatory trouble in 1992 after its founder, Dr. Anthony Nobles, was found to have falsified his academic credentials.

A fellow named Nick Masee, who for 37 years at the Bank of Montreal had been a private banker for many of Howe Street's best-known promoters - including Harry Moll - resigned his job and became a director of the new Turbodyne. According to the Sun, Masee was known to have a taste for the good life. He consorted with Moll and his associates in a world of yachts and fancy restaurants. Masee reportedly invested in his clients' deals; although he was said to have no "street smarts." As described by the Sun, Masee looked more like a flashy promoter than a plodding banker: perpetual tan, bronze-colored hair, gold jewelry and an exotic-looking Asian wife.

According to published interviews with acquaintances, Masee had become, frustrated earning $80.000 a year while watching his clients scarfing millions with their stock schemes. He wanted a piece of the action. Massie joined the Turbodyne board in March 1994, soon after the reverse takeover According to the Vancouver Sun, the Vancouver Stock Exchange required Masee to sign an undertaking that he would have no further dealings with Moll, who had been banned from the VSE by then.

0n August 10, 1994, just a few months after changing careers, Masee and his wife, Lisa, were supposed to meet an unidentified prospective financier at Trader Vic's restaurant in Vancouver. The couple disappeared that night and were never seen again. There were no signs of foul play but also no evidence that the couple had chosen voluntarily to disappear. Their beloved black cat, Spider, was found at their house days later, half starved, and they had not taken their passports.

According to the Sun, despite being a banker, friend, and confidant to many of Howe Street's most notorious scam artist, Masee was considered clean. There was an unsubstantiated rumor that he may have guaranteed Moll's gambling debts, and that those debts had been assigned to a group of nasty bikers. Masee also. had been subpoenaed as a witness in an embezzlement trial involving a client. The bottom line: Because he was a Howe Street cynosure, almost all of Nick Masee's chums could be considered suspects. An irony pointed out by the Sun is that, while Turbodyne's share price was only 10 cents when he disappeared, in just a few years his holdings and options would have made him the millionaire he aspired to become.

Turbodyne, looking for a quick charge, engaged Pecunia Gmbh to sell shares privately in Germany. Whether Turbodyne had seen the advantage of placing its stock overseas, especially in a non-English-speaking country that might not be able to properly investigate a company's background, is not known. Teutonic Turbodyne investors probably wouldn't recognize the name Harry Moll or remember a strange story about a couple mysteriously disappearing. In any case, Turbodyne was a hit among the Germans. Later, after we translated our reports into German, the German press would become enchanted the Asensio-Turbodyne saga.

By March 1995 Turbodyne's stock, pumping mightily but not nearly at the point it would reach a few years later, had risen to $1.18. Canada Stockwatch, a sporadically useful publication that epitomizes the simultaneous revulsion and fascination Howe Street has for its stock promoters, printed several positive pieces about the company at the time. But when Turbodyne's Edward Halimi, queried by Stockwatch about a sudden price plunge, lamely punted that it was due to "more sellers than buyers," the publication tore into Turbodyne as an "also-ran promotion" of "Harry Moll and his followers."

At this point Turbodyne lacked sales. Now, it's usually easier to promote a company's future promise than to try to explain why a moribund product already on the market is suddenly going to enjoy explosive sales growth. But Turbodyne apparently felt that if it acquired a manufacturing business in the automotive field, it would add fuel to its story and substance to its earth-saving product claims.

In October 1995 it announced the acquisition of California based Pacific Baja Light Metal Holdings for $12 million cash and $18 million in stock. Pacific Baja, a "real" company with actual sales and earnings ($14.7 million/$2.1 million as of the previous year), had ostensibly been a supplier to Turbodyne. Not only did the deal afford Turbodyne sales, but also, just like Diana Corporation's money-losing Atlanta Provision meat distribution holding, maybe it could help obscure lack of earnings from the front and center promote. (Pacific Baja and its subsidiaries commenced Chapter 11 bankruptcy proceedings in the United States Bankruptcy Court for the Central District of California on September 30,1999.)

In April 1996 Turbodyne was forced to make a strange announcement that one Melanie St. James had been acting as a secret maker maker for the stock since June 1995. The company disclosed that St. James is a relative a Edward Halimi, then the company's president. (Other reports specify that she is Halimi's stepdaughter.) No further details were disclosed, but insider trading reports show that Halimi transferred 800,000 shares to St. James in June 1995 at no cost to her. The company also awarded David St. James who lived at the same address as Melanie, an employee option to buy 150,000 shares a $1 each. Evidence of wrongdoing? Not per se. Suspicious? Hell yes.

In June of that year the company overstepped itself in a release, announcing that Granatelli Performance Technologies had agreed to act as worldwide distributor for the auto and motorcycle gasoline-engine aftermarket. Granatelli would be required to purchase a least 15,000 Turbopac units in 1996 for USD $9.4 million and 50,000 units at USD $31.3 million in subsequent years. Although it was never implied directly, many investors may have believed that this automotive company was associated with Indy race car driver Andy Granatelli.

A later prospectus, however, revealed that Granatelli Performance Technologies had purchased not 15,000 units but only 125 units, for USD $78,000, and that the company was in fact merely a shell formed specifically for the purpose of marketing Turbodyne products with no significant assets or sales history. Plus, Granatelli was forced to change its name to Grand Technologies, reportedly because Andy Granatelli, who had no connection to the scheme whatsoever, had threatened legal action. In other words, the company had announced and promoted a marketing "deal" with a business even funnier than its own. (On January 21, 2000, Turbodyne announced it had paid a judgment to Grand Technologies in response to liens that Grand was holding against Turbodyne and Edward Halimi.)

Nonetheless, the promotion rolled on, and in Match 1997 Turbodyne began trading on die Nasdaq, at around $8 a share. On April 11 Turbodyne announced in a press release that it had been awarded designation by the United Nations Flag Technology Program: "The special acknowledgement by the Global Technology Group has been given only to technologies that assist developing countries through the creation of employment, improving health conditions or enhancing the environment. The Turbodyne system meets all three criteria." The letter of designation was issued by Joseph D. Ben-Dak, described in the release, as "chief of the U.N. Global Technology Group." Ben-Dak praised Turbodyne in the release.

This Flag-Technology designation was invoked repeatedly in future releases. And there's a useful lesson here. Often a stock promotion will claim credibility via some impressive-sounding imprimatur. And what could be more impressive than the United Nations? But you must ask yourself: "Have I ever heard of Joseph D. Ben-Dak? Have I ever heard of the Flag Technology Program? Do I know of any legitimate companies that have been so designated? What does the U.N. have to do with any leading-edge product or commercial activity? What does the U.N. know about any technology."

This U.N. anointment brings to mind some other scams that announced real deals with known entities that vastly overstated potential revenues, such as Zonagen with Schering-Plough, Solv-Ex with Shell Oil, and Diana Corporation with Concentric.

On July 30, 1997, Turbodyne joined the European EASDAQ exchange, becoming one of the few companies to trade on both the Nasdaq and die EASDAQ. (In 18 months it would be one of even fewer companies to have had trading forcibly halted on both exchanges.) On August 14 Turbodyne delisted itself from the Vancouver Exchange to trade exclusively in North America on the Nasdaq.

In October 1997 Turbodyne promoters figured out a way to get into the New York Times They were able to get a small article regarding their pledge, as thanks for the U.N. designation, to donate half a percent of their gross sales so the United Nations. Hmm. And to whom were they going to send this check? Buotros Boutros-Ghali? Ted Turner? Superman? Regardless of my mockery, it was a masterful publicity ploy.

The so-called analyst were falling into place, as well. On February 2,1998, Christina S. Kohlhaas of CSK Securities Research in Novato, California, issued a strong buy. Her lengthy report looked like it was straight from the Turbodyne PR department, with no negatives or cautions whatsoever regarding a company that had yet to ring up a sale from its new invention. "An impressive management team ... to bring it all together," she burbled. The impressive management team hadn't yet brought it all together, however, the price held steady at $3 a share.

On March 3 Turbodyne shareholders voted to become U.S. domiciled, in Delaware, rather than in Canada. This change caused the removal of the Scarlet "F" - designating a foreign stock - from the stock's symbol; it went from TRBDF to TRBD. By getting the "F" out of there, Turbodyne raised the comfort level of chauvinistic U.S. investors.

On April 27, 1998, Fox News presented a feature on Turbodyne in connection with Earth Day. Two days later the company announced a purchase order from Italy for 40 car units. On May 13 CA IB, the investment bank of the Bank Austria group, issued a buy/buy, with a headline touting "increasing torque for earnings growth." Shares had risen from February's $3 to over $11.

On May 26 came a big, vague announcement "A major European vehicle and engine manufacturer has selected Turbodyne's Turbopac models 1500 and 2200 for incorporation on there classes of engines being manufactured for the 1999 model year." Turbodyne claimed it was "contractually restricted'* from divulging the name of this manufacturer.

On June 16 a Turbodyne announcement claimed that Paris Transit was going to test the Turbopac. It went on to claim: "The custom kits reduce emission by more than 50% while saving fuel and other operational costs." On July 2 Turbodyne began waving around a purchase order for $30,675,000 from the TransBusiness Group of Moscow. The Russians supposedly were ordering 10,500 TurboPacs for Moscow Transit Buses, with the first shipment due October 1. In the week preceding the announcement, the stock ran up from $7 to $9 a share.

I picture Harry Moll on the deck of his beach house in the Caymans, dropping his phone in wonderment when he learns how far Turbodyne has been able to run with his little 10-cent shell company. Not only has the company amassed a stunning market cap built on press releases, but it's also postured itself as the environmental savior of the world. As Edward Halimi stated, "Turbodyne's technology is now considered as the only technology available which can reduce the global warming effect of diesel vehicles."

Despite the company's "highly speculative status," a number of respectable institutions were making a market in Turbodyne, including Salomon Smith Barney (which moved almost 3 million shares in April 1998) and our old friends at Neuberger Berman. Neuberger Berman was a frequent and voluminous trader in Turbodyne, becoming a significant market maker just prior to the run-up. It shifted over a million shares a month during mid-1998.

In the first seven months of 1998, Turbodyne issued 33 press releases. A July 20 release stated that Turbodyne was engaged in preliminary discussions with "several major industrial concerns regarding the possible establishment of a strategic alliance with, and the possible acquisition of a minority interest in Turbodyne." The engine of this little company with the big ambitions was roaring.

On August 3 it overrevved at $16.63 per share. Was Turbodyne ready to blow a gasket? A penny shell that acquired a car-part patent for $200,000 in stock now had an insane market cap of $700 million.

You'll recall that Diana was another San Fernando Valley-based promotion whose bogus technology was obtained for $200,000. Diana, which received a slew of media attention and was championed by major investment houses, attained a peak market cap of only $600 million. I believe Diana received more attention because, with only 5 million shares outstanding, it was able to blow people's socks off with a price rise from $5 to $120. But Turbodyne, with over 40 million fully diluted shares out, priced its shares cheaper. Doing this made the stock more attractive to people who were willing to take a flutter. Psychologically, it's more satisfying to purchase stock in big round numbers; at $120, 100 shares of Diana cost a hefty $12,000. For whatever reason. this Vancouver filly outpaced the New York Stock Exchange's entry in the 1990s Promoters Cup race by $100 million.

Unfortunately, Turbodyne's peak performance coincided with my undergoing a major surgical procedure, On July 28, 1998, I spent 10 hours horizontal on an operating table. It was one oft he few times since becoming an active short trader that I wasn't in touch with my office during trading hours, closely checking stocks in which I am involved or have an investment interest. Relative to our capital base, Asensio & Company generally has large, undiversified positions that require constant vigilance. 'That's the way I like to trade. I always stayed in touch with the markets. After having waited so long for the Turbodyne Express, however, it took off without me.

I was in the hospital for three days. And in those three days, Turbodyne stock traded tip to new highs. I had been following the stock for months. waiting for the opportunity. I could tell from the price and volume action that new buyers were entering the stock. I laughed a my predicament and realized that the time had comes, so I decided to issue a report on Turbodyne. I began preparing the report from my hospital bed.

I couldn't speak; my head was bandaged, I couldn't even suck liquids through a straw. I was eating by injecting soup stock with a syringe through a rubber hose running into my mouth behind my wired jaw. I communicated with my office via e-mail. But I was in great spirits, enjoying the kindness of my mother and ex-wife, who'd both come to New York to be with me. It was the first time since 1993, when we started the public brockerage, that I had taken any time off. But Turbodyne called: "Come get me. Come get me." I got bored with chicken soup through a rubber hose. I had to get me a taste of that sweet, sweet Turbo sugar.

On August 4 we initiated coverage. Our 400-word, no-frills report hit the overblown Turbodyne stock hard. We unveiled our research on Turbodyne and detailed that over the previous five years, Turbodyne had claimed deals with 12 different companies in over 14 different countries, yet no manufacturer had ever incorporated a single Turbodyne product in a new engine. During this same sales-free period, Turbodyne had sold over 25.6 million shares at an average price of approximately $2.18 per share to the public. None of these shares was sold under a U.S. registration statement and underwriting. The vast majority of Turbodyne's 44.2 million fully diluted shares had been sold through below-market private sales to insiders who then resold the shares to the public.

We had never seen a stock crack like Turbodyne did that day. I was home so I missed the thrill of the dancing numbers. From its previous day's high of $16.63 it dipped as low as $5.63, a drops of 66 percent. Bloomberg covered our report and the stock action in Turbodyne as one of the top global stories that day. But I didn't have a quote machine at home, and I couldn't speak. I woke up late, checked the price. and almost choked on my watery slit-pea soap. My Turbo hunger was sated, but it was almost a letdown to see the company capitulate without a fight.

On August 17 a frazzled Edward Halimi returned to company headquarters in Woodland Hills, California, claiming to have spent the previous, 10 days in "negotiations" in London and Moscow. (Hmmm. London and Moscow. Perhaps he was planning to buy a bridge? Some of those cute li'I Russian nesting dolls?) Traveling with him had been Ben-Dak "of the U.N. Development Program." With the stunning drop in the stock price, the earlier promotional excess would have to be increased exponentially - now the numbers would have to be huge. In a press release, Halimi described Turbodyne's Russian market as "representing more than $1 billion in potential sales to the company." He also claimed that the company was "poised to access" Mexico's "potential market of $1.2 billion." Regarding the "libelous and loathsome tactics" of the short sellers, Halimi stated, apparently in reference to the Bloomberg coverage, "The good news is [they] have brought our important breakthrough technology to the attention of the world press." This is like Nixon thanking the Washington Post for establishing his place in history within delightful Watergate coverage.

A late August research foray produced a nugget of solid gold for us, but we really had to work for it. The United Nations' anointing of Turbodyne had been gnawing at me. I'm not a big U.N. fan, but I felt something more than bureaucratic hoopla was involved. Either U.N. officials were unaware of this low-level bureaucrat, Joseph Ben-Dak, and his imprudent granting of U.N. endorsements, or, much worse, they were aware. If they were aware, this would be a much bigger story. And if they weren't aware, we decided to make them aware and solicit comment.

I can't imagine any more difficult research assignment than trying to thread one's way through the fractured structure of the United Nations hierarchy. Who the hell knows how to reach the proper person there? And the problem was compounded many times over by the fact that it was August when most of the world is on vacation. We began with the inspector general of the U.N. and the Office of Human Resources. No one there was helpful in any way. Thereafter we decided never to let anybody go without either releasing a statement or giving us the name of someone more directly involved.

It was like unpeeling the layers of an onion: All steps were small, incremental. We gradually bored our way toward the proper authority. Finally we reached the United Nation Development Program (UNDP) and from there the internal Human Resources department. We sent them copies of the Turbodyne press releases exploiting the "U.N. Flagship Technology" designation. Several days later we received an amazing fax from Fracois Loriot, the chief of die legal section of the UNDP's Office of Human Resources. Here is what he told us.

Ben-Dak had left the United Nations Development Program on April 1, 1997, 10 days before Turbodyne's original announcement of its designation from the U.N. Flag Technology Program - that's 10 days before the first of Turbodyne's many descriptions of Ben-Dak as an "official of the UNDP." The Global Technology Group that Ben-Dak managed had been terminated. Turbodyne's press releases concerning its "U.N. Flag Technology" endorsement or status were not authorized by the UNDP and in no way represented the UNDP's position with regard to Turbodyne's technologies or related financing.

Further work revealed that Ben-Dak was involved with affixing a false UN. seal to other stock promotions, as well. On March 18, 1997 - just two weeks before Ben-Dak left his U.N. post for greener pastures - GK Intelligent (GKI) Systems, Inc., announced that it had received official notification from the UNDP that it had been designated as a Flag Technology.

According to GKI's Form I0-SB-A, filed October 2,1997, Ben-Dak had served as vice chairman of its board of directors since September 1996, six month before the designation - and five and a half month before he left his U.N. post. It also stated that Ben-Dak had recently undertaken a "full-time project" for the company. In this form, Ben-Dak was also listed as owning 6.4 Percent, or 1 million shares, of GKI. This did not include an additional 500,000 unvested warrants.

During the first half of 1998, GKI's stock rose less than 50 cents per share to a high of $19.75. On August 13, 1998, GKI announced that its chairman and several other key employees, including a board member, its chief financial officer, chief information officer, and corporate counsel had resigned en masse and without comment. The company is now gone, its doors literally locked, but it still trades a few shares every day (OTC: GKIS) at around 30 cents.
(see the different view of Dr. Ben-Dak's lawyers - this is not a part of Asensio's book!)

That same month Turbodyne issued press releases regarding tests at Southwest Research Institute and Goldenwest Emissions Laboratories. Take that, short sellers - in your face! But we learned something of interest The tests at Southwest Research was conducted by one Magdi K. Khair. In July 1997 Khair had sold a patent to Turbodyne for an undisclosed amount. And Goldenwest turned out to be a college laboratory class.

Turbodyne applied to cease being a reporting issuer in British Columbia, where it had traded on the Vancouver Stock Exchange, on January 12, 1999. Trading in Turbodyne was halted by the Belgium-based EASDAQ just eight days later, on January 20. The stock closed that day at $5.34. The EASDAQ announced that it planned to initiate disciplinary procedures against the company for, among other things, allegedly issuing a number of press releases that contained false or misleading information.

The Nasdaq, ever wary of alienating even the foulest of paying constituents, failed to halt the trading of Turbodyne until February 26. And despite a preponderance of evidence regarding the company's bogus promotional efforts, trading was resumed on the EASDAQ on Match 8, 1999, with the price by then in the $1 range.

Nasdaq perhaps reluctantly, finally delisted Turbodyne as of April 1, 1999. The Nasdaq Listings Qualification Panel alleged that Turbodyne "engaged in a pattern of issuing misleading and incomplete news releases, which often were unsupported by an adequate basis in fact."

In mid-1999 Turbodyne underwent a sweeping management change. On July 2 Peter Hofbrauer replaced Edward Halimi, Turbodyne's longtime leader, as CEO. On October 8 Hofbrauer became chairman, and Gerhard Dels was named president and CEO. Notably, the new guys came to me to settle our ongoing legal dispute. It's sad that, just to reach this point, I had to pay $1 million in legal cost defending my right to free speech. Still, Hofbrauer and DeIs seemed legitimately interested in building some sort of business.

Unfortunately for them, the new regime inherited the sins of the old. On August 1, 2000, a Turbodyne press release stated that there was enough working capital to remain a going concern only until the end of the month. And that was the good news. The company also announced it had conducted an investigation into prior management's 1999 issuance of approximately 8.7 million shares of common stock for an aggregate purchase price of approximately $9.5 million. Turbodyne concluded that it had not effectively registered those shares under the Securities Act of 1933 and had not disclosed this failure in its SEC filings. It stated that the issuance of the shares, to eight institutional investors and three individuals, each of whom was located outside the United States, had been erroneously reported in SEC filings as being the result of a repricing and subsequent exercise of options.

The next day, with the stock trading below 50 cents, the EASDAQ suspended trading in Turbodyne shares. On August 17 the suspension was reaffirmed through at least October 3, 2000. And so ends the saga of the missing banker, the phony U.N. guy, and the engine thingy that was going to saw the world.
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