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Technology Stocks : Preference Technologies

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To: afrayem onigwecher who started this subject4/10/2003 8:41:04 PM
From: StockDung   of 460
 
Mr. Chell is tied to Mr. Valentine through his role as a shareholder and chairman of one of Mr. Valentine’s funds, the VC Advantage Fund Limited Partnership, according to the Ontario Securities Commission.

Shares of Chell Group were used as part of Mr. Valentine’s manipulation of another fund, the Canadian Advantage Limited Partnership, according to regulators.

New broker head’s business associates under cloud

Tech taint shades Pru "star"

Investment News
by Bruce Kelly
December 11, 2002

At a time when Wall Street is desperate to regain investor trust, the new head of brokers at Prudential Securities Inc. in New York is enmeshed in a growing Canadian financial scandal.

Prudential Financial Inc. of Newark, N.J., last week tapped Michael Rice, a 35-year-old “rising star” in the company, to lead its struggling brokerage operations. But according to investigators and regulators in Canada, Mr. Rice is a director and major stockholder of a technology holding company in Toronto whose founder, along with a close business associate, has been implicated in a string of securities violations. Mr. Rice, a graduate of the Wharton School of the University of Pennsylvania, joined Prudential Securities in 1997 from Salomon Smith Barney Inc. in New York. He didn’t return repeated calls seeking comment.

His role during the past year as a board member and leading shareholder in the Chell Group Corp. raises questions about his ability to lead the 4,360 brokers at Prudential at a time when Wall Street is widely mistrusted by investors. Canadian regulators say the founder of Chell Group is a “known business associate” of a Toronto stockbroker who has been indicted in the United States for securities fraud.

The broker, Mark Valentine, who is now living near Miami, has been charged with manipulating stock prices to launder money and engage in “death spiral” stock manipulations of startup technology firms. The holding company in which Mr. Rice is involved is structured to make acquisitions and conceivably also could provide the means to conduct death-spiral deals.

Mr. Rice has been serving as a director at Chell Group since last December. The Nasdaq Stock Market Inc. in New York delisted the moribund company in June “based on the company’s failure to comply with net tangible assets and shareholder equity requirements.”

In filings with the NASD last year, Mr. Rice said he had expected to spend about an hour a week on his director duties. But his involvement with Chell has almost certainly grown since then.

Mr. Rice now has a leading stock position in the company — 1.7 million shares, or 7.6% of the common stock, according to a May proxy statement filed with the Securities and Exchange Commission.

After Chell lost its Nasdaq listing in June, the company’s founder, Cameron Chell, turned over the proxy-voting rights he controls to directors on the five-member board, including Mr. Rice.

Mr. Chell’s career is checkered with securities violations. The Alberta Stock Exchange in 1998 stripped him of his license to sell securities. And this summer, the Ontario Securities Commission, in a statement of allegations, identified Mr. Chell as Mr. Valentine’s business associate.

Such a statement of allegations is the first step by regulators to prove a violation of the province’s securities laws. It’s akin to an SEC civil investigation.

Meanwhile, the Ontario Securities Commission alleges that Mr. Valentine engaged in a variety of improper trades to enrich himself at the expense of his brokerage clients over a two-year period beginning in 2000.

In a separate criminal case, Mr. Valentine, who is former chairman of Toronto broker-dealer Thomson Kernaghan & Co. Ltd., was a central figure in a massive Canadian stock fraud and money-laundering investigation earlier this year.

The case resulted in the indictment of 58 people, according to Canadian officials. As part of that investigation, federal prosecutors in the United States charged Mr. Valentine with three counts of securities fraud.

The case involved the FBI and the Royal Canadian Mounted Police. Mr. Valentine was arrested in Germany in August and extradited a month later. He is currently free on bail, residing in a condominium in Key Biscayne, Fla., according to published reports.

The U.S. charges, which are pending, stem from a deal he is accused of making with undercover FBI agents. Mr. Valentine allegedly offered to pay kickbacks in return for the agents’ agreement to manipulate the stock prices of three firms owned by Mr. Valentine.

DEATH SPIRALS

According to the Ontario Securities Commission, Mr. Valentine’s alleged fraudulent deals involve Chell stock as well that of Jawz Inc., a Toronto-based technology startup co-founded by Mr. Chell.

At least some of the stock manipulation involving Chell shares allegedly occurred in March, several months after Mr. Rice had joined the board, leading up to the Nasdaq delisting.

Canadian regulators say Mr. Valentine’s deals, including the financing of Jawz, involved death spirals and “toxic financing.”

Such deals involve complex swaps of private debt and equity. Venture capitalists often use such financial arrangements to fund technology startups, leading to an initial public offering of stock.

The deal becomes a death spiral after the IPO when the share price is manipulated downward. That allows the debt holder to trade debt for stock at a lower price to boost greatly the number of shares acquired. Then the stock price is allowed to float up again, often resulting in huge profits at the expense of other shareholders and the company.

Direct links, if any, between Mr. Rice and Mr. Valentine are unknown, but Mr. Rice’s position on Chell’s board suggests he has close ties to Mr. Chell, who still has a role with the company although he has resigned as president and CEO.

Mr. Chell is tied to Mr. Valentine through his role as a shareholder and chairman of one of Mr. Valentine’s funds, the VC Advantage Fund Limited Partnership, according to the Ontario Securities Commission.

Shares of Chell Group were used as part of Mr. Valentine’s manipulation of another fund, the Canadian Advantage Limited Partnership, according to regulators.

After Mr. Valentine’s funds acquired warrants for stock in Mr. Chell’s company, Jawz, Mr. Valentine’s brokerage issued a “buy” recommendation for it in November 2000, according to Canadian regulators.

At one time, Mr. Valentine owned 23.4% of Chell Group.

At the time of his appointment to the board of Chell last December, Mr. Rice praised the company.

“Chell Group Corp. has some very exciting initiatives,” he said in a statement. “Today’s markets present excellent acquisition opportunities, and I am pleased to be joining an already-dynamic board, helping Cameron Chell and his team realize their strategic-growth plans.”

But since then, the company’s problems have been compounded.

Last month, the Canadian government’s Competition Bureau filed criminal charges against Adrian Towning, the chairman of Chell’s board of directors, for his alleged involvement in an unrelated telemarketing scheme to bill businesses for office supplies they didn’t order.

Last Wednesday, Chell stock traded for 20 cents a share on the over-the-counter bulletin board. Chell disclosed Nov. 8 that the Nasdaq had denied its appeal to re-list on the Nasdaq SmallCap Market.

At the end of last month, Chell filed for an extension for its quarterly report with the SEC.

On its website, Chell touts an April research report from Taglich Brothers Inc. of New York that reports a 15-month price target for the company of $3.43 a share.

It fails to state, however, that Taglich suspended its price target after the Nasdaq gave Chell the boot.

In April, Chell said it had closed the last round of $8 million in fund raising led by Joseph Gunnar & Co. LLC of New York. At the time, Mr. Chell was meeting with Nasdaq officials to discuss the company’s delisting.

When asked about Chell and the firm’s investment, Joseph Gunnar executive Steven Stein declined to comment.

RESTORING TRUST

Against that backdrop, Mr. Rice will be in charge of leading Prudential Securities through a difficult market and reassuring both his brokers and clients that the firm is a model of integrity.

The seriousness of Wall Street’s image problems was a hot topic at the Securities Industry Association’s annual meeting of brokerage executives last month in Boca Raton, Fla.

“There’s an anger out there,” New York Stock Exchange Chairman Richard Grasso said in the keynote speech.

Prudential Securities has not been directly involved in the scandals that have eroded investor confidence in Wall Street brokerage houses.

Exiting the investment banking business in early 2001, the firm had little, if any, hand in bringing to the market the technology and Internet companies that snared other major Wall Street firms in scandal.

But Prudential Securities has been hemorrhaging cash, and Prudential Financial chief executive Arthur Ryan has been shopping the firm.

Through the first nine months of the year, its private-client group had lost $21 million, compared with $105 million a year earlier.

Mr. Rice is well regarded at Prudential Securities, say sources both inside and outside the firm. But his youth and inexperience have raised concerns for some.

“He never ran a branch at Smith Barney,” says one industry observer. “Now he’s running a firm?”
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