The OLIEphant In The Room

OLIE Nov — Dec 2013

January 27, 2014 (update): Shares of OLIE and HSCO were suspended from trading today pending an SEC investigation. It is expected that trading will resume on February 8, 2014 on the Grey Market.

December 20, 2013: It’s been a big week for formerly narcoleptic Olie Inc. ( OLIE ). On Monday 16 December it moved out of the triple zeroes to close at $0.0022. The next day it soared above a penny, closing at $0.014 astonishing volume of 180 million shares. On Thursday, profit-taking hit after an intraday high of $0.02 was reached; Friday’s performance was lackluster. But many believe the fun isn’t over.

The cause of all the excitement was evidently known to some on Monday, and to everyone else on Tuesday, when OLIE ‘s CEO Robert Gardner issued a press release announcing that the company’s subsidiary, Settlement Management Series 1, LLC, had just completed an assignment for $20,000,000 MTN [Medium Term Note] USD, credit linked to a Triple A US Treasury Strip (MTN). According to the announcement, this MTN matures in ten years and upon maturity pays out Settlement Management’s clients, the principal, and the 5% interest premium. Settlement Management has no liens or debts, and accordingly there should be no depreciation in the inherent value held in the MTN which therefore would accrue to the benefit of the Company’s consolidated financial statements. This assignment is in addition to the $5,000,000 five year, 5% US Treasury Strip already owned by Settlement Management and announced by the Company on November 19th, 2013. On that same day, OLIE filed a Form 8-K containing a great deal more information, none of which makes much sense.

The 19 November news had gone practically unnoticed, causing only a small and short-lived blip in OLIE ‘s stock price. The company reported then that it had acquired Settlement Management, a Delaware LLC that owned the Treasury strip referenced above, which supposedly matures in five years and upon maturity pays out Settlement Management the principal and the 5% interest premium. That is not how Treasury strips work, as will be explained moving ahead. CEO Robert Gardner noted that the acquisition was in keeping with the Three Step Corporate Plan announced a few weeks earlier, when the company declared that it intended to use its Convertible Preferred Securities as currency. Presumably the acquisition was paid for with a chunk of that convertible preferred. No amount was specified, but the Forward Acquisition Agreement between the parties, attached as an exhibit to the 8-K filed on 17 December. stated that the managing partner of Settlement Management, D. A. Pearman, was given 2 million Series B Anti Dilutive Preferred Shares priced at @ $2.50, and 4.9% of OLIE ‘s total issued and outstanding stock, just under the 5% threshold that would require reporting of sales.

In the body of the 8-K, however, it was specified that the stock was actually issued to ten United States resident NexPhase shareholders in reliance on Section 4(2) and Regulation D of the United States Securities Act of 1933. NexPhase is not identified, but as it turns out, it is a Florida company specializing in LED lighting. In February 2011 it was acquired by InfoSpi, Inc. a public company. In the share exchange agreement struck between the two, ten NexPhase shareholdersits only shareholdersare named. They must be the people who received 2 million shares of OLIE’s Series B convertible preferred. D. A. Pearman is not listed among them. Subsequently, InfoSpi changed its name to Onteco Corp. ( ONTC ), and then to Inelco Corp ( INLC ). The name changes didn’t help: it’s a Pink Limited Information stock, trading at $0.0001 by $0.0002, thanks to numerous Pump & Dump campaigns.

No explanation of the distribution of the OLIE convertible preferred to the ten NexPhase shareholders is offered. What is their relation to Settlement Management? Were they the owners of the Treasury strip?

Two pumps are better than one

OLIE was not alone in its run; it had a companion, Hi Score Corp. ( HSCO ). Though it scarcely seems possible, HSCO was even deader than OLIE. stuck at $0.0001 by $0.0002, trading no volume at all some days. Its sorry performance was in considerable part due to a 1:2000 reverse split inflicted on shareholders in July. But it rose from $0.0002 on 18 December to an intraday high of $0.0012 on the 19th. Though it fell back to close at $0.0006, it was still up 133% for the day, on volume of 526 million shares. There was a lot of buying, and, of course, a lot of selling.

HSCO Dec 11 — 19, 2013

HSCO rose in tandem with OLIE because on the 18th, new CEO William White announced that the company would be acquired by OLIE. Gardner issued a similar press release on behalf of OLIE. The acquisition would be paid for withyou guessed itconvertible preferred stock, this time Series D. The amount was not disclosed because the transaction will not be consummated until HSCO complete an audit. To accomplish that last task, they’ve hired MaloneBailey, LLP. MaloneBailey has reportedly already been paid.

Within the press release, White also stated that: We have on our balance sheet, a $5,000,000 USD MTN, credit linked to a AAA US Treasury Strip, and we have moved a considerable amount of affiliate and non-affiliate debt off our balance sheet.

Another Treasury strip, or the same one?

HSCO is purportedly in the LED lighting business. So is NexPhase. Both are located in Florida. It might seem reasonable to imagine that there’s some connection, but NexPhase is never mentioned in HSCO ‘s OTCMarkets filings. So that might or might not be the case. The ten NexPhase shareholders who now own OLIE convertible preferred are apparently not associated with HSCO in any way.

One Treasury strip, two, or none at all?

In an attempt to arrive at an answer to that important question, it’s best to consider the events of the recent past chronologically. The story is complicated, and in some ways tedious, but it is very important.

On 14 November, HSCO announced that it had acquired a company called Sequoia Management Series 1, LLC, a company that owns a $5,000,000, five year, 5% US Treasury Strip, without liabilities on its own financial statements. It did not publish or explain the terms of the acquisition. Since it, like OLIE. has proclaimed that convertible preferred stock is currency, very likely that’s what Sequoia received. Or what we are meant to think Sequoia received.

On 19 November, OLIE announced its own acquisition of Settlement Management Series 1, LLC, which, like the company just acquired by HSCO. happened to own a $5 million, five year, 5% Treasury strip, and was willing to sell it in exchange for convertible preferred stock. We know that stock went to the NexPhase shareholders.

Both Sequoia Management and Settlement Management are Delaware companies. Sequoia was formed on 15 November 2013, one day after it was acquired by HSCO.

Settlement Management, bought by OLIE. was formed on 18 November 2013, one day before Gardner announced the deal.

Obviously both entities were created for the sole purpose of being acquired by a couple of penny stock companies. But why should they have happened to hold identicaland identically described, in the relative press releasesTreasury strips?

Strips is the acronym for Separate Trading of Registered Interest and Principal of Securities. When a Treasury not or bond is stripped, the principal payment becomes a zero-coupon security. Holders of strips are not paid both principal and interest. This is well-known; most people understand what a zero-coupon bond is. Oddly, though, it seems our CEOs do not: Gardner insisted that upon maturity [the strip] pays out Settlement Management the principal and the 5% interest premium.

And what 5% interest are Gardner and White fantasizing about? Since 2009, no Treasury notes or bonds have had yields anywhere near 5% .

There are several exhibits attached to the OLIE 8-K reporting the acquisition of Settlement Management. The Forward Acquisition Agreement between OLIE and Settlement Management has already been discussed. Another is a private placement memorandum in which Sequoia Management Infrastructure Series 1, LLC offers $200 million medium term notes at 5.5% interest. Gardner referenced these notes in his OLIE press release of 17 December, saying Settlement Managementnewly acquired by OLIE had just completed an assignment for them. Yet he got the interest rate and the dollar amount wrong: he said 5% instead of 5.5%, and $20 million instead of $200 million.

The private placement memorandum is a curious document. Unusually, it’s in .pdf format. The SEC does not permit documents of this kind to be submitted in formats that are not searchable. And in fact it never was filed with the SEC. The securities are senior, unsecured corporate notes with a maturity date in December 2023.

Treasury strips are mentioned only once in the lengthy document:

Clearly Sequoia Infrastructure doesn’t plan to buy strips; it plans to buy securities credit-linked to strips.

The document lacks clarity in parts, and is inconsistent. The type on some pages is justified; on others it is not. This, of course, suggests a careless cut-and-paste job. Perhaps the author never expected anyone to read it from start to finish.

The memorandum is dated 15 November 2013, and is signed by J. R. Blackwell, managing member of Sequoia Infrastructure. Which is interesting, given that the LLC wasn’t formed in Delaware until 22 November.

There is also a Partial Deed of Assignment between Sequoia Management Infrastructure Series 1 and Sequoia Management Series 1, LLC, executed on or about December 10, but dated 16 November. In it, Sequoia Infrastructure assigns the full $200,000,000 worth of the notes offered in the prospectuswhich was signed only the day beforeto Sequoia Management Series I, the company acquired by HSCO on 14 November. The signatory for Sequoia Infrastructure is Sherrie A. Jenkins. Like D. A. Pearman, she does not turn up on any internet searches. Neither one has so much as a Linked In page. They would not be the first nonexistent company officers to turn up in connection with a penny stock.

The Deed of Assignment states that the agreement was made as collateral for the equity investment as described in the Capitalization Acquisition Agreement dated on or about December 10, 2013. That document is not one of the exhibits.

What was the point of composing a prospectus if the plan all along was to sell the notes to Sequoia Management, HSCO ‘s company? But according to Gardner. the notes were assigned to OLIE ‘s Settlement Management. It may be wondered whether he even read the relevant documents. In the Forward Acquisition Agreement, Settlement Management makes it clear that the Treasury strip is its only asset.

Caught In The Act

Obviously all these Delaware companies were created at the same time for the same purpose: to do dealsor what appear to be dealswith OLIE and HSCO. Is there really a Treasury strip worth $5 million that someone was willing to exchange for convertible preferred that may never be worth a dime?

Probably not. In the private placement memorandum. two securities firms were named as underwriters: Fordham Financial Management and Centaurus Financial. An early morning call to Fordham proved fruitful. Phyllis Henderson, Chief Compliance Officer, was very surprised indeed to learn of her company’s supposed participation in the purported offering. She stated unequivocally that Fordham has never heard of Sequoia Management Infrastructure Series 1, LLC. much less agreed to underwrite anything for it.

This explains why the documentation is inconsistent, and why Gardner and White reported their contents inaccurately. The whole bond story is an invention. And it is brazen fraud .

Javan King and the Syndicate Trust

Anyone familiar with the Citadel Eft ( CDFT ) comedy (which was covered in earlier articles here. here and here ) will already have detected Javan King ‘s hand in OLIE and HSCO ‘s insistence that convertible preferred stock can be used as currency. No doubt, its judicious use can help a company restructure debt in the short term, but moving debt around does not make it disappear. Convertible preferred shares are a hybrid security, with the characteristics of both debt and equity.

Robert Gardner

Robert Gardner is an Englishman, a barrister proud to be a Queen’s Counsel. He emigrated to Canada decades ago, and settled in Vancouver, where he opened a successful law practice. Along the way, he became interested in the financial markets. He once defended notorious Vancouver promoter Murray Pezim. He became a promoter himself, and has served as an officer or director of many companies, most of them listed in Canada. In recent years he’s extended his reach into the States. Gardner is a colorful character. As a young man, he served in Britain’s famous SAS, a highly-trained special forces unit. He’s tried his hand at movie making, run for political office, and spent a good deal of time sailing the Pacific. He’s been involved in considerable controversy over the years, and has made quite a few enemies, but has never been subjected to any disciplinary actions by the Canadian or U.S. regulators.

Perhaps Gardner had already seen the writing on the wall, and was looking around for something else to do with the OLIE shell. It appears that he became acquainted with Javan (Jay) King, or at least with some members of King’s circle, as early as February. On the 27th, someone from BenjaminFunds tweeted: