Jayhawk, No Longer a Highflier, Crashes to Earth

by Melissa Davis - 1/26/2010 12:22:26 PM

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Following a swift plunge that cut its stock price by almost half, Jayhawk Energy (JYHW.OB) stepped forward this week to blame the recent volatility on outside promotions followed by aggressive profit-taking – a classic, if softened, description of a “pump-and-dump” scheme – with no connection to the company’s actual operations. JYHW insisted that the company itself played no role in the stock’s short-lived rally, even though its top officer profited from the stock’s big run-up before its subsequent crash.

In the span of less than a week, CEO Lindsay Gorrill executed four well-timed insider sales that netted him almost $200,000 in profits. Between Jan. 14 and Jan. 20, Gorrill sold a total of 115,000 shares of JYHW stock at prices ranging from $1.55 to $2 a share. His final sale came on the very day that JYHW hit a new 52-week high of $2.16 a share before starting its recent plunge.

Those insider sales (while relatively small) could attract the attention of securities regulators, some experts believe, who have already investigated the company’s activities at least one time in the past.

Meanwhile, JYHW took another big hit following the company’s comments on the recent stock activity. After falling more than 25% the day before that announcement, the stock weathered a similar plunge – dropping below 90 cents a share – under heavy selling pressure on Tuesday.

Jarret Wollstein, publisher of the Intelligent Investor Report, issued some of the most bullish recommendations on JYHW in the months leading up to that crash. (He has made equally aggressive claims about Americas Energy Company, or AENY, another high-flying penny stock that has been raising eyebrows as well.)

In a newsletter fielded by investors around mid-December, Wollstein cheerfully predicted that JYHW could soar by as much as 1,200% -- eventually reaching $8 a share -- over the course of the next two years. At current prices, he insisted, JYHW posed “little foreseeable downside risk” and should in fact see “nothing but upside” ahead.

Although the stock in fact went on to triple, it lost most of those impressive gains during the past week’s sudden collapse.

Flight Pattern

JYHW followed an eerily similar pattern several years ago. The company became a favorite pick among stock promoters (pocketing six-figure payments for their services) shortly after it shifted its focus from jewelry to energy back in 2007. Lifted by those touts, the stock rapidly soared to a record high of $2.75 a share.

By mid-2008, however, the U.S. Securities and Exchange Commission had started cracking down on the company. Specifically, regulatory filings show, the agency demanded more information about a recent acquisition that was supposed to significantly boost the company’s energy production.

When JYHW finally responded to the SEC’s concerns later on that year, the company indicated that it had in fact misled investors about the true value of its assets. Of the 34 wells it purchased in the deal that triggered the SEC probe, JYHW revealed, 27 had never produced any gas. Moreover, the company admitted, the remaining seven wells had produced only minor amounts of gas and needed to undergo a “dewatering process” before they could generate any more.

“In fact, we were incorrect to use wording suggesting that we had acquired production,” JYHW confessed in a November 2008 letter to the SEC. “It would have been more correct to say that we acquired wells that have potential for production and income generation upon completion of a dewatering process and connection to the pipeline.”

By then, JYHW’s stock had already plummeted to 65 cents a share. It continued that downward spiral for months, fetching a mere 15 cents a share by the following spring.

With JYHW hovering around that low, Wollstein suddenly burst forward with a bullish report on the company. An outfit calling itself Focus Financial Group – and holding 500,000 JYHW shares that could be sold at any time – paid $33,000 to finance that report. The same firm paid three times that amount for another JYHW tout published by Wollstein around Christmastime.

In the later report, Wollstein portrayed JYHW as “a homerun for investors” who purchased the shares quickly.

“My immediate recommendation: Buy JYHW, (and) don’t wait any longer,” Wollstein declared. “Opportunities like this simply don’t come around very often.

“Mark my words,” he added. “You’ll be kicking yourself if you let it get away!”

Those who purchased JYHW in the run-up that followed that promotion – and held onto the stock in hopes of bigger gains – have lost up to 60% of their investment. In contrast, those who sold JYHW when TheStreetSweeper first raised concerns about the company escaped most of that pain. The stock has now fallen more than 50% since TheStreetSweeper sounded alarms about the company just one week ago.

* To contact Melissa Davis, the author of this story, please send an email to editor@thestreetsweeper.org.

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