AENY: Look What's Hiding beneath that Former Shell

by Melissa Davis - 2/4/2010 8:23:01 AM

* Click here to start/join a discussion of this article or send tips for future news stories.

Americas Energy Company (AENY.OB) exposed some ugly flaws when it emerged from its corporate shell.

Following its heavily hyped reverse merger, AENY now counts CEO Christopher Headrick – a longtime dealmaker with a history of failure – as its sole officer, director and member of its staff. Although AENY has announced plans to expand its senior management team, the company aims to do so by hiring leaders who have benefited handsomely from a series of generous related-party deals. One of those potential executives, already identified as a company vice president in the past, has agreed to plead guilty to felony tax evasion charges and could face up to five years in prison for his crime.

Meanwhile, AENY chose a tainted auditor to verify the financial statements for its recent merger deal. Jonathon Reuben has previously been sanctioned by government officials for allegedly signing off on bogus PIPE (private investment in public equity) deals used in a massive Ponzi scheme. He had by then already come under attack by his own industry watchdog, which criticized his “pervasive failure to plan, perform and document” audits according to standard accounting rules.

AENY’s new financial statements, while barely a week old, have started raising some eyebrows already. They reveal a far different – and far more expensive – merger deal than the company originally described. That deal left the company with massive levels of dilution and debt that came as a surprise to many.

AENY issued 33 million shares of company stock, increasing its prior share count by 160%, in order to seal the transaction. It also promised $32 million – a sum that dwarfs the entire price tag for the original merger deal – to purchase assets long controlled by the family of an insider.

Of course, AENY might need those extra assets in order to bolster its performance. The coal-mining company generated just $530,000 in revenue – and racked up $357,000 in losses – during its first four months of operation. It spent $227,842 on executive compensation (mostly in the form of dirt-cheap stock), but just $18,622 on exploration equipment, during that same timeframe.

AENY currently boasts a handsome market value of $240 million -- 140 times the book value of all its mineral assets combined -- despite its weak track record. Thanks to his 14.7% stake in the company, Headrick is now worth almost $35 million on paper as a result.

Filling in the Gaps

By now, Headrick has been chasing after success for quite some time.

He has spent the bulk of his 25-year career working in the real estate industry, while running into regular trouble whenever he ventured outside that familiar arena. His official bio, included in AENY’s latest regulatory filing, conveniently glosses over those past business failures.

According to that bio, for example, Headrick spent four years as senior manager of development for an outfit known as The Auction Company back in the 1990s. That company supposedly sold itself to another auctioning firm known as ACUSA, the bio claims, which in turn hired Headrick to serve as its senior manager over strategic partnering.

Based on court records supplied to TheStreetSweeper, Headrick – while doing business as The Auction Company – filed for Chapter 7 bankruptcy while ACUSA was still in operation. ACUSA itself followed suit the following year, local news reports show, leaving behind millions of dollars in unpaid debts and sticking shareholders with piles of worthless stock.

Headrick returned to the real estate business shortly before ACUSA’s bankruptcy filing, his bio shows, where he remained until 2008. While that bio offers no clues about Headrick’s activities between 2008 and mid-2009 – when he suddenly surfaced at AENY – public records have served to fill the gap.

In early 2008, government records indicate, Headrick ventured – for the first time – into the coal-mining industry. He established a company known as Patriot Products Group (PPG) in early 2008, which state officials dissolved the following year.

By then, Headrick had already moved on. In July of 2009, he agreed to sell a new coal-mining venture to Trend Technology (now AENY) for a generous combination of cash and company stock.

Headrick seemed eager to ink that deal in a hurry, since he apparently failed to notice that his name was misspelled on the official paperwork. Moreover, he signed that letter of intent 10 days before the actual “inception” date now listed for his company.

Taking Care of Insiders

That month brought a flurry of activity.

On July 13, Headrick and four other company officers -- Jimmy Dunn, George Frankenberg, John Gargis and Ronald Scott -- formally incorporated AENY in the state of Nevada. During the same month, recent filings show, AENY issued 33 million shares of stock to the company’s founders. It estimated the total “market value” of that stock at just $200,000 – or less than a penny a share – at a time when public investors were bidding more than $1 a share for the same stock.

AENY continued to list its total share count at 22.5 million in the meantime, while indicating that it would be issuing just 17 million shares to finance its looming merger deal. Since then, Headrick and three other related parties have emerged as the largest owners of the company’s stock. More than six months after receiving their shares, they have still yet to file obligatory ownership statements – normally required within days – detailing their massive stakes in the company.  

Dunn, the admitted tax cheat, is curiously absent from AENY’s new list of major shareholders. Gerald Tuskey, a securities attorney who reported selling all of his AENY stock ahead of the merger deal, rounds out the list instead. With 6 million shares, Tuskey now owns the same amount of AENY stock that he supposedly sold just before the big merger announcement.

AENY still took good care of Dunn, however. In fact, AENY agreed to purchase a firm owned by Dunn a week before the company even got around to filing its own incorporation papers. The company has arranged to purchase assets from other insiders as well.

Meanwhile, by the end of July, AENY had inked lucrative employment agreements with all five of its senior managers. Those contracts promised AENY leaders (among other things) the following: annual salaries approaching or, in most cases, reaching the six-figure mark; cheap stock options tied to company performance; 44 paid days off (the equivalent of one day off for every five days worked); and up to five years worth of severance pay following termination from the company for virtually any reason.

Although AENY set aside those contracts when closing its merger deal, the company has already exposed a penchant for generous executive rewards. Even Arch Coal (ACI) and Peabody Energy (BTU) – two of the largest coal-mining operations in the country – look somewhat stingy in comparison. Those giant corporations guarantee their executives up to three years of severance pay (as opposed to five), regulatory filings show, and only face that obligation if the executives are terminated without cause.

AENY has already paid Dunn a handsome sum for his company, D&D Energy, in the meantime. He picked up $370,000 for D&D, even though it is classified as an exploration-stage company that produced only a “small number of barrels” of oil – generating just $7,000 in revenue – during the month of November. Thanks to that transaction, Dunn now has enough money to pay off his $250,000 tax bill with the equivalent of one year’s worth of salary to spare.

AENY still owes Evans Coal millions of dollars for its most valuable assets, however. In November, AENY signed a deal to purchase Evans for $32 million. (A.Y Evans, yet another related party, belongs to the family that has long owned that company.) Although AENY arranged to pay $25 million of that with revenues generated from coal sales over time, the company was supposed to deliver the remaining $7 million by the end of last month.

When AENY announced the closing of its merger on Jan. 21, the company indicated that it had already paid $2.65 million of that total. When AENY filed its official financial statements a few days later, however, the company revealed that it had paid only $400,000 – with another $6.6 million due by the end of January – for the Evans coal mines.

AENY originally planned to raise that money before closing its reverse merger. With skeptics portraying the company as an overvalued corporate shell, however, AENY suddenly closed the merger without raising those extra funds.

Finding the ‘Right’ Auditor

AENY also hired a new auditor to sign off on the financial statements for its merger deal.

The company previously relied on a firm that had failed to enter into a formal participation agreement with the Canadian Public Accountability Board, prompting British Columbian regulators to issue a cease-trading order for its stock. The company replaced that firm with Reuben – a past target of government officials here in the U.S. – before closing its big transaction.

Reuben’s background looks troubling at best. In October of 2007, the state of California issued a “desist-and-refrain” order against the auditor for his alleged participation in a $52 million Ponzi scheme. According to state officials, Reuben served as the auditor for a series of fraudulent PIPE deals that were touted as “excellent” investments but turned out to be outright scams instead.

The U.S. Securities and Exchange Commission filed charges against the leaders of that alleged scheme the following year. Although the SEC excluded Reuben from that action, it blasted the transactions he was supposedly hired to audit.

“The so-called PIPE investments did not exist,” the SEC stated bluntly. “The defendants raised millions of dollars from unsuspecting investors and simply used it to enrich themselves.”

Last year, The Los Angeles Times reported, federal prosecutors formally convicted the alleged ringleader of that investment scam.

By the time that Ponzi scheme exploded, Reuben had already attracted some unwelcome attention. In November of 2004 – the same year that Reuben allegedly began auditing the fraudulent PIPE deals – the Public Company Accounting Oversight Board launched an inspection of his activities. The board reviewed Reuben’s audits of four different companies, later declaring that all of those audits “included deficiencies of such significance that it appeared to the inspection team that the firm did not obtain sufficient competent evidential matter to support its opinion on the issuer’s financial statements.”

Although Reuben portrayed those findings as unfair, he admitted that his documentation “could have been better” and was “lacking” in some ways. He also claimed that he had taken steps to prevent similar shortcomings in the future.

Four years later, however, skeptics look at AENY – the latest company to hire Reuben as its auditor – and see another disaster ahead.

“The business of turning paper into gold without producing anything has become a fine art on Howe Street,” The Vancouver Sun wrote when examining AENY, originally a Vancouver shell, over the weekend. But “it doesn’t take a genius to predict that this stock will end up in the basement.”

AENY’s highflying stock, the newspaper boldly declared, is “destined to crash and burn.”

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

Share

For Previous Stories Click Here!