InterOil: How a Deceitful Company Made a Very Dumb Deal, Too

So far this blog has shown how InterOil (NYSE: IOC) filed false and misleading reports with the Securities and Exchange Commission and lied to the New York Times about its dealings with Carl Caserta who was banned by the SEC from the securities industry. As I will detail in this blog post, besides InterOil management being deceitful to investors and the press, they seem to be very dumb, too.

On June 1, 2008, InterOil sold its 43.130% interest petroleum retention lease 4 (PRL 4) for $5 million and its 28.56% interest in petroleum retention lease 5 (PRL 5) for $1.5 million to a wholly owned subsidiary of Horizon Oil Ltd. (ASX: HZN). On May 20, 2009, Horizon Oil Ltd, in turn, sold a 50% interest in PRL 4 and a 24.82% interest in PRL 5 to Thailand based P3 Global Energy Co. Ltd. (P3GE) for $55 million. Therefore, Horizon sold a slightly higher combined stake in PRL 4 and 5 to P3 Global Energy Co. Ltd for over eight times the amount it paid InterOil to acquire those interests in less than one year!

In June 2008, Santos Ltd. (NASDAQ: STOSY) owned a 50.353% interest in PRL 5, alongside InterOil’s 28.56% interest. On June 3, 2009, Santos sold its 50.353% interest in PRL 5 to P3 Global Energy Company Ltd for $20 million. Therefore, P3 Global owned 75.17% of PRL 5, after buying a 24.82% interest from Horizon and 50.35% interest from Santos.

If InterOil had waited less than a year to sell its interest in PRL 5, they could have sold it to P3 Global for $11,343,912, on a relative basis. Instead, InterOil sold its 28.56% interest in PRL 5 to Horizon Oil for just a mere $1.5 million in May 2008. InterOil could have received over seven times that sum had it waited to sell its interest to P3 Global.

When InterOil announced its sale of PRL 4 and PRL 5 to Horizon Oil, InterOil CEO Phil Mulacek claimed, “We are selling our interests in PRL’s 4 and 5 in order to focus our resources and efforts on appraisal and development activities in the Elk/Antelope field. Despite all the hype disseminated by InterOil, its cronies at John Thomas Financial, and an anonymous web site called Shareholdersunite.com (out of the Netherlands) surrounding InterOil's Elk/Antelope field, the company has yet to report any proven commercially exploitable oil and gas reserves. Instead the company passed on huge potential profits on PRL 4 and PRL 5 to fund an uncertain energy project that as of today has no proven reserves.

In a previous blog post, I detailed how in April 2008 InterOil papered-over Carey International and John Thomas Financial's involvement in raising funds for a $95 million private placement convertible debt offering. InterOil used Clarion Finanz AG to act as a buffer between the company on one side and Carey and John Thomas Financial on the other side. On April 28, 2009, Wayne Kaufman from John Thomas Financial appeared on CNBC and pumped InterOil as "Our favorite stock...." and failed to disclose his company's relationship conflict with InterOil.

In another blog post, I detailed how InterOil lied to the New York Times about its relationship with Carl Caserta, who was banned from the securities industry by the SEC. InterOil continued to use Caserta to raise funds for the company and Caserta had an active InterOil email address, despite InterOil telling the New York Times that he stopped working for the company in 2005.

InterOil, like other deceitful companies followed in this blog, such as Overstock.com (NASDAQ: OSTK) and Bidz.com (NASDAQ: BIDZ), are a securities regulator's wet dream. Every time I take a look at their disclosures, I find even more questionable issues. InterOil, Overstock.com, and Bidz.com are like an axis of evil for investors.

One must ask the obvious: What else is the senior management of IOC concealing, papering over, not disclosing and hyping to the detriment of company stockholders?

To be continued....

Written by:

Sam E. Antar

Disclosure:

I am a convicted felon and a former CPA. As the criminal CFO of Crazy Eddie, I helped Eddie Antar and other family members mastermind one of the largest securities frauds uncovered during the 1980s. I pleaded guilty to three felonies.

I am assisting Barry Minkow and Fraud Discovery Institute in researching InterOil and Minkow has a short position in InterOil. I have no position in InterOil, Overstock.com, and Bidz.com securities, long or short. My research on Overstock.com and Bidz.com are freebies for securities regulators to help me try to get into heaven for past sins, though I doubt I can ever make up for my past evil acts.

Other information:

Fraud Discovery Institute Investigation of InterOil

List of White Collar Fraud Blog Posts (date order)

Media Reaction to my Blog

Diamonds Are Not Forever For Two Key Bidz.com Insiders

For certain key Bidz.com (NADSAQ: BIDZ) insiders it seems that diamonds are not forever as they continue selling shares, while the company buys back its stock, faces a Securities and Exchange Commission investigation into its accounting practices, and defends several lawsuits claiming securities and consumer fraud.

Company buys back stock while two key insiders sell their shares

On July 1, 2009, Bidz.com announced that in its latest quarter ended June 30 (Q2 2009), the company repurchased 714,000 common shares at an average price of $3.50 per share for a total cost of approximately $2.5 million. The press release went on to hype the company's future prospects:

"With the price of our stock continuing to trade below what we believe to be a reasonable valuation, our Board of Directors believe that the continued aggressive repurchase of our Company's shares is an excellent use of capital," said, David Zinberg, the Company's Chairman and Chief Executive Officer. "The combination of our liquidity, profitability and our ability to successfully execute our business strategy gives us confidence that the continued repurchase of our shares will help to deliver long-term shareholder value."

Meanwhile, during that same quarter David Zinberg (Bidz.com CEO) and his sister Marina Zinberg (Bidz.com Vice President) sold a combined amount of 162,417 shares and pocketed gross proceeds of approximately $595,512. David Zinberg sold 30,000 shares at an average price of $3.83 per share for total proceeds of $114,941, while Marina Zinberg sold 132,417 shares at an average price of $3.63 per share for total proceeds of $480,571 (Source: Various SEC Form 4's).

Therefore, while Bidz.com is telling investors that the price of its stock is "continuing to trade below what we believe to be a reasonable valuation," the company's two key insiders are selling their shares. Apparently, David and Marina Zinberg are not voting for their company's long term prospects with their pocketbooks.

All of David Zinberg's and all but the last two of Marina Zinberg's stock sales during Q2 2009 were completed under a 10b5-1 plan that helps executives defend against potential allegations of insider-trading by removing their discretion as to when their stock is sold (Details here and here). However, as I will describe below, David Zinberg continued to de-facto control his discretion in selling Bidz.com stock by first adapting a 10b5-1 plan, terminating it before its expiration, and later selling stock under an apparently new 10b5-1 plan.

David Zinberg goes in and out of 10b5-1 plans and flip flops on salary

On August 15, 2007, Bidz.com announced that David Zinberg adopted a 10b5-1 plan. The company disclosed:

Rule 10b5-1 allows officers and directors of public companies to adopt written pre-arranged stock trading plans when they are not in possession of material, nonpublic information. Once a Rule 10b5-1 trading plan is established, the insider retains no discretion over sales under the plan, and the trades are executed through a broker in accordance with the terms of the plan at later dates without regard to any subsequent material non-public information that the insider may receive.

In addition, Bidz.com disclosed that Zinberg's $290,000 annual salary was, "...voluntarily being reduced to $1 per year and he is not expected to receive any bonus or stock option grants." The plan was due to terminate on July, 31, 2008.

On February 28, 2008, the company reported that Zinberg terminated his 10b5-1 trading plan "effective immediately" or five months before the termination date of July 31, 2008:

...David Zinberg’s Rule 10b5-1 Trading Plan has been terminated effective immediately. This plan was originally implemented in August 2007, after Mr. Zinberg voluntarily reduced his annual salary to $1, with no stock option grants. The Board of Directors has reinstated Mr. Zinberg’s annual salary of $290,000 per annum, as well as his eligibility to earn an annual bonus, effective March 1, 2008.

Note: Bold print and italics added by me.

However, on December 17, 2008, David Zinberg resumed selling his stock "as part of a 10b5-1 plan." I could not find any press release or report filed with the SEC that disclosed when David Zinberg resumed his terminated 10b5-1 plan or started a new plan. In any case, David Zinberg sold more stock under a 10b5-1 plan after the Bidz.com reported the early termination of his original 10b5-1 plan.

According to Bidz.com's recent proxy statement filed with the SEC:

As of August 16, 2007, Mr. Zinberg voluntarily reduced his annual salary to $1 per year. Mr. Zinberg’s annual salary of $290,000 per annum, as well as his eligibility to earn an annual bonus, resumed as of March 1, 2008. Effective April 1, 2009, Mr. Zinberg’s employment agreement was amended to increase his base salary to $500,000 per annum.

Note: Bold print and italics added by me.

Now David Zinberg has his cake and can eat it, too. His salary increased from $1 per year to $500,000 per year and he is still selling stock under a 10b5-1 plan. Both David and Marina Zinberg control over 10 million shares of Bidz.com's 22.8 million outstanding shares and have effective control of the company. In addition, David Zinberg's initial adoption of a 10b5-1 plan, his later termination of such plan, and still later sales of stock under a 10b5-1 plan seems to be an end around to paper over his discretion to sell stock and avoid potential insider trading liability. Hopefully, the company can provide some clarification on this issue.

Marina Zinberg has a 10b5-1 plan but sells stock outside the plan

Marina Zinberg's last two disclosed stock sales during Q2 2009, on June 26 and June 29, were not sold under a 10b5-1 plan. Therefore, she exercised her own discretion to sell her stock. On June 26, Marina Zinberg sold 4,567 shares at $3 per share for total proceeds of $13,701 and on June 29 she sold 7,850 shares at $2.94 per share and pocketed proceeds totaling $23,079. A few days after Marina sold those shares, Bidz.com issued the press release (above) claiming that the stock was undervalued and "confidence that the continued repurchase of our shares will help to deliver long-term shareholder value."

David and Marina Zinberg sell even more stock during Q3 2009

Just today, new SEC Form 4 filings revealed that both David Zinberg and Marina Zinberg sold even more stock after Q2 2009 pursuant to their 10b5-1 plans. David Zinberg sold another 10,000 shares and pocketed $29,240 in proceeds from July 1 to July 6. While Marina Zinberg sold another 18,900 shares and pocketed $53,537 in proceeds from July 1 to July 6 (Source: David Zinberg Form 4 and Marina Zinberg Form 4).

Should Bidz.com buyback stock with weak fundamentals?

In Q1 2009, Bidz.com reported revenues of $31.2 million compared to $61.9 million during the previous year period or about a 50% decline in revenues. The company also reported net income of $1.5 million compared to $4.6 million during the previous year period or about a 67% decline in net income (Source: 10-Q report).

At the end of Q1 2009, Bidz.com reported a cash balance of a mere $3.16 million. Working capital was reported at $33.4 million. Inventory, which is a key component of working capital, was reported at $38.5 million and it takes Bidz.com over 150 days to turnover its inventory. During Q1 2009, reported inventory loss reserves ballooned from $820k to $1.35 million or from 2.1% of gross inventory at the end of Q4 2008 to 3.3% of gross inventory at the end of Q1 2009, over a 50% increase in relative terms.

Bidz.com has not reported Q2 2009 financial results as of this blog post. The average analyst estimate for Q2 2009 sales growth is minus 45.4% and the average estimate of earnings per share growth is about minus 65%.

Today, Bidz.com common stock closed at $2.71 per share, far below the average price paid by the company to repurchase its shares and below the average selling price of both David and Marina Zinberg's shares during the latest quarter.

It seems like Bidz.com shareholders are getting the raw end of the deal as the company wastes precious resources by buying back stock during this time of economic uncertainty, while David and Marina Zinberg continue to cash out their stockholdings. Those Bidz.com stock buybacks seem to benefit the Zinberg's on the backs of other company shareholders.

Written by:

Sam E. Antar

Disclosure:

I am a convicted felon and a former CPA. As the criminal CFO of Crazy Eddie, I helped Eddie Antar and other family members mastermind one of the largest securities frauds uncovered during the 1980s. I pleaded guilty to three felonies.

I do not own any Bidz.com securities, long or short.

Other information:

List of White Collar Fraud Blog Posts (date order)

Media Reaction to my Blog

Banned Stock Promoter Carl Caserta Still Working for InterOil and Promoting Its Stock Despite Previous Denials

Documentation obtained by this blog shows that Carl Caserta, who in 1991 was barred by the Securities and Exchange Commission from “association with any broker, dealer, or investment advisor” still has an available, current, and active email address (carl.caserta@interoil.com) at InterOil (NYSE: IOC). Other documentation obtained by this blog show that Caserta has continued helping InterOil promote its stock to investors. That documentation has been delivered to securities regulators. However, a January 2007 New York Times article reported that Caserta “stopped working for InterOil” after the company found out that he was barred from the securities industry by the SEC.

According to a 2005 report by short seller Citron Research, InterOil used Lighthouse Capital as its investor relations agent. As a principle of Lighthouse, Caserta’s job was “bringing InterOil around Wall Street attempting to attract buyers to the stock.” In 2007, the New York Times made inquiries to both InterOil and Lighthouse Capital about Caserta’s role in helping InterOil promote its stock to investors:

In 2004, Mr. Mulacek hired an investor relations executive named Carl Caserta, whom the Securities and Exchange Commission had barred from the securities industry almost two decades earlier, after he was accused of buying hundreds of thousands of stock shares for clients without their authorization. Mr. Caserta, who declined to speak on the record, stopped working for InterOil in 2005, according to his former employer, Lighthouse Capital Ltd.

Mr. Byker [InterOil Board Member] said the InterOil board was not aware of Mr. Caserta's history when he was retained. Mr. Dermedgoglou of InterOil said he was not aware that the firm had hired Mr. Caserta.

Note: Bold print and italics added by me. Bracketed information added by me for clarity.

According to the New York Times article above, Carl Caserta “stopped working for InterOil in 2005” and InterOil board member Gaylen Byker told them that the company “was not aware of Caserta’s history when he was retained.” However, documentation obtained by me shows that Caserta still has a current email address at InterOil and continued working for the company, after the New York Times article was published in 2007.

The email address carl.caserta@interoil.com is owned by InterOil Corporation and the secure mail server resides physically in Cairns. (60-92 Cook St Cairns 04870). The administrative contact is Terry Gilsenan.

Administrative Contact: Gilsenan, Terry

InterOil Corporation

Level 2, Orchid Plaza

79-87 Abbott St

Cairns, Queensland 4870 Australia

61417600360

InterOil used employees to blog about company while hiding their affiliation

In another stunt, Susuve Laumaea, Senior Manager Media Relations at InterOil, wrote an blog post promoting InterOil's business agenda in Papua New Guinea and apparently tried to conceal his relationship with the company. According to the article, Laumaea identified himself as:

...an award-winning veteran PNG newspaper journalist. He writes a popular weekly Public Affairs column in Port Moresby-based weekly newspaper, Sunday Chronicle.

However, the article failed to disclose Laumaea's employment by InterOil. I clinked on the link hidden under the author's name, Susuve Laumaea, and there was an InterOil email address (susuve.laumaea@interoil.com).

If Mr. Laumaea wants to cite journalism awards to impute his credibility for his article on InterOil, he should have disclosed his relationship with InterOil, too.

Anonymous Netherlands based blog promotes InterOil agenda

Another peculiar twist is an anonymous Netherlands based blog called Shareholdersunite.com that hypes InterOil's prospects to investors and acts as an apologist for the company's misdeeds. In addition, the blogger using the anonymous handle STPIOC, posts messages day and night promoting InterOil's agenda on the Yahoo message board.

For example, he wrote a blog post sarcastically trying to rebuke the article by the New York Times, detailed above, about the relationship between InterOil and Carl Caserta. He quoted the New York Times article:

“In 2004, Mr. Mulacek hired an investor relations executive named Carl Caserta, whom the Securities and Exchange Commission had barred from the securities industry almost two decades earlier, after he was accused of buying hundreds of thousands of stock shares for clients without their authorization. Mr. Caserta, who declined to speak on the record, stopped working for InterOil in 2005.”

Then, he offered the following excuse:

Yes, you read that right. IOC hired somebody who, almost two decades ago(!), was accused (convicted? The article doesn’t say so, and you’ll bet if he was convicted, this article would have mentioned it) of something improper. Not a hint that that ’something improper’ had anything to do with anything related to IOC (pretty hard, as it was almost two decades ago), and when IOC management found out, they released him.

Terrible! I’m shocked!! They hired somebody who was accused of something two decades ago. How could they! That makes me lose all my trust in IOC!! Think of it for a moment. Which company hasn’t hired somebody who was accused of something a couple of decades ago…

I’m not going to trust IOC because one of their employees tried to chat up my wife once. Terrible!

You see how he smears the company with really VERY VERY little substantive issues. So unsubstantiated, in fact, that you could smear ANY company this way, if you wanted to. And that this guy wanted to is beyond reasonable doubt after reading this.

First, he questioned whether Caserta was actually convicted of any securities violations by writing "was accused (convicted? The article doesn’t say so, and you’ll bet if he was convicted, this article would have mentioned it) of something improper."

According to the SEC:

Robert J. Gallaro and Carl Caserta, Registrant's president and vice-president, respectively, have submitted Offers of Settlement, which the Commission accepted. Registrant, Gallaro and Caserta, without admitting or deny-ing the allegations, consented to Findings and Order Imposing Remedial Sanctions which finds that they wilfully violated various antifraud provisions of the securities laws, and that Gallaro and Caserta wilfully aided and abetted Registrant's violations of other antifraud provisions of the Exchange Act, and the net capital, bookkeeping and reporting provisions of the Exchange Act.

While Caserta technically did not admit or deny the SEC allegations, he did in fact consent to "Findings and Order" which found that he "wilfully violated antifraud provisions of the securities laws...."

According to Shareholdersunite.com, when Interoil "found out" about Caserta being barred from the securities industry, "they released him." However, documentation delivered by me to securities regulators show that Caserta continued promoting InterOil stock to investors and has a current company email address.

Other recent developments

Fraud Discovery Institute, led by my close friend and convicted felon turned fraud fighter Barry Minkow, released a report showing how InterOil's press releases raising "investor expectations of a potentially huge commercially exploitable oil and gas find" inflated the company's stock price. Yet to date, InterOil has not reported a single barrel of proven commercially exploitable reserves." Additional information on Minkow's continuing investigation of InterOil can be found on his website InterNoOil.com.

Update:

According to my sources, InterOil disabled Caserta's email after my blog was posted.

Written by:

Sam E. Antar

Disclosure:

I am a convicted felon and a former CPA. As the criminal CFO of Crazy Eddie, I helped Eddie Antar mastermind one of the largest securities frauds uncovered during the 1980s. I pleaded guilty to three felonies.

I am assisting Barry Minkow and Fraud Discovery Institute in researching InterOil and Minkow has a short position in Interoil. I have no position in InterOil securities, long or short.

Other Information:

List of White Collar Fraud Blog Posts (date order)

Media Reaction to my Blog

Bidz.com Auditors Cited by PCAOB in Five of Thirteen Audits Sampled

Bidz.com (NASDAQ: BIDZ) should seriously consider replacing Stonefield Josephson Inc. as its auditors. According to a March 2007 Public Company Accounting Oversight Board (PCAOB) Inspection Report, Stonefield Josephson, Inc. was cited for significant deficiencies in five of thirteen audits reviewed or about 38.5% of audits sampled. See below:

The scope of the inspection procedures performed included reviews of aspects of the performance of 13 of the Firm's audits of the financial statements of issuers. Those audits and aspects were selected according to the Board's criteria, and the Firm was not allowed an opportunity to limit or influence the selection process. The inspection team identified matters that it considered to be audit deficiencies.

The deficiencies identified in five of the audits reviewed 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.

Note: Bold print and italics added by me. Full report here.

Unfortunately, the PCAOB report does not identify which company audits failed inspection, even though many people have questioned such a policy. However, failing to "obtain sufficient competent evidential matter to support its opinion," in five of thirteen audits inspected, raises a red flag about the overall quality of Stonefield Josephson's audits.

This blog has written extensively about Bidz.com's inventory accounting disclosures and possible violations of Generally Accepted Accounting Principles in the company's accounting for inventories (details here, here, and here). The SEC started investigating such disclosures after I alerted them.

Bidz.com is besieged by a flurry of lawsuits, seeking class action status, alleging securities fraud by the company and David Zinberg (CEO and President), based on issues raised in reports by short seller Citron Research. In addition, the company is being sued for alleged shill bidding on its web site.

Written by:

Sam E. Antar

Disclosure:

I am a convicted felon and a former CPA. I pleaded guilty to three felonies for my role in the Crazy Eddie fraud as the former criminal CFO of the company.

I do not own any Bidz.com securities long or short.

Other information:

List of White Collar Fraud Blog Posts

Media Reaction to This Blog

InterOil Files False Disclosures With SEC (Redacted Version)

Note: My previous blog post was deleted by me and replaced by this redacted version because it included certain sensitive information that I subsequently decided to sent to law enforcement.

InterOil (NYSE: IOC) filed a deliberately false Form D with the Securities and Exchange Commission relating to a May 2008 $95 million private placement convertible debt offering and tried to conceal material details of the transaction in later regulatory filings. Worst yet, Wayne Kaufman of John Thomas Financial, a New York based brokerage firm and a party to the private placement, failed to make conflict of interest disclosures while appearing on CNBC and pumping Interoil’s future prospects.

The above revelations resulted from a month long investigation by convicted felon turned fraud fighter and short seller Barry Minkow (co-founder of the Fraud Discovery Institute) with key assistance from veteran securities litigator Howard Sirota, and additional research by me.

The information was pieced together from Court filings and affidavits involving a lawsuit brought by William Ziegler against John Dolan and two of his entities (Carey International Ltd and John Thomas Structured Finance - unrelated to John Thomas Financial above). Dolan had assisted InterOil in raising funds for the private placement and raised $20 million from Ziegler. However, Ziegler claims that he is owed certain fees from Dolan and his companies.

Note:

Download lawsuit here, download exhibits here, download John Dolan affidavit here, download Thomas Belisis (John Thomas Financial) affidavit here, and download Neil Dolinsky (InterOil Affidavit) here.

InterOil $95 million private placement

On May 12, 2008, InterOil announced a private placement of $95 million in convertible debt securities to institutional investors and issued the following press release:

INTEROIL ANNOUNCES $95 MILLION PRIVATE PLACEMENT

May 12, 2008 — InterOil Corporation (IOL:TSX)(IOC:AMEX) (IOC:POMSoX), a Canadian company with operations in Papua New Guinea, announced that it has closed on gross proceeds of US$95 million from the sale to institutional investors of 8% Subordinated Convertible Debentures due 2013. InterOil used the proceeds today to fully repay all outstanding indebtedness (US$70 million) under its credit facility with Merrill Lynch Capital Corporation. InterOil will use any remaining proceeds to drill and develop oil and gas wells on the Elk/Antelope structures in Papua New Guinea and for general corporate purposes.

The Convertible Subordinated Debentures carry an 8% coupon rate with a conversion price of US$25.00 per share. In some cases, interest payments may be made in common shares. If the daily volume-weighted average price of the Company’s common shares equals or exceeds US$32.50 for at least 15 consecutive trading days, InterOil may require the investors to convert the debentures into common shares. InterOil may also be required to repurchase the debentures for cash, at 101% of the face value plus accrued and unpaid interest, upon the occurrence of certain change of control events.

On May 28, 2008, InterOil filed Form D with the Securities and Exchange Commission which required the company to disclose sales commissions and finder's fees paid in connection with the $95 million convertible debt offering (See Section C, Item 4 on page 5 of 10). InterOil estimated that no sales commissions or finder's fees would be paid in connection with the offering. However, Court documents show that Interoil had prior knowledge that such commissions or finder's fees were paid.

InterOil uses Clarion Finanz AG as a front for dealings with Carey International and John Thomas Financial

In a January 19, 2009 affidavit filed by Neil Dolinsky (InterOil Special Projects Manager) in connection with Ziegler's lawsuit against Dolan and his companies, Dolinksy said that as of April 24, 2008, InterOil agreed to pay Clarion $5.7 million in convertible securities for its role in helping the company raise $95 million in its private placement of convertible securities and:

IOC issued to Clarion 228,000 restricted shares of its common stock as a finders fee, valued at $25 per share, equating to a total value of $5.7 million.

On April 24, 2008, Clarion entered into a separate Investment Banking Consulting Agreement with Carey International for its role in helping Clarion Finanz raise funds for InterOil.

The agreement called for Carey International to "receive compensation in the amount equal to five and one half percent (5 1/2%) of gross proceeds...." of funds it helped Clarion Finanz raise on behalf of InterOil. In addition, the agreement stated that "Carey International Ltd and/or assigns will pay a royalty fee of approximately 20% to John Thomas Financial and/or assigns."

In May 2008, John Dolan and his company Carey International raised $20 million in funds from William Ziegler. In September 2008, Ziegler sued Dolan and his companies claiming that he was owed part of their fees.

Carey International received 44,000 of the 228,000 restricted common shares due to Clarion Finanz from InterOil. Those shares were issued directly from InterOil to Carey International and John Thomas Financial and were valued at $25 per share (total value of $1.1 million or 5.5% of the $20 million raised by Carey). From those 44,000 restricted common shares due Carey International, John Thomas Financial received 20% of such shares as a "royalty fee" or 8,800 restricted common shares valued at $25 per share or $220,000.

It turns out that brokers from John Thomas Financial were cold calling investors to buy InterOil stock and that on April 28, 2009, Wayne Kaufman appeared on CNBC and said (see video link):

Our favorite stock is something called InterOil which I recommended on the air before.

Note: Above quote appears 3 minutes and 55 seconds into video clip.

Worst yet, 4 minutes and 6 seconds into the video clip, CNBC shows a screen called "Analyst Disclosure" that checks off the following items as "no."

Stock Ownership:

Analyst: No

Analyst's Family: No

Analysts's Firm > 1%: No

Investment Banking Client: No

Other Conflicts: No

Contrary to the disclosure above on CNBC that John Thomas Financial had no investment banking relationship with InterOil, such relationship was cleverly hidden by InterOil using Clarion Finanz AZ as a buffer to raise $95 million for its private placement and by having Clarion deal separately with John Thomas Finance through Carey International as per their Investment Banking Consulting Agreement.

InterOil hides transactions with Clarion is various filings with the Securities and Exchange Commission

The $5.7 million finders fee payable to Clarion Finanz was not disclosed in Interoil’s May 12, 2008 press release (above) and Interoil’s May 24, 2008 Form D filed with the SEC (above).

In its 2008 annual report, InterOil finally disclosed that it paid $5.7 million pursuant to the $95 million convertible debenture offering without mentioning Clarion, Carey International, or John Thomas Finance (See footnote 23):

The placement fee of $5,700,000 paid to the investors in common shares of the Company was treated to be in the nature of a debt discount and was offset against the liability component. The transaction costs relating to the issue amounting to $219,966 has been split based on the percentages allocated to the liability and equity components; the costs relating to the liability component of $189,711 has been offset against the liability component, and costs relating to the equity component of $30,255 have been allocated against the equity component recognized.

Note: Bold print and italics added by me.

However, $1.1 million of such fees were not paid to "investors" as claimed by InterOil and was instead paid directly to Carey International and John Thomas Financial. Neither John Dolan nor Carey International invested any money in InterOil and therefore, such fees cannot possibly be a part of the $5,700,000 paid to “investors.” Yet, that is exactly where Mr. Dolan’s 44,000 shares, valued at $1.1 million, came from. Ultimately, Carey's shares were divided up into 35,200 shares made payable to Carey International (John Dolan’s company) and 8,800 shares John Thomas Financial (as a royalty fee).

In addition, InterOil provided no disclosure of Clarion’s role in the transaction unlike other material disclosures relating to Clarion such as on:

Page 37 “Midstream Liquefaction Operating Review” Page 47 “Financing Activities” Page 90 Footnote 19 “Secured loan”

Interoil’s “Annual Report Form” lists various disclosures under the caption, “Material Contracts.” However, InterOil ommitted any disclosure relating to Clarion's roles in the $95 million private placement while disclosing Clarion's role in other transactions.

Attorney Michael F. Brown has sent a referral to the Securities and Exchange Commission (download here) and FINRA has also been contacted by me. Other details of Fraud Discovery Institute's investigation of InterOil are provided here.

Written by:

Sam E. Antar

Disclosure:

I am a convicted felon and a former CPA. As the criminal CFO of Crazy Eddie, I helped Eddie Antar mastermind one of the largest securities frauds uncovered during the 1980s. I pleaded guilty to three felonies.

I assisted Barry Minkow and Fraud Discovery Institute in researching InterOil and both Minkow and Sirota are short on Interoil. I have no position in InterOil securities, long or short.

Other Information:

List of White Collar Fraud Blog Posts

Media Reaction to my Blog