Vancouver promoters are creating dozens of bogus shell companies every month that are used for fraudulent promotions on the over-the-counter markets in the U.S., according to registration statements filed with the U.S. Securities and Exchange Commission.

These companies feature sham businesses, nominee officers and directors, and bogus shareholders, all of which makes a mockery out of the basic requirement for full, true, plain and timely disclosure.

The creation of these companies — because they require the professional complicity of lawyers, accountants, geologists and other professionals — also contributes to Vancouver’s well-established culture of chicanery.

The companies are sold to promoters who vend in more promotable businesses and then ratchet up the stock to unseemly levels, usually on the OTC Bulletin Board in the U.S.

For the most part, these companies are exploding cigars that leave investors seriously burned and, in the process, cement Vancouver’s reputation as a haven for penny stock crooks.

More than a year ago, the B.C. Securities Commission created a special enforcement unit to deal with the problem, but so far it has had little impact. At the time, it estimated there were 880 companies with “solid B.C. connections” listed on the OTCBB or the even more lowly “pink sheets.” This figure may now exceed 1,000.

The failure to curb the proliferation of these shells is not entirely the commission’s fault. The problem is complex and it will require legislative amendments as well as a community-wide assault to bring it under control.

Despite calls from the NDP opposition party, the B.C. Liberal government has not yet intervened.

One example of one of these sham companies is Opes Ex-plor-ation Inc., which filed a registration statement earlier this year listing its president as Gord Racette, 51, a former boxer, kick-boxer and lacrosse enforcer. The registration statement says that Racette has “no previous experience in mineral exploration,” but has “worked to familiarize himself with our business by attending two mineral conferences.”

Opes’s mineral claims were staked over the Internet for the grand sum of $289. Vancouver geological consultant Erik Ostensoe, whose services are routinely used in such situations, then recommended a $25,500 phase-one exploration program, a budget that will not go very far in the remote area of Atlin in northern B.C. (population 350).

Financial statements say the company has total assets of $51,803 — all of it cash, raised by selling several million shares to private investors at prices as low as one-tenth of a cent apiece.

The statements were audited by the Vancouver chartered accountancy firm of Manning Elliott LLP, which routinely audits companies for the process of going public, even though it is clear that many have little chance of commercial success.

Equally troubling is the question of whether Racette is really running the show at Opes. During an interview, he couldn’t name the lawyer who prepared the company’s registration statement. Ostensoe, the geologist, says he had never heard of Racette; rather, he had been dealing with a Vancouver promoter named Greg Corcoran, whose name doesn’t even appear in the registration statement.

It is still early in the game, but if Opes follows the usual shell-company pattern, the promoters will collapse the share distribution and then sell the shell to some other promoters, who will merge it with a more promotable business.

Manchester Inc. is an example of a rigged share distribution that went on to become a major stock promotion. Like Opes, it was created as a mineral exploration company. Its president, Jackson Buch, 62, of Kelowna, B.C., had no prior experience in exploration and it is by no means clear that he was actually running the show.

Manchester claimed to have sold seed stock to 40 people. One was Anna Skokan of Delta, B.C., who was listed as owning 150,000 shares.

Skokan, however, says she never bought any shares. In fact, she maintains she had never heard of the company. “I’m concerned that my name is being used for something I didn’t authorize,” she said in an interview.

Karl Kuipers of Kelowna was also listed as owning 50,000 shares. But, he says, “There is no way I would have bought 50,000 shares of this company. I was building a house in 2002. I didn’t have any money
for investing.”

Delores Press of Vancouver, who was listed as owning 145,000 shares, similarly denies buying any shares. She also says she has never heard of the company.

@page_break@Although it’s not clear who put these people on the shareholder list, it is clear why they were put on the list. To meet share distribution requirements, such companies must have at least 35 shareholders. So, whoever is putting together the deal finds names or solicits people to act as nominee shareholders.

Then, when the company goes public, all the shares are gathered up, so there are no shares in the hands of the public. With no public float, the promoters can swap shares back and forth and set the stock price at whatever level they want. Not surprising, a clean, tight shell company can command as much as $800,000.

Manchester’s address was listed as 200-675 Hastings St., the law office of Greg Yanke, a key player in the shell manufacturing business in Vancouver.

Some of Yanke’s clients have attracted the attention of police and regulators.

In 2004, an RCMP investigator swore search warrant information indicating that certain listed shareholders of Silver Star Energy Inc., a Vancouver-based bulletin-board company, were simply nominees. The investigator reported that more than $2 million from the sale of the shares was transferred from the apparent nominees into trust accounts at Yanke’s law firm.

In an interview, Yanke portrayed himself as merely a legal functionary. “I’m just hired to do the SB-2 [registration statement]. It’s part of my business. I do the same for Canadian companies,” he says.

But Paul Minichiello, who replaced Buch as president of Manchester in August 2004, said Yanke asked him to serve as president.

In November 2004, Manchester announced it would acquire a U.S. company that provides high-interest car loans to high-risk borrowers. But, Minichiello says, he had nothing to do with the deal. “My impression was that Yanke was running the company, unless he had somebody else he was reporting to. I don’t know.” Yanke denies he played any role other than filing the registration statement.

After the acquisition was proposed, Manchester’s stock price rose almost every single day for the next two years, regardless of trading volume or news. John Woods, editor of Vancouver-based Canada Stockwatch, took one look at the stock chart and said, “There is no contest between buyers and sellers here. Somebody appears to be fooling with Mother Nature.”

By early October, the stock had peaked at US$8.59 a share and the company’s market capitalization had reached US$260 million. But it still didn’t have an active business. In mid-October, the company announced it had acquired Nice Cars Ltd., which owns a chain of used car lots in Tennessee and Georgia.

Although audited statements show the business is profitable, it is not profitable enough to justify the hefty market capitalization. In a two-day period, investors sliced Manchester’s share price by two-thirds on massive trading volume.

The company blamed the usual bogeyman of illegal short-selling for the price decline. But it is also possible that the promoters — whoever they are — were the big sellers. IE