Investors beware: Investment newsletters can lead to riches — but sometimes not for the subscribers. One tangled tale reveals the underside of the stock-promotion game.
CALLING HIMSELF "THE OTHER ORACLE FROM OMAHA," Mike Schaefer tells his newsletter readers that he learned about stocks hanging around the house of his neighbor, Warren Buffett. On Buffett’s advice, Schaefer says, he became an expert in energy and mining stocks, and, in early 2006, he let thousands of junk-mail recipients in on a "rich man’s secret": the Calgary-based oil outfit called Gran Tierra Energy . With its team of "oil and gas superstars," Schaefer said the stock might rise 2,000%.
Schaefer’s Secrets of Fortune mailing seemed like just a subscription solicitation for his $495-a-year newsletter. But it also touted Gran Tierra stock (ticker: GTE) in the hire of a stock-promoting crew that’s been under investigation by federal prosecutors. Along with ersatz gurus like Schaefer, the promoters were:
• Adam S. Gottbetter, a 41-year old New York lawyer who has spawned more than 160 public companies in the past decade, while raising funds for Albert Einstein College of Medicine, the elite Spence School attended by his daughter, and shock-jock Howard Stern’s favorite strip club;
• Mark N. Tompkins, a hard-partying veteran of Vancouver’s sometimes wild equity market, whose stock promotions have netted the 46-year old millions of dollars stashed in offshore havens, one of the priciest villas in South Florida and a penthouse in one of Manhattan’s most expensive residential properties, the Time Warner Center.
Supplying funds for Tompkins and Gottbetter’s deals were Samuel Belzberg, the once-feared corporate raider, and the Houston-based brokerage Sanders Morris Harris.
Gran Tierra Chief Executive Dana Coffield calls his business "one of the most successful start-up companies in recent years." It reported 16 cents a share in profits last year on the sale of $113 million in oil from wells in the Colombian jungle. Although the stock’s fallen to $2.40 from last year’s $8.78 high, Gran Tierra sports a $570 million market cap, because it has pumped out shares as vigorously as oil.
Coffield says he hired Schaefer on the instruction of financier Tompkins. Like all newsletters from Schaefer’s Angel Publishing, Schaefer’s four Gran Tierra mailings carried fine print saying he got no compensation for his recommendation, while mentioning that $750,000 went to an obscure corporation. Wyoming records show the corporation as domiciled on Schaefer’s isolated ranch. Schaefer submitted the corporation’s bills for more than $1 million in "awareness marketing campaigns," say people who saw the bills.
Testimonials and amazing forecasts are staples of Mike Schaefer’s newsletters and e-mails touting his backers’ shares.
GRAN TIERRA’S SUCCESS TO DATE is unusual among companies promoted by Tompkins, Gottbetter and Schaefer. The other stocks where they collaborated all collapsed after an initial pop. Typical was Alternative Energy Sources (AENSE), an ethanol refiner whose shares peaked at close to three bucks in 2006 — when most trading consisted of blocks going back and forth between accounts controlled by Gottbetter and Tompkins, say people who have seen the trading records.
Not long thereafter, millions of e-mails spammed out with an Alternative Energy recommendation by Schaefer colleague Jeff Siegel — who has appeared on CNBC as a green-investing guru. Trading volume spiked in the stock, which then unfortunately sold off. It’s now nearly worthless; the refinery is shuttered.
Federal prosecutors in Manhattan are investigating whether Tompkins and Gottbetter manipulated Alternative Energy and other stocks. Gottbetter declined to talk toBarron’s, while Schaefer and Tompkins didn’t respond to voice-mails. When subpoenaed by a court-appointed receiver of the seized profits of a Tompkins associate, Tompkins asserted his Fifth Amendment right against self-incrimination and said that he maintained no business records. He warned associates never to send him e-mails. He didn’t even have a personal checkbook, Tompkins testified in marriage-dissolution proceedings initiated three years ago by his wife, a former Miss Florida USA.
"I have a pretty simple business," said Tompkins in his divorce-case deposition. "It’s stocks."
But Tompkins’ business appears anything but simple. The Securities and Exchange Commission and the U.S. Attorney for the Southern District of New York began looking into his dealings after the February 2007 arrest of Louis W. Zehil, a Jacksonville, Fla., lawyer whom Tompkins had tapped to counsel the public companies he minted.
In parallel civil and criminal cases, the government charged Zehil with surreptitiously selling at least $17 million worth of unregistered shares in seven companies Zehil was advising, including Gran Tierra. Zehil pleaded not guilty, and his case hasn’t yet gone to trial. A court-appointed receiver took control of Zehil’s bank accounts. The receiver, New York lawyer Susan E. Brune, soon heard from eight Tompkins-financed companies, all demanding compensation for Zehil’s alleged betrayal.
Then something strange happened. The lawyer for one of the companies made disturbing allegations, Brune told U.S. District Court Judge Loretta A. Preska, suggesting that the other companies weren’t innocent victims. Although the lawyer later said Brune had misunderstood him, Brune launched into a remarkable investigation of Tompkins’ activities, issuing more than 100 subpoenas and reviewing 187,000 pages of e-mails, bank and broker statements and other documents.
Brune passed her findings along to the government, and in June 2008, prosecutors got Judge Preska to halt the companies’ attempts to get at Zehil’s money. The government told the judge it was investigating a criminal scheme to manipulate the stocks of the eight companies, among others, and the companies did not appear to be true victims of Zehil’s fraud. Zehil didn’t talk to Barron’s.
Government attorneys and SEC-appointed receiver Brune likewise refused comment. People contacted in the case say prosecutors are looking at Gottbetter and Tompkins. Gran Tierra chief Coffield says he knows of no wrongdoing beyond that alleged of Zehil. "I don’t understand why he’s still walking around," grumbles Coffield. "I am very unsatisfied with the legal system in the U.S."
WHETHER OR NOT THE INVESTIGATION yields charges against anyone other than Zehil, public records indicate that Zehil, Tompkins and their associates had developed a lucrative system for promoting stocks.
Tompkins called his Tompkins Capital Group "the leading investor in, and executor of, reverse-merger transactions." Reverse mergers let a private business quickly come public by merging into a shell company that has a publicly-traded stock. Tompkins worked out of the Madison Avenue office of his lawyer, Adam Gottbetter, who did a dozen deals with Tompkins, secured the construction permit for Tompkins’ $6 million Palm Beach condo and even bore witness to the $11 million settlement agreement in To
mpkins’ marital breakup. Tompkins’ associates weren’t surprised by the divorce, saying Tompkins spent weekends in Las Vegas and many evenings entertaining his retinue at the Los Angeles sushi bar KOI.
In the family-court proceedings, Tompkins said that his gross income in 2005 was about $8.7 million, and he was bringing in more than $1 million monthly in 2006. He’d spent a million bucks renovating his New York penthouse, and had a $17 million Venetian-style villa in Fort Lauderdale. He had other homes in Palm Beach and the Cayman Islands, a Bentley and a 38-foot yacht. Including nine offshore bank accounts and 20 brokerage accounts, he acknowledged total assets of $18 million.
His wife believed he had more assets hidden. Tompkins "maintains dozens of financial accounts and conducts business through corporate entities in ‘nondisclosure’ countries like the Cayman Islands and Switzerland," she said in a court petition.
Gottbetter also did well from his work with Tompkins, buying a $12 million co-op at the Stanhope, a Fifth Avenue landmark. He hired rock icon Southside Johnny to play at his 40th birthday party. YouTube videos show Gottbetter singing with Glenn Tilbrook of the group Squeeze, and leading a dad’s band at fundraisers for the exclusive Spence School for girls in Manhattan.
Some of his securities clients were less impressive. They included Scores Holding(SCRH) the operator of a strip club touted by radio host Stern before it lost its liquor license when undercover officers were propositioned by the strippers. In 2003, Gottbetter cut a deal with the strip club to help finance a South Florida club. Scores would pay his banker’s fee to a corporation he called Jackson Steinem — in apparent tribute to the firm run by the evil Gordon Gekko in the movie Wall Street.
So proud was Gottbetter of his reverse mergers that he applied for a trademark on what he called the "Gottbetter Public Offering." His Tompkins deals indeed had certain trademarks. The companies caught up in the Zehil case, for instance, had private placements arranged by Sanders Morris Harris and Tompkins’ pal Rob Anderson, a top-producing broker at Canaccord. Sanders Morris’ chief executive Ben Morris didn’t respond to Barron’s questions. Canaccord said that Anderson no longer worked there, and that it had received no regulatory inquiries on the Tompkins deals.
People were attracted to Tompkins’ deals because his stocks achieved large trading volume, say associates. Regular patrons of these placements included several Swiss banks, the top officers of Sanders Morris, Sam Belzberg and Caymans-based entities associated with Belzberg’s son Marc (Samuel Belzberg declined to speak). The younger Belzberg left New York for Israel in 1992, after the SEC successfully sued him for skirting takeover laws in the Belzbergs’ unsuccessful run at Ashland Oil. Tompkins bragged to colleagues that the Belzbergs were "his guys."
Most remarkable about Tompkins and Gottbetter’s reverse mergers, however, was how shareholders of the shell companies kept the most valuable piece of the merged company. In the 2006 deal that produced Alternative Energy, for example, private-placement investors like Belzberg got 30% of the shares, company managers, 32% — all locked up for at least a year. But the shell shareholders retained about 37%, and those shares were free-trading. These shareholders traded amongst and between themselves as the stock price rose to the initial peak shown on the nearby stock chart. People who’ve seen the trading records say that most of these shares were held by accounts that traced back to Gottbetter and Tompkins. Former colleagues say they were aghast that Tompkins’ controlling stock positions were never disclosed in SEC filings.
But as Tompkins said, his business was just about stock. "People lie," he would tell colleagues, "stocks don’t."