Local Penny Stock Violates SEC Rules

(© 2002 Northwest Arkansas Business Journal)

Misleading financial statements, suspicious relationships and a questionable lawsuit appear to have helped Golf Entertainment Inc. turn a company shell into a shell game.

The publicly traded Springdale company has nothing to do with birdies or fairways. Golf’s primary operation is television station KVAQ-LP, Channels 20/71, which broadcasts Spanish-language programming as an affiliate of Fort Worth’s national Hispanic Television Network. The penny-stock company also produces some local programming on Saturday evenings.

Golf, formerly a golf course management firm in Alpharetta, Ga., was inactive for nine months in 2001 before its company shell was apparently purchased in December. The deal was consummated through a series of transactions begun by Golf CEO Tim Brooker and Jim Bolt, the company’s vice president and chief operating officer. (See related story here).

These transactions, along with several odd filings with the U.S. Securities and Exchange Commission, prompted both the Northwest Arkansas Business Journal, a sister publication of Arkansas Business, and the staff of Longandshortreports.com of Winnipeg, Manitoba, to take a closer look at Golf.

Longandshortreports.com is an Internet-based financial services newsletter that produces objective reports about investment opportunities.

The five-month probe into Golf, traded over-the-counter as GECC.OB, turned up a multitude of apparent SEC rules violations as part of an apparent conspiracy to defraud shareholders. Several company executives and major shareholders were also found to have criminal histories, albeit old enough that they did not have to be disclosed to the SEC. (See related story here.)

Neither the Federal Bureau of Investigation’s field office in Fayetteville, the Arkansas Securities Department in Little Rock nor the Benton or Washington County Sheriff’s Offices would comment on the existence of any investigations into Golf Entertainment. But on Aug. 13, U.S. Sen. Tim Hutchinson, R-Ark., sent a letter asking SEC Chairman Harvey L. Pitt to personally request an inquiry into Golf. In the letter, Hutchinson stated that Benton County Prosecuting Attorney Bob Balfe was investigating “a number of serious and credible charges about potential efforts to manipulate stock prices and defraud investors.”

“… If these allegations prove to be true,” Hutchinson wrote, “these are precisely the kind of activities we must curb to restore investor confidence in the market and our economy.”

Shell Company

At a public auction in December, a Bentonville entity called the Genesis Trust supposedly sold $1.028 million in assets consisting of TV broadcasting equipment and “the right to purchase a Federal Communications Commission license” to Golf.

In May, Brooker described the Genesis Trust as “a nonprofit organization” that had helped recapitalize Golf. But an extensive search revealed no evidence of Genesis’ incorporation, official business formation or proof of exempt-organization status with the Internal Revenue Service. It appears to have been used, however, to inflate the value of Golf’s assets and to allow people closely allied to Golf to obtain and sell shares of the company.

Charles Rusk, senior trustee for the Genesis Trust, said during a tape-recorded interview that John Dodge, in-house counsel for Golf, created the trust. When informed that the tax identification number that the trust had included in various documents did not check out with the IRS, Rusk said: “Too bad.”

Other findings about Golf include:

• Multiple sources have confirmed that a “material relationship” between Golf and the Genesis Trust exists, which was expressly denied in Golf’s 8-K “news events” document filed Dec. 31 with the SEC. Rusk appeared to confirm as much when he stated that Dodge created the supposed trust in the first place.

• An inexplicable step-up in stock value from Jan. 27-29 established a suspicious trading pattern. The stock spiked from daily trading of 3-4 cents per share on the average volume of a couple hundred shares to about 30 cents on 340,000 shares traded. The price also closely resembled the 27.5-cent mark that, according to the 8-K filing, Golf had to hit in January to book its assets at full value.

No news regarding company events was published that might prompt such a rally for Golf. And the stock deflated almost immediately.

As a side note, Golf paid stock promoter Scott Wilding of Pembroke Pines, Fla., 2 million shares of unrestricted stock for a public awareness promotional campaign in early May. The activity is not illegal, but such campaigns have nothing to do with the intrinsic value of the stock. Stock promotions companies merely take payment to induce short-term increases in demand for stocks so that shares can be sold.

Wilding said that one of the strategies used was the retention of a Belgian-based buyers group, which was given unrestricted shares of stock in exchange for an agreement to purchase additional shares on the open market.

• Golf announced on Feb. 1 that it had signed an intent agreement with First Metropolitan Mortgage of Bentonville — Rusk until recently managed this subsidiary of the legitimate Chicago-based lender — for $300,000 in financing for short-term debt restructuring related to the purchase of the TV station.

Marty Unger, First Metropolitan’s outside legal counsel, said the company was in the mortgage business and not in the business of commercial operations financing or making capital investments in corporations.

When asked if the company’s Bentonville office had sought approval for such a loan, Unger said, “Ask [Rusk’s office] to submit the non-existent paperwork for the non-existent loan.”

• The firm violated the SEC requirement of timely disclosure of material events related to the company. On May 6, Golf settled a curious lawsuit filed by the Genesis Trust by issuing to it 15 million unrestricted shares. (This brought the number of shares outstanding from between 7 million-9 million, depending on the document filed, to 22 million.) The settlement came only six days after the original complaint was filed and, on its face, appeared to give away control of the company.

Golf didn’t mention the Genesis Trust settlement until July 17 when it filed an 8-K. That report cited a previous mention of the terms in a filing that does not appear to exist.

Richard S. Hardwicke of Bentonville, who is listed as the Genesis Trust’s attorney in the suit, declined to comment on whether he even drafted or filed the suit. Rusk said it was probably delivered to Hardwicke by Dodge — the lawyer who was supposed to be representing the defendant.

The basis for the complaint apparently was a $185,000 tax liability held by a subsidiary of the original Golf Entertainment called LEC Leasing, which Genesis claimed exposed it to the possible lien and seizure of its asset base. Mike Daniels, a former president of Golf and a current company director, said the tax problem could have been settled for about $15,000.

Golf stated in its April 15 annual report that it believed the claim had no merit. But rather than pursuing an active defense of the suit, Golf chose to settle by awarding Genesis the 15 million shares plus warrants for an additional 2 million shares at 5 cents each.

• Golf made unsubstantiated claims about its financing in a June 6 company press release that trumpeted the infusion of $5 million in venture capital funding from O. Bruce Mikell & Associates of Warrior, Ala. Half of the money was said to have been placed in escrow immediately.

During an interview with LongandShortReports.com, Mikell was asked where he had escrowed the $2.5 million.

“I really don’t remember,” Mikell said.

• Golf announced on April 5 that James Slayton, a CPA in Las Vegas, had been retained to audit the company’s annual report due out April 15. Slayton had been charged Jan. 7 by the SEC with misconduct that included artificially inflating the revenue of a California company. On June 6, the SEC ordered Slayton to “cease and desist” auditing public companies. Golf has yet to formally replace Slayton.

Because the violations of SEC regulations are a federal matter, any allegations, if proven in court, could result in guilty parties being banned by the SEC from holding positions with public companies. Federal wire and mail fraud charges can also be added.

But it is also not uncommon for the SEC, because of its limited resources, to simply join states in securities fraud prosecutions. Because Sen. Hutchinson revealed in his letter that the Benton County prosecutor is working on the case, it is possible that the violations may be pursued under Arkansas law.

“Securities fraud” under Arkansas law is class “B” felony that can carry a sentence of five to 20 years in prison and a fine of up to $15,000.

Golf’s Rebuttal

On Aug. 8, a Business Journal reporter visited Golf’s offices at 1008 Clayton St. in Springdale to give its officers an opportunity to address each of these issues. But Dodge, Golf’s vice president and corporate counsel, instead handed the reporter a subpoena for all of the publication’s notes and documents related to this story.

The subpoena, believed to have been prepared while the reporter was on the premises attempting to conduct the interviews, was issued by Dodge as part of a “John Doe” civil RICO action filed this June by Golf. The suit claims a group of unidentified people attacked the company on Internet message boards and thereby hurt its stock price.

Little Rock lawyer T. Martin Davis, representing Arkansas Business Publishing Group, which owns the Business Journal, objected to the subpoena as an attempt to squelch work on this article.

Neither ABPG nor any of its divisions have any relationship to the alleged Internet “stock bashers.”

During the reporter’s office visit, Dodge was asked in a recorded conversation about his material relationship with both Golf and the Genesis Trust. Dodge took three steps backward and pointed the reporter toward the door.

“As far as I am concerned,” Dodge said, “now would be the time for you to leave.”

Multiple attempts over the past month to contact Golf CEO Tim Brooker — a part-time professor at John Brown University in Siloam Springs and Oral Roberts University in Tulsa and a former local radio talk show host — were unsuccessful.

Jim Bolt, vice president and chief operating officer of Golf, referred all questions to Dodge. Melvin Robinson, a trustee of Genesis Trust and an executive at Agracat Inc. in Farmington, could not be reached for comment.

Other Troubles

Given the growth in northwest Arkansas’ Hispanic population, which grew 815 percent from 2,885 to 26,401 between the 1990 and 2000 Censuses, Golf’s management ap-peared to have a good business plan.

The Business Journal visited Golf’s offices in May, and Brooker said the plan was to create a regional “superstation” that would market Spanish-language programming to Hispanics across the Midwest and South.

Brooker said Golf would produce original programs such as a fishing show, a local professional wrestling show and eventually nightly newscasts all in Spanish. During the spring, Golf started listing its “doing business as” name as Sienna Broadcasting

“Businesses that are ignoring [the Hispanic] market are doing so at their own peril,” Brooker said.

In several SEC filings, Golf claimed to be pursuing the acquisitions of additional TV stations in other states. But no expansion has materialized.

Ozark Wireless in Springdale, which provides the wireless service that carries KVAQ, said the station’s subscriber base is only about 340 people.

The FCC has no record of Golf Entertainment Inc. having any broadcast license. The station’s license is still held by Christians Incorporated for Christ Inc. — its previous owner which sold equipment to Bolt and Brooker as part of the series of acquisitions that led to Golf’s December reincarnation. (See story here.)

FCC regulations prohibit companies that allow convicted felons to serve as officers from obtaining a license to broadcast. Golf has also apparently not notified the FCC of any intention to change the station’s format or ownership.

Golf did issue a release saying that it had been hired by “a major shareholder” and paid $60,000 in cash plus 750,000 shares of its own stock to produce a video called “Welcome to America.” But that project has apparently not been completed.

HTVN, the Spanish-language network with which Golf Entertainment is affiliated, filed for Chapter 11 bankruptcy protection in July. Ray Grimes, executive vice president of HTVN, did not return repeated phone calls from the Business Journal.

Another bankruptcy, that of Golf board member Annette Gore, was filed in U.S. Bankruptcy Court on Aug. 1. The list of creditor claims, which includes a $131,000 IRS debt incurred from 1992-1998, totals $167,351.

Gore was appointed to Golf’s board sometime between December and March. According to Golf’s annual report, Gore is a licensed real estate broker in northwest Arkansas.

Some of the principals of Golf and Genesis have also been involved in numerous lawsuits with other companies and public officials. Bolt and Robinson were part of a suit against now defunct Aarow Broadband Wireless Inc. of Oklahoma City, Okla., for which they won a minor default judgment.

In depositions for the suit against Aarow, Robinson said that he and Bolt knew each other well and were friends in prison.

(Click here to learn more about the directors of Golf Entertainment Inc.)