“Whereas the whole process might cost $2 to $3 million, if you can get your stocks relatively early on, you can use them to pay for your later costs, your post-closing costs,” says Aaron Blumenfeld, a Bay Street lawyer who represents one of Jay Chiang’s creditors in an ongoing lawsuit. “So your actual out-of-pocket investment might not be that huge. If you calculate right and you’re buying the shares at X and they’re going to market for, say, three X or four X, you’re going to have your profit locked in, especially if you sell shares out relatively quickly.”
Kelley later said in a court document that Chinese companies like Telestone would end up owning 70% of the shares, with the remaining 30% split between the public float, himself and his partners. Winner received anywhere from 600,000 to 1.5 million shares for each firm it brought public. In the case of Orsus Xelent, Winner received 1.45 million shares.
Of course, to make their money back and earn a profit, Kelley and his partners had to ensure the stock went up rather than flatlining or declining. So they spent up to two years promoting the companies to investors in “dog and pony” shows.
To trade Winner’s shares in the RTO companies, Kelley opened accounts with various brokers, including E*Trade. “For my own personal interest [the E*Trade account] allowed me to keep some management over the process of what was being bought and sold, more particular sold in this case,” Kelley said in court. “Just so that, you know, they weren’t being sold at the incorrect time.”
In the end, the trading proved profitable: Winner International reaped more than $20 million by trading in shares of just the initial four RTOs. It’s difficult to say how much Kelley pocketed himself from the RTOs.
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While its newly minted companies were being touted in road shows, Winner also paid stock-research outfits that later produced enthusiastic evaluations of the firms’ prospects. In October, 2007, a Florida-based research firm called RedChip issued a report on Orsus Xelent with a “strong buy” recommendation and a 12-month price target of $6.65—which was more than double the market price at the time. Orsus Xelent’s share price rose 7.3%, to $3.25, the day after the RedChip report became publicly available. A review of trading records showed that roughly 16 million shares changed hands over the next week or so. Orsus Xelent’s stock ended that period at $5.09.
But the report was optimistic. In 2007, Orsus Xelent had forecast sales of 50,000 of its X180 cellphones, as well as the sale of 300,000 over time. As it turned out, the company sold only about 10,000 of the phones, virtually all in the first half of 2007. That was the last report of sales of the X180. RedChip later disclosed that it received $34,500 for the report while its affiliate, Aurelius Consulting Inc., was being paid $10,000 a month under a services agreement with Orsus Xelent. Court documents show that Winner paid Aurelius $20,000 in November, 2006.
In March, 2008, RedChip dropped research coverage on Orsus, which, by its filing for the fourth quarter of 2010, was down to just $5,000 in cash and $93 million in accounts receivable—many of them so aged that the company had to take a writedown of $33.8 million. By June, 2011, the company had “no discernible business operations,” according to a report by the research firm GeoInvesting.
The same pattern occurred with New Oriental Energy & Chemical Corp. In the fall of 2007, the website StockUpTicks.com issued a report touting the company’s growth potential and its financial performance. StockUpTicks.com disclosed in the report that it had been paid $30,000 by Kelley’s MCC Management for a 90-day advertising campaign. New Oriental Energy’s shares rose 16% the day the report appeared, to $6.98, on a volume of 340,507 shares. Over the next two trading days, the stock rose as high as $7.45, with an additional 277,822 shares changing hands. Within nine days of the StockUpTicks report, the share price fell back to the $6 mark it had been at prior to the campaign.