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Canadian flag atop the “Danger No Entry” sign and a Canadian flag and Namibian flag in background on top of tower at a well site.John Grobler/The Globe and Mail

In the early days of 2020, few people were paying much attention to an obscure Vancouver-based oil company with an unproven project in little-known Namibia. But around that time something happened that evidently piqued the interest of a securities regulator. On Jan. 14, shares in Reconnaissance Energy Africa Ltd. (ReconAfrica) rocketed up 40 per cent on volume that was nine times higher than the day before.

On Jan. 15, ReconAfrica said in a news release it could not think of any significant reason for the astonishing surge in trading. Then, two days later, at the request of the Investment Industry Regulatory Organization of Canada (IIROC), the company revealed it had paid $120,000 to a German media company, Bull Markets Media, for an aggressive stock promotion campaign. (The company trades on the TSX Venture Exchange and the Frankfurt Stock Exchange.)

As part of the campaign, German stock promoter Gunther Goldherz had been paid to write several highly speculative articles about ReconAfrica – including one on Jan. 14 on the site goldherzreport.de – that compared its stock to a jackpot-winning lottery ticket.

Today, after a barrage of similar promotional articles about its Namibia project over the past 18 months, ReconAfrica’s stock has soared to about $12 from 50 cents. But now it faces two detailed complaints, submitted to U.S. and B.C. securities regulators, alleging it has engaged in deceptive stock promotion and inadequate disclosures.

The complaints cast a spotlight on Canada’s weak regulations around stock promotions. The two complaints focus on issues that tend to be poorly supervised and enforced in Canada, with regulators failing to require the kinds of disclosures that are demanded in the United States and failing to enforce their existing rules as vigorously as U.S regulators.

The complaints against ReconAfrica were filed with Wall Street’s top watchdog, the U.S. Securities and Exchange Commission (SEC) and the British Columbia Securities Commission (BCSC). The allegations have surfaced as Canadian regulators struggle to police a rash of shady stock promotions that have contributed to erratic trading in small resource companies this year.

ReconAfrica’s exploration drilling in Namibia has become a highly controversial global issue, sparking strong criticism from environmentalists because of its proximity to elephant migration routes and to the Okavango River, which flows into the famous wildlife-rich Okavango Delta.

Canadian firm eyes Namibia oil boom, sparking environmental fears in biologically sensitive region

The BCSC complaint, filed June 4, alleges ReconAfrica has been deficient in its disclosures by marketing its project to investors for most of the past two years as a fracking play, even though Namibia had not approved the unconventional drilling method.

Then, after the Namibian government made it clear last September that fracking wasn’t allowed, ReconAfrica dropped its previous emphasis on fracking, but did not make the change in its business model sufficiently clear to investors, according to the BCSC complaint. “ReconAfrica has never explained these changes or filed a material change report relevant to these changes,” the complaint said.

The BCSC complaint was filed by an environmental organization, which asked for confidentiality because of internal rules at the institutions where its members work. The Globe And Mail is aware of the members’ identities.

When asked if the BCSC had started an investigation into ReconAfrica based on the complaint, commission spokesman Brian Kladko wrote in an e-mail to The Globe that he could not confirm or deny the existence of a probe.

In response to a series of questions sent in writing by The Globe about the SEC and BCSC complaints, ReconAfrica said it “operates and manages its business in compliance with all laws and regulations in a number of jurisdictions.”

The company added, “if a valid and substantiated complaint has been filed, we would expect BCSC to make us aware of it and we would then address it directly with BCSC, as is appropriate.”

The SEC complaint, filed last month and reported on by National Geographic, cites a slew of misleading promotional posts published over the past year on stock trading websites that have contributed to volatile trading in ReconAfrica. The articles carried headlines touting ReconAfrica as “The Most Exciting Oil Play of the Decade” and “The World’s Next Giant Oil Discovery.”

Much of the content in the promotional posts was tailored to hook investors into believing the early-stage company, which has no proven reserves, is sitting on a treasure trove. “120 billion barrels of oil in the Kavango Basin. That’s the potential amount of oil sitting under the Kalahari Sands in Namibia and Botswana,” Richard Mason wrote on valuethemarkets.com on Sept. 30.

The article says ReconAfrica is on the path to discovering “phenomenal riches” in Namibia. “Kavango Basin could generate the kind of opportunity that even the majors dream about! It is an exceptional play. There is nothing out there today that is like it.”

Much of the claims in the promotional posts are pinned on a report commissioned by the company pointing to the potential for oil, but containing no actual proof. They are also partly based on the earlier assumption that Namibia would allow oil in unconventional deposits to be extracted.

ReconAfrica paid valuethemarkets.com US$116,000 for the September post, as well as similar articles and banner advertisements. In a disclaimer on the site, valuethemarkets.com pointed out the information was biased and it couldn’t guarantee the accuracy. Despite the apparent shoddy quality of the information, ReconAfrica paid hundreds of thousands of dollars for promotions such as these over about 12 months.

Being a number of steps removed from the promotion does not release ReconAfrica from responsibility over the accuracy of the content. Since it is paying for the content, the articles fall under the purview of its disclosure.

ReconAfrica must ensure the statements abide by Canadian securities laws. When a company makes a claim about the size of its discoveries, it is supposed to be able to back it up with a regulatory document, such as an engineering report conducted by an independent third party that proves the oil is actually there. ReconAfrica said in a regulatory filing in April that it has “no reserves,” meaning it hasn’t proved even one barrel of oil can be extracted economically.

The practice of outsourcing stock promotion to third-party websites that frame paid advertisements as articles that appear to be written by journalists is a commonplace but loosely policed phenomenon in Canada. Regulators have warned these kinds of promotions can lead to artificially high stock prices, enabling market manipulations such as pump and dumps.

In 2018, the Canadian Securities Administrators (CSA), the umbrella group that oversees Canada’s 13 provincial and territorial regulators, told investors to be on the lookout for “promotional campaigns that provide unbalanced or unsubstantiated material claims” and “content disguised as independent analysis or news, designed to encourage readers to make a decision to invest quickly.”

IIROC and its surveillance team are responsible for scanning marketplaces that have retained the organization as their regulation service provider. Staff look for stock price and volume moves that can’t be explained by material news events. If IIROC finds anything unusual, it is supposed to contact the company to see if it can explain the activity, and the regulator can issue a trading halt to allow the market to properly absorb the information.

When a company fails to make timely disclosures of material information, provincial securities regulators can issue a cease trade order, which stops the trading of the company’s stock and remains in effect until the company meets its disclosure obligations.

Occasionally, when the share prices of junior resource companies explode for no apparent reason, it’s because there are aggressive promotions going on behind the scenes. This appears to have been the case in 2020 for ReconAfrica – first with the German promotional campaign and then with similar campaigns in North America.

In November, trading in ReconAfrica’s shares again raised the interest of IIROC. On Nov. 19, the stock price raced up by 19 per cent amid exceptionally high volume of 1.7 million shares. At the urging of the regulator, ReconAfrica said in a release that day it couldn’t explain the volatility in its stock. But again, behind the scenes, there had been an aggressive promotion campaign going on that appears to have been the reason for the volatility. This time, investors were kept completely in the dark.

On Nov. 18, James Stafford, founder and editor-in-chief of the stock promotion website oilprice.com, wrote an article entitled, “Is this the most exciting oil stock for 2021?” Mr. Stafford said ReconAfrica had “18.2 billion barrels of oil in place” and cited as evidence a report issued by a small investment bank that had financial ties to ReconAfrica.

In a disclaimer at the bottom of the article, the website said its owner held shares in ReconAfrica and said it might be paid by ReconAfrica for promotion in the future. The disclosure also contained many other warnings and cautions, including the disclaimer, “We have not investigated the background of the company.”

When asked for comment on its past regulatory dealings with ReconAfrica, IIROC spokesman Sean Hamilton wrote in an e-mail to The Globe, “We do not disclose to the public any of the discussions we have with issuers or comment on the existence of any investigations into active matters.”

While ReconAfrica has a history of running aggressive stock promotion campaigns, the company also has a history of aggressively pushing back on negative news coverage. After National Geographic published an article about the SEC complaint last month, ReconAfrica accused the magazine of conducting a “hit piece.”

It also accused the magazine of enabling short-sellers – investors who profit from declines in share prices. However, ReconAfrica did not offer any evidence of significant short positions in the company. In fact, ReconAfrica has a very small short position, with only about 0.56 per cent of its shares outstanding sold short as of the end of May, according to Refinitiv.

The Globe has also faced aggressive pushback from ReconAfrica stakeholders, even before the publication of this article. One of the authors, Niall McGee, has been relentlessly targeted on e-mail, Twitter and Reddit by individuals with disguised identities accusing him of “corruptly colluding” with short-sellers on a “hit piece” about ReconAfrica.

When asked if it had anything to do with the attacks against Mr. McGee, the company said it has no role or knowledge of the campaign. “We regret the fact that Niall McGee has been the subject of online media harassment and don’t condone this behaviour. ReconAfrica did not encourage and does not support this behaviour,” the company wrote in an e-mail to The Globe.

Canadian regulators don’t have a stellar record in cracking down on misleading promotion campaigns fraught with conflicts of interest. The U.S., by comparison, has a much more hands-on approach to policing misleading stock promotion. The surveillance team at small-cap trading platform OTC Markets routinely spots dodgy stock promo campaigns as they are under way, flags companies being promoted with a red stock-promotion flag on its website and occasionally brands companies that engage in duplicitous promotion with “caveat emptor” warnings.

The level of disclosure required in Canada around stock promotion is also significantly weaker than in the U.S., and varies considerably by province and territory. And unlike U.S. companies, Canadian companies do not have to disclose amounts they pay for promotion.

B.C., the home jurisdiction for many small resource stocks, has tighter rules around promotion than many other provinces in Canada, and has moved to tighten the screws even more.

Under proposed new B.C. rules unveiled last month, amounts companies pay for promotion would be made public for the first time. Furthermore, any company that outsources promotion would have to issue a news release specifying who the promoters are, on what platforms promotions will appear and how much everyone is being paid.

“Some companies have a legitimate need to engage in promotional activities and they should have no trouble complying with the proposed rules,” Peter Brady, executive director with the BCSC, said in a release in May about the proposed rules. “Abusive stock promotions are a scourge that go hand in hand with abusive trading, and the new rules would give us one more tool to tackle them.”

Those rules might not affect ReconAfrica, however, because the company has already quietly relocated its offices to Alberta, which means its primary regulator could change to the Alberta Securities Commission (ASC), which has more lenient rules than B.C. around stock promotion.

In an e-mailed reply to questions from The Globe on May 21, the company said: “ReconAfrica has just completed the relocations of its operations to Calgary, which is where the majority of its staff will now be located.”

The company’s new Calgary office address will “soon be posted on the company’s website,” it said. As of this week, however, the Calgary address still had not been posted on its website.

With a report from Emma Graney in Calgary

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