ReconAfrica agrees to pay out more than $10-million over allegedly misleading disclosure

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Canadian oil company ReconAfrica is spending nearly US$1-million on a new marketing campaign to promote its Namibia exploration project, just weeks after agreeing to pay a reported US$10.8-million to settle two court cases over investor complaints of misleading statements about the project.

The oil company, formally known as Reconnaissance Energy Africa Ltd. RECO-X, says it has hired Florida-based FTB Capital Inc. to conduct “investor awareness, advertising and marketing activities” on its behalf, including banner ads and paid articles.

The agreement took effect on March 18 – less than three weeks after ReconAfrica announced it had settled two class-action suits by investors in Canada and the United States over allegations about its communications in the past.

The company has been drilling for more than three years in Namibia in a region near the Okavango River, which flows into the Okavango Delta, a world-famous wildlife reserve. Environmentalists have voiced alarm that the project could threaten elephant migration routes and other sensitive ecological sites.

Three years ago, after an earlier promotional campaign to market its Namibia project, ReconAfrica’s stock soared from pennies to more than $13 apiece on the TSX Venture Exchange.

Much of the content ReconAfrica paid for was tailored to hook investors into believing the early-stage company, which had no proven reserves, was 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,” paid stock promoter Richard Mason wrote on valuethemarkets.com in 2021.

German stock promoter Günther Goldherz compared ReconAfrica’s stock in 2021 to a jackpot-winning lottery ticket.

Today ReconAfrica’s stock trades at about $1.20 a share, a more than 90-per-cent decline from its peak.

Canadian securities regulators have promised repeatedly to tighten their oversight of promotional activities by Canadian-listed companies, but market watchers say there is little sign of progress, years after the promises were made.

Canadian law firm Berger Montague said last month that ReconAfrica has agreed to pay $5.075-million to settle the Canadian class-action suit, if the agreement wins court approval. A hearing on the matter is scheduled next month at the British Columbia Supreme Court.

The plaintiffs in the Canadian suit had alleged that ReconAfrica gave misleading statements about its African oil project, including statements implying it would conduct fracking of unconventional deposits in Namibia, even though the Namibian authorities had never allowed fracking in the past.

In the U.S. class-action suit, ReconAfrica agreed to pay US$7.05-million to settle the case, based on similar allegations, according to a U.S. website that monitors court settlements.

In both cases, the company denied the allegations and made no admission of liability. In a statement in late February, ReconAfrica did not specify the amounts of the settlements, but it said the amount was “within our insured limits” and would not cause any “direct financial impact” to the company.

FTB Capital, the company hired by ReconAfrica for its latest promotional campaign, is registered by Andrew Paul Rudensky, according to Florida corporate records. In 2018, Canadian stock regulators investigated Mr. Rudensky and suspended him for two years for making false and misleading representations to an investment dealer about his personal financial dealings with a client.

The Globe and Mail contacted ReconAfrica to ask about its promotional spending, its dealings with Mr. Rudensky and its settlements of the class-action suits, but the company did not respond to the request for comment.

The Globe in 2020 and 2021 reported extensively on an outbreak of questionable stock promotion campaigns that were causing mayhem in the trading of small resource stocks, including those involving ReconAfrica.

The Canadian Securities Administrators (CSA) subsequently created a market abuse task force in late 2021 to address what it termed a “resurgence of abusive promotional and trading activity.” CSA is an umbrella group for Canada’s 13 provincial and territorial regulators. As part of that strategy, CSA said it was looking at ways for provincial regulators to work together to clamp down on promotions carried out on social-media platforms.

“The CSA is examining abusive practices surrounding promotions of companies trading on the venture markets, and the obstacles to successfully detecting, investigating and prosecuting abusive conduct,” Ilana Kelemen, senior strategic adviser, communications and stakeholder relations with CSA, said in an e-mail to The Globe earlier this month.

But critics say there’s little evidence that much progress has been made in the years since the CSA task force was launched. Toronto-based securities lawyer Joseph Groia, who is a former head of enforcement at the Ontario Securities Commission, said he’s seen no measurable improvement in Canadian oversight around abusive stock promotion in the past 15 years.

“I’m seeing really abusive trading stuff going on in the market and nothing is being done about it,” he said. “That’s coming from offshore, or people who aren’t registrants, and from people who really don’t give a damn about having to make a settlement with the commission.”

Mr. Groia said that prosecuting such cases is extremely difficult and Canadian regulators seem unwilling to take them on.

“They’re afraid of spending the time and money that’s necessary to go after those kinds of people.”

Canadian regulators, he added, seem to be unable to keep up with changes in the social-media landscape that have seen promotion campaigns conducted via questionable newsletters, fly-by-night websites and on X.

Regulators in Canada have also failed to take action in cases where class-action lawsuits have been successfully launched around disclosure issues, such as has been the case with ReconAfrica.

“It’s a fair question to ask why the regulators haven’t done anything with that company,” Mr. Groia said.

Yolanda Holtzee, a Seattle metro region-based whistle-blower with decades of working with regulators on both sides of the border, says that with the exception of the Alberta Securities Commission (ASC), Canada has done “an exceptionally lousy job” of policing and prosecuting both dubious stock promotion and faulty disclosure from companies.

The situation has gotten so bad that she’s all but given up trying to work with Canadian regulators – apart from the ASC – owing to their unwillingness to engage with her, and their apparent indifference to the problems.

Lack of leadership from the top is a big problem across many of Canada’s securities regulators, she said. Canada’s biggest securities regulator, the OSC, has been without a permanent head of enforcement since the end of February, after former head Jeff Kehoe stepped down unexpectedly, leaving a major vacuum in enforcement.

“It’s like you’re running a high school or elementary school, and you haven’t had a principal for a while,” Ms. Holtzee said.

In an e-mail to The Globe, Andy McNair-West, manager of public affairs in communications, international and stakeholder affairs with the OSC, said that Leslie Byberg, who has taken over for Mr. Kehoe on an interim basis, has provided “strong leadership and oversight,” aided by her decades of experience in regulation and in law. He added that an executive search to find a replacement for Mr. Kehoe has been in motion since March, and the OSC looks forward to announcing his replacement soon.

Both Mr. Groia and Ms. Holtzee say the United States, which has a single national securities regulator, is doing a much better job than Canada. A number of the U.S. actions have been extremely high-profile. In 2022, the U.S. Securities and Exchange Commission and the U.S. Attorney’s Office for the Southern District of New York brought charges against 16 people, half of them Canadian, including a B.C. Hells Angels member and a former CFL player, alleging they manipulated the share prices of scores of U.S. penny-stock companies over a period of about 15 years.

In addition, the OTC Markets Group in the United States is more pro-active than small-cap Canadian exchanges in warning about suspect stock promotion campaigns in real time, Ms. Holtzee said. The OTC on its website clearly flags companies that are engaging in paid stock promotion campaigns. Occasionally it brands companies with “caveat emptor” warnings, indicating the need for extreme investor caution.

“OTC Markets, in the past five years, it just keeps improving,” she said. “It’s just very user-friendly, very transparent and they hold issuers accountable.”

The British Columbia Securities Commission (BCSC) has had some success in cracking down on poor disclosure around payments made to stock promoters although the financial penalties have generally been modest. The BCSC last summer ordered B.C. marketing company Stock Social Inc. and its chief executive officer to pay a combined $75,000 for not adequately disclosing it disseminated stock promotion materials on behalf of five companies. One of the companies promoted by Stock Social was also ordered to pay $20,000 for failing to ensure the stock promotion materials were flagged as issued on its behalf.

Editor’s note: A previous version of this article incorrectly stated that Jeff Kehoe stepped down as the Ontario Securities Commission's director of enforcement in January. He left at the end of February. This version has been updated.