SEC Files Charges Against GMCC and Richard Brace

There is a lot of detail and some surprises in the complaint. Really credit goes here to he SEC for acting pretty quickly. The
summary follows:

On February 22, 2008, the Securities and Exchange Commission filed an action against GMC Holding Corporation (GMC) and its chief executive officer, Richard Brace, for defrauding investors by issuing false press releases touting the company's development of a motor technology device capable of generating unlimited energy and negotiations to sell this technology for hundreds of millions of dollars. The Commission's complaint further alleges that these false press releases enabled GMC and Brace to raise more than $2 million from investors through illegal unregistered offerings of the company's stock.

According to the Commission's complaint, GMC and Brace issued press releases in 2005 falsely claiming independent tests, issued by a professional engineer, on the motor device showed it was able to produce more energy than it consumed. The complaint also alleges that GMC and Brace issued false press releases in February and March 2006 stating that it was negotiating with unnamed S&P 500 corporations to acquire the company's technology for $300 - 500 million. These press releases, drafted by Brace, were utterly false. In reality, according to the complaint, the press releases claiming that the motor device produced more energy than it consumed failed to include the professional engineer's limitations, namely that the efficiency lasted only a few moments and that they were unable to duplicate the results in subsequent tests. Additionally, GMC and Brace never contacted, much less negotiated with, an S&P corporation, or any other company, regarding the sale of the company's technology. According to the complaint, GMC's false press releases artificially pumped up the company's share price and trading volume and helped GMC raise more than $2 million from investors through illegal unregistered stock offerings, which provided GMC's only source of revenue.

The Commission's complaint charges that the defendants violated Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 and Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 (Exchange Act) by conducting an unregistered offering of securities and making material misrepresentations and omissions to investors. The Commission's complaint seeks a final judgment permanently enjoining defendants from further securities laws violations, ordering defendants to disgorge their ill-gotten gains, and assessing civil penalties. The complaint further seeks an order barring Brace from serving as an officer or director of a public company and from participating in any offering of a penny stock.

On March 8, 2006 the Commission temporarily suspended trading in GMC's securities (Release No. 53442) and instituted administrative proceedings against GMC for failure to make its required periodic filings (Release No. 53448). On April 5, 2006, the Commission issued a settled order deregistering GMC's securities, finding the company had failed to file the required reports of a publicly traded company (Release No. 53601). The Commission acknowledges the assistance of the Financial Industry Regulatory Authority (FINRA) in this matter.

More details are in the complaint (PDF). The complaint claims that the summary of Gene Augistin's report published by GMCC was written by Richard Brace rather than Augustin. The complaint also claims that GMCC wasn't communicating with anyone about a potential sale of their technology at the time that GMCC was announcing the imminent sale, hundreds of millions of dollars, and a cash dividend.

A good article in the Orlando Sentinal by staff writer Richard Burnett gets some comments from Brace. Says the Sentinal:

In an interview Monday, Brace denied any wrongdoing in the case, blaming the problems on former consultants who had allegedly embezzled money from the company.

It's going to be hard to blame any embezzlement by consultants for the quotes the Brace is supposed to have fabticated or the press releases about an imminent nine figure deal when there were no discussions with anyone! The Sentinal article ends in a long rambling quote from Brace that is really worth a read.

Linda Stein at The Times, Trenton on Genesis

Read Duped investors to recoup a portion of their losses before November 25th while it's still free. Stein paraphrases Deputy Attorney General Patrick Flor

Kelly was described as an "ex cellent salesman who fooled a lot of people." About 500 of those who in vested in his company were from Mercer and Burlington counties, though his company apparently was never registered, even though Kelly claimed it was a Delaware corporation. Investigators found Kelly used the money for other purposes such as spending $200,000 on eight cars for himself and $80,000 for a fountain for his home.

At sentencing, Kelly told the judge

"I'm heartbroken this happened," Kelly said. "I really believed in this project. We worked very hard on this project for seven years. The choices I made were with the expectation the project would go well."

It starts with really believing and it ends with selling stock in a company that doesn't exist and spending the money on cars and Koi ponds while you tell investors that you are building products.

Stein notes also

The judge noted that Kelly had a limited criminal record but it did include a 1995 conviction for conspiracy and making false statements to a government agency in Rochester, Minn.

Thats must have eluded the New Jersey based promoters who claimed to the investors to do a background check on Kelly.

Also brought out in the Times article is that Kelly's assistant John Yoka has 5 patents. A Pet Locating Collar is the only one I can find.

Quiet End to Genesis World Energy

Patrick Kelly pled guilty on 2006-07-31, admitting to spending $200,000 of the United Fuel Cell Technologies money on personal vehicles. So that's the yellow Hummer and a few more cars. The sentencing hearing is not scheduled yet. John Yoka's case is still pending.

Can we get the "free Patrick Kelly" guy back to explain why Kelly admitted to those charges? Was he swayed by my propaganda?

Update 2006-11-11
Thanks to an anonymous poster who alerted me off that the case against Yoka was dismissed. From the New Jersey Attorney General.

Idaho Man Sentenced for Stealing Funds Invested in Bogus Fuel Technology Venture

TRENTON – Attorney General Stuart Rabner and Division of Criminal Justice Director Gregory A. Paw announced that an Idaho man has been sentenced to prison for stealing funds from victims who invested in United Fuel Cell Technologies Inc., a phony corporation that the defendant claimed had developed a revolutionary technology to convert water to hydrogen fuel.

According to Director Paw, Superior Court Judge Thomas P. Kelly of Mercer County sentenced Patrick Kelly, 51, of Kuna, Idaho to five years in state prison on a charge of second-degree theft by failure to make required disposition of property received. The defendant also was ordered to pay $400,000 in restitution. Kelly pleaded guilty to the charge on July 31, admitting that he used more than $200,000 in funds invested in United Fuel Cell Technologies to purchase eight cars in his own name.

An investigation by the Division of Criminal Justice determined that between November 2000 and June 2004, Kelly collected about $2.5 million in investments in United Fuel Cell Technologies from about 500 people, mostly New Jersey residents.

It is alleged that Kelly spent investor funds on a variety of expenses, many of which were clearly not related to the business or the development of their purported technology. Kelly allegedly spent $80,000 for a fountain for his home and financed a credit card for his 12-year-old daughter.

“This defendant is going to prison because he stole from investors,” said Attorney General Rabner. “We are committed to vigorously prosecuting these cases to protect New Jersey residents who are trying to invest and save for their retirement or their children’s education.”

“Mr. Kelly claimed to offer investments in a breakthrough technology. In reality, he offered only lies,” said Director Paw. “We have ensured that he will be appropriately punished for his greed and deception.”

The Division of Criminal Justice obtained a state grand jury indictment on Sept. 23, 2005 charging Kelly with second-degree securities fraud in connection with his sale of “common stock” in United Fuel Cell Technologies. The indictment alleges that he falsely claimed that United Fuel Cell Techologies was a Delaware corporation, and that Hewlett Packard and IBM had agreed to assist the corporation in developing and marketing its technology and related products. In fact, United Fuel Cell Technologies was never incorporated, and Hewlett Packard and IBM did not make any agreement with the company. Kelly also was indicted on second-degree charges of conspiracy and theft.

The judge today dismissed charges in the case against a second man, John Yoka, 35, of Livermore, Calif.

Hydrogen fuel cells, which are a legitimate technology, generate energy using hydrogen or hydrogen-rich fuel, with water as a byproduct. However, Kelly, who also used the name Genesis World Energy, fraudulently claimed to have invented a process to separate the hydrogen and oxygen molecules in water to produce hydrogen and oxygen gases to be burned as fuel or used in fuel cells. He claimed the technology would free the U.S. from dependence on oil from the Middle East.

State Investigator Noelle Holl and Deputy Attorney General Patrick J. Flor were assigned to the investigation for the Division of Criminal Justice. They were assisted by Investigators Dean Kuehnen and Julian Leone of the New Jersey Bureau of Securities. Flor prosecuted the case and represented the state at the sentencing.

Note that the period when Kelly was collecting investments, November 2000 and June 2004, includes the period that the Genesis website was up claiming that they were not taking investments.

Curious $1.9 Million Writeoff for Alternate Energy

The latest Annual Report from Alternate Energy Corp includes a curious write-off. What's curious is not the amount or that it's written off, but that this is occurring now and not a year or more ago. First lets take a look at what they say in the latest 10K.

In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," which was adopted in its entirety on May 22, 2003, we evaluate the carrying value of other intangible assets annually as of December 31 and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. When evaluating whether or not the asset is impaired, we compare the fair value of the reporting unit to which the asset is assigned to its carrying amount. If the carrying amount of a reporting unit exceeds its fair value, then the amount of the impairment loss must be measured. The impairment loss would be calculated by comparing the implied fair value of the reporting unit to its carrying amount. The initial evaluation of our patents and technology, completed as of October 1, 2003 in accordance with SFAS No. 142 resulted in no provision for impairment losses being recorded. Additionally, we performed our periodic review of intangible assets for impairment as of December 31, 2005 and identified asset impairment as a result of the review of approximately $1,906,000.

It's interesting that they would point out here that they found no impairment in 2003, but neglect to reiterate what they reported in the 2004 annual report: Additionally, the Company performed its periodic review of its intangible assets for impairment as of December 31, 2004, and did not identify any asset impairment as a result of the review. The company filed suit against Rothman in October 2004 over the asset that was just now written off. The most concise statement of their claim was in their 2005-July 10SB12G/A where they said We alleged in our lawsuit that Rothman had in fact sold the technology to other companies, and on more than one occasion, prior to entering into the agreement with us. We additionally allege that the technology he purported to sell did not work.

So in or before October 2004, they sued Rothman claiming the technology was not his to sell, and didn't work. But two months later, they reviewed it, and found it unimpaired. Then 12 months later they found the impairment. So did something happen in the 12 months between reviews that made the Rothman technology worth less? Since the company recognizes now that the asset is worthless, they should have recognized it in 2004. The 2004 financials should be refilled.

Alternate Energy Corp Late Annual Report

Alternate Energy Corp on April 4th filed a NT 10k announcing that their annual report would be late. Explaining why they would not file their annual report on time, they stated:

The Registrant was unable to file its annual report on Form 10-KSB for the fiscal year ended December, 31, 2005 in a timely manner because its independent auditors could not complete their review and issue their report as a result of an outstanding balance due, which has been satisfied as of the date hereof. The registrant anticipates that its form 10-K might not be completed for filing by the extended due date.

It looks like there might be some confusion over priorities over there. Their 2005-Q3 quarterly shows them having $165k in deferred consulting costs and $219k in prepaid expenses. So those prepaid expenses don't include the auditor. What consultants are they paying first?

GMC Holding Now a Private Company

GMC Holdings is now a private company, as a result of a settlement with the SEC on April 5th. The order is shown below.





GMC holdings on April 7th changed its webpage to reflect this change in status and made the following statement indicating that the SEC investigation is not yet closed.

The management of GMC Holding Corp. would like to inform our stockholders of the events and conditions currently facing the company. The Securities and Exchange Commission has instituted an investigation of GMC’s management, financial reporting and progress on technologies. We are fully complying with the Securities and Exchange Commission in the attempt to assist them with this investigation to accelerate a conclusion. We are confident that our complete disclosure of all information regarding our business practices, financial condition and current R&D progress will facilitate this result. In order to protect our shareholders, we requested an expedited delisting at this juncture. We wish to assure our stockholders that even though we are not trading, it is business as usual for the company.

We continue our efforts to improve our Cold Motor and other complimentary technologies. Negotiations continue with parties interested in purchasing a portion, or all of our technology. Once we have reached a resolution with the Securities and Exchange Commission, we have identified plans to move the company forward assuring that our bona fide stockholders will benefit and share in any sale of our REMAT technologies assuring that our bona fide stockholders will benefit and share in any sale of our REMAT technologies

Lee Webb has also posted updates to his Feb 15 Stockwatch article on April 7 and March 8. And there is a new Stockwatch article April 10.

GMC Holding Corp (GMCC) Class Action Lawsuit

George M Khoury, a previous CEO of GMCC (then Here Comes Grandma), is trying to organize a class action suit against GMCC. Additionally he filed in 2005-May a suit (case number 13-2005-CA-008899-0000-01) against GMC Holding Corp, CEO Richard Brace, and former director Stuart Cooper. It would be great to see investors fight back against GMCC and Brace but I'm skeptical of this effort for a few reasons.

Khoury's announcement is filled with Richard Brace class wishful thinking and self-contradiction. Towards the end Khoury writes In the event the technology the Company claims ownership too (sic), has a value of 350 million dollars, shareholders will be well served in joining me and others in this class action suit. It's self-contradictory to entertain the idea of 9 figure asset sales while contemplating a suit, since if Brace really was negotiating a 9 figure deal, shareholders would want to cut him some slack. Worse, shareholders should not be encouraged to continue to daydream about the motor or selling it. They need to wake up and realize that there is no invention and there are no buyers.

It's hard to see what's the commonality of interests between the older shareholders such as Khoury who turned over control of the worthless GMCC to Brace in 2002 in exchange for a share of whatever he could make of it and the new shareholders who turned over actual money in 2004-2006 to own a portion of a "fueless motor". I've talked to Khoury about this and he hasn't answered.

Finally, given Khoury's past involvement with Brace and GMCC, it's possible that investing in a Khoury led effort to recover their investment wouldn't be throwing good money after bad. A credible recovery effort would need to be run from outiside Castleberry.