SEC sues Terax Energy for misleading news
2007-09-17 15:48 ET - Street Wire
Also Street Wire (U-*SEC) U.S. Securities and Exchange Commission
Also Street Wire (C-TPC) TrueStar Petroleum Corp
by Mike Caswell
The U.S. Securities and Exchange Commission has filed civil fraud charges against Terax Energy Inc., a California company that said it was acquiring 17.8 million shares of TSX Venture Exchange listing TrueStar Petroleum Corp. this summer.
The regulator says Terax's undisclosed backer is convicted felon Mark Anderson. He allegedly misled investors about Terax's investment in TrueStar and exaggerated its oil revenues.
The complaint, announced late Thursday by the SEC, names as defendants Mr. Anderson, 53, and his office assistant Linda Contreras, 26. In addition, it lists Terax Energy Inc., which trades on the OTC Bulletin Board, and Westar Oil Inc., a private company Mr. Anderson controls.
On July 25, 2007, Terax reported that it was acquiring 17.8 million shares of TrueStar, or 19.8 per cent of the company, in the open market. TrueStar traded at 11 cents. However, the SEC says the transaction was never completed; it was part of Mr. Anderson's fraud.
Texas investors
Mr. Anderson took control of Terax in April, 2007, and installed Ms. Contreras as a nominee officer and director. He planned to merge Westar and Terax, and used the names of the companies interchangeably.
The SEC says Mr. Anderson induced 30 investors in Texas to buy 1.03 million "pre-IPO" shares in Westar at $1 each. Based on a "major discovery" in Railroad Valley, Texas, he told them the stock could go to $10 or $20. (All figures are in U.S. dollars.)
However, Westar did not have any oil and gas leases in the Railroad Valley area, nor has it filed any reports with government authorities claiming any production.
On June 8, Mr. Anderson negotiated a purported share exchange agreement with Terax, in which Westar's shareholders would receive four Terax shares for each Westar share. In spite of several promises, the shareholders never did receive any Terax shares.
Mr. Anderson did receive some Terax shares, however. The SEC says he caused 500,000 shares to be issued to two Nevada trusts he controls. He also issued 500,000 shares to an unknown individual that may be in Hong Kong.
False news releases
Once he had his shares, the SEC says Mr. Anderson caused Terax to issue false and misleading news releases:
On June 8, 2007, the company said it expected to generate $750,000 per month in cash flow from six oil wells in Erath county, Texas.
On June 22, 2007, Terax claimed an unidentified New York lender had agreed to provide $175-million in financing to "Westar Oil." (Mr. Anderson referred to Terax as "Westar.")
On July 25, 2007, Terax issued a news release saying it had acquired a controlling interest in TrueStar Petroleum.
None of this was true, the SEC alleges.
Prior production from the company's wells in Texas did not support its monthly cash flow projection. In fact, Terax's regulatory filings showed the company operated the wells for a few months in the summer of 2006 and they only produced $100,000 worth of oil and gas.
The news of the financing was misleading because the lender had only offered to consider to provide it, and the offer had expired on June 18, before the news release was issued.
As for the investment in TrueStar, Terax did not pay for the shares. On July 20, a Canadian broker acquired 17,869,000 TrueStar shares on Terax's behalf.
On July 25, the broker demanded payment. Mr. Anderson first said he wired the cash; subsequently he sent a $2-million cheque, but stopped payment on the cheque.
"When the broker-dealer learned that Anderson had stopped payment on the cheque, he liquidated the position on the open market," the SEC says.
Market impact
In a period spanning less than two months, Mr. Anderson's news releases took Terax from the 40-cent range to a $4.88 high.
Prior to May, 2007, the stock traded between 20 and 40 cents on monthly volumes of 76,000 shares or less. Within a week of the Westar share exchange being disclosed, the price went to $2.50 on volume of 912,700 shares.
The volume and price continued increasing, reaching $4.02 on volume of 654,800 shares on June 22. The company reached a 52-week high of $4.88 on June 25, equal to a market capitalization of $18-million.
Meanwhile, the SEC says Mr. Anderson's company, September Trust, holds $1.3-million worth of Terax shares. On June 22, it sold 12,000 shares at $4. The remaining shares have been converted into street name, but have not been sold.
Anderson's record
In 1994, Mr. Anderson was convicted of mail fraud and sentenced to seven years in jail. Formerly a lawyer from Nevada, he was disbarred in 1993 based on the activities that led to his criminal conviction.
At the open on Thursday, the SEC suspended all trading in Terax for 15 days. The stock last traded at $2.65.
TrueStar is also halted, but for different reasons. The TSX-V halted the stock on Sept. 4, ahead of its news that its main operating subsidiary has declared bankruptcy. The stock, which traded at 11 Canadian cents when Terax disclosed its investment, last traded at four Canadian cents.
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