The man on the podium: Canadian stock promoter plays hidden role in Chinese reverse mergers

/* /*]]>*/ You won't find S. Paul Kelley's name in any Securities and Exchange Commission filings. But the Canadian stock promoter pops up in photo after photo taken at the NASDAQ and American stock exchanges, usually smiling and surrounded by executives at Chinese companies that went public through reverse mergers. A Sharesleuth investigation found that Kelley and several equally anonymous partners helped create a string of U.S.-listed Chinese companies, including Telestone Technologies Corp. (Nasdaq: TSTC) and Kandi Technologies Corp. (Nasdaq: KNDI). Documents show that Kelley and his partners packaged the Chinese companies for reverse mergers with shell companies, paved the way for their listings on U.S. exchanges and promoted their stock afterward. One of the partners even fronted the legal and accounting bills for some of the companies. In return for their assistance, Kelley and the other participants in the venture got millions of shares of stock at low, pre-market prices. Their roles were not discussed in those companies' SEC filings, nor were their share deals disclosed. The SEC has taken the position in previous enforcement actions that anyone who is compensated for acting as a finder or facilitator in a reverse-merger transaction must be registered as a broker/dealer (see cases here, here and here). Sharesleuth could not find anyone who participated in Kelley's Chinese deals who met that requirement. In fact, one person who was involved in at least three of the reverse mergers was previously charged by the SEC with violating that rule. A SECRET PARTNER One of Kelley's partners was Jay Tien Chiang, a Canadian businessman who was found to have defrauded a computer company of nearly $10 million in the 1990s. Chiang has spent more than 12 years trying to avoid the financial judgments against him. His personal bankruptcy case — which includes allegations that he stashed a small fortune with family and friends before claiming insolvency — ranks as one of the longest and most contentious in Canadian history. Documents uncovered in case link Kelley and Chiang to a Hong Kong company called Winner International Group Ltd., which played a central role in the creation of Telestone, Kandi, New Oriental Energy & Chemical Corp. (Nasdaq: NOEC) and Orsus Xelenet Technologies Inc. (AMEX:ORS). The documents show that Winner International may have reaped more than $20 million from those deals, without ever appearing on the radar screens of securities regulators or other investors. The testimony and records assembled after the initial discovery by a private investigator offer a rare and revealing look into the often-opaque world of Chinese reverse mergers. Sharesleuth stumbled onto the bankruptcy case while researching Kelley's activities. We went to Toronto and reviewed thousands of pages of documents, including copies of brokerage statements, emails, depositions and other testimony. We then compared that information against SEC filings, corporation filings and other records to piece together additional elements of the reverse-merger network. Although most of the Chinese companies that Kelley and his associates brought to the United States saw brief spikes in their share prices, nearly all have become long-term losers. THE CREATIONS Kelley has helped at least 11 Chinese companies go public through reverse mergers. They are: Telestone (Nasdaq: TSTC). Telestone sells wireless communications equipment and network access packages, primarily to China's three main mobile phone companies. The Beijing-based company went public in 2004 by merging with a U.S. shell that had just reorganized in bankruptcy court. Orsus Xelent (AMEX: ORS). The company, which also has headquarters in Beijing, manufactures and distributes cellular telephones. Kelley helped the company gain a U.S. listing in 2005. New Oriental Energy (Nasdaq: NOEC). The company is based in Xinyang and makes fertilizer and chemical products. It went public in 2006. Kandi (Nasdaq: KNDI). The company, which currently has headquarters in Jinhua, makes all-terrain vehicles and go carts, and is developing its own line of electric cars. Kandi became a public company in 2007. China INSOnline (Pink Sheets: CHIO.PK). The Beijing-based company once operated a web portal offering information on insurance services. Kelley helped bring the company public in 2007. Its shares were delisted from the Nasdaq in November and now trade on the Pink Sheets. China Auto Logistics Inc. (Nasdaq: CALI). The company, which has headquarters in Tianjin, imports and sells cars. It went public through a reverse merger in 2008. China Infrastructure Investment Corp. (Nasdaq: CIIC). The company has headquarters in Zhengzhou and owns and operates a toll road called the Pinglin Expressway. Kelley helped it get a U.S. listing in 2008. Guanwei Recycling Corp. (Nasdaq: GPRC). Guanwei is based in Fuqing City and recycles plastic waste from Europe into polyethylene for use by Chinese manufacturers. It went public through a reverse merger last year. Winland Online Shipping Holdings Corp. (OTCBB: WLOL.OB). The Hong Kong company operates a fleet of oceangoing vessels and offers shipping and logistics services. It became a public company in 2008. CH Lighting International Corp. (Pink Sheets: CHHN.PK). CH Lighting is based in Shangyu City and makes fluorescent bulbs, lamps and other lighting products. The company, which once traded on the Over-the-Counter market, became public in 2008. Chisen Electric Corp. (OTCBB: CIEC.OB). The Changxing-based company makes batteries for electric bicycles, motorcycles and cars. It became a public company in 2008. Sharesleuth has identified a handful of additional Chinese reverse-merger companies that have connections to some of the players in the deals listed above. We'll have more on them in part two of this story, next week. A FINANCIAL MIDDLEMAN Although it's not apparent from SEC filings, Winner International was the key financial middleman in the reverse mergers that turned Telestone, Kandi, New Oriental Energy and Orsus Xelent into public companies traded. Court documents say that Winner International paid the legal, accounting and other compliance expenses for those four companies, in advance of their reverse mergers and for as many as two years afterward. Those outlays totaled $2 million to $3 million per company, and were never listed as a financial obligation in the companies' SEC filings. Kelley was vice president of Winner International from 2002 to 2009, and set up the U.S. brokerage accounts it used to sell much of the stock it received in the reverse-merger deals. Winner said in a legal filing that it authorized Kelley or his employees to trade the shares on its behalf. A financial summary prepared by a forensic accountant shows that at least $11.4 million in cash was transferred from those brokerage accounts, mostly to Winner International's bank account in Hong Kong. Because of the lack of public disclosure surrounding the share allotments in the reverse mergers, it was nearly impossible for ordinary investors to know when the people who had created — and touted — the Chinese companies were cashing out. FROZEN ASSETS One of Winner International's U.S. brokerage accounts, at E*Trade Securities, was frozen last year by a Canadian judge who concluded that Chiang secretly controlled it. As of February, that account was worth an additional $9.4 million, much of it in the shares of Telestone, Kandi and New Oriental Energy. Court records show that Winner International's bank account in Hong Kong was emptied in February and March of 2009, while Chiang's creditors were trying to get a court to enforce a freeze order there. An admitted money launderer in Toronto testified that he had previously helped route money to Chiang from that account, at HSBC Bank, doing his best to ensure that the transfers went undocumented. Kelley and Winner International have been named as defendants in a California case related to the original judgment against Chiang. They are alleged to have participated in the fraudulent conveyance of assets by helping him hide money. The trustee overseeing Chiang's bankruptcy also has named Winner International as a defendant in that case, again claiming fraudulent conveyance. A trial is scheduled for next week in Toronto to determine the true owner of Winner International's frozen E*Trade account. Sharesleuth is not alleging that any of the companies that Kelley and Chiang helped take public were complicit in any of the above financial transactions. But we think that people who have made, or are considering, investments in those companies might want to know more about their behind-the-scenes partners. We also think the failure of those companies and their top executives to disclose the connections to Kelley, Chiang and Winner International, and the compensation they received, raises questions about their credibility on other corporate issues. The reported last month that the SEC was investigating allegations that a network of American firms and individuals had teamed up with Chinese partners on fraud schemes that have cost investors billions of dollars. The site said the SEC was particularly interested in stock promoters, investment bankers, auditors and law firms that have helped Chinese companies gain listings on U.S. exchanges and sell additional share to American investors. (Disclosure: Mark Cuban, majority owner of LLC, has no position in the shares of any of the companies mentioned in this report. Chris Carey, editor of, does not invest in individual stocks and has no position in any of the companies mentioned, nor does Justin McLachlan, co-author of this story.) A FAMILIAR PATTERN With the exception of Telestone, whose stock shot to nearly $25 last year, the shares of most of the Chinese companies that Kelley has brought to the United States have followed roughly the same trajectory. They started out on the Over-the-Counter market and then moved to the AMEX or Nasdaq, rising to a range of $5 to $10 a share before entering prolonged declines. Despite the surging Chinese economy, six of the 11 companies that Kelley and his associates helped to bring public reported revenue declines – or, in one case, no revenue at all — in their most recent quarterly financial filings. Because the companies have rarely reached market capitalizations of more than $200 million, their activities have drawn little attention from securities analysts or others who might be inclined to dig more deeply into their structure or finances. KELLEY Kelley, who lives in the suburbs of Toronto, bills himself as a merchant banker and venture capitalist. He operates through MCC Group USA Inc. and a subsidiary, Asia First Financial Corp., both of which list headquarters in New York. He previously worked for Medallion Capital Corp., an investor relations company headed by his father, Stafford Kelley. In 2008, Stafford Kelley settled charges with the Ontario Securities Commission in connection with a stock-manipulation scheme involving a small minerals company called Hucamp Mines Ltd. Regulators alleged that Stafford Kelley, who handled investor relations for Hucamp, traded in its stock to create the appearance of greater market activity, and made purchases that had the effect of boosting the company's share price. He was fined $10,000 and agreed to a five-year ban on securities trading and a 10-year ban on serving as an officer or director of a public company. Old press releases show that Paul Kelley also handled investor relations for Hucamp at the time the manipulation scheme was playing out. He was not accused of any wrongdoing. But Hucamp's chief executive, a director and two other people faced charges along with Kelley's father. All agreed to settlements with the OSC that included trading bans, officer and director bans and fines. Sharesleuth noted that one of Stafford Kelley's longtime associates, a Toronto accountant named Howard S. Barth, was appointed to the boards of directors of four of the Chinese reverse-merger companies — New Oriental Energy, Orsus Xelent, China Auto Logistics and Guanwei Recycling. JAY CHIANG Chiang and his brother, Julius Chiang, operated Aamazing Technologies Corp., a California-based company that imported and distributed computer monitors. In 1998, one of its main suppliers, Korea Data Systems Ltd., won a $9.7 million judgment against the Chiangs. The judge found that they not only failed to pay for monitors and parts, but engaged in fraud and breached their fiduciary duty. Both Chiangs promptly filed for bankruptcy. Despite claiming to have no income or financial resources, Jay Chiang and his wife, Christina, continued to live a life of relative luxury, remaining in their 10,000-square-foot house in Richmond Hill, Ontario, driving expensive cars, taking international trips and sending their two sons to an expensive private school. The Toronto Star, in its coverage, has referred to the couple as "mysteriously rich.'' Jay and Christina Chiang were sentenced to jail terms in 2007 for failing to heed a judge's order to answer specific questions about their finances. Jay Chiang served nearly eight months before an appeals court ordered him released. // A RELENTLESS ADVERSARY Jay Chiang's main adversary is Lap Shun "John" Hui, a Chinese-born entrepreneur who was part owner of Korea Data Systems. Hui sold another of his companies, eMachines Inc., to Gateway Inc. for cash and stock valued at $290 million. Hui, who lives in California, has spent several million dollars pursuing the Chiangs on behalf of Korea Data Systems (USA) Inc. The legal fight extends beyond the United States and Canada, to Hong Kong and at least two other foreign jurisdictions. Hui has been supported in that effort by the bankruptcy trustee in the Canadian case, who is attempting to find and liquidate assets so that all of Chiangs creditors can be paid. Hui's hunt for assets that he believes Chiang transferred to family and friends led to a private investigator's discovery of a shredded brokerage statement in Chiang's trash, which suggested he had access to Winner International's E*Trade account. COMMON TIES Additional documents turned over by Kelley, Winner International and others involved in the case revealed common ties among a number of U.S.-listed Chinese companies – links that are not apparent from their SEC filings. Copies of emails and brokerage statements show that Kelley, Chiang and others played significant, undisclosed roles at the companies after they went public. They reviewed business plans and press releases, worked on financing with investment bankers and even bought and sold stock to help spur or sustain the public market (Look for more details on these activities in part two of our story). The court documents connect Winner International to Telestone, Kandi, New Oriental Energy and Orsus Xelent. Shares of a fifth company, Winland Online Shipping, also wound up in one of Winner International's U.S. brokerage accounts. Chiang's creditors presented trading records that suggest he bought that stock in the open market to bid up the price, the same day a partner's selling unexpectedly sent the company's shares plummeting. SEC filings show that certain participants in the reverse mergers that created Telestone and New Oriental Energy also were involved in some of the later deals. Ten of the 11 companies that Kelley is known to have helped bring public currently use the same investor relations firm, DGI Investor Relations Inc., which is based in New York and headed by Ken Donenfeld. The eleventh company, Telestone, recently switched to a different firm. Donenfeld told Sharesleuth that he was not employed by Kelley or Kelley's firms. He said he typically is hired by companies after they go public. Donenfeld forwarded Sharesleuth's questions to all 10 of the Chinese reverse-merger clients we asked about. Only one, Winland Online Shipping, responded. RESPONSES Winland said through an attorney that it had no relationship with Kelley, his affiliates or his associates, warning that "any statement or implication to the contrary may prove injurious to our client.'' However, the website for one of Kelley's companies lists Winland among its previous deals. In addition, court filings say that one of Kelley's associates in China helped engineer that company's reverse merger with a U.S shell. Telestone responded through its investor relations firm, CCG Investor Relations. Like Winland Online Shipping, it did not answer any of our questions, but instead offered this statement: "It is a matter of public record that in August 2004 Telestone Technologies Corporation completed a share exchange transaction with the stockholders of Success Million International Limited (SMI) by which SMI became our wholly-owned subsidiary and through which we conduct our business operations. On September 15, 2006, NASDAQ accepted Telestone Technologies for listing on the NASDAQ Stock Market and on January 30, 2007, the NASDAQ Stock Market approved Telestone's transfer to the NASDAQ Global Market. Since the consummation of the transaction with SMI, Telestone Technologies believes that it has complied fully with its obligations under the Securities Exchange Act and the rules and regulations of the Securities and Exchange Commission as well as its obligations as a listed company on the NASDAQ Stock Market. Telestone Technologies intends to continue to fully comply with its legal obligations and to act in the best interests of its shareholders." Kelley did not respond to a list of questions submitted by Sharesleuth. Chiang's attorney said he was unable to provide any additional information or comment on his client's activities. THE JOINT VENTURE Kelley and Chiang began working together on Chinese reverse mergers in 2002. According to testimony in his bankruptcy case, Chiang introduced Kelley to Ning "Jack" Tang, an old friend in Beijing who worked with Chinese companies that wanted to go public. Tang created Medallion Capital Corp. China as a vehicle for participating in the reverse-merger venture. According to the testimony, Chiang and Tang would find Chinese companies seeking to get their shares on U.S. exchanges, and Kelley would tell them what changes the companies needed to make to meet listing standards. Kelley's MCC Group teamed with Winner International and Medallion Capital Corp. China on the reverse mergers that created Telestone, Kandi, New Oriental Energy and Orsus Xelent. Court filings say MCC Group, Winner International and Medallion Capital Corp. China all were allowed to buy free-trading shares in the newly created companies at nominal prices. The filings say Chiang and Tang negotiated the stock allocations for the participants in the reverse-merger deals. One document submitted by Kelley's lawyer shows that Winner International alone received: 950,000 shares of Kandi, which peaked at $7.25 in April 2008 599,700 shares of New Oriental Energy, which spiked to $10.10 in October 2007 1.45 million shares of Orsus Xelent, which hit a high of $7.90 in October 2007. The filing did not say how many Telestone shares went to Winner International, , or how many shares of any of the reverse-merger companies went to MCC Group and Medallion Capital Corp. China. But a stock certificate elsewhere in the court documents shows that Winner International got at least list 200,000 Telestone shares, which would have made it one of the biggest investors in the company. And a brokerage statement shows that Winner International's E*Trade account had 242,020 Telestone shares — some of them purchased on the open market — a few months before it was frozen. At Thursday's closing price of $8.67 a share, that stock would be worth $2 million. MYSTERY SHARES Like the SEC filings, the court documents in Canada do not explain exactly how MCC Group, Winner International and the other parties acquired stock in the Chinese reverse-merger companies. But for the shares to be free trading and not subject to registration or a holding period, the participants would have had to obtain them from the shell company or its owners. In the cases of Telestone and China INSOnline, it appears that MCC Group and other parties got millions of shares of stock in return for providing $50,000 in loans to a pair of shell companies just before the completion of their bankruptcy reorganizations, and for paying off some of their other debts. Both reorganization plans stated that the shell companies intended to resurrect themselves through reverse mergers. PHOTO OPPORTUNITIES Kelley helped Telestone go public in 2004, through a reverse merger with a shell called Milestone Capital Inc., which had just shed debts and unwanted assets through bankruptcy. Its stock started out on the Over the Counter market. When Telestone's stock moved to the AMEX in 2005, the redheaded, bespectacled Kelley was there. One photograph shows him shaking hands with Daqing Han, Telestone's chairman and chief executive, on the podium overlooking the trading floor. When Telestone ascended to the Nasdaq Global Market in 2007, Kelley again joined in the celebration. He was pictured with Han and other company officials who came to New York to ring the bell that signals the beginning and end of trading each day. Kelley also was photographed at bell-ringing ceremonies with executives from Kandi, China Auto Logistics and Guanwei Recycling. A copy of Han's business card puts his U.S. address, and Telestone's U.S. address, at the same suite of offices that MCC Group originally listed as its New York headquarters. Phone logs, emails and other documents filed in the Canadian court case show that Chiang and Han also were in touch with one another, and that Chiang corresponded with the chief executives of a few other Chinese reverse-merger companies. TELESTONE Sharesleuth reported last August on accounts receivables questions at Telestone. The wireless communications company's stock rose more than 2,000 percent between March 2009 and January 2010, peaking at $24.94 a share. The surge was fueled partly by financial reports showing sharp increases in sales and earnings. But as Sharesleuth pointed out in that story, Telestone had not collected most of that revenue. Its $95.2 million in accounts receivable at the end of 2009 equaled all of that year's sales, plus two-thirds of the previous year's sales. Telestone's latest quarterly filing with the SEC shows that its receivables have continued to rise. They totaled $139.9 million, before adjustments for doubtful accounts, at the end of September. NEW QUESTIONS Telestone's shares fell more than 25 percent on Tuesday after an anonymous writer using the name "The Forensic Factor'' posted an analysis of the company's accounting and financial reporting practices on, an investment site. Among other things, the article questioned Telestone's "failure to generate a penny of cumulative cash flow, despite claims of spectacular sales and earnings growth.'' The article also asserted that Telestone's revenue recognition and accounts receivables policies do not conform with generally accepted accounting principles. It noted that the company had gone through three chief financial officers in three years, and had changed auditors twice. And it pointed out that Telestone claimed to have developed cutting-edge wireless communications technology while spending less than $1 million a year on research and development. Telestone has pointed out that nearly all of its receivables are owed by China's "Big Three'' wireless providers. It says that those partners have billions of dollars in revenue and assets, and are unlikely to default on their obligations. Telestone reported $70.8 million in sales and $12.6 million in profits for the first nine months of 2010. It announced guidance of $129.4 million in revenue for the full year, which would translate to an 80 percent increase from 2009. Telestone raised $18.5 million in capital in November, through a private placement at a discounted price of $12 a share. Its stock has fallen below $8 since then, which has reduced the company's market capitalization to just $80 million. WINNER'S FINANCIAL DEALINGS Court documents show that Winner International sent money to lawyers and auditors from its account at HSBC Bank in Hong Kong, as well as from at least one of its U.S. brokerage accounts. One summary listed nearly $1 million in payments from HSBC Bank in Hong Kong to a handful of professional firms, including Anslow & Jaclin LLP, a law firm in Manalapan, N.J., and K&L Gates LLP, an international law firm with headquarters in Pittsburgh. The accountants that received payments included Moores Rowland (now Mazars CPA Ltd.), which is the current auditor for Telestone and the former auditor for Orsus Xelent; and Weinberg & Co., which was the auditor for Kandi and New Oriental Energy. The court documents show that Winner International deposited nearly $1 million that came from a handful of individuals and funds that were later listed in SEC filings as private-placement investors in New Oriental Energy. Those investors included MidSouth Investor Fund L.P. and Lake Street Fund L.P., both of which have participated in a number of Chinese reverse-merger deals. It is unclear why the private-placement investors would have paid money to Winner International. In addition, the transaction summary shows that Winner International received almost $85,000 from Richard N. Molinsky, a former senior vice president at D.H. Blair & Co., a defunct New York brokerage. He pleaded guilty to securities fraud and attempted enterprise corruption in 2002 in connection with that brokerage's boiler-room style activities (see this Sharesleuth story for more on Molinsky). The transaction summary also shows a deposit of $50,000 into Winner International's Hong Kong bank account that came from an entity called the Kagel Family Trust. David L. Kagel, a California attorney, has voting control over the shares held by the trust. The SEC brought charges against Kagel in the 1990s, alleging that he orchestrated a fraudulent scheme to take a company public through a reverse merger. A judge found that he prepared filings that contained false and misleading statements, committed "repeated and deliberate'' violations of federal securities law and he tried to conceal the violations after a specific inquiry by regulators. The financial summary does not include any explanation for why Molinsky or the Kagel Family Trust provided money to Winner International. Neither appears in the SEC filings of any of the companies connected to Kelley. MEI HUANG Hong Kong corporation filings list a woman named Mei Huang as Winner International's sole director and shareholder. She has testified in Chiang's bankruptcy case that the assets in its bank and brokerage accounts are hers. Documents in the bankruptcy case also identify her as an investor in Medallion Capital Corp. China. She was described as a businesswoman from Shenzhen. Huang speaks almost no English. Hui — Chiang's nemesis — told Sharesleuth that when Huang was cross-examined last year, it was clear she had little knowledge of the U.S. stock market or Winner International's trading. Court documents show that Huang declined to answer questions about the transfer of $2 million from the HSBC account in late 2008. That money wound up in the account of Wainwright Ventures Ltd., which was an investor in an earlier reverse-merger deal that involved Paul Kelley, Stafford Kelley and Winner International. Court filings show that Wainwright Ventures has been paying the legal expenses for Winner International and Huang in the court proceedings in California. Huang's sister, Min Huang, is listed as the sole director of Wainwright Ventures. However, SEC filings for a reverse merger that Kelley helped arrange in 2002 identified a British citizen, Allister Mathew Cunningham, as its control person. LIYA WU Another key player in the reverse-merger process is a woman named Liya Wu. Wu worked for Kelley's MCC Group, and handled investor relations for many of the Chinese companies that he helped to bring public. She currently is vice president for marketing at one of his most recent creations, Guanwei Recycling. (See her discussing the company's activities in this video interview) Wu testified in Chiang's bankruptcy case that she joined Medallion Capital Corp. China in 2002. She was its only employee, and her responsibilities included translating due diligence documents and drafting business plans. Wu also prepared the articles of incorporation for Winner International. She testified that Mei Huang was the sole director and sole shareholder. Wu moved to Canada in 2003 to work for Kelley's MCC Group. She said Tang took care of the China side of the reverse-merger business, identifying promising companies and signing contracts with them to provide the necessary assistance. She testified that Kelley lined up securities lawyers and auditors, recruited market makers, and took care of other details in North America. Wu testified that she viewed both Kelley and Chiang as her bosses. She said that she was paid by Kelley through MCC Group, and that he – not Huang — gave her instructions about transferring money from Winner International's HSBC account. BRIDGING THE CULTURAL GAP Wu said Chiang served as a bridge between Kelley and Tang, who didn't speak much English. Chiang had knowledge of Chinese culture and Chinese companies, and helped them understand how to qualify for public listings and comply with regulatory requirements. Wu characterized Chiang as "the glue'' in the arrangement, and testified that without his assistance, Kelley and Tang probably wouldn't have been able to work together. Court filings suggest that Tang also is known as Jing Yuan Tang. Documents show that, after Chiang filed for bankruptcy, someone by that name received more than $2.5 million in transfers from another hidden business that his creditors have uncovered. Jing Yuan Tang also is listed in the financial summary for Winner International as having provided money that was deposited into that company's Hong Kong bank account, and having received payments out of that account. THE SHELL PROVIDERS Sharesleuth noted that a number of the shell companies used in Kelley's reverse mergers had ties to people who previously were the subject of regulatory actions by the SEC or the Financial Industry Regulatory Authority. Two of the shells – the ones that became Telestone and China INSOnline — were provided by Focus Tech Investments Inc., a Houston company headed by Michael T. Fearnow. The SEC brought charges against Focus Tech and Fearnow in 2000, alleging that they violated securities laws in previous reverse-merger deals by effecting securities transactions without being registered as a broker/dealer. Fearnow is a former brokerage executive whose registration had been revoked years earlier by the National Association of Securities Dealers (now FINRA). Fearnow settled the SEC case without admitting or denying guilt. He paid a $10,000 fine and agreed not to violate securities laws in the future. Documents in Chiang's bankruptcy case show that Fearnow also was involved in the creation of Kandi. Two other shell companies – the ones that became New Oriental Energy and Orsus Xelent — were controlled by people with close ties to Byron R. Lerner, who settled fraud charges with the SEC in 2002. The majority owner of the shell that became New Oriental Energy was James Tubbs. He and Lerner were the top two executives at Teltran International Group Ltd., which the SEC charged with materially overstating its revenue and earnings and disseminating misleading share price projections. The majority shareholder of the shell that became Orsus Xelent was Lerner's son, Darrell Lerner. Tubbs, Darrell Lerner and Byron Lerner owned 95 percent of another shell that was used to create a third Chinese reverse-merger company, China Elite Information Co., at about the same time. ARTHUR PORCARI Fearnow's former brokerage partner, Arthur J. Porcari, has been one of Kandi's biggest boosters. He posts about Kandi almost every day on stock message boards, and recently uploaded to a set of videos showing his visit to the company's facilities in China and a test drive of one of its electric cars. Last month, Porcari posted a glowing update on Kandi and its prospects on Although a disclaimer noted that Porcari had a long position in Kandi's stock, it did not say that he was involved with the group that arranged its reverse merger. Porcari has said in postings on Internet message boards that he has been a shareholder of Kandi since the day it went public, and also was an early investor in Telestone and New Oriental Energy. Porcari and Fearnow both were fined and suspended by the NASD for violating insider-traiding and fair practice rules at their now-defunct firm, Porcari, Fearnow and Associates Inc. The SEC also brought administrative proceedings against Porcari in 1994. It said that while he was working as a financial relations consultant for a public company, he sought to engineer a "short squeeze'' by making baseless predictions about its share price to brokers and urging them to make coordinated purchases of stock. Porcari later was an online cheerleader for two other companies — Net Command Tech Inc. and Host America Corp. — whose stock rose sharply after they issued attention-getting press releases. The SEC halted trading in both companies' stock, citing the accuracy or adequacy of their public disclosures. When trading resumed, their shares plummeted in value, prompting investor lawsuits that each company settled for millions of dollars. Sharesleuth determined that at least two other people connected to Host America – one of whom sold millions of dollars worth of stock after a false press release boosted the share price — were involved with the Chinese reverse-merger network. KANDI Kandi is perhaps best known as a maker of go karts, three-wheeled motorcycles, utility trucks and other specialized vehicles. It also produces a low-speed, electric car known as the Coco. Kandi is developing a new line of larger, faster electric cars. To help spur sales, it has announced plans to set up a network of battery-changing stations in partnership with a batter maker and State Grid Power Corp. Kandi says the stations will allow electric-vehicle owners to quickly swap depleted batteries for fully charged ones, reducing the need for them to charge the vehicles themselves. The company reported $28.6 million in revenue for the nine months that ended Sept. 30, up almost 50 percent from a year earlier. It had a loss of $709,326 for the period, versus a profit of $219,625. Kandi sold $16.6 million in stock to several institutional buyers in a private placement last month. The price was $5.50 a share, which amounted to a nearly 18 percent discount from the closing price the day before the deal was announced. Kandi's stock currently is trading for around $5.30 a share, giving the company a market valuation of roughly $125 million. KELLEY'S TRACK RECORD Kelley is listed in New York corporation filings as the chairman and chief executive of MCC Group, which bills itself as a "top US venture capital and management consulting firm." It says its mission is to help clients become publicly traded companies and gain access to North American capital markets. The Flaherty Report, an investment newsletter, said in an article in April 2009 that Kelley, MCC Group and Asia First Financial had helped at least 10 Chinese companies gain listings on U.S. stock exchanges through reverse mergers. The report said Kelley's organization "acts in some ways like an unregulated investment banker.'' It quoted Kelley as saying that although most Chinese companies that go public through reverse mergers end up bankrupt in just a few years, all of the ones that he had helped were still afloat. While that may be technically true, many of Kelley's creations are faltering. ORSUS XELENT The stock of Orsus Xelent, which Kelley and Winner International helped take public in 2005, has gone from a high of around $7.90 in the fall of 2007 to 17 cents a share now. Orsus Xelent reported $20 million in sales for the first nine months of 2010, down 70 percent from a year earlier. It posted a loss of $585,000, compared with a profit of $5.81 million in the corresponding period of 2009. The company attributed the decline to the waning popularity of the non-3G cell phones it produces. Like Telestone, Orsus Xelent has a mounting accounts-receivables issue. Its latest quarterly SEC filing shows that the company had $98.9 million in receivables as of Sept. 30, up from $81.1 million at the start of the year. The company's quarterly filing said it was down to just $4,000 in cash at the end of September. CHINA INFRASTRUCTURE INVESTMENT China Infrastructure Investment, which operates a toll road in Henan province, peaked at $4.75 a share. Its stock currently trades for 67 cents. The company reported revenue of $13.1 million for the first quarter of its new fiscal year, down roughly 4 percent from the corresponding period of 2009. Its earnings fell by almost half, to $1.51 million, because of higher operating expenses. CHINA INSONLINE The shares of China INSOnline reached a high of $6 in January 2008. They bottomed out at 2 cents a share last month, after the company was delisted from the Nasdaq. They now trade for around 7 cents. China INSOnline reported revenues of $9.54 million for the 9 months that ended March 31, down from $13.0 million a year earlier. It said it had earnings of $4.2 million for the period, compared with $5.44 million. However, SEC filings show that its business inexplicably went off a cliff in the first three months of 2010. The company reported just $670,232 in revenue, compared with $3.99 million a year earlier. It had a loss of $105,095, versus a profit of $2.19 million. China INSOnline cited a decline in online advertising revenue and software development revenue for the steep drop in sales and earnings. The company said, without elaboration, that it was "temporarily unable'' to obtain purchase orders from certain customers during the quarter. China INSOnline later said it would jettison those two businesses to focus on its insurance agency business. It reported no revenue, and a net loss of $2.39 million, for the three months that ended Sept. 30. In November, the company announced that it had changed directions entirely, through a second reverse merger with a Chinese biodiesel producer. CHINA AUTO LOGISTICS AND GUANWEI RECYCLING Both China Auto Logistics and Guanwei Recycling have seen significant declines in their share prices over the past year. China Auto Logistics, which went public in 2008, reached $6.25 last January, a few days after moving to the Nasdaq market. It now trades for less than half of that price. China Auto Logistics reported sales of $176.4 million for the first nine months of 2010, compared with $143.1 million in the same period a year earlier. It said profits totaled $5.7 million, up from $4.41 million Guanwei Recycling hit the market in December 2009, closing at $2.25 in its first day of trading. Its shares reached a high of $5.70 in mid-April after they moved to the Nasdaq. The company's stock now trades for around $3.40. Guanwei Recycling reported revenue of $33.6 million for the first nine months of 2010, down 11 percent from a year earlier. However, the company said earnings rose to $7.69 million, an increase of more than 30 percent. Guanwei Recycling also said that its sales for the three months that ended Sept. 30 were more than double its sales for the corresponding period of 2009. NEW ORIENTAL ENERGY New Oriental Energy peaked at $10.10 in October 2007. Its shares are currently trading for around $1.20. The company reported $17 million in revenue for the six months that ended Sept. 30, up about 7 percent from a year earlier. But revenue for the final three months of that period was just $3.19 million, a drop of more than 50 percent. New Oriental posted a loss of $3.32 million for the six months that ended Sept. 30, compared with a loss of $6.62 million during the same period in 2009. The company was notified by the Nasdaq this summer that its shareholder equity was well below the $2.5 million level required to stay listed on the exchange. New Oriental said in an SEC filing in September that two debt holders – which had not been identified in any previous filings — had agreed to convert $1.44 million in debt to common stock to help the company meet Nasdaq's listing requirements. Sharesleuth noted that both of those debt holders are entities that were involved in several of Kelley's other reverse-merger deals, including Telestone, China Infrastructure Investment and China INSOnline. We'll cover all of the reverse mergers in more detail in part two of our story. We'll also take a closer look at how Kelley, Chiang and others interacted with those companies and their management. Stay tuned. Kristina Saar provided fact-checking services for this article

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