InterOil Files False Disclosures With SEC (Redacted Version)

Note: My previous blog post was deleted by me and replaced by this redacted version because it included certain sensitive information that I subsequently decided to sent to law enforcement.

InterOil (NYSE: IOC) filed a deliberately false Form D with the Securities and Exchange Commission relating to a May 2008 $95 million private placement convertible debt offering and tried to conceal material details of the transaction in later regulatory filings. Worst yet, Wayne Kaufman of John Thomas Financial, a New York based brokerage firm and a party to the private placement, failed to make conflict of interest disclosures while appearing on CNBC and pumping Interoil’s future prospects.

The above revelations resulted from a month long investigation by convicted felon turned fraud fighter and short seller Barry Minkow (co-founder of the Fraud Discovery Institute) with key assistance from veteran securities litigator Howard Sirota, and additional research by me.

The information was pieced together from Court filings and affidavits involving a lawsuit brought by William Ziegler against John Dolan and two of his entities (Carey International Ltd and John Thomas Structured Finance - unrelated to John Thomas Financial above). Dolan had assisted InterOil in raising funds for the private placement and raised $20 million from Ziegler. However, Ziegler claims that he is owed certain fees from Dolan and his companies.

Note:

Download lawsuit here, download exhibits here, download John Dolan affidavit here, download Thomas Belesis (John Thomas Financial) affidavit here, and download Neil Dolinsky (InterOil Affidavit) here.

InterOil $95 million private placement

On May 12, 2008, InterOil announced a private placement of $95 million in convertible debt securities to institutional investors and issued the following press release:

INTEROIL ANNOUNCES $95 MILLION PRIVATE PLACEMENT

May 12, 2008 — InterOil Corporation (IOL:TSX)(IOC:AMEX) (IOC:POMSoX), a Canadian company with operations in Papua New Guinea, announced that it has closed on gross proceeds of US$95 million from the sale to institutional investors of 8% Subordinated Convertible Debentures due 2013. InterOil used the proceeds today to fully repay all outstanding indebtedness (US$70 million) under its credit facility with Merrill Lynch Capital Corporation. InterOil will use any remaining proceeds to drill and develop oil and gas wells on the Elk/Antelope structures in Papua New Guinea and for general corporate purposes.

The Convertible Subordinated Debentures carry an 8% coupon rate with a conversion price of US$25.00 per share. In some cases, interest payments may be made in common shares. If the daily volume-weighted average price of the Company’s common shares equals or exceeds US$32.50 for at least 15 consecutive trading days, InterOil may require the investors to convert the debentures into common shares. InterOil may also be required to repurchase the debentures for cash, at 101% of the face value plus accrued and unpaid interest, upon the occurrence of certain change of control events.

On May 28, 2008, InterOil filed Form D with the Securities and Exchange Commission which required the company to disclose sales commissions and finder's fees paid in connection with the $95 million convertible debt offering (See Section C, Item 4 on page 5 of 10). InterOil estimated that no sales commissions or finder's fees would be paid in connection with the offering. However, Court documents show that Interoil had prior knowledge that such commissions or finder's fees were paid.

InterOil uses Clarion Finanz AG as a front for dealings with Carey International and John Thomas Financial

In a January 19, 2009 affidavit filed by Neil Dolinsky (InterOil Special Projects Manager) in connection with Ziegler's lawsuit against Dolan and his companies, Dolinksy said that as of April 24, 2008, InterOil agreed to pay Clarion $5.7 million in convertible securities for its role in helping the company raise $95 million in its private placement of convertible securities and:

IOC issued to Clarion 228,000 restricted shares of its common stock as a finders fee, valued at $25 per share, equating to a total value of $5.7 million.

On April 24, 2008, Clarion entered into a separate Investment Banking Consulting Agreement with Carey International for its role in helping Clarion Finanz raise funds for InterOil.

The agreement called for Carey International to "receive compensation in the amount equal to five and one half percent (5 1/2%) of gross proceeds...." of funds it helped Clarion Finanz raise on behalf of InterOil. In addition, the agreement stated that "Carey International Ltd and/or assigns will pay a royalty fee of approximately 20% to John Thomas Financial and/or assigns."

In May 2008, John Dolan and his company Carey International raised $20 million in funds from William Ziegler. In September 2008, Ziegler sued Dolan and his companies claiming that he was owed part of their fees.

Carey International received 44,000 of the 228,000 restricted common shares due to Clarion Finanz from InterOil. Those shares were issued directly from InterOil to Carey International and John Thomas Financial and were valued at $25 per share (total value of $1.1 million or 5.5% of the $20 million raised by Carey). From those 44,000 restricted common shares due Carey International, John Thomas Financial received 20% of such shares as a "royalty fee" or 8,800 restricted common shares valued at $25 per share or $220,000.

It turns out that brokers from John Thomas Financial were cold calling investors to buy InterOil stock and that on April 28, 2009, Wayne Kaufman appeared on CNBC and said (see video link):

Our favorite stock is something called InterOil which I recommended on the air before.

Note: Above quote appears 3 minutes and 55 seconds into video clip.

Worst yet, 4 minutes and 6 seconds into the video clip, CNBC shows a screen called "Analyst Disclosure" that checks off the following items as "no."

Stock Ownership:
Analyst: No
Analyst's Family: No
Analysts's Firm > 1%: No
Investment Banking Client: No
Other Conflicts: No

Contrary to the disclosure above on CNBC that John Thomas Financial had no investment banking relationship with InterOil, such relationship was cleverly hidden by InterOil using Clarion Finanz AZ as a buffer to raise $95 million for its private placement and by having Clarion deal separately with John Thomas Finance through Carey International as per their Investment Banking Consulting Agreement.

InterOil hides transactions with Clarion is various filings with the Securities and Exchange Commission

The $5.7 million finders fee payable to Clarion Finanz was not disclosed in Interoil’s May 12, 2008 press release (above) and Interoil’s May 24, 2008 Form D filed with the SEC (above).

In its 2008 annual report, InterOil finally disclosed that it paid $5.7 million pursuant to the $95 million convertible debenture offering without mentioning Clarion, Carey International, or John Thomas Finance (See footnote 23):

The placement fee of $5,700,000 paid to the investors in common shares of the Company was treated to be in the nature of a debt discount and was offset against the liability component. The transaction costs relating to the issue amounting to $219,966 has been split based on the percentages allocated to the liability and equity components; the costs relating to the liability component of $189,711 has been offset against the liability component, and costs relating to the equity component of $30,255 have been allocated against the equity component recognized. [Emphasis added.]

However, $1.1 million of such fees were not paid to "investors" as claimed by InterOil and was instead paid directly to Carey International and John Thomas Financial. Neither John Dolan nor Carey International invested any money in InterOil and therefore, such fees cannot possibly be a part of the $5,700,000 paid to “investors.” Yet, that is exactly where Mr. Dolan’s 44,000 shares, valued at $1.1 million, came from. Ultimately, Carey's shares were divided up into 35,200 shares made payable to Carey International (John Dolan’s company) and 8,800 shares John Thomas Financial (as a royalty fee).

In addition, InterOil provided no disclosure of Clarion’s role in the transaction unlike other material disclosures relating to Clarion such as on:

Page 37 “Midstream Liquefaction Operating Review” Page 47 “Financing Activities” Page 90 Footnote 19 “Secured loan”

Interoil’s “Annual Report Form” lists various disclosures under the caption, “Material Contracts.” However, InterOil ommitted any disclosure relating to Clarion's roles in the $95 million private placement while disclosing Clarion's role in other transactions.

Attorney Michael F. Brown has sent a referral to the Securities and Exchange Commission (download here) and FINRA has also been contacted by me. Other details of Fraud Discovery Institute's investigation of InterOil are provided here.

Written by:

Sam E. Antar

Disclosure:

I am a convicted felon and a former CPA. As the criminal CFO of Crazy Eddie, I helped Eddie Antar mastermind one of the largest securities frauds uncovered during the 1980s. I pleaded guilty to three felonies.

I assisted Barry Minkow and Fraud Discovery Institute in researching InterOil and both Minkow and Sirota are short on Interoil. I have no position in InterOil securities, long or short.