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Open Letter to Morgan Stanley "Research" Analyst Evan Calio: About Your Seriously Flawed Report on InterOil

To Morgan Stanley "Research" Analyst Evan Calio:

Evan Calio
Back in the day as the criminal CFO of Crazy Eddie, some of our staunchest defenders were gullible Wall Street research analysts like you. Even as events were imploding around us, we could count on gullible and naive research analysts to pump up the price of Crazy Eddie shares, as the Antar family continued to unload stock and pocket millions of dollars in ill-gotten gains.

Like those research analysts back in the day, your recent deluge of Morgan Stanley (NYSE: MS) "research" reports seem to be more interested in defending your past hype of InterOil (NYSE: IOC), rather than accurately communicating to investors the potential substantial material adverse financial risks facing the company in the very near future, as InterOil insiders are dumping shares.

The issue is not whether the Todd Peters case will be ultimately settled or goes to trial. The case may or may not be settled or go to trial. As I will detail below, the Morgan Stanley "research report" bearing your name seems to have no issue with InterOil and its CEO Phil Mulacek making conflicting disclosures to investors and the Courts.

Your reports do not accurately consider both InterOil's and Mulacek's disclosures about the potential material adverse financial impact of the Todd Peters litigation on InterOil that is scheduled for trial in October 2010, barring a settlement. Is success that is based on either a company or its CEO to lying to investors or the Court a business plan that you endorse for your investors?

InterOil and Phil Mulacek's Potential Legal Issues

Recently, former LA Times reporter William Lobdell wrote a series of reports in iBusiness Reporting* that provides details of serious fraud allegations made in an ongoing court case by the original investors in InterOil against company CEO Phil Mulacek. Those investors are alleging that Mulacek and various entities under his control defrauded them. (Details in iBusiness Reporting: here, here, and here).

Note: iBusiness Reporting is a division of Fraud Discovery Institute which was co-founded by convicted felon, turned fraud fighter Barry Minkow. Both William Lobdell and Barry Minkow have publicly disclosed holding a short position in InterOil securities. My disclosure is at the end of this blog post.

Originally, the investors sued InterOil, Mulacek, and Nikiski Partners, which is controlled by Mulacek (Todd Peters, et. al. v. Phil Mulacek et. al.). Mulacek attempted to throw Nikiski into bankruptcy (in re Nikiski Partners, Ltd.) to derail the Todd Peters lawsuit and any potential liability or other economic consequences effecting InterOil. However, the Bankruptcy Court Judge dismissed the bankruptcy attempt by Mulacek, ruling that it was filed in "bad faith" as argued by the investors.

In attempting to throw Nikiski into bankruptcy, Mulacek testified in various Court hearings. According to the December 30, 2009 Bankruptcy Court transcript, Attorney Thomas M. Kirkendall said:
InterOil CEO Phil Mulacek under fire
InterOil, as Mr. Mulacek testified that InterOil wouldn't even be able to pay a $50 million judgment, much less a 100 million or several hundred millions or a billion-dollar judgment, as the Peters group is seeking, without substantial third party financing.
The Thomas Peters lawsuit is currently scheduled for trial on October 18, 2010. In recent weeks, certain InterOil insiders seem to be hedging their bets by dumping over $10 million in company shares prior to the scheduled trial date, barring a settlement of the said action.

Morgan Stanley Defends InterOil

Right after William Lobdell reported about the above litigation affecting both InterOil and Phil Mulacek, you issued a barrage of "research reports" defending its previous guidance on InterOil and hyping the company's future prospects. In particular, the March 29, 2010 "research report" takes issue with Lobdell's reporting of the litigations.

Your research report starts off with the usual reference to Barry Minkow and William Lobdell holding short positions in InterOil and reference to Minkow's criminal past (like Morgan Stanley has no past and present legal problems itself):
What Happened Late Last Week? Negative claims regarding IOC’s management, resources and valuation (addressed below) began Wednesday evening with two stories circulating similar negative claims. These general claims have been made before over the past year and we believe they remain incorrect. On Thursday, after these stories, IOC was up in down energy tape (unclear why). On Friday, IOC gapped lower, trading on high volume (8.4MM shares) on the back of a negative claim made by the Fraud Discovery Institute and iBusiness Reporting. Both the Fraud Discovery Institute and iBusiness Reporting are entities affiliated with Barry Minkow, a convicted felon for securities law violations who publicly states it holds short positions of stocks it is “investigating” (it is “investigating” IOC).
There is no secret about the relationship between Fraud Discovery, Barry Minkow, and William Lobdell. Both Minkow and Lobdell have publicly stated holding short positions in InterOil securities. Minkow is very vocal and makes no excuses about his past criminal misdeeds, having written several books about it, discussing it openly in the media, and disclosing it on his website.

Since Minkow's past seems to concern you, consider InterOil's covert relationship with Carl Caserta, who in 1991 was barred by the Securities and Exchange Commission from “association with any broker, dealer, or investment advisor.”

According to a 2007 New York Times article, Caserta "stopped working for InterOil in 2005." InterOil Director Gaylen J. Byker claimed that that the company was "not aware of Mr. Caserta’s history when he was retained." Anesti Dermedgoglou, Vice President Investor & Public Relations, claimed that he "was not aware that the firm had hired Mr. Caserta."

It turns out that Carl Caserta continued his relationship with InterOil. In 2008, Carl Caserta helped InterOil raise $95 million in a private placement of convertible debt securities.

Emails obtained by me and turned over to FINRA show Carl Caserta as a party to various emails discussing details of the transaction with InterOil CEO Phil Mulacek and John Thomas Financial CEO Thomas Belesis.

InterOil filed a false Form D with the Securities and Exchange Commission claiming it was paying no sales commissions or finder's fees in connection with the offering, when, in fact, the company previously agreed to pay such commissions and fees. InterOil's concealment of such fees enabled John Thomas Financial to hype InterOil shares on CNBC and to investors without disclosing its investment banking relationship with the company.

As of July 2009, Carl Caserta still had an available, current, and active email address ( at InterOil.

Legal Claims

Your Morgan Stanley "research report" discusses the "legal claims" involved in the Todd Peters litigation and the Nikiski bankruptcy:
Legal Claims. The legal claims relate to two actions: (1) claims made by Plaintiff in a legal filing in 2008 in litigation between Phil Mulacek, Chairman and CEO of IOC, and early stage investors in certain refining equipment of predecessors to IOC (Peters vs. Mulacek) over ownership interests in IOC stock, and (2) a Bankruptcy court ruling and selected findings/statements (In re Nikiski Partners). We believe that both cases pose immaterial risks to IOC and reporting of selected facts in Plaintiff’s filings and statements from Bankruptcy action can be misleading. IOC has likely reached a similar conclusion, as it has not reserved any contingent liabilities.


Damages sought in the case vary depending on IOC’s share price; however, in the most recent AIF, the company states that actual damages could exceed $125MM. Plaintiffs also seek unspecified punitive damages, attorneys’ fees, expenses and court costs. The case is set for trial in October 2010.
The Judge already ruled that the Nikiski bankruptcy case was filed in "bad faith" and that case was dismissed. Mulacek put Nikiski into bankruptcy to avoid a material adverse financial exposure for InterOil. That material adverse financial exposure for InterOil still remains in the Todd Peters case, contrary to your claim that "both cases pose immaterial risks to IOC."

InterOil's financial disclosures contradict your Morgan Stanley "research report" claim there is no potential material adverse financial exposure to InterOil, arising from the Todd Peters litigation. In its 2009 Annual Information form, InterOil disclosed that:
If, however, plaintiffs are successful in obtaining a favorable verdict, actual damages could exceed $125,000,000.  Plaintiffs also seek unspecified punitive damages, attorneys' fees, expenses and court costs. The case is set for trial beginning in October 2010. The Company and other defendants are vigorously contesting the matter. If however, plaintiffs succeed in obtaining a judgment in the amount they seek, it could have a material adverse effect on the Company or its subsidiaries. (See: InterOil 2009 Annual Information page 43.)

Note: Bold print and italics added by me.
However, your Morgan Stanley "research report" failed to alert investors that InterOil's own disclosures say investor claims in the Todd Peters case, "could have a material adverse effect on the Company or its subsidiaries."

While it is true that InterOil has "not reserved any contingent liabilities", the company disclosed a loss contingency exceeding "125,000,000." At this time, InterOil simply does not have the resources to reserve for a contingent liability exceeding "125,000,000." As of December 31, 2009, InterOil reported an unrestricted cash balance of only $46,449,819. The company's net working capital (which includes restricted cash of $22,698,829) was only "$114,535,654." InterOil would require "substantial third party financing" as revealed in the Bankruptcy Court transcript quoted below:
InterOil, as Mr. Mulacek testified that InterOil wouldn't even be able to pay a $50 million judgment, much less a 100 million or several hundred millions or a billion-dollar judgment, as the Peters group is seeking, without substantial third party financing.
Are you saying that Mulacek and his attorneys lied to the Bankruptcy court and we should not accept their representations to the Court as facts? If Mulacek and his attorney did in fact lie to the Bankruptcy Court, are you comfortable with the CEO of a public company, like InterOil, making false representations to the Court so long as it favorably impacts the company? Is that a business plan that you endorse for your investors reading your supposed "research" reports?

Your "research report" claims that:
Legal Actions and Statements are Not New News. The litigation is not “new,” has been under way for a number of years and has been disclosed in each IOC’s last 3 annual information forms (2007, 2008 and 2009). The act of highlighting the plaintiff’s claims (from a July 2008 court filing) and selected judicial statements in various transcripts (from a December 2009 hearing), in a sensationalistic and one-sided manner, was “new.”
While it is technically correct that the Todd Peters litigation is not "new" you seem to miss the main point of William Lobdell's report about InterOil's and Mulacek's conflicting disclosures. According to InterOil's disclosures detailed above, "...actual damages could exceed $125,000,000....." and "it could have a material adverse effect on the Company or its subsidiaries." As of December 31, 2009, InterOil reported a cash balance of only $46,449,819 and the company's net working capital (which includes restricted cash of $22,698,829) was only "$114,535,654."

What is new is that the Bankruptcy Court transcript says, "Mr. Mulacek testified that InterOil wouldn't even be able to pay a $50 million judgment, much less a 100 million or several hundred millions or a billion-dollar judgment...without substantial third party financing." As you noted above, "The case is set for trial in October 2010."

If Phil Mulacek was truthful to the Bankruptcy Court and did not commit perjury by lying under oath, InterOil failed to disclose that even a "$50 million judgment" could have a "material adverse financial effect" on the company. The company's disclosures said that a judgement exceeding "125,000,000" could have a "material adverse financial effect" on the company.

Did CEO Phil Mulacek lie to the Court and commit perjury or did InterOil lie to investors and commit securities fraud? Take your choice! In any case, lies to one venue or another don't seem to bother you or Morgan Stanley, as long as your "research reports" can keep hyping InterOil to its uninformed investors.

Your Morgan Stanley "research report" goes on to say that:
Even if Meritorious, Limited Impact to IOC. The civil case is primarily against Phil Mulacek who, directly and indirectly, owns more than 5MM shares of IOC. The value of these shares, even off Friday’s lows is likely sufficient to cover any liability.
Your claim that "Even if Meritorious, Limited Impact to IOC" conflicts with Bankruptcy Court transcripts that reveal:
Mr. Mulacek testified that InterOil wouldn't even be able to pay a $50 million judgment, much less a 100 million or several hundred millions or a billion-dollar judgment...without substantial third party financing.
In addition, your claim conflicts with InterOil's disclosure that:
...actual damages could exceed $125,000,000.


If however, plaintiffs succeed in obtaining a judgment in the amount they seek, it could have a material adverse effect on the Company or its subsidiaries.
Here again, the Morgan Stanley "research report" fails to consider both InterOil and Mulacek's representations to investors and the Courts.

Your Morgan Stanley "research reports" highlights areas where you could be wrong. See below:
Where We Could Be Wrong
• Exploration failure. IOC is proving its resource base and any exploration failure will likely delay development and impact price.
• Failure to enter LNG JV. IOC is unlikely to be able to finance LNG development and its continued exploration program w/o partners.
• PNG risks. 100% of IOC’s operating assets are located in PNG.
• Failure to enter JV (LNG or liquid stripping) before potential 2H10 liquidity shortage forces additional capital raise.
In addition to your failure to address certain issues detailed above, you also failed to highlight that you could be wrong if the Todd Peters litigation does not settle and the Plaintiffs win a substantial monetary reward. As I detailed above, "Mulacek testified that InterOil wouldn't even be able to pay a $50 million judgment."

In your research report, you write:
Attacks are left to credibility. Media attacked have focused on management credibility.... We focus on what management has accomplished.....
So it's just fine with you that any public company and its CEO can lie to investors and the courts, if there is a the slightest hope that it can make money in the future? No wonder Wall Street remains a cesspool. I guess its all about making making money - our securities laws and justice system be damned.


Sam E. Antar

PS: Please take note of my disclosure below. As a convicted felon and former CPA who trains law enforcement to identify and catch white collar criminals, I feel uniquely qualified to comment about moronic "research" analysts like you who don't care about management integrity issues.


I am a convicted felon and a former CPA. As the criminal CFO of Crazy Eddie, I helped Eddie Antar and other members of his family mastermind one of the largest securities frauds uncovered during the 1980's. I committed my crimes, simply because I could.

If it weren't for the efforts of the FBI, SEC, Postal Inspector's Office, US Attorney's Office, and class action plaintiff's lawyers who investigated, prosecuted, and sued me, I would still be the criminal CFO of Crazy Eddie today.

I do not own any InterOil securities, long or short. However, I assisted Fraud Discovery Institute in researching InterOil. Fraud Discovery co-founder Barry Minkow has publicly that he has held short positions in InterOil securities.


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