InterOil, Tilson, Minkow and the SEC – What An Adventure !

Author's Avatar
Oct 07, 2010
Article's Main Image
I’ve taken a bit of an interest in a company called InterOil (IOC) of late. The company either has a fantastic natural gas asset and is a great investment or is a company with little substance and a market cap created through hype and promotion.

I have no idea.

But since I’ve written a couple of articles about Whitney Tilson (whose opinion I respect based on a decade of good decisions) who is short InterOil I thought I should try and provide some balance to the story.

Here are my prior articles:

If you are interested in InterOil either as a long position or a short position you should be aware of Barry Minkow. Minkow of course is well known for the gigantic fraud of a company he ran as a very young man and more recently (after serving time) as a short seller/investigator behind the Fraud Discovery Institute.

Here is what the Fraud Discover Institute does according to its website:

“Fraud Investigation/Forensic Services

FDI takes a very unique and proactive approach to investigating fraud. In addition to being licensed as a private investigator, our years of experience in not only detecting and investigating fraud, but also our consultants' unique perspective of perpetrating fraud, allows FDI to uncover complex transactions and detect previously undiscovered fraud. Our associates have investigated some of the most high-profile frauds as well as provided forensic services to every major branch of law-enforcement. For example, in the MX Factors fraud case, the Fraud Discovery Institute helped secure evidence which lead to convictions from licensed private investigators Juan Lopez and Paul Palladino who worked with Barry Minkow to gather evidence for the United States Postal Inspectors office in San Diego. And in the case of Financial Solutions, Barry Minkow and private investigator Juan Lopez went undercover to secure evidence that was later used by the Securities and Exchange Commission in court documents to shut down Financial Solutions for allegedly running a 25.7 million dollar Ponzi scheme. FDI is licensed as a private investigator in the state of California.

Consulting & Support

FDI provides consulting to corporations regarding instituting proper fraud prevention measures, board (Director, Audit Committee) selection and best practices, and other services such as our proprietary fraud audit service, Fraudits (see below)

Fraud Education Services

First and foremost, fraud detection and prevention is more than a state of mind. Unless there is a perception of detection throughout an organization, fraud can and will frequently happen. Understanding what constitutes fraud (and how to prevent it) must start with training and mentoring at the highest levels of management to set an example for all stakeholders. Once a fraud does occur, the costs in earnings, manpower, possibly hostile litigation, higher insurance premiums, and corporate credibility are hard to contain. FDI's proactive fraud detection and awareness program can save you time, money, embarrassment, and potential damages in a class-action lawsuit.

Expert Witness Testimony

Many times, expert witness testimony is critical to ensure a successful trial, no matter what side you are on, FDI can provide expert witness testimony involving financial fraud cases. Based on years of experience on both sides of the law, FDI provides the following support services:

  • Presenting complicated evidence and concepts in a concise and clear manner through the use of graphs, charts, schedules and other illustrative techniques
  • Testifying about analyses related to liability issues
  • Testifying about issues related to the amount and causes of damages
  • Testifying about economic, business or accounting matter/
  • Developing evidence, court exhibits, and testimony topics for other experts, including academicians and industry specialists
  • Ensuring consistency among expert witnesses
  • Rebutting Opposing Experts' Testimony
  • Aiding in the formulation of cross-examination questions
  • Analyzing and rebutting the opposition's experts or exhibits qualifications, testimony, or analyses
Due Diligence Services

Many companies that perform due Diligence on a regular basis as a course of normal business (e.g. insurance, lending) use outdated or inadequate processes. FDI can provide a complete due Diligence“overhaul”, both from a paperwork and a process standpoint.

“After-the-fact” Support

Companies use FDI for “After-the-fact” support and due Diligence services. Essentially, FDI assists fraud victims in areas such as assessing culpability of a given fraud for the audit committee or board of directors in a certain company as well as determining the chain of events and “who did what, why, and how” and “who knew what”.”

One of the companies in Minkow’s sites is InterOil. In prior months Minkow released a steady stream of information (similar to what Tilson has said publicly) questioning the InterOil business and asset value.

That information from Minkow though has dried up since this press release from the FDI in June that disclosed that he was the subject of an SEC probe (note the reference to Whitney Tilson ):

“By Maxwell Murphy, Of DOW JONES NEWSWIRES

NEW YORK -(Dow Jones)- Former fraudster turned self-styled fraud investigator Barry Minkow said he and his firm, Fraud Discovery Institute, are the subject of a probe by the U.S. Securities and Exchange Commission.

The SEC in January sent subpoenas to Minkow, FDI and other parties thought to have ties to Minkow and his firm. Minkow said he is the target of the investigation, though the SEC doesn't make this clear in communications accompanying the subpoenas.

The SEC states the "investigation is a non-public, fact-finding inquiry," intended "to determine whether there have been any violations of the federal securities laws," according to copies of three of the subpoenas and related materials reviewed by Dow Jones Newswires.

An SEC spokesman declined to discuss the matter. In the subpoenas, the SEC says the investigation, titled "In the Matter of Fraud Discovery Institute," doesn't mean that it has concluded that the subpoena recipients "or anyone else" has broken the law, nor does it mean that the agency has a "negative opinion of any person, entity or security."

Minkow has been a vocal critic of several public companies, and has issued scathing reports on the FDI website that have prompted some target companies to both sue Minkow and press the SEC to investigate him. These companies claim Minkow spreads false information to harm the price of their shares, which enriches Minkow and his cohorts via short positions they place in hopes that the securities fall in value.

Minkow acknowledges that he takes short positions in some of the companies he criticizes, and said he shared with the SEC his trading account names and passwords so the agency has a complete record of all his transactions.

Minkow served seven years in prison for the fraud that was his ZZZZ Best Co. carpet-cleaning business, which collapsed about 23 years ago. He became a Christian minister in prison and then became an independent fraud investigator following his incarceration.

The subpoenas also ask, among other things, for all communications regarding six companies FDI has criticized: InterOil Corp. (IOC), Lennar Corp. (LEN, LENB) , Pre-Paid Legal Services Inc. (PPD), Medifast Inc. (MED), Herbalife Ltd. (HLF) and Usana Health Sciences Inc. (USNA).

Aside from those subpoenaed, the SEC wants information on all contacts the recipients had with more than two dozen other people, including two journalists with Dow Jones Newswires, Ben Dummett in Toronto and Michael Rapoport in New York, who have both covered InterOil. Neither of the two journalists has received any subpoenas or other requests from the SEC related to the Fraud Discovery investigation, nor has Dow Jones Newswires.

The SEC also wants to know, according to the subpoenas, about Minkow's involvement with Whitney Tilson, who runs a $135-millionNew York hedge fund. Tilson declined to reveal whether he had been subpoenaed, but said he has known Minkow for years, has paid him for his services and believes there is "no one more qualified" to uncover the kinds of frauds that help investors feel secure that their negative bets on companies are well founded.

Tilson said there is a fine line between the SEC investigating legitimate potential wrongdoing and the agency being used by companies. He said he is "very confident Barry Minkow will be exonerated."

Michael Tanczyn, Medifast general counsel, said Medifast did complain to the SEC about Minkow and FDI, but "it is our understanding that the SEC does not or will not tell us what they're doing." He said Medifast conducted its own investigation of Minkow's allegations against it and determined they were " false, misleading and without merit."

The other five companies either declined to comment or didn't respond to interview requests.

Minkow said he has complied with the subpoenas, including submitting a lengthy narrative explaining his actions in detail. He calls the investigation an attempt by the companies he has attacked to use regulators to muzzle him. The SEC will see he and his firm have broken no securities laws, Minkow said, and he hopes afterward the SEC will turn its attention to the companies pressing for this investigation.

In a post last Friday on his FDI website, Minkow acknowledged the investigation, and said it is coming to light only recently because the office of Rep. Anthony Weiner (D., N.Y.) leaked the information to the press. Weiner, whose office denies any involvement in alerting the media to the situation, recently criticized gold-coin company Goldline International, and Minkow issued a report defending Goldline.

Goldline issued two press releases taking issue with the congressman's findings, and said it wasn't given the opportunity to "correct the misstatements in his report." Goldline said it complies with all applicable laws, noted its " A+" rating with the Better Business Bureau and 50-year history, and said it has "the most comprehensive written disclosures in the precious metals industry."

Minkow, who takes credit for uncovering some $1.8 billion in frauds, calls Weiner's report a politically motivated shot, as Goldline is a sponsor of conservative radio and television host Glenn Beck, a fierce critic of Democrats. Beck has a show on the Fox News Channel, which like this newswire is owned by News Corp. (NWS, NWSA).”

As I’ve said before I want no part of InterOil either on the long or short side. There are plenty of other fish in the sea. However, if there is a more interesting company to track in the public markets these days I’m not aware of it.

Also check out:
3 / 5 (5 votes)
Author's Avatar

Request A Demo

Learn more about GuruFocus' key features, including All-In-One Screener, backtesting, 30-year financial, stock summary page, guru trades, insider trades, excel Add-in, google sheets and much more.

GuruFocus Screeners

Related Articles