Well, we knew it was coming… Barry Minkow, a “fraud buster” with a history of years in jail for securities fraud is targeting InterOil. But does serious fraud investigations involve shorting the stock, accepting large payments from hedge funds, turning up daily at message boards (even rigging it’s ratings system), things that emerged from a deposition under oath relating to his previous target (USANA health, we covered that already here). And, past apart, how serious is a “fraud investigator” that has produced no results yet, who has shown enormous memory lapses under oath and being sued for nakedly shorting one of his targets and admitting he doesn’t know what that is? How competent is Barry, after a presentation at a Value Investors conference gone bad, that he “didn’t belong there, these guys are much smarter and more experienced…”

Barry Minkew’s Fraud Discovery Institute (FDI) undercover investigation captures problems at InterOil

• The Fraud Discovery Institute launched an undercover investigation into InterOil (IOC) that captured stock-touting problems at the company on tape. An undercover operative for Fraud Discovery, who posed as a representative of several wealthy families who expressed interest in investing $25M-$50M into a bulk stock purchase, captured stock touting by Vice President of Investor Relations at InterOil Corp, Wayne Andrews.
• Andrews agreed or alluded to the prediction of InterOil’s stock price rising to $200 per share no less than three times during the undercover investigation. There are other examples within Fraud Discovery’s transcript and report that point to stock touting by InterOil. “This is a company that up until 2 days ago never reported a profit and never found oil in any material way and yet survives on hype which lead us to the ‘head hyper’,” says Barry Minkow, the Co-Founder of the Fraud Discovery Institute.
• Minkow added, “we focused on Andrews because he was the ‘lone analyst’ following InterOil for years while working at Raymond James and is currently the VP of Capital Markets and is in charge of investor relations. With no proven oil and gas reserves and little to no earnings, we opened up an investigation into just how much ‘hyping’ goes on behind closed doors at InterOil” Reference Link :theflyonthewall.com

Now, let’s see, we have numerous issues with this.

1) Is it a coincidence that these people come out with this at this time?

• No. There are one or two parties that have shorted InterOil at much lower prices, and not only do they have to pay quite some interest rates on these positions, they could have lost 200% or more already, perhaps plagued by margin calls and fearing what upcoming DST test might reveal… These people must be desperate, and it shows.

2) The supposed quote from Wayne Andrews (the “$200 share price”), formerly a highly respected analyst from Raymond James, is that touting? Well, that really depends. We will look at the literal quote below, but we have reasons to believe the $200 target was conditional on things that can be reasonably expected in the future:

• InterOil finding more gas as indicated by the seismics, drilling data and third party analysis. Gas liquids and oil could very well be part of that. They already have found both, the question that will be answered within a couple of weeks is how much, but on the liquids at least, there are already very good indications.
• $200 per share amounts to something of an $8B company. Now, if you assume that InterOil will be able to get a similar deal as Nippon Oil buying a 3.6% stake for $800M in the exploration assets and (yet to be built) LNG facility by OilSearch and Exxon. According to Raymond James, a similar deal would value InterOil at $22B, that’s almost a $600 share price..
• Is that hype, well, in more than one way, the InterOil assets are actually better. The proposed project cost are only half of that of Exxon/OilSearch, and it’s not hard to figure out why. InterOil already has infrastructure in place (like the only deep water port in the country), needs to build 1/3 of the pipeline, its resources are concentrated into one resource in the lowlands, versus scattered ones in the highlands, and InterOil’s wells flow an order of magnitude more profusely than those of OilSearch.
• InterOil is already talking to numerous (up to 50) parties, so they also could very well have a fairly good indication already about what they will be able to sell at which prices.
• So a $200 price is indeed speculative, but based on things panning out (mainly seismics, liquid testing and negotiations) that are already there.

But of course, you best read what Wayne said himself.. It’s supposedly the transcript of a meeting of Wayne Andrews with an undercover private investigator posing as a representative for rich families, posted on a Barry Minkow website:

• That’s why I came to the company because let’s try to put some perspective on valuation. Exxon has a project where they also are taking gas, these gas fields, and they’re going to build a pipeline all the way down here to an area near Port Moresby where they’ve already bought land and they want to build an LNG project. There was a partner that owned some of the resources and part of the plant and they sold their interest to Nippon, a Japanese firm in December when oil prices were $35 a barrel and they got $800 million for 3.6% interest. I think our project is better than Exxon’s. It’s better because we’ve got all the infrastructure. Our wells here are averaging about one-third the cost. They’re drilling wells for $75 to $100 million. Our wells are costing between $25 and $40 million. The initial productivity of our wells is several hundred million cubic feet a day. Up here, they’re in the 8 to 15 million cubic foot a day range. So we’re 20 times more productive at one-third the cost, 60-fold improvement in economics versus drilling in this sandstone reservoir up here versus the limestone that we’ve discovered here. So our project is low cost. I told you the gas is low cost. We’ve got the place to build the plant. Off-the-shelf technology, very simple project and we’ve had an overwhelming amount of interest in it and if we could achieve, you know, if you calculate what the valuation is based on the sale, 3.6%, that values our interest something in the $10 billion range and we’re a 1.3 billion market cap company site.
• I believe that this is a several hundred dollar stock in the next three to five years.

3) The quote from Minkow himself is well.. “This is a company that up until 2 days ago never reported a profit and never found oil in any material way and yet survives on hype”

• Never reported a profit? Perhaps there is something wrong with my eyes, but the June and Sept 08 quarters look quite good..
• And overall company figures are hobbled by exploration cost and a couple of millions in expenses for maintaining Liquid Niugini (the owner of the yet to be build liquefaction facility)
• Never found oil? They actually reported on finding some oil a month ago (testing is ongoing), they almost certainly have enough liquids to produce commercially, and this is almost as good as oil.
• Most importantly, they have 3.4Tcf of gas per December 31 2008, according to a third party engineering bureau. And that can only become more, as at that date, Antelope1 had yet to reveal its enormity in payzone and porosity, let alone that world record flow rate.
• So what’s actually the hype?

4) We know that the shorts were disseminating misinformation for a long time. one only has to go back into this Daily Distortion series to see. but there is more:

• They have employed a person for at least four years as a basher on the Yahoo message board. This guy post 24/7 (for instance, a single old article hundreds of times), after Yahoo started to remove his messages he split into multiple ID’s

5) Is showing up with buddies on a message board part and parcel of a serious fraud investigation?

• At InterOil, only Howard Sirota and Sam Antar have showed up (as far as we know, Barry Minkow hasn’t, but we can’t be sure of that, he could be using aliases)
• However, their previous “case”, USANA Health, all three of them showed up on a daily basis

6) Is rigging the Yahoo message board rating system a sign of a serious fraud investigation or a sign of weakness and desperation?

• Recently they have even started to rig the Yahoo star system of recommended posts. One very good post by Denintex, which had received over 50 five stars in a couple of days, was bombarded by over 300 one stars to get it out of sight.
• The logistics of such an ‘operation’ is quite daunting, for every single rating, a new Yahoo ID has to be created, which shows you thatthey can’t be too confident in their “arguments”

7) Is shorting the stock part of a serious fraud investigation?

• Howard Sirota reluctantly gave indications he was short in some form in InterOil
• However, much more instructive is the deposition under oath from Barry Minkow in their previous case USANA Health, which showed that they shorted the company (Deposition part1 p.33)

8) Is contact and accepting payments from hedge funds part and parcel of a legitimate fraud investigation?

• Again, we have no evidence whether this happened in the InterOil case, but it did happen in the USANA case… (D.E. Shaw, Tilson Funds, T2 Partners, Cactus Capital, the fund that Sirota represents, Shulton Feltz Group, and more, see Deposition part1)

9) Can Barry Minkow be considered a serious fraud buster?

• Shorting the stocks himself, accepting payments from hedge funds, showing up on message boards of the investigated companies are all pretty lousy indicators
• Minkow spend years in jail because of securities fraud, not exactly reassuring
• How good is he? Did his “investigations” ever had legal consequences? Not that we know off, the only one we could find was that he himself got sued by USANA for nakedly shorting 2 million shares..
• And how serious is this guy who claimed (under oath) that he didn’t even know what naked shorting is.., who admitted when he gave a presentation on fraud at a Value Investors Congress that he “didn’t belong there, that there were guys much smarter and experienced than him” (Deposition part1 p31)

10) Is it a coincidence that these guys are all over the Overstock board on a daily basis and writing reports about it (Sam Antar, another buddy of Howard Sirota and Barry Minkew and also an ex-con now turned “fraud buster”) that invariably go nowhere only AFTER Overstock’s CEO started a campaign against naked shorting?

11) And Howard Sirota, who has turned up on the InterOil message board tries to

• Purposely exploit the difference between reserves and resources (this is far from the only incident). That difference is explained here, gas that has no market outlet are resources, not reserves, so this basically boils down to saying InterOil doesn’t have an LNG facility yet. We think we already knew that, somehow.
• Howard argued that we were at the center of a conspiracy
• Accused InterOil of accounting shananigans (invariably without details)
• He also recently tried to compare it with Rift Oil, but couldn’t even answer the most simplest of questions.
• When asked why, considering the quality of the Elk/Antelope resource, there wouldn’t be parties interested while lesser quality resources receive billions of investment dollars he finally (after many attempts) answers here. It’s a very curious answer, arguing mysteriously removed posts in the past that somehow had pointed to information that only came out that day, and info that has nothing at all to do with the question anyway…

12) These people are hired hands for the shorts, this conclusion seems unescapable to us. The shorts cannot even enlist the likes of Gradient, Stocklemon, or Ross Smith anymore.. They have to go to the lowest division..