New York – In a series of scathing articles, The Vancouver Sun has focused on questionable research from Beacon Equity Research, a paid-for research provider based in Texas. Reporter David Baines investigated the backgrounds of three penny stocks covered by Beacon, revealing significant issues with company management and the firms themselves. As exchanges and more reputable research firms tentatively embrace the paid-for business model to provide research on under-covered stocks, it is unfortunate that one practitioner appears to be giving the business model a bad reputation.
Baines investigated three stocks covered by Beacon, GreenChek Energy Resources, EV Innovations Inc., and Green Star Alternative Energy Inc., each purporting to be in the alternative energy sector. GreenChek describes its business as manufacturing a “hydrogen-generating system that helps internal combustion engines burn fuel more cleanly and efficiently.” According to Baines, GreenChek’s predecessor firm was a mineral exploration business called Ridgestone Resources which was incorporated in Nevada in 2006, filed as a public company on the OTC Bulletin Board in 2007, and then announced a change in business in 2008. It decided to license emission-reduction technology but defaulted on its payments and wrote off the assets associated with the new technology. Baines found discrepancies in the background of the company’s CFO, and claims the company’s auditor has had “run-ins with the SEC, NASD and the US Public Company Accounting Oversight Board.” According to Baines, Beacon issued a speculative buy on the stock with a price target of $3.42 and the company’s stock price went from 73 cents to $1.07, and then fell to 14 cents.
EV Innovations is a firm Baines already had researched in his investigations of questionable penny stocks on the now-defunct Vancouver Stock Exchange. Like GreenChek, EV Innovations started as a mineral exploration company called Whistler Investments and then acquired rights to green technology, in this case lithium-ion battery technology for electric vehicles. It renamed itself Hybrid Technologies Inc. and according to Baines was investigated by the SEC in 2004. Baines was sued for his article on Hybrid by a shell company owned by the promoter behind Hybrid Technologies. Hybrid subsequently changed its name to EV Innovations. According to Baines, EV’s revenues were $223,000 for the six months ending January 2009, while cumulative losses were $53 million, yet Beacon provided a speculative buy on the stock, boosting the stock price from $1.2 to $2.
Green Star Alternative Energy purports to be developing wind farms in Serbia and is listed on the ‘pink sheets’. According to Baines, the head of the firm was a bodyguard for “Thai financial fugitive Rakesh Saxena, who had been charged with embezzling $88 million US from the Bangkok Bank of Commerce and had fled to Vancouver, where he has been fighting extradition ever since.” In June the British Columbia Securities Commission issued a cease-trade order against the company because it should be filing statements with the commission. Its financial statements as of December 2008 showed assets of only $3,310 yet Beacon issued a speculative buy with a price target of $5.70 per share. The stock increased from $1.95 to $2.45.
Beacon Equity Research is a paid-for research firm based in Frisco, Texas run by Jeff Bishop. Like many paid-for research firms, it draws on free-lance analysts who are contracted to produce the research for the firm. Most of the analysts have CFAs, and we know some of the analysts to be reputable. The firm covers established companies such as Baidu, Inc., the leading Chinese search engine. The analyst responsible for the three reports questioned by The Vancouver Sun is Victor Sula, who is a level III CFA candidate. Sula is also the analyst covering Baidu.
Beacon was paid $100,000 for coverage of GreenChek, according to its disclosures. It was paid $30,000 for coverage of Green Star Alternative Energy plus 30,000 shares of the stock. According to Beacon its policy is to “liquidate all shares immediately”, which would suggest it received between $58,500 and $73,500 based on the price range for the stock when its report was issued. It also received $6,000 for an online posting of research on Green Star Alternative Energy, according to a separate disclosure.
As we have noted recently, there has been an increase in exchange-led initiatives to provide coverage on small-cap and mid-cap stocks. The London Stock Exchange formed PSQ Analytics, which offers research from Argus Research, International Investment Research Plc, and Pipal Research. The NASDAQ OMX stock exchange group entered into an agreement with Morningstar to provide profiles on more than 3,600 listed companies. NYSE Euronext offers interactive models on listed companies provided by Virtua Research. In the majority of these cases, fees for the research are being paid either by the exchanges or by the firms themselves. Unlike Beacon and other research firms with exclusive paid-for business models, the research providers affiliated with exchanges are not providing buy/sell recommendations. We believe there will be a future for the paid-for business model as bundled commissions wane and coverage offered by investment banking analysts continues to shrink. For this reason, it is unfortunate that aggressive firms such as Beacon are attracting negative publicity for the paid-for model.