http://64.38.12.138/News/2006/015180.asp
A U.S. Securities and Exchange Commission quarterly report recently filed by Texas-based Global Energy Group Inc. may raise concerns of Cherokee Nation citizens since Cherokee Nation Industries is heavily invested in the company.
James Garland, the attorney for seven Tribal Councilors who filed a federal lawsuit against two CNI executives and Principal Chief Chad Smith in an attempt to recoup CNI's $2.5 million investment, said questions have been raised about the latest quarterly report that states the company received notice from the SEC about GEG's purchase of Global Energy Distribution Group LLC.
"The SEC believes Global may have incorrectly accounted for the transaction," the quarterly report states. "However, pending the outcome, Global may have to restate financial results for the periods ending Sept. 30, 2005; Dec. 31, 2005; March 31, 2006; and June 30, 2006; if the SEC requires restatement."
John Bailey, GEG CFO, said the accounting was accurate.
"The SEC is so diligent in their efforts to keep accounts exact that we've gone back and forth, making a number of adjustments. They've never said our accounting is inappropriate; however, the SEC is the SEC, and we will change (quarterly statements) if we have to."
Bailey said the company has never been, nor is it now, under investigation by the SEC.
However, Garland said he believes the SEC is looking closely at the company.
"GEG will not know about an SEC investigation until someone shows up with papers in hand requiring them to turn over information. I do believe when they make comments on restatement of accounting procedures, a serious look is being taken at the company."
GEG listed its total assets for the quarter as $16.9 million with the goodwill portion of those same assets as $15.5 million. Garland said after taking away "intangible" assets, GEG is listed with approximately $100,000 in assets and carries more than $8.5 million in debt.
Bailey said the company is making headway, and future prospects are good.
"Contracting with any Native American company takes longer, what with due diligence and all, but we're finally getting things under way."
GEG has a "going concern" statement in the report indicating it has incurred losses from inception in 1998 through June 30 this year.
"The company does not have an established source of revenues sufficient to cover operating costs, and accordingly, there is substantial doubt about its ability to continue as a going concern," the statement reads. "To develop an established source of revenues and achieve a profitable level of operations, the company will need, among other things, additional capital resources. However, there is no guarantee that management will be successful in procuring any outside funding."
Jim Majewski, chief executive officer of Cherokee Nation Industries, was placed on paid administrative leave June 7 pending an investigation of alleged investment improprieties.
The CNI board of directors and the board of managers of Cherokee Nation Distributors, which is owned by CNI, made the decision to place Majewski on leave following accusations of him altering information and concealing details about a financially unstable company.
CNI officials said Brian Collins will be the acting CEO.
Majewski, who persuaded the CNI board to buy $2.5 million in stock in Global Energy Group, came under fire following a financial review by Doug Evans, the council's executive director of financial oversight.
According to its Web site, GEG's goal is to research, develop and patent affordable technologies that reduce energy use in new or existing equipment and to protect the environment.
In August 2005, CNI purchased 51 percent controlling interest in GEG stock, which at the time had $350,000 in publicly held assets and $5.3 million in debt.
The purchase came from a Bureau of Indian Affairs loan that served as an adjustment of a $14 million revolving loan from the bureau to CN in 2002 to help pull CNI out of a financial slump.
William Schonacher, president of IBC Bank of Tulsa, wrote the BIA requesting a modification to the loan, which had noted the $14 million loan's purpose as "a revolving credit facility to support working assets."
The BIA wrote Schonacher on Sept. 2, 2005, approving the waiver and authorizing the bank to make the loan to purchase GEG.
In December 2005, Councilors Linda O'Leary and Bill John Baker asked Evans to conduct a financial review of the merger after Evans voiced concerns about GEG's balance sheet. The review was sent Feb. 21 to the U.S. Securities and Exchange Commission for further scrutiny.
Councilor Joe Crittenden said he grew suspicious of the merger after learning of it.
"Evidence from this internal investigation has continued to grow, where I am now concerned that someone may have violated some federal laws, which puts this in an entirely different arena," Crittenden said. "When the council approved the $14.4 million BIA loan, it was to prevent a massive layoff of tribal employees because of a temporary excess inventory problem that developed within CNI back in 2002. The money was for restructuring the operations and was not approved by council for investment or venture capital."
GEG's quarterly report, filed with the SEC June 30, 2005, indicates the company has losses from its inception in 1998 through June 2005 causing Evans to question why the tribe would make such an investment.
Since the initial stock purchase, CNI has lost control of GEG and now owns 49 percent of the company, which filed losses of more than $12 million on March 31.
In January, Evans said he became concerned about losing controlling interest in the investment. For less than $10,000 CNI could have secured control by purchasing 4.2 million shares.
"I questioned Majewski regarding the remaining 4.2 million shares, and how we were going to get a portion of them when and if they were ever issued," Evans said. "He assured me that with our 52 percent controlling interest, we would never lose control."
SEC records indicate CNI now owns less than controlling interest in a company that has virtually no assets and a debt almost three times its original investment.
"There is little way CNI can protect its interest and even a less chance of liquidating its shares without taking huge losses," Evans said.
Also disturbing Evans are moves some tribal business officials made for CNI to buy GEG.
On April 27, 2005, Majewski met with the tribe's business advisory team to recommend buying GEG. The team recommended CNI get a non-binding letter of intent to lock down the potential deal terms, make the letter subject to thorough due diligence and have Cherokee Nation Businesses provide its standard report for business deals exceeding $1 million.
For CNI's April 28, 2005, board meeting, one version of the minutes reflects Majewski's presenting the recommendation for purchase of GEG to board members. But in a second version of the minutes, which were distributed to councilors, this information was omitted. A motion to authorize the purchase was made by board member Jay Edwards and seconded by Wathene Young.
In a January CNI board meeting, Edwards admitted he had purchased and owns stock in GEG, raising the possibility of insider trading. Principal Chief Chad Smith, who appoints all CNI board members, recently chose not to reappoint Edwards.
CNI board member William Grass, who listened to the meeting via telephone, asked Majewski if CNB had reviewed and approved the purchase since the amount was above the $1 million threshold set by Smith for expenditures on new business. Majewski indicated the committee had reviewed the purchase and given approval to proceed. Grass said he believed the approval was to proceed with an agreement subject to due diligence. Cherokee business advisory team member Benny Dixon replied the committee had given authorization to proceed. Following discussion, the motion for the purchase passed with no dissenting votes.
Although Dixon told the CNI board "due diligence" was not required, a July 13, 2005, report to Smith and the CNI board from the business advisory team indicates they had reviewed the business case for the transaction and recommended the purchase 4-1.
Smith signed documents on July 1, 2005, giving Majewski voting control of the stocks in GEG. The purchase agreement between CNI and GEG was signed and submitted to the SEC on July 1. Both documents were signed a full two weeks prior to the advisory team's recommendations regarding the purchase.
"I believe Jim Majewski and Benny Dixon, director of business development (for Cherokee Nation), falsified information to their CNI board to obtain approval to make the purchase," Evans said. "The question still exists if the board even formally approved the investment prior to the actual purchase."
He believes GEG has also reported questionable financial statements to the SEC.
"Just after CNI's purchase, GEG began reporting to the SEC a goodwill asset of $16 million, showing 95 million shares at an inflated value of 16 cents per share, allegedly using a minor stock sale price to set all stock at 16 cents. That grossly misrepresents to the public the company financial statements. Shareholders could buy and sell each other an ample number of stocks for $500, creating sales activity on market tickers even though no new money was coming into the company."
More on the investigation
TAHELQUAH, Okla. - Following the announcement of the investigation of Cherokee Nation Industries' purchase of Global Energy Group, Tribal Councilors received a letter from GEG's chief financial officer.
John Bailey wrote concerning allegations made by Doug Evans about the details of the investment.
Bailey claims Evans mistakenly indicated that the preferred stock is redeemable over 10 years, "when in fact, each year on June 30, 20 percent of the outstanding preferred is to be redeemed, if the funds are available."
Evans said he misstated the time of redemption as being 10 years. However, documents show the correct five-year redemption period.
Bailey also claims "Cherokee Nation still enjoys a 67.2 percent voting control over GEG," and that this information is based on transactions made between Cherokee Nation Distributors, a company owned by CNI, and Global Energy Distribution Group, a company owned by GEG.
The quarterly report filed with the SEC by GEG March 31, states: "Cherokee Nation Industries Inc. is a subsidiary of the Cherokee Nation which, through its subsidiaries possesses voting and distributive power over approximately 50 percent of the outstanding common stock and voting control over approximately 67 percent of the total voting power of our common and preferred stock."
However, according to Evans' report, within the purchase agreement, CNI also negotiated the authority to vote a percentage of the interest of the preferred stockholders voting rights, giving CNI an overall voting strength of an estimated 67 percent of the overall voting interest in the company. However, as the indebtedness to the preferred stockholders is retired, the additional negotiated voting advantage diminishes back to only what is allowed by the CNI ownership of common stock, said Evans. Following the sale of 4.2 million remaining shares to a GEG product distributor, CNI's common stock holdings fell to 49.9 percent.
Councilors said they stand firmly behind the information Evans provided them.
