Category Archives: Business Services

2 Houston businessmen sent to prison for $5.5 million fraud

John Elsner, formerly of Houston, and Larry Page, of Katy, have been sent to prison for 51 months and 15 months respectively following their convictions to commit wire fraud involving a fraudulent invoice scheme.

Page pleaded guilty in December 2018 and Elsner in January 2019.

Elsner was the General Manager and President of Logistical Solutions International (‘LSI’), which had its head office in the Galleria area. Page was the VP of Finance.  LSI provided corporations with logistical support and training services that facilitated the stay of international visitors on assignment. The company started in 1999 and their first client was ExxonMobil. Their largest market was Iraq and their other big client was Fluor.



The fraud scheme was pretty simple. LSI began factoring invoices with Spinnaker Financial in 2002. Spinnaker would purchase an LSI invoice for 85% when it was issued. It was LSI’s responsibility to bill the customer and collect the monies. The remaining 15% was split between LSI and Spinnaker, depending on how old the invoice was when it was paid. Invoices not paid reverted back to LSI

Beginning in 2011 and continuing through June 2015, Elsner and Page created false invoices that were factored with Spinnaker but never sent to the clients. For a while they were able to cover their tracks by applying payments of newer invoices to the older, outstanding invoices. This practice is known as ‘Teeming and Lading’.

Page, the CFO, kept an Excel spreadsheet that had a tab for an ‘Internal balance sheet’ and one for ‘External balance sheet’ that contained adjustments to account for the fabricated invoices.

In total, Spinnaker was defrauded out of $4 million.

In October 2014, LSI opened an office in Oxford, England and Elsner moved his office there. He hired an outside firm to seek equity investors or individuals interested in buying LSI. Elsner neglected to tell either the outside firm or the potential investors about the false invoices.

Two investors gave loans worth $1.5 million to LSI. They were not repaid.

Elsner was ordered to pay $5.6 million in restitution and will be required to serve three years of supervised release, following his release from prison. Page was also ordered to pay $5.5 million in restitution and was ordered to serve one year of supervised release, after his prison term.

Elsner Page indictment

https://www.justice.gov/usao-sdtx/pr/former-houston-businessmen-sentenced-fraudulently-taking-over-5-million

Bristow Group files for bankruptcy

Bristow Group, which provides helicopter services, has filed for Chapter 11 bankruptcy. This comes less than 24 hours after another Houston company, Weatherford International said it intends to file for bankruptcy.

Bristow said that its US subsidiaries and two of its Cayman Islands subsidiaries are included in the Chapter 11 filings. Its other non-US entities are not included.



Certain senior secured noteholders made a $75 million term loan to the company prior to the filing and provided a commitment for a further $75 million in debtor-in-possession (“DIP”) financing.

Earlier this week, I wrote that 9 senior executives, including the newly-installed CEO and CFO were paid large cash retention bonuses.

The company hasn’t filed a quarterly return since September 2018 as the company found material weaknesses in its internal controls. It had obtained waivers of default but the company elected not to make a $12.5 million interest payment in April on its senior loan notes. This means that waivers expired. In an April 12 filing, the company stated it had $202 million in liquidity.

Bristow has debt of around $1.5 billion. The senior note holders are owed $895 million while the banks and financial institutions are owed $580 million.  The company had assets of $2.86 billion at September 30, 2018.

No details yet on the terms of the restructuring.

Alvarez & Marsal is serving as the company’s restructuring advisor. Houlihan Lokey is serving as the financial advisor to the company.

On Friday, the shares closed at 29 cents (market cap $10 million).

Press release

https://cases.primeclerk.com/Bristow/Home-Index

2 Houston men indicted in Business Email Compromise scheme

The Southern District of New York has indicted four men, including two from Houston for engaging in a fraudulent business email compromise (“BEC”) scheme.

Joshua Ikejimba was arrested in Houston yesterday. Cyril Ashu and Ifeanyi Eke were arrested in Atlanta, Georgia. The fourth defendant, Chinedu Ironuah, of Houston, remains at large.

The scheme allegedly ran from 2016 through July 2018. The defendants registered shell companies. They opened bank accounts in the name of the shell companies and under false identities.



The indictment alleges that they sent fraudulent spoofed emails to companies and entities, purporting to be vendors requesting payments. After funds were wired, the monies were transferred to other accounts controlled by the defendants. Ikejimba and Ironuah allegedly withdrew the cash using check cashing facilities in Houston.

Victims listed in the indictment include

  • Intergovernmental organization in New York ($188,815)
  • Foreign-based healthcare company ($41,495)
  • Foreign-based manufacturing company ($123,895)

The press release mentions that the defendants allegedly stole millions of dollars.

All four are charged with one count of conspiracy to commit wire fraud and one count of wire fraud. These charges each carry a maximum penalty of 20 years in prison. Cyril Ashu is also charged with one count of aggravated identify theft.

Last month, I wrote about a customer of Houston-based Prosperity Bank that lost $2.6 million in a BEC scheme.

https://www.justice.gov/usao-sdny/pr/us-attorney-announces-charges-against-multimillion-dollar-business-email-compromise

Firtitta blank check company upsizes IPO

Landcadia Holdings II, a blank check company owned by Tilman Fertitta has completed its Initial Public Offering (IPO). It ended up raising $275 million, up from the $250 million originally anticipated.

The stock will begin trading on the Nasdaq on May 9, 2019.



Currently Mr Fertitta owns 51.7% of Landcadia II through Fertitta Entertainment, Inc (FEI) with the remaining amount owned by Jefferies, an investment banking firm.

The same duo launched a similar IPO nearly 3 years ago. Landcadia Holdings (Landcadia I) went public after raising $250 million. In November 2018, Landcadia I acquired Waitr Holdings for $308 million. Waitr is based in Lake Charles and specializes in online delivery from local restaurants to at-home customers. It primarily serves secondary markets and has a current market capitalization of $642 million.

Press release

By my reckoning that makes 187 publicly-traded companies that have their head office in the greater Houston area. You can see the complete list here.

Tilman Fertitta launches another Blank Check IPO

Tilman Fertitta is launching another Blank check company, Landcadia Holdings II, that is proposing to raise $250 million through an Initial Public Offering (IPO).

Currently Mr Fertitta owns 51.7% of Landcadia II through Fertitta Entertainment, Inc (FEI) with the remaining amount owned by Jefferies, an investment banking firm.

FEI has revenues of over $4 billion. It owns 500 restaurants such as Morton’s, McCormick & Schmick, Saltgrass Steakhouse and Rainforest Cafe. It also owns Golden Nugget Casinos in Las Vegas and other locations. Other assets owned by FEI include the Houston Rockets (acquired for $2.2 billion), the Post Oak Hotel in Houston and the Kemah Boardwalk.



Landcadia I acquires Waitr

The same duo launched a similar IPO nearly 3 years ago. Landcadia Holdings (Landcadia I) went public after raising $250 million.

In November 2018, Landcadia I acquired Waitr Holdings for $308 million. Waitr is based in Lake Charles and specializes in online delivery from local restaurants to at-home customers. It primarily serves secondary markets and has a current market capitalization of $769 million. It recently acquired BiteSquad.com for $321 million. Mr Fertitta still owns 7.3% of Waitr.  After its acquisition, Waitr partnered with the various restaurant chains in the FEI group to drive revenue growth.

Blank Check companies

A blank check company, also called a SPAC (Special Purpose Acquisition Company) is a publicly listed company with no operations that raises money from investors for acquisitions via an IPO.

According to the S-1 filing, Landcadia II intends to focus on ‘business combination targets in the consumer, dining, hospitality, entertainment and gaming industries including technology companies operating in these industries.’ The words in italics are my emphasis as it represents a change from the wording used in the filing for Landcadia I.

There are two other publicly-traded blank check companies based in Houston. Graf Industries went public in October 2018. Sentinel Energy went public in November 2017 but recently called off its merger with Strike LLC.

SEC filing – Landcadia Holdings II

SEC alleges improper conduct by Houston auditor

The SEC has alleged improper professional conduct against LBB & Associates and Carlos Lopez regarding its audit of Behavioral Recognition Systems (‘BRS’).

LBB is a PCAOB-registered accounting and auditing firm with 28 public company clients. It has two partners and approximately 8 accountants on staff. Carlos Lopez is the managing partner and majority owner. It is based in the Westchase area of Houston.

BRS, now known as Giant Gray, is a private company owned by Ray Davis that sold video analytic software. In December 2017, the SEC filed a complaint against BRS and Davis alleging that they engaged in a fraudulent scheme to raise $28 million from BRS investor funds and divert $7.8 million for Davis’s personal use. The SEC alleged that Davis used the funds to purchase ancient jewelry, gold and other artifacts. Davis allegedly tried to cover his tracks by submitting fake consulting invoices to BRS from two companies that he controlled.

Mr Davis died in July 2018 before the case could be concluded. He had sold BRS in July 2015 and the alleged fraud was discovered soon afterwards. Giant Gray filed for Chapter 7 bankruptcy in April 2018.

Mr Davis hired LBB to conduct audits for BRS for the years 2010 through 2014. Lopez was the engagement partner for 2010 through 2012 and the Engagement Quality Review partner for the 2013 and 2014 audits. Mr Lopez should have known the audit was high risk as the audited financials would be used to raise money from investors.

BRS had no CFO and relied on a single part-time bookkeeper to maintain its accounting records. The SEC alleges that, for the 2012 audit, Mr Lopez relied on management representations regarding the $1 million transactions with the related parties and didn’t perform proper auditing procedures.

https://www.sec.gov/litigation/admin/2019/34-84983.pdf

CFO at small Houston public company resigns

Bill Brod, CFO at American Electric Technologies (market cap $10 million), has resigned to pursue another career opportunity. He has been CFO for 3 years and has a base salary of $290,000.

AETI is based in Bellaire and is a provider of power delivery systems to the Energy Sector. Back in May the company engaged Oppenheimer & Co to pursue strategic alternatives for the company.

In August the company announced the sale of the US operations for $17.3 million (plus an adjustment for working capital) leaving only its operations in Brazil and a joint venture in China remaining. On the same day, CEO Charles Dauber stepped down.

The buyer of the US business has notified AETI that it believes the working capital adjustment should be a $4.3 million reduction to the sales price. AETI is disputing this.

Mr Brod will be replaced by Don Boyd as the (contract) Principal Financial Officer. He previously worked at the company from November 2012 until June 2016 when he retired. Mr Boyd will be paid $19,000 a month. He will also receive a bonus of $20,000 if engaged through the filing of the 2018 10-K and $30,000 if engaged through a ‘transformational event’.

SEC filing

Struggling Sugar Land company replaces CFO

Susan Ball has been appointed CFO of Team Inc (market cap $500 million), effective December 3, 2018. She replaces Greg Boane, who has been the CFO since November 2014

Between 2012 and April 2018, Ms Ball was the CFO at another Sugar Land company, CVR Energy Partners, a public company that is 80% owned by Carl Icahn.

She will receive a base salary of $475,000, a one-time restricted stock award of $240,000, and a 2019 grant of $600,000 in restricted awards. She will also receive a relocation payment of $50,000 in order to move to Sugar Land. (For a long time CVR had a corporate office in Kansas City, which is where Ms Ball is presumably based).

Mr Boane will remain an employee until the end of February 2019. He will continue to be paid for a further 15 months after that ($0.5 million). His unvested restricted stock will also vest (worth approximately $0.4 million).

Mr Boane also entered into a consultancy agreement for March-May 2019 that will pay him $33,500 a month.

Team Inc is a provider of speciality industrial services to the refining, petrochemical and other heavy industries. Mr Boane became the CFO after the previous incumbent, Ted Owen, was promoted to CEO. Mr Owen stepped down in September 2017 following pressure from an activist shareholder.

The company ran into trouble after making two large acquisitions in quick succession. It acquired Qualspec (based in Torrance, CA) in July 2015 for $256 million and Furmanite (based in Houston) in February 2016 for $282 million. In 2017, the company wrote off $75 million in goodwill from these acquisitions, most of it related to Furmanite.

The company struggled to integrate the businesses, particularly as it was trying to implement a new ERP system at the same time. At the end of 2013, the company had decided to install Microsoft Dynamics AX. By the time they went live in March 2017 they had spent $47 million in capital costs, and a further $22 million in operating expenses!

In the 4th quarter of 2017, the company hired outside consultants, Alvarez & Marsal, to review the business for improvement and cost saving opportunities. In the 9 months to September 2018, the company spent $12 million on the consultants. It expects to spend $30 million (including restructuring and internal training costs) before the exercise is complete. For a business has annualized revenues of around $1.2 billion, it’s no surprise that it is losing money.

Ms Ball has her hands full.

SEC filing

Houston staffing owner pleads guilty to $20 million tax fraud

Jonathan Van Pelt, the former owner of Stat Source Inc, has pleaded guilty to failing to pay the IRS $20 million.  Stat Source Inc is a staffing agency founded in 2011. It is based in the Spring Branch area of Houston focused on blue-collar and healthcare positions.

For 18 quarters between 2011 and 2015, Mr Van Pelt failed to pay employment taxes that the business owed. Instead he spent the money on various luxury items such as cars, furniture, jewelry, lavish vacations, an expensive home and various entertainment venues.

Mr Van Pelt has agreed to pay $20 million in restitution to the IRS and will be sentenced in January 2019. He faces up to 5 years in federal prison and a possible $250,000 fine.

[UPDATE: In February 2019, Mr Van Pelt was sentenced to 30 months in prison, followed by three years of supervised release.]

https://www.justice.gov/usao-sdtx/pr/man-pleads-guilty-20-million-tax-fraud

Houston construction company CFO resigns

Chris DeAlmeida, the CFO of Orion Group Holdings, has resigned to pursue another opportunity with a private company. He joined the company 11 years ago and has served as the CFO since February 2014.

Robert Tabb, currently the VP of Finance, has been appointed as the interim CFO. The company has said it will consider both internal and external candidates for the role.

Orion Group has its head office in SE Houston, near Ellington Field. The company provides specialty construction services such as marine transportation and pipeline construction and commercial concrete construction services. It has a market capitalization of $142 million.

SEC filing