DAILY NEWS 4/8/2010 5:03:00 PM - 0 comments

OSC charges Agoracom with fraud

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Vancouver - Agoracom Investors Relations calls itself the online forum for citizens of the small-cap investment community, its name a modernized version of the Greek word ‘agora', meaning marketplace. The company prides itself on providing an ad-free venue for public companies and investors to communicate that is "free of the bashing, hyping, spam, and profanity that have plagued other small-cap communities for far too long."

But according to the Ontario Securities Commission (OSC), Agoracom has been doing a bit of exactly what it purports to hate: promoting stocks through veiled online postings for its own gain.

Agoracom operates internet hubs that provide information on client and non-client companies, including a profile, stock quotes, press releases, and webcasts. Each hub also hosts a discussion forum where anyone who has registered with Agoracom, for free, can join an ongoing conversation about the company.

Agoracom says it will set up a hub for any genuine small-cap company, whether a client or not. To get the added investor relations help that comes with being an Agoracom client, a company must hand over stock options equal to 250,000 shares or 0.5% of a company's fully diluted outstanding count at the prevailing share price, whichever is greater, and pay a monthly fee that averages $3,000.

It is completely legitimate for an investor relations firm to promote its clients and for that firm to also operate chat forums for those clients. But the OSC is alleging that Toronto-based Agoracom participated in those chat forums in order to deceive both potential investors and its clients.

The OSC filed charges against Agoracom on April 1, alleging the company's directors, George Tsiolis and Apostolis Kondakos, instructed their employees to post thousands of anonymous, promotional comments about client firms to each firm's discussion forum. Specifically, from September 2006 to July 2009 the OSC says Agoracom employees used 670 aliases to post 24,000 disguised messages on client and non-client hubs.

Agoracom representatives allegedly made up 40 to 50 aliases each, though some created as many as 200 fake identities, and were required to make a requisite number of posts to each hub each day or risk a dock to their pay.

The OSC did not clarify how many of those 24,000 postings were to client hubs versus non-client hubs but did state that some of the postings came from Tsiolos' residence.

The Securities Commission continued in its charges to allege posts made by Agoracom employees using aliases "were promotional and promoted purchasing and/or holding stock." The OSC's Statement of Allegations concluded Agoracom "knew or ought to have known that the posting activity described above put their clients at risk of being in breach of the TSX-V Corporate Finance Policies governing investor relations firm activities and compensation."

If Agoracom did what is alleged, it not only violated the rules of the TSX but also Agoracom's commitment to its clients. The key issue here is that neither public users nor Agoracom's clients were aware the firm was adding comments to the forum debates. So each month, when the firm reported the number of posts and inquiries to a client hub, that number was inflated by the posts and inquiries from Agoracom employees.

In fact, the OSC charges that "for certain clients, alias posts by Agoracom's representatives represented a significant proportion of the postings within the forum."

Finally, the Commission says Agoracom "took steps to actively conceal the fraudulent posting activity by its representatives" when, in March 2009, the company issued an official statement in response to the revelation that a single Agoracom employee had been posting using the alias Goldilocks. Tsiolis stated at the time that this was an isolated, unsanctioned incident and that he would be taking steps to ensure it would never happen again.

"[OSC] staff allege the posting activity described...was undertaken to create a misleading appearance of greater interest and trading activity in the securities of Agoracom's clients to (1) induce clients to contract or continue to contract with Agoracom and (2) increase the value of Agoracom's stock options," concluded the OSC in its Statement of Allegations.

The charges, if proven, constitute perpetrating fraud on persons and companies and abusing the capital markets, according to the OSC. A hearing set for April 26 will contemplate the charges; if proven, the repercussions could be significant. Tsiolis and Kondakos could be suspended, restricted, or banned from trading, holding securities registrations, acting as officers or directors of any issuer, or working as promoters. And the OSC could impose a $1-million fine for each alleged transgression, a toll that would likely spell the end for Agoracom.

According to Tsiolis, however, the charges have less to do with fraud or abuse of capital market than with big names on Bay Street who are mad that Agoracom has provided retail investors with an effective avenue through which to fight for their rights.

Tsiolis is not denying that Agoracom reps used aliases to participate in hub chats. But he is adamant the alias posts were not promotional; rather, he says the intention was simply to "act as a catalyst to spark conversation" by providing the first post, thereby removing the common social fear of initiating interactions.

He also thinks the alias posting activity is being blown out of proportion. In his official response to the allegations Tsiolis provided the Google Analytics data for the latter 24 of the 35 months in question, which indicate the site saw 2.2 million unique visitors and 14 million visits total. He says Agoracom employees accounted for only 0.23% of total visits to the site during that time.

If, as Tsiolis insist, the posts were infrequent and innocuous, then why is the OSC levying such serious charges? The Agoracom head says regulators are moving on his company because of pressure from Bay Street, which has come to hate Agoracom because of the powerful voice it has given to retail investors. Tsiolis says that voice has already created serious headaches for ‘the big guys' in two key situations. First, Agoracom's efforts to rally and organize angry investors seriously hampered Kinross Gold's (K-T, KGC-N) takeover bid for Aurelian Resources. A few months later, aggravated investors in Noront Resources (NOT-V) channelled and aligned their grievances through Agoracom and managed essentially save Noront's board from a takeover attempt by Rosseau Asset Management.

In the Kinross-Aurelian situation, Aurelian investors who thought Kinross' offer undervalued the company used Agoracom to organize their opposition to the takeover. The united front ultimately failed to prevent the deal, but the group did succeed in forcing Kinross to extend its offer four times in order to achieve the 90% tender needed.

And when Rosseau proposed to run its own slate of directors against the incumbent board at the Noront annual general meeting in late 2008, arguing its nominees would better guide and manage the hot junior explorer that had recently discovered the first deposit in what is now known as the Ring of Fire in Ontario, Agoracom threw its weight behind the junior's management. Noront's directors had tried to avoid a proxy battle by negotiating with Rosseau, a 9.2% shareholder, but Rosseau denied the effort. The denial made Rosseau's move look like an attempt to obtain control of Noront by controlling the board, something other investors did not like.

Over 19 days the Noront shareholder community used Agoracom - via 41,700 unique visits and 2.2 million page views - to organize their opposition to Rosseau. The hedge fund and the current management then agreed to jointly determine a single slate of directors. Noront's chairman, Richard Nemis, credited the company's retail shareholders for giving management's position the strength it needed to fight the Rosseau battle: "Without the Agoracom support, we never would have come to a balance with Rosseau," he said.

Tsiolis believes these successful revolts against Bay Street's control of small-cap companies has angered the ‘big boys' so much that they have asked their friends at the OSC to move on Agoracom. That is the only reason for the charges, he alleges.

On his blog, Tsiolis responded to a poster named Ken who commented about this supposed chumminess between Bay Street ‘big guys' and regulators with this:

"To be clear, I can't say the OSC is ‘in hoc with the big guys' but I don't think it is a coincidence that our Bay Street blackball and the resulting pressure started coming down once Agoracom and its members created history via the online revolts at Noront and Aurelian Resources. We've been told in no uncertain terms that we've pissed off people whose grand plans were disrupted by Agoracom and its members. When you foil the plan of a hedge fund to take control of Noront and force a major gold producer to renew its ‘friendly' takeover four times - all while being embarrassed by members fighting back via the media and YouTube videos - rich people start getting angry.

"When rich people get angry, they start calling their friends."

In another comment on his blog, Tsiolis writes, "As a prominent executive in the small-cap mining space told us, "You cost a lot of these guys a lot of money...and they're not happy.""

Tsiolis says the one good thing about the OSC charges is that now he can "finally open up to a reality that we've been living with" ever since Agoracom helped organize the two retail investor revolts.

Tsiolis' take on the situation, however, assumes that Bay Streets bankers, company directors, hedge fund managers, and the like have some degree of control over the OSC, an assumption the Commission flatly denies.

In the days following the charges, most Agoracom clients were prepared to stick by the company until the hearing, relying on a presumption of innocent until proven guilty. Spiros Cacos, a director of Agoracom client Fire River Gold, said his management team has decided to remain with Agoracom until the hearing. Other clients, such as Bard Ventures, have made similar comments.

Not everyone is sticking around for the verdict, however. Peter Grandich, a newsletter writer and chief Agoracom commentator, resigned his post and moved his work to an individual site. Of the move, he said, "In light of the allegations brought by the Ontario Securities Commission against Agoracom and certain of its directors and officers, I felt I had no choice...What was to be four days of solemn prayer then celebration [over Easter] ended up being the four worst days of my life."