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10/9/12

Liberty Silver (LBSV) (LSL.to), from IKN179


This is the report written on Liberty Silver (LSL.to) (LBSV.ob) that appeared in last Sunday's edition of The IKN Weekly, issue 179. The only thing to have changed are the two price charts, because I didn't save the ones from last week and have used the ones available on yahoo today which show the same thing, just a couple of extra days down the line. The rest is verbatim.


Liberty Silver (LBSV.ob) (LSL.to): A scam and a screaming short (if it ever trades over a buck again)
A number of weeks ago (to be quite honest, I can’t remember exactly when) I did a quick pass check of a TSX listed company called Liberty Silver (LSL.to) (LBSV) (LBSV.ob) on the suggestion of an IKN reader, but at that time had made it an easy pass because of the low-grade marginal property it was optioning into. I didn’t look much at the people or structure behind LSL at the time as it was one of those companies I tend to filter out quickly as “not reaching first base”, place in the mental discard pile, simply avoid from that point and move on to other potentials. It’s a pity I didn’t look more closely at LSL at the time because if I’d done so I would have seen a screaming short candidate.
Cut to last week, and on Wednesday I was pointed in the direction of LSL by a contact, someone who knows both the property and had checked behind the company curtain, and told me in no uncertain terms that the company was a scam. I saw the recent share price run-up...


...downloaded the SEDAR files, checked through them and suddenly LSL was past first base and onto second, but this time as a potential short. And when I saw the name of the person who was running the show from backstage, a certain infamous Bobby Genovese, it went straight to home run. With the price running above $1.50 on Thursday on strong volume and no real news and listing in the USA on the OTCBB (that does most of the volume) and on the TSX as LSL.to (note, not a Venture exchange listing) this had the makings of a great shortable story to put before you today and one that many of you (I admit not all, because shorting Canadian stocks isn’t child’s play and much easier if you’re an accredited investor or inside an insto) would be able to play to the downside.
Then on Friday morning, my big idea was shattered by this (22), an SEC news release halting trading in the stock. This halt was well reported in the press, for example this (23) the link to a Stockwatch report on LSL last Friday evening written by the always good Mike Caswell, which also adds background to this scam and is well worth reading. So anyway, pre-bell Friday the SEC put a ten day trading halt on the otcbb listing which was emulated very quickly by IIROC in Canada (not before 138k shares had traded through at a big drop price of 97c, but to be honest IIROC did pretty well under the circumstances to block trading in LSL.to as quickly as it did and should be commended). We can see the effect the halt had on the stock via the few trades that got through before the Canadian listing was halted, in this five day chart:

As the LSL NR later that day (24) (after the bell in fact) confirmed the halt and added some flavour to the reasons behind it
According to the Order, the SEC states that, "It appears to the SEC that there is a lack of current and accurate information concerning the securities of Liberty Silver because of questions concerning publicly available information about Liberty Silver, the control of its stock, its market price, and trading in the stock"
We can translate that for you. It means that the SEC believes there is at least one large holder of LSL stock (and probably more than one) that has not done the right thing and filed their total holding in the stock to the authorities. These are known as “undisclosed free trading shares” and the problem is that the person who owns them can suddenly decide to dump some or all of that large holding on the market without anyone knowing who the seller might be. And if, as is almost certainly the case in this story, the large holder is an insider at the company, the sales can easily be made at the most advantageous  moment for the seller. Or put in simple terms, the cloak of anonymity makes the “dump” part of “pump and dump” a whole lot easier and probably much more profitable. It’s also illegal, which is why the SEC has halted the stock to give time for investigations.
About the people behind Liberty Silver
Before we jump in to this section, I’d like to make clear that some of the information that follows comes from an as-yet unpublished report that was sent out by persons who wish to remain anonymous (for obvious reasons) to myself and to a mailing list that includes industry professionals and journalists who have shown interest in this scam, in LSL the company, in the history and track record of Bobby Genovese and in market scams in general. They are concerned investment professionals who want real reform and better regulatory oversight of micro and small cap issuers and have assured me that they are not short (or long for that matter, no position at all) Liberty Silver. I also know the ID of at least one of the people who authored the report (again, will remain anonymous) and will personally vouch for that person’s trustworthiness, absolute integrity and track record of hunting down market scumbags. The report is excellent and goes deeply into the background of the unwholesome people behind this scam, highlighting the many other examples of otcbb pump and dump scams they’ve been associated with over the years, going into detail as to how LSL has been set up and also marking your cards on two other companies currently being set up as pump and dumps scams by Genovese and his crew.
What follows is a quick rundown of datapoints on the corporate structure and people behind LSL, unearthed by your author in the period Wednesday to Friday as well as a few of the many datapoints revealed by the report. It’s not as long as it was going to be if the SEC hadn’t halted the stock and scuppered the potential short play, but it should give you more than enough idea.
The company has around 81m shares outstanding. Around 65m of those shares were issued at a fraction of a penny and are now held in offshore accounts (that’s reliable off-record).

Most of those 65m very cheap shares are held by Robert Donald Bruce Genovese, known to friends and foes alike as Bobby Genovese or sometimes simply “Bobby G”. We’ll call him ‘Genovese’ from here on because I have no desire ever to be on first name terms with this scumbag. Genovese also bought a fair whack of LSL shares over the OTC market in the period December 2011 to January 2012 at prices at or around one dollar (25) at the same time as a placement that raised $4.6m (the qualifying placement for the company’s TSX listing) was running on the stock, units priced at 50c. From these transactions, we know that he controls at least 10% of the company but that’s almost certainly the tip of the iceberg and he holds a lot more of these shares. Based on information from reliable sources, Genovese holds at least 48m shares of LSL that come from the original transactions and forward splits that set up the company structure we see today. However, it’s necessary to state that this 48m holding is not officially known and in fact the lack of disclosure on Genovese’s part is likely one of the main reasons the SEC halted the stock pre-bell Friday morning, so in the course of the next few days I’d expect clarification on this matter.
 
Genovese is a penny stock pump and dump scam runner and has made millions of dollars for his own back pocket by unscrupulously ripping off the general public over the years. That’s not an opinion that’s a fact, as anyone who watched the action and events around “Clearly Canadian”, a mineral water company that shot higher and dived lower in the period 2005 to 2008 will testify. According to SEDI insider transaction records Genovese had access to millions upon millions of very cheap shares and proceeded to dump those millions of shares on the general public while in charge of the company at the time. His aggressive selling continued up to the point when the share price, that tended to fluctuate between $2 and $4.50 (the average between $2.50 and $3), collapsed back into the pennies region. He used highly aggressive pumping techniques, including paying pumpers to do his dirty work and sucker in as many retail shareholders as possible, then when the stock was high enough he cashed in relentlessly.

‘Clearly Canadian’ is not his only pump and dump scam either, not by a long chalk. The last 20 years is littered with the remains of companies he has promoted, pumped, dumped and cashed in with, all to the retail shareholders’ chagrin. The table above is from the mentioned report (I asked for and was denied permission from the authors to pass on the whole PDF, but was granted permission to sample from it, including the sampling of this table). For further reading I also point you towards to this report (26) by Carol Remond of Dow Jones Newswires dated November 2009 that goes into the world of Genovese and some of the scams that he has successfully led. Genovese is now by all accounts a very wealthy man, but he’s made his money the parasite’s way.
Moving back to LSL, in August and September 2012 Genovese cajoled or hired for cash a bevy of newsletter writers into promo’ing his stock. Top of the list comes James West of The Midas Letter, one of the most two-faced and unscrupulous of all mining newsletter writers (and my stars, there’s competition for that mantle) to pump the company to his subscribers. Along with the others brought on board for the same purposes West was paid handsomely to write up LSL in glowing terms and got a lot of people on board, pushing the share price higher on no apparent news. Interestingly, since the SEC halted LSL James West has decided that he doesn’t want to be associated with the name any more and as all good cockroaches do, has crawled under a rock and pulled his glowing (and extremely stupid) note on LSL from his website. However it can still be found at this address (27) and we also recommend that you check out Iwnattos’s review of the James West piece here (28) as that blogger does an entertaining job of pulling James West’s infantile promotion arguments into little pieces. And before we leave this paragraph, it’s worth noting that the two-faced West may get his own comeuppance on this play because the only disclosure he makes on payment from LSL is “I am a shareholder”. This is a direct violation of SEC rule 10b5, because he needs to state exactly, precisely how many shares and how he came to own them. If, as is almost certainly the case, he was given the shares in exchange for his sordid pumping of the stock and also received a cash payment, the man could be in trouble with the U.S authorities. Maybe that’s why he was so keen on pulling his note from his own website, but as noted above other copies already exist.
The property
A pump and dump has to be centred on something of value (or at least something that can be claimed as having value) and in this case, LSL’s fortunes have been tied to the Trinity Silver property in Nevada, USA. Here’s another brief rundown of the basic points of Trinity.
  • The Trinity property has been optioned from Renaissance Gold (REN.to). The deal cost LSL $25,000 up front, has a few cash payments along the way and the company now has four years in which to spend $5m on its development in order to earn 70% rights.
  • The heart of the Trinity property isn’t much more than a mined out deposit. It was mined by the Borax Company of USA in the period 1987 to 1989, when that operation mined out the best rock in the centre of the deposit grading around 6oz/t silver (around 185 g/t) in oxide host. When the best was mined, Borax decided that the silver price at the time for what was left was too low and they closed down the operation.
  • That’s still true today. Borax and others put in a lot of drill holes in and around the Trinity property, trying to find more of the good grading stuff, but nothing doing. What’s left there today is a non-43101 compliant historical resource that’s understood by the 2011 technical report to grade at an average of 0.7 ounces Ag per tonne. There’s plenty of rock there that grades to that average, but the whole resource is based on the halo of lower grading material that was left behind when Borax had finished the good material.
  • According to optioners REN.to (a serious exploration company), the interest that Trinity may hold is at depth, with the potential to drill under the low grading oxide halo and into the underlying sulphide to potentially discover a copper style porphyry system that wasn’t on the agenda of Borax in the 80s or others later. However, Genovese and LSL have stated that the company can put together a PEA based on the drilling done to date alone and that it’s not necessary to drill any more. This clearly implies that the very limited drilling program done by LSL earlier this year, which included just two twinning holes to check previous assay results from the historical drilling program instead of the 12 holes that third party technical report compilers Mine Development Associates (MDA) recommended, is all that LSL thinks it needs to get a PEA and then move to “fast track production” when added to the historical drilling that shows a lot of meterage but was done for another purpose, namely to find better, higher grade oxide with which it could extend mine life.
  • Now for an idea of project economics on this low grading oxide halo material. At the moment, both LSL and the third party technical report compilers MDA are using a conceptual recovery level of 75% for the silver held at Trinity. This means that processing a tonne of rock will earn you perhaps $18, at best in payable metal (based on 22g Ag grade, 16g recovered, $35/oz Ag price). From this you pay mining, processing, smelting, G&A, tax and interest on any loan. Look, on paper it might be possible to process that rock and make a marginal profit, but off the top of my head I can think of a dozen, nay two dozen other development stage silver projects that offer far, far better ballpark economics than that and none of them have a market cap anywhere near $70m, let alone $126m.
  • As for the valuation consider one thing, simply for perspective: According to the price at which LSL closed Thursday ($1.58), it’s $1.4m in cash and 70% of Trinity (assuming it makes the optioning-in commitment) is worth $126.4m by company market cap. Meanwhile, its 30% partner REN.to has a market cap of around $30m, but it also has another 30 exploration targets on its books (26 of those in Nevada/Utah), working capital of $6.3m (IKN estimated, with June 30 filings showing working cap of $7.36m and a company with  modest underlying burn rate) and top class geols running its show (it was spun out of AuEx Ventures and is headed by Ron Parratt, known in the trade as world class especially on Nevada).
People, this is nuts and it’s what put me off the company in the first place, back when I quickly filtered it, decided it didn’t get to first base and then discarded it without looking “behind the curtain”. Even if it weren’t being controlled by a proven pump and dump scam artist in Bobby Genovese, the most cursory glance at its only asset (barring an IKN estimated $1.4m in working capital that may have already depleted further) makes the company very, but very easy to discard.
The Sennen Affair
Another moment along the way in LSL version 2012 was its unsuccessful offer to buy out Sennen Resources (SN.v), a tiny exploreco that’s been quiet for a long time but does have one significant thing in its favour; a cash treasury of $13.5m that it’s been protecting through this rough period for juniors (Sidebar: SN.v currently has a market cap of $8.25m, so on paper at least there’s value in this stock’s share price at the moment). The offer was an all-paper deal in which LSL offered 0.28 of its shares for every share of SN.v. According to LSL this placed a 47.3% premium on SN.v’s share price and was equivalent to them running a private placement at 71c.
It goes without saying that SN and its board and management strongly disagreed. The merger was clearly a move to get its hands on the SN.v treasury by paying with dubious paper and after running its own DD, Sennen management were scornful of that paper and the assets that backed it up. In a series of some of the most entertaining defence NRs to a hostile takeover I’ve seen in years, SN released NR such as (29) on August 20th that included a mountain of pearls like this one...
Sennen's management and directors are totally focused on the resource sector, unlike the CEO of Liberty, who is a managing partner of a fund management company and sits on nine company boards, some of which are in the media and entertainment sector and responsible for such resource and energy related blockbusters as "Bingo Night in Canada", "Hooking up with Mariko" and "Ladies Night Out".
...along with plenty of technical and financial reasons to laugh the offer out the room and then concluded its argument in these terms.
Stated Ian Rozier, President and CEO of Sennen, "Liberty's Offer is an insult to the intelligence of Sennen Shareholders who understand that this is a clear case of the management and promoters of an OTC shell company with very little money and questionable assets trying to back their ludicrously overvalued paper into an established company with tangible assets-in this case Sennen and its treasury.
Wonderful stuff. In early September the hostile bid collapsed, with apparently very few or even none of the shareholders having decided to accept the LSL bid.
Conclusion
We could continue on this case for pages upon pages, but it’s time to draw a line under things. Liberty Silver (US OTC: LBSV) (TSX:LSL) is a scam stock run by a long-time scam runner who has made multi-millions of dollars over the years by taking the money of the innocent retail investor and putting it straight into his own back pocket. The plan today was to have pointed your way to an easy shorting opportunity on the TSX (and to be quite honest, even after dedicating plenty of time to this case this week and looking into the qualifying transaction back in late December, I’m still not sure how Liberty Silver managed to get a ticker straight on the TSX without having to go through the Venture exchange first; that’s one that raises serious questions about the Canadian regulators, I’m afraid), but the SEC slammed the gate shut on Friday morning and now things look very grim indeed for the company and anyone left holding a bag after having bought on the promo pump led by the scoundrel James West and aided and abetted by others who made buy calls on this stock.
In the end, I’m glad, very glad, that the SEC has acted quickly because a quick cauterizing of this cancerous company will do more good than an easy buck on a short trade. We applaud the SEC for its prompt action and therefore offer up LSL to you as a prime example of what happens when you do not do your own DD and rely on the word of others when investing in the junior mining world.

UPDATE: You need to read this, the report referenced above is now available for download. Go get your copy