William Deutsch and his son Peter might not be names that are on the tip of investor’s tongues, but there is a fair chance that the wines they import have been. The New York area pair have done quite well for themselves importing and marketing some of the most popular wine brands on store shelves, including Australia’s [yellow tail] and Georges Duboeuf’s Beaujolais.
Finding previously little known vintners and peddling their wine to the middle class has paid off.
Starting out in a spare room in the family home 31 years ago, William–Peter joined in 1985–built a business generating $450 million in annual revenue. Through it all, the Deutsch’s managed to keep a generally low profile.
A low profile might not be in the cards for much longer, however, because of a stock market gambit seemingly gone off the rails.
The Deutsch’s have gotten themselves–and a handsome chunk of their fortune–enmeshed in a baffling securities investment scheme involving the shares of China Medical Technologies, a delisted Chinese company that appears to have fallen off the face of the earth. Per SEC filings, the Deutsch’s currently own a roughly $43 million stake–amounting to just over 13 million shares–or 40.4% of the float of a company that has not filed financial statements or communicated with investors or regulators in more than six months.
That has made for a long holiday weekend for the father and son since the Securities and Exchange Commission, noticing the frothy trading on the OTC Bulletin Board market, initiated a two-week trading halt for China Medical’s stock last Friday. The shares are slated to open back up on July 13, but there are risks: The SEC’s primary reason for the halt was the absence of corporate communications and shareholder filings and to date, The Financial Investigator has been able to identify a law firm or investor who has made contact with management. If China Medical’s shares have their registration revoked, or they do not reopen, the possibility exists for a loss of most or all of the Deutsch’s capital.
As things go, the trading halt is only the beginning of the incongruities surrounding what is fast becoming a saga.
At the center of everything is China Medical Technologies, a company whose stock is an unlikely platform for a pair of rich investors to make their SEC filings debut in. There is little doubt that few companies have ever had a six-month run as disastrous for investors as the Beijing-based maker of cancer diagnostic devices.
In December, Glaucus Research, a short-selling research outfit run by former Roth Capital Partners salesman Matthew Wiechert, issued an extensive report accusing the company of defrauding shareholders through rampant self-dealing. One week later the once $55 per share company, whose last issued financial statement claimed $206 million in cash, missed a coupon payment on its 6.25% convertible notes; in February, it missed the interest payment on its 4% notes. Its sole U.S.-based independent director, University of Washington Medical School professor Lawrence Crum, resigned, an event the company chose not to disclose (Crum, reached for comment by phone, declined comment “Upon instruction from [my] counsel.”)
NASDAQ delisted its shares in February when China Medical ceased filing financials; communication with investors, regulators and even lawyers, appears to have ended in mid December after it announced a balance sheet restructuring just weeks after reporting a 27% increase in operating cash for the first two quarters of its fiscal year. Liquidation proceedings have begun in the Cayman Islands to wipe out China Medical’s equity and hand over whatever corporate assets remain to the $400 million in angry bondholders. Topping it off, another short-seller, Bronte Capital’s John Hempton , who has had success identifying and writing about a series of Chinese frauds on his website, examined its technology and concluded it made little commercial sense.
So it’s easy to see how China Medical is widely understood as the stock market equivalent of a three-alarm fire. How the Deutsch’s got so close to the blaze can be pieced together through SEC filings.
North Hampton, N.H. based AER Advisors, run by the husband-and-wife team of David and Carol O’Leary, raised eyebrows when a series of 13-G filings listed the firm as being a massive buyer of China Medical’s seemingly doomed stock beginning in January. It wasn’t until the most recent filing that the Deutsch’s were even disclosed as the owners. Even the choice of filings merits a raised eyebrow: 13-G filings are for passive investments; 13-D filings, such as the one made on June 20, are done when an investor seeks to force the company to take actions such as a sale, merger or management change. [With China Medical completely silent and not opposing even its own dissolution--its website’s front page still lists its shares as traded on NASDAQ, with a last trade of $3.18--what corporate change the Deutsch’s might effect is unclear.]
Nothing in AER’s public history suggested a taste or skill-set for managing aggressive risk. Nor, from a corporate finance perspective, does the AER-Deutsch strategy of buying the stock as it traded upwards seem logical: AER could have merely tendered for the shares in February and March at between $1 and $2 and likely met many of their goals.
With four employees and just under $51 million in assets according to an SEC disclosure filing, AER’s non-Deutsch related business has been a mixed bag over the past two years. In September 2011, Invesco’s PowerShares shut down a pair of exchange traded funds AER managed for what appears to have been poor performance.
The only real link between the tiny New Hampshire money manager and a pair of wealthy wine importers from Fairfield county’s gold coast is through AER’s sole outside director, Thomas Steffanci, a former colleague of AER co-founder David O’Leary and the father of Tom Steffanci, the president of Deutsch Family Wines and Spirits.
[Multiple phone messages left with Peter and William Deutsch by phone at their homes and work were not returned. Carol O’Leary declined comment twice when reached by phone at her office. The Steffanci’s, both father and son, have unlisted phone numbers and were unable to be reached.]
If China Medical fails to open up again, it could be a financial body blow to Peter Deutsch, who owns 10.13 million shares (his father William owns 2.9 million.) A look at his September 2007 divorce filing suggests a net worth of between $40 million and $50 million based on an $18.42 million lump sum payment to his former wife, as well as giving the title to two houses and two cars (from a family law perspective, Connecticut practices “Just and Equitable Distribution” of marital assets, resulting in a generally even split of assets if there isn’t a prenuptial agreement in force.) With an obligation to pay a combined $350,000 annually in child support and private school tuition, amid a slowing economy and volatile markets, generating enough cash flow to buy $30 million worth of stock in a single company is not an easy feat.
The Deutsch’s and AER appear undaunted and are giving every indication that they are gearing up for a second round of stock purchases in the shares of a de-listed Chinese company of dubious provenance. This time it is ZST Digital Networks, a project of former penny stock banker and China Reverse merger impresario Richard Rappaport, whose WestPark Capital has structured and arranged a host of collapsed Chinese companies. WestPark’s regulatory problems, though unmistakable, pale in comparison to the sustained mayhem wrought upon investors by Rappaport’s former employers Cohig & Associates and its successor firm, EBI.
Remaining unanswered, of course, is a fundamental question: Why would otherwise successful business owners risk their good name and a measurable part of their fortune to play a short squeeze in a company that appears en route to being dissolved?
No definitive answer is likely forthcoming.
But China Medical Technologies made a host of institutional investors believe its tales of rapid growth and increasing profits when it raised $750 million in stock and bonds over the past five years. Next to those losses, the plans of a pair of winesellers and their struggling financial adviser are small beer indeed.