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CDFT: DeRoos BONDS With The Devil

Written by Janice Shell

February 21, 2014: Citadel EFT, Inc. (CDFT) continues to delight fans of OTC story stocks.  For the last year, the company, its CEO Gary DeRoos, and a bizarre and sometimes sinister supporting cast have been a dependable source of drama, suspense, and most of all, belly laughs.

Gary DeRoos
Whenever it seems the fun must come to an end, DeRoos cooks up yet another zany scheme.

CDFT in a nutshell

And there are plenty of nuts to go around.  DeRoos's adventures in our capital markets began in 2010, when he decided to take the credit card transaction company he'd run for years public.  The attorney he chose to prepare his initial S-1 registration statement was the notorious Diane Dalmy, who by that time had already been relegated to OTCMarkets' Prohibited Attorneys list.  We reported on a promotion run by the company--one paid for by an illegal issuance of S-8 stock--as early as 19 September 2012. That S-8 issuance was promptly cancelled when we exposed this embarrassing "mistake."

Shortly thereafter, DeRoos somehow hooked up with Canadian Javan King and his Syndicate Trust, and a few months later described the wonders of this new relationship in an interview with Nanocap Magazine.  (Nanocap was then owned by King; it has since been sold to Olie, Inc.--OLIE--the same OLIE that was suspended by the SEC in January.)

King's plan for CDFT, and for all the companies he advises, was that they should uplist to an exchange.  To accomplish that feat, rare for OTC issuers, they would need to do several important things:  acquire assets sufficient to meet the listing requirements by paying for them with "anti-dilutive" convertible preferred stock; pay common shareholders a dividend in a different series of convertible preferred; do a gigantic reverse split to reduce the float to almost nothing; have those shareholders reconvert their new preferred to restricted common stock; and--finally--file an S-1 offering with the SEC to register the restricted common shares and "reconstitute the float."  It would, however, be reconstituted at a much higher level:  DeRoos intended to price the offering at $2.50.

King's program for CDFT was well documented in an article written for Promotion Stock Secrets.  For the purposes of this present piece, suffice it to say that the program did not work out as intended.  The S-1, promised for 31 July at the latest, never appeared, so shareholders were stuck with their restricted stock.

The Riad bond scam

Since the first few asset purchases, once appraised, turned out to be worth less than anticipated, a new one, much more valuable, was needed.  Sometime in June or July, it seems, DeRoos met Joseph E. Riad, a strange character who claims to own more than 700 U.S. Treasury bonds with a face value of $1 billion each.  Riad had no trouble working his wizardry on the hapless DeRoos.

Joseph E. Riad
Riad was introduced as a new member of Citadel's board on 15 August, 2013.  While the relative press release made no mention of the his fabulous bond trove, CDFT investors learned of it when they researched Riad, and naturally the sheep were thrilled by the revelation.  Ten days later, a second over-the-top announcement appeared, proclaiming that a valuation of a "portion of [Riad's] personal assets" had shown him to be worth a cool $43.8 billion, making him the third-richest man in the United States.  Obviously the bonds were not included in that valuation.

Needless to say, Riad's "bonds" are fakes.  Very well-known fakes, familiarly known as "Morgenthau bonds."  They're discussed with approbation and great enthusiasm at conspiracy websites, but all that really needs to be known is that the U.S. government has never issued securities with so high a denomination.  Visual proof is readily available.

Here's a photo of one of Riad's "bonds," which are actually described both as "bonds" and "gold certificates," in reality two entirely different animals.  The color is explained by the use of a yellow filter by the photographer:

One of Riad's "bonds"

It is identical to the fake bonds seized by Italian anti-mafia authorities in a spectacular bust conducted in 2012.  The total nominal value of the instruments confiscated was $6 trillion.

Fake bond seized in Italy in 2012

What no one knew at the time Riad joined the board of CDFT was that DeRoos had already purportedly purchased five of these supposedly valuable securities for $700 million in CDFT stock.  That transaction, as we learned months later, occurred on 22 July 2013, and was memorialized in a Form D filed very untimely on 22 October.  Riad received 2 billion shares of Series E convertible preferred and 7,031,282 shares of common.

That form D might never have been filed at all had it not been for complications that arose in connection with an 8-K the company submitted on 18 September, in which it stated that it had fired its auditor, MaloneBailey LLP.  Four amendments followed, in response to questions from examiners at the SEC's Division of Corporation Finance.  In the first, several important disclosures were made.  At last, the company got around to explaining that it had bought what it described inaccurately as "5 US Treasury Bonds, backed by the full faith and backing [sic] of the United States government…"  It also revealed that it had had the bonds appraised, but did not append the appraisal as an exhibit.  The only exhibit was a letter from MaloneBailey, in which it objected that, contrary to what CDFT sustained, there had been a material disagreement between it and the company.  MaloneBailey did not go into detail.

The second amendment, also produced at the behest of the SEC, contained a far meatier exhibit.  In it, MaloneBailey said flatly:
  • we do not believe the documents appraised to be 'U.S. Treasury Bonds'
  • we do not believe the documents are 'backed by the full faith and credit of the U.S. Government'
If an auditor has questions about the valuation or authenticity of securities, he is expected to get confirmation from the issuer of those securities.  In this case, the issuer would be the Treasury Department.

In two subsequent amendments that are of little real interest, DeRoos stuck by his apparent belief in the authenticity of the "bonds" and his wish to book them as assets worth $700 million.

About face

Suddenly, on 25 November 2013, a new 8-K was filed.  Riad had resigned from the board a few days earlier, and CDFT had "nullified" the acquisition of those pricey fakes. DeRoos did not quite admit that they were phonies; he said delicately that "the value of the asset is zero and 100% impaired."  It appears more likely that DeRoos's understanding of fiduciary duty is impaired.

At no time did DeRoos admit he'd been snookered.  Riad, in message board posts such as this one, continues to claim his paper is real.  Worse yet, when the company's 10-K was filed on 22 January, 2014, it became painfully clear that Riad had not returned the shares he was paid in July.  As CDFT put it:  "The value of the shares has been expensed, pending their recovery."

The company's idea, obviously, is to "Servpro" the whole thing:  as if it never even happened. Unfortunately a fraudulent transactions involving fake Treasury instruments was consummated willingly by bother parties.  It seems only one entity associated with CDFT made even the slightest attempt at due diligence.  That was MaloneBailey, and the firm was fired for its trouble. DeRoos has yet to disclose the exact terms of the asset purchase agreement with Riad.

Now DeRoos was between a rock and a hard place.  Though he'd said nothing about the previously announced move to the NYSE MKT for many months, shareholders still expected it, and now, without the impressive "bonds," CDFT lacked sufficient assets to meet the listing requirements.  Moreover, his investors were not happy about their frozen stock.  On 3 December 2013 he finally announced that the restrictive legends could be removed from that stock on 19 December--the original Series D convertible preferred had been issued to most of them on 18 May--and they would be free to sell at last.

But wait!  What about that S-1 filing?  Without it, the legends could be removed, but as Rule 144 stock, it would not be registered.  Shareholders would need to get an opinion letter from an attorney and a new certificate from the transfer agent.  On 3 December, DeRoos informed his flock how that could be accomplished.  They'd need only obtain an opinion from the company's counsel, fill out a Seller's Representation Letter, and send the company a check for $500, made out to Citadel EFT, Inc.

The transfer agent charges a little over $100 for a new cert, so the $500 charge for an opinion that would be identical for all shareholders, except for their names, seemed a bit stiff.  But that wasn't the worst of it. DeRoos also noted that investors should "make sure" their brokerages would accept the resulting new certificates for deposit.  That was a critical point, given that most discount brokers will not accept penny stock certs for a variety of reasons.  DeRoos helpfully suggested that if they had problems, they might want to turn to John Hurry's Scottsdale Capital or to Wilson-Davis & Co., both well-known, or perhaps notorious, for their willingness to clear almost anything.  As far as can be known at this time, no retail investor has found a broker willing to take CDFT paper.

Christmas failed to bring the tidings of great joy that the CDFT sheep had been promoising themselves.  Baaaa humbug.

A new story

DeRoos/CDFT remained silent through the holidays, but once again began issuing news in mid-January.  This news was, typically for CDFT, unclear almost to the point of incomprehensibility, but at least it was news.

Intended to be most exciting was an announcement that "the Company has received written notice and a recent bank statement for $5,000,000.00 (Five Million USD) deposited on their [sic] behalf."  The press release went on to explain that the funds had been "posted to provide a 'Standby Letter of Credit' (SBLC) provider with proof of available funds."

Clear as mud, but the zeros were cheering, especially given that the SBLC in question was supposed to be in the amount of $200 million, and issued by a "Top 25 Global Bank." Standby letters of credit are used as a guarantees of payment.  If a company--in this case Citadel---is required to pay cash in connection with business transactions, the letter of credit guarantees that payment, should the company be unable to meet it. Naturally the money will be paid back; how and when will depend on the terms of the agreement between the company and the bank issuing the SBLC. It is similar to a bank guarantee.

Given CDFT's line of work, which is credit card processing, it is difficult to see why it would need an SBLC.  But as almost always with CDFT, no further information was provided.  Not the name of the "Top 25 Global Bank" or the "3rd party credit facility located here… with a top 5 US Bank."  It sounds like gibberish.  And let's face it:  SBLCs, like bank guarantees, are often used in scams.

He probably sells Rolexes, too

A few weeks later, the SBLC story changed.  Now CDFT claimed it had "received written notice and a recent bank statement for $1,000,000.00 (One Million USD) deposited on their [sic] behalf."  An additional "$4 million will be posted and confirmed upon official receipt, according to certain agreements in place are met."  More gibberish. What certain agreements? With whom? These were distinctly different numbers from those given in the first press release.  It looks as if that money hadn't really been in an escrow account by 14 January, despite the company's original claim that it had.

At the same time, DeRoos filed an 8-K containing an exhibit showing "proof of funds," the funds in question being those deposited in escrow as described above.  The escrow agent is an attorney named David F. Michail.  The accompanying statement shows a deposit of $1 million in an IOLTA account. IOLTA accounts are attorney trust accounts that are used to hold very small amounts.  Interest from those accounts is pooled statewide, and used to pay for civil legal aid to the poor.  Most states have IOLTA programs.  But why use an IOLTA account for this transaction?

On 22 January, the company filed its 10-K.  Late.  In it, two new names appeared. According to the filing, in mid-December CDFT had entered into an agreement with InterGlobal Management LLC and Spartacus Partners Corporation "to place 4,000,000 restricted shares at a price [of] $2.50 per share ($10,000,000) with Spartacus, to be held in escrow in return for an interest" in an SBLC worth $180,000,000.  More numbers that don't really add up.  What happened to that aforementioned "Top 25 Global Bank" and to the "Top 5 US Bank"?

InterGlobal Management has a name so generic it cannot be identified.  Spartacus, however, can easily be discovered.  It is located in New York City, and its "team"--at least those members who are not identified by initials only--has real experience in the world of finance.  But at the bottom of the homepage of the firm's amateurish website is a very odd message saying, among other things:  "These types of rouge [sic] individuals try to justify their own existence, lies, fabrications, distortions, shortcomings, business failures, and misdirected statements of truth, by attempting to harm the reputation of those they deceived.  It is no wonder they fail at life."  (Original capslock omitted, out of consideration for the reader.)  We wonder what they are referring to and exactly how this type of statement is supposed to comfort clients.

According to the 10-K, Spartacus also agreed to buy $125 million of the company's common stock over a 12-month period.  There is no mention of share price or timelines. There are no attached exhibits to make what these very material agreements available to the investing public and the SEC.

With all this hocus pocus going on, DeRoos managed to give a little thought to the company's actual business, credit card processing. CDFT announcing a "possible joint venture" with Frank Speight's Paragon Processing. Stress "possible" joint venture.  It is difficult to see why DeRoos felt the need to inform shareholders about a deal that hadn't yet happened, and conceivably might never happen.  After all, Speight isn't an associate to brag about.

Frank Speight
Paragon is located in Belize City, perhaps because Speight has encountered a number of regulatory and legal problems in the U.S.  It was, however, also incorporated by him in Florida in September 2013, with his wife serving as an officer.  Speight also operates a company called HighGate Securities in Belize. HighGate is a broker-dealer that offers international banking services as well.  Belize has become a haven for those seeking to conduct questionable business practices. Speight has several other Florida companies, and says in his Linked In account that he does business in Malta.

Speight has been successfully sued twice for fraud, and the SEC revoked the registration of his American Capital Partners Limited, which had been involved in that fraud.

Now for another scammy bond deal

It might be thought that in the wake of the Riad caper, mere mention of the word "bonds" would make DeRoos's blood run cold.  Not so.  Over the Presidents' Day weekend, CDFT issued a largely incoherent press release referencing "Investment Grade Collateral Bonds worth in excess of $1 billion."

On Tuesday, 18 February, 2014, he satisfied his public's curiosity by filing an 8-K. Evidently pleasantly surprised by his recent experience with attached exhibits, this time he appended 34 of them. Taken together, the documents explain the structure and purpose of the deal.

There is a woman named Marli Mantovani Garrigos in Sao Paolo, Brazil.  She owns a number of Brazilian Letra do Tesouro (LTN) bonds issued in 1972.  On Valentine's Day--the day before DeRoos made his big announcement--Mantovani Garrigos entered into a joint venture agreement with an Indiana company called Carbon Development, Inc. (CDI), which was represented by Christopher Abi and is located in the town of Highland.  Its address is, you guessed it, a UPS Store mailbox outlet.  By the terms of the agreement, Mantovani Garrigos will entrust her bonds to Abi, who will "obtain secured lines of credit or loans" in the amount of $1.3 billion.  Abi, acting for CDI, will then allow Citadel to use the bonds as collateral for those loans.  The loan proceeds will be divided between the two companies:  CDI will get $800 million, and CDFT will get $500 million.  The mechanics of obtaining these loans are not discussed or described.

On the same day, CDI and CDFT signed their own joint venture agreement.  The terms complemented those of the agreement between CDI and Mantovani Garrigos.  CDI would turn the bonds over to Citadel, and Citadel would arrange for the loans.  It would in addition pay CDI 10 million shares of restricted common.  No value, current or future, was assigned to the stock.

Doesn't all this sound just peachy?  DeRoos lost out on Riad's "bonds," meant to be booked at $700 million, but as a result of his superb deal-making abilities, found a way to score $500 million instead!  In his excitement, perhaps he failed to wonder why Mantovani Garrigos didn't simply arrange for a loan herself, and keep that extra $500 million.

There's an explanation for her reluctance to do so, and it has to do with the nature of the bonds.  The LTNs are not exactly fake.  But they are pretty much worthless.

Something else DeRoos failed to consider is the history of Brazil's currency devaluations.  All that is explained in an interesting article about LTN scams.  The Brazilian Treasury has weighed in on the subject as well, explaining that LTNs issued in the 70s had maturities of, at a maximum, 365 days, and that those maturities were never rescheduled.   This is what an original LTN from 1970 looks like:

LTN bond 1970
This is an example of the bonds owned by Mantovani Garrigos; it forms one of the exhibits to the 8-K:

Mantovani Garrigos LTN bond
The second image leaves much to be desired, but clearly they're the same bond, except for the serial number.

Naturally we don't know whether there really is a Marli Mantovani Garrigos or, if there is, whether she was really involved in these agreements.  The documents supposedly coming from the Brazilian side of the deal are full of purported identifying information--her passport number, the name of her attorney--but that kind of thing is easily invented. We don't know much about Christopher Abi, either.  It's a more common name that one might imagine.  It does belong to an apparently well-known scammer, but he seems to operate mostly out of New York.

What we do know is that DeRoos has been taken in a bond scheme.  Again.

All aboard the train to Crazytown

DeRoos was so happy about his big score that he filed a press release commenting on it a few hours after the filing hit Edgar.  Not one to waste time, he'd already "initiated talks with a business consultant who is in direct contact with the largest shareholder of a growing India bank…"  His "team" is planning to use "highly experienced traders" to "leverage" all that delicious money he'll believes he'll be getting in the very near future.

This is madness.  What is wrong with DeRoos?  Has his obvious addiction to big numbers with lots of zeros driven him round the bend?  How does he meet and get involved with one con artist after another?  Does he believe that people are so impressed by his business acumen that they're desperate to throw money at him? Perhaps he's just one of those people who actually answers junk mail from Nigerians offering "interesting business opportunities."

None of this is doing him any good.  Yesterday he filed CDFT's most recent quarterly report, for the period ended 31 December.  It is beyond dismal.  The company has total assets of $3.034 million, $3 million of which is accounted for by the spring 2013 acquisition of sports memorabilia that probably cannot be resold for anything near that amount.  In fact, there is nothing to suggest that DeRoos has made an attempt to resell it.  Astonishingly, net loss has ballooned from $296,883 as of 30 September 2013 to $29 million as of 31 December, thanks to charges associated with the unwinding of the disastrous Riad bond deal.  The company changed its domicile from Nevada to Wyoming to save money.  According to the same 10-Q, former CDFT counsel David Sayid is threatening to sue the company.  And according to an NT 1-Q filed on 14 February, CDFT moved its office to a trailer park in an unsavory neighborhood of Oceanside, California.

CDFT's New Headquarters
To make matters worse, CDFT's stock price has suffered a sharp decline of late.  For months following the 1:12,000 reverse split effected in June 2013, CDFT barely traded, thanks to an extremely low float.  The bid stayed for the most part steady at $2.50, and DeRoos has valued recently issued restricted common stock at that price.  This month, however, shares have traded as low as $0.03.  It seems doubtful that anyone who bought stock late last year, or accepted it in payment for services, is happy.

Still, a strange kind of street justice has been served: the shares given to Carbon Development are unlikely to have much value six months from now.  The ballyhooed Brazilian bond deal was nothing more than a pointless exchange of one kind of worthless paper for another.

We're tempted to say nothing could possibly top this, but DeRoos is full of surprises. With any luck, there's more hilarity in store.  If our favorite CEO wants to keep his company, though, he badly needs to find a better class of playmates.