THE NEVADA VOTE

By J. Patrick Coolican

Thursday, Oct. 12, 2006 | 7:23 a.m.

Candidate Mark DeStefano's record inspires questions

Mark DeStefano, Republican candidate for state treasurer, once helped a generic drug company that made no drugs merge with a restaurant company that owned no restaurants. The new company then merged with a technology company and now trades for about a nickel a share.

DeStefano specializes in those kinds of business maneuvers. He deals in a murky world of penny stocks, vaguely defined companies and complex financial instruments that, when combined, allow privately held companies to go public - selling stock to investors - without the heavy scrutiny of government regulators.

A Sun review of some companies DeStefano helped create found no evidence of wrongdoing.

But penny stocks and the types of mergers and acquisitions DeStefano engineers are "on the fringe of financial deals," said Michael Sullivan, a UNLV finance professor.

For that reason, DeStefano's career is an issue for voters weighing whether to make him the state's top financial officer. The Nevada treasurer's office controls $3.5 billion in its investment portfolio - tax revenue received before it's spent - while also managing bond issues for state and local governments.

The treasurer also manages the Millennium Scholarship program and college savings plans.

In recent years, other states and localities have witnessed embarrassing spectacles of incompetence and corruption overrunning their treasurer offices.

DeStefano's unorthodox financial career is matched by an equally eccentric resume for someone running for treasurer. He has declared bankruptcy, sued the U.S. government for discrimination and was kicked off the ballot on a residency issue in a run for university regent. As the Sun reported Tuesday, a Nevada charity says he was asked to resign from its board.

His opponent, Democrat Kate Marshall, was an antitrust lawyer in the Justice Department before being tapped by Nevada's then-Attorney General Frankie Sue Del Papa to start up an antitrust division. She has never been a financier.

An example of DeStefano's business practices is found in his company Plainview Laboratories, described by DeStefano as a generic drug company.

Plainview had assets of $858 in 2000 when it merged with a publicly traded entity, Boppers Inc., a restaurant company with no actual restaurants. Boppers was also tied to DeStefano.

The pairing was odd. "There's no synergy there," said Saeyoung Chang, a UNLV finance professor and an expert on mergers.

Next, this newly formed restaurant/drug company merged with e-Smart Technologies, a private technology company that, unlike Plainview, had substantial assets. The effect was that e-Smart became a public company - but did so in a way that avoided the time, expense and regulatory scrutiny that comes with a conventional stock offering.

Further, by merging with a company that wasn't trading on one of the big, heavily regulated exchanges, such as the New York Stock Exchange, e-Smart avoided another layer of scrutiny.

The maneuver - blending a larger private company with a smaller public company - is known as a "reverse merger."

The benefits of reverse mergers for public companies are immediate. Chang said the private company typically pays an above-market price for the public company, in effect buying the privilege of going public without the higher costs and greater scrutiny of more conventional stock offering.

DeStefano said he made money on the e-Smart deal, though he declined to say how much.

Hartley Bernstein, who runs a stock fraud watchdog Web site, StockPatrol.com, said deals like that should raise red flags for investors. Indeed, the price of e-Smart shares has been in steady decline, and were trading at five cents Wednesday.

In December 2002, after the merger, the Securities and Exchange Commission suspended trading of e-Smart because of questions about the accuracy of information the company was releasing, according to the SEC. After filing financial information to the SEC years late, the company was cleared of wrongdoing.

DeStefano said that before the merger, he and his team had completed all the necessary "due diligence" to ensure that the merger was in compliance with securities law. He also said that he had nothing to do with the company after the merger. He and his firm work for either stock or a flat fee to engineer the mergers, he said.

In early 2003, a DeStefano-related public company called EZ Travel that had virtually no assets performed a reverse merger with World Information Technology, a private Taiwanese Internet company, according to SEC filings. (EZ Travel's chief executive at the time, Edward Zimmerman, runs DeStefano's charity, Future Stars of America.)

A little more than a year after the merger, the SEC suspended trading of the company because of questions about information the company was putting out, according to the SEC. Again, DeStefano said his company performed proper due diligence, and had no way of knowing the new company would run afoul of regulators.

DeStefano describes himself as an entrepreneur, and proudly cites his role as the founding treasurer of Eaton Laboratories, which he described as a generic drug manufacturer, except that it produces no drugs.

Although DeStefano says the company is ready to introduce a generic drug, it's still trying to find financing to bring it to stores. Last week, even though Eaton Laboratories has no product, it spun off a subsidiary.

According to a recent filing with the SEC, the company needs $1 million before it will be able to produce a generic drug and bring it to market. It had $11 in current assets as of June 30.

As of Friday, the stock was trading for $1 a share on the over-the-counter bulletin board, an electronic exchange without the same listing requirements as the New York Stock Exchange and other major exchanges.

Bernstein was skeptical about Eaton Laboratories: "If you have a million dollars you can create any business," Bernstein said. "He doesn't have a company. He's got a name."

Eaton Laboratories had merged with a public company called Pinoak, which existed as a "blank-check company," meaning it had no plans to develop a product or service. Its sole purpose was as a merger vehicle, according to its SEC filings.

Pinoak was controlled by a relative of Eaton Laboratories' current chief executive, T.J. Jesky, who is a DeStefano business partner.

Before it merged with Eaton, Pinoak tried to merge with Lanzhou Lantong Petro Machinery Forging Co., a Chinese oil equipment company, and with Global H2O Resources, a British Columbia company that buys and ships fresh water. Both fell through because they failed to produce audited financial statements, according to company filings.

Sullivan of UNLV said the SEC looks at these kinds of penny stock deals with "a jaded view" because they can allow unsavory companies to slip under the regulatory radar.

Nevertheless, Chang said that because the SEC doesn't have the resources it needs, it pays closer attention to large companies. That lack of oversight leaves penny stock deals prone to manipulation, he said.

The deals are especially susceptible to so-called "pump-and-dump" schemes, wherein shareholders of a newly public company use bogus press releases and other publicity to inflate the price of a company before dumping their own shares before the price dives.

DeStefano conceded that the business he's in carries with it a certain stigma: "The business of reverse mergers has a small percentage, maybe 5 percent, who have created a bad reputation" for everyone else. He says he did not engage in improper behavior and pledged to have associates who could attest to his proper conduct call the Sun. None did so.

Bernstein said the types of deals and companies DeStefano is engaged in are marginal: "You can look at any of these penny stock companies and ask why anyone would buy them - because they often aren't really in any business."

DeStefano insists he won't take his high-risk bets on early stage companies if elected treasurer. But his political problem is that his biography raises doubts about his financial purposes and abilities.

In 1989, he filed for and received Chapter 7 bankruptcy protection. He said his daughter had health problems, which caused him financial distress that led to the bankruptcy.

The bankruptcy filing, however, shows that most of the more than $30,000 in unsecured debt was because of credit cards, not medical bills. Moreover, he and his then-wife also owned two nearly new cars at the time of the bankruptcy: a 1989 Acura Integra and a 1988 Chevy Cavalier.

At the time, DeStefano, who had been a stock broker, was working as an air-traffic controller in Los Angeles.

According to a lawsuit filed in federal court in California in 1994, DeStefano says he was medically disqualified as an air-traffic controller in January 1992 because of a "pyschotic disorder." He claimed discrimination in the suit and sought damages.

Now, he says, he never did suffer from a psychotic disorder. He said he had been pressured into the suit by the air-traffic controllers' union.

DeStefano ran for Nevada university regent in 2004, but was thrown off the ballot when he testified he never slept in the cabin in Lee Canyon he was claiming as a residence and so didn't live in the district.

Monday, the director of the Nevada Partnership for Homeless Youth said the charity's board asked DeStefano to resign from the board after he hired away an employee of the charity.