US regulators are investigating Bermuda-based investment firm Lines Overseas Management (LOM) for alleged securities fraud.

The allegations are from the US Securities and Exchange Commission (SEC), which has oversight of all companies listed on American stock exchanges.

The SEC's investigations relate to LOM's trading of securities in three US-listed companies. LOM, in a Press statement issued on Monday night, refuted the SEC's allegations, which were revealed in an application in the US courts after LOM failed to comply with requests in four subpoenas that were issued last month on the company and its managing director Scott Lines.

LOM said it did not comply because it was prevented from divulging certain information under laws in the jurisdictions it operates in Bermuda, Bahamas and the Caymans. The SEC's investigation reportedly relates to civil investigations that began in 2003 into trading of three securities - HiEnergy Technologies Inc, Sedona Software Solutions Inc, and Shep Technologies Inc.

The net effect of the SEC allegations are that the Lines brothers and LOM customers profited by more than $6.4 million from fraud and market manipulation and that the firm caused false statements to be filed with the SEC as well as editing internal records that have been asked for in the investigation.

Here are details of the SEC's investigation, company by company, as well as information provided by LOM this week, in specific to each area of the SEC's probe.

In the case of the HiEnergy and Sedona investigations, the SEC said it had issued an order directing private investigation into whether antifraud and/or provisions of the federal securities laws had been violated.

The Shep technologies investigation was said to be tied to the Sedona matter.

“During the course of the Sedona investigation, the (SEC) staff has identified apparent fraud, market manipulation and reporting violations in the securities of a third US registrant, Shep, involving some of the same actors from the Sedona investigation, including LOM, the Lines brothers and several of the same nominees. The Commission is investigating the Shep transactions in connection with the Sedona investigation,” it said.

The SEC has alleged, in its HiEnergy investigation, that LOM had ties to “recidivist securities violator” and “convicted felon” Philip Gurian.

HiEnergy, which was said by the SEC to be a Delaware corporation with offices in Irvine, California claims to have developed a product capable of detecting chemicals used in explosives. Gurian was said to control HiEnergy, at least in 2002 and was charged with not disclosing his involvement to the SEC, which had bearing over HiEnergy as a publicly-listed company, or to its investors.

The SEC added that HiEnergy through a British Virgin Islands hedge fund called Benil Finance “which functions as Gurian's alter ego” he had purchased nearly nine percent of HiEnergy's outstanding stock. The SEC said that in its investigation of HiEnergy it had “developed information that LOM has established accounts in its name with at least five US broker-dealers. These LOM accounts traded in HiEnergy stock,” the SEC said.

It added that its subpoena of LOM for certain documents relating to HiEnergy was warranted as “those records will assist in establishing whether Gurian or related persons or entities profited from Gurian's fraudulent undisclosed control of HiEnergy by selling its stock through LOM, and whether any person or entity, including possibly Gurian or LOM, manipulated HiEnergy stock. LOM said in regards to the HiEnergy investigation by the SEC: LOM executed transactions in HiEnergy on behalf of 21 accounts.

No transactions were executed on behalf of LOM, and principals of LOM bought and sold only 20,000 shares for a net profit of $3,913. The SEC has alleged that a “recidivist securities violator”, Philip Gurian, and several of his associates may have owned a significant amount of HiEnergy shares, and that they may have manipulated the stock in 2002. The SEC filings imply that Gurian may have traded through accounts at LOM.

In fact the SEC have not alleged that Gurian is connected to any LOM accounts or that there was any improper trading within LOM. LOM has found no evidence of any improper trading through LOM accounts, and we have found no evidence whatsoever that Gurian or his associates have any connection to any accounts at LOM. LOM has advised both the Bermuda Monetary Authority and the SEC that Gurian and his associates do not have accounts with LOM, or any relationships with any LOM employees. LOM has cooperated and fully complied with all BMA requests made in this matter. Any suggestion implied by the SEC in its filing that Gurian is in someway in partnership with LOM is entirely false.

In this investigation, the SEC has alleged that “through the use of nominees, Brian and Scott Lines secretly acquired 99 percent of Sedona's outstanding shares”, as a British-Columbia registered company.

Subsequently, LOM entered into an agreement to help raise between $3 million and $6 million for a privately-held company, Renaissance Mining Corp., but on the condition that on Renaissance Mining reverse merging into Sedona, which was “a public shell company”.

In its filing, the SEC also claimed that a press release issued by Renaissance at the time reportedly “touted LOM's role in the private placement as Renaissance's ‘investment banker', but failed to disclose that the Lines brothers controlled 99 percent of Sedona's outstanding shares, and as a result, stood to profit enormously from the completion of the Renaissance/Sedona merger”.

On January 21, 2003, Sedona's stock opened for trading at $9 per share, “a 30,000 percent increase over its previous closing price of $0.03 per share”, according to the SEC.

Brian Lines sold 97,000 Sedona shares on that day and another 51,000 shares the following week, the SEC investigation charged.

In total, Brian Lines was said to have profited from these sales, as well as from sales to LOM's own customers, by more than $1.4 million, said the SEC.

The SEC has also charged that documents were edited with the “effect of concealing Brian and Scott Lines' significant ownership and control over Sedona's outstanding shares”.

In addition, the SEC said its staff had found “at least, on one occasion, LOM, Brian Lines, and Scott Lines had previously engaged in very similar conduct.

In particular, the staff has developed facts tending to show that, between January 2002 and June 2003, Brian Lines, LOM, and two LOM customers (both residing in Vancouver, B.C.) apparently engaged in an unlawful scheme to manipulate the stock of SHEP Technologies, Inc., another US-registrant that is publicly-traded in the US.

The SEC alleged that, through nominees, Brian Lines and LOM may have been able to “obtain secret control over 88 percent of SHEP's outstanding shares, then a shell company, on behalf of the two LOM clients, who have accounts at LOM Cayman and LOM Bahamas.

In addition there were allegations that instructions had been passed to “a US lawyer to file with the SEC ownership reports that falsely stated that several of the nominees beneficially owned or had sold SHEP shares, when, in fact, the two LOM customers owned and had sold these shares.

LOM also provided false information concerning the identity of the beneficial ownership of the SHEP shares to the issuer, who then included that false information in public filings.

“Following the public dissemination of SHEP touts (by several US residents) that were paid for by the two LOM customers (and possibly, others), Brian Lines, Scott Lines, and the two LOM customers sold approximately 3 million shares into the ensuing demand through the US markets. (LOM's two customers sold over 2 million shares, while Brian and Scott Lines together sold almost 1 million shares).

“Brian and Scott Lines executed almost all of their SHEP sales through LOM accounts at several US brokerage firms.

“Profits from the sale of the 3 million SHEP shares were approximately $3 million,” the SEC allege.

Although the SEC said that Scott Lines and LOM were cooperative to begin with, it later discovered that documents had been edited to hide beneficial ownership.

However, important portions of these records were redacted. For example, LOM redacted the identity of customers who had accounts at LOM Cayman and LOM Bahamas, even in internal documents that were created and maintained in Bermuda (such as internal emails between two LOM employees in Bermuda, or trading records generated by LOM in Bermuda).

LOM said in regards to the Sedona Software investigation by the SEC: The SEC has been investigating Sedona for a year and a half. From the beginning, LOM attempted, within the confines of the laws of the jurisdictions in which it operates, to co-operate with the SEC.

To that end, in April 2003 LOM voluntarily provided hundreds of pages of documents directly to the SEC.

This included information regarding accounts controlled by Brian Lines where confidentiality requirements were voluntarily waived.

Because of the allegations made to the BMA by the SEC, the BMA decided to do its own investigation, which it launched in June 2003.

LOM welcomed this and hoped that once completed, the findings could be used to satisfy the SEC's concerns.

This investigation was substantially completed and an initial draft report completed in October, however despite repeated requests, the BMA has not shared this report or its findings with LOM.

The LOM Audit Committee also launched its own internal investigation in mid 2003, retaining senior US legal counsel to review documents and interview staff.

All profits resulting from sales of Sedona shares by accounts in question were frozen by the LOM Executive Committee in February 2003, pending resolution of the investigations. LOM strongly refutes the SEC's allegations of fraud and market manipulation in reference to the Sedona transaction.

LOM said in regards to the Shep Technologies investigation by the SEC: The allegation in the SEC documents that accounts belonging to LOM or its principals made massive profits by trading in Shep Technologies is materially inaccurate.

Beginning in August 2002, two accounts invested $243,000 and $338,000 respectively in Shep Technologies.

After holding the investment for several months the accounts gradually sold the holding.

Over the course of a year and a half profits of $275,000 and $260,000 were realised. LOM, and its principals vehemently deny the SEC's allegation that they “engaged in an unlawful scheme to manipulate the stock of Shep Technologies”.

They have not made profits anywhere near the extraordinary and unsubstantiated amounts claimed by the SEC, nor are the profits made in Shep Technologies unrealistic when related to the size and timing of the investment, or of the market environment at the time.

Furthermore these transactions can not be considered substantive in relation to the principals normal trading activities or the amounts they have invested in the securities markets.

LOM added that it could not comment on other customers' transactions in SHEP Technologies without their written consent.

In conclusion, LOM said it would “like to make it clear that its principals have not made $6.4 million from illegal securities trades. They have not been involved in stock manipulation. No customers of LOM have been damaged in these matters and LOM has received no complaints or concerns from any customers”.

LOM said that it administers accounts for over 2,000 active customers and executes transactions in billions of shares in various markets each year.

It also advised that regulatory investigations are not unusual for any large, active broker-dealer,” such as itself.