A brewery in the Luhansk Oblast city of Lysychansk, 742 kilometers southeast of Kyiv, is an unlikely place for a publicly traded U.S. energy company to reap all of its profits.
But that brewery was the sole customer of Ukrainian National Securities and Stock Market Commission Chief Timur Khromaev, whose GASE Energy traded on U.S. penny stock exchanges as a Luhansk Oblast gas exploration and drilling firm.
It traded publicly, that is, until June 2015, when it deregistered amid scrutiny from Khromaev’s U.S. equivalent — the U. S. Securities and Exchange Commission, the government regulator charges with protecting investors and ensuring fairness in markets.
A Ukrainian securities commission spokeswoman told the Kyiv Post that the scrutiny was unrelated to Khromaev.
“Timur Khromaev cannot comment on any questions linked to the activity of GASE Energy after his appointment to the position of head of the National Securities and Stock Market Commission, because he was not involved in its operational processes,” the commission said in a statement. “Khromaev is not familiar with the details of the SEC investigation.”
GASE, originally founded as Epsilon Corp., was named in an SEC securities fraud complaint in February 2018 as a company created via a fraudulent “shell factory” scheme. According to the complaint, a group of businesspeople had filed sham business plans and financial reports with the SEC to create a series of fake publicly traded shell companies, Epsilon among them, which were then sold off at a profit. Epsilon was sold to GASE.
The case means that the chief U.S. securities regulator effectively investigated — and, notably, did not charge — the head of its Ukrainian equivalent.
Ukraine’s National Securities and Stock Market Commission is charged with policing the country’s stock market, ensuring securities filings are accurate, and preventing fraud.
GASE supplied the U.S. SEC with documents as part of the investigation, but denied that it was culpable.
“There was no information or suspicion that the management was doing something untoward,” said Larysa Primenko, GASE Energy’s former CEO and the current director of a Ukrainian company formed to manage its gas assets. “We were just unlucky.”
An SEC spokeswoman declined to comment.
Feeling secure
GASE Energy started off as Great East Energy, incorporated in Nevada in April 2013.
The company’s activity centers on two assets in Luhansk Oblast, in addition to a gas field — NPK-Kontrakt, a methane gas extractor, and Lispromgaz, a distributor.
Without further investment, the company was forced to sell its gas locally — a situation that harmed its cash flow. According to a 2015 securities filing, the firm’s sole customer for 2012 and 2013 was the Lysychansk Brewery.
In July 2013, things changed for Great East Energy. The company moved to purchase a publicly traded company called Epsilon Corp, via a reverse takeover. A reverse takeover is a process by which a private company acquires a public one, thereby going public itself while avoiding extensive regulatory review.
Great East Energy paid around $100,000 to acquire Epsilon. August 2013 saw Epsilon pay $1.25 million to a Khromaev-owned company for the Lysychansk assets, according to securities filings. By September, the company had changed its name from Epsilon to Great East Energy, completing the takeover.
The deal to bring the company public saw millions of dollars move through the firm. One securities filing anticipated the company’s 2014 revenue – all from the Lysychansk brewery – at $1.8 million.
Epsilon, however, had been created as part of a fraud scheme run by an Israeli man named Sharone Perlstein, the SEC wrote in its complaint. According to the regulator, Perlstein and others created fake business plans and filled the companies with sham directors in a bid to sell the firms to people interested in owning a company on the U.S. penny stock market.
Perlstein worked in Ukraine’s agricultural sector in the 2000s, for a company called BSD Ukraine Agro Ltd., a venture that attempted to turn Vinnytsya Oblast collective farms into profitable agribusinesses.
A spokeswoman for OTC Markets Group, where GASE was traded, told the Kyiv Post that in the U.S. penny market, “it is up to the companies to provide/disclose information.”
“It looks like this company chose to make disclosures available through our system from 2010–2015 and then ceased to do so,” the spokeswoman added.
Having a gas
Khromaev, GASE’s former owner, enjoys a reputation among Ukraine’s foreign backers as a competent official focused on pushing through the changes needed to build a transparent, vibrant securities market.
In an interview last month on a separate topic, he expressed similar thoughts, saying that the Rada was blocking him from enacting changes that would allow Ukraine — an “exotic” investment destination — to develop a prosperous securities market.
It’s not clear the extent to which Khromaev and his team were aware of the fraud involved in setting up the company they purchased.
Primenko, who now works as a director at ARTA capital, denied having any knowledge, and said that she complied with a document request sent by SEC attorneys in 2016 in relation to the case.
At the time of the purchase, eastern Ukraine appeared poised to take off as a worldwide gas supplier. Shell had just concluded a multi-billion dollar contract to drill the Yuzivska gas field, which extends from the Kharkiv region into Donetsk’s northwest suburbs.
GASE’s field — as a February 2014 investor presentation states — boasted a potential of 713 million cubic meters of gas, and was “surrounded” by the Yuzivska field, giving the company potential access to infrastructure without having to invest in building it.
“With Ukraine natural gas priced over three times U.S. levels, the energy industry holds compelling economics as well,” the company said at the time, arguing that Ukraine’s need for “self-sufficiency” from Russian gas made it a prime investment opportunity.
Primenko said that the company registered in the U.S. to “find funds on the OTC market.”
“But it wasn’t very successful,” she added. “It happened in 2013, which wasn’t the best time to collect money for Ukrainian assets.”
The company continued attempting to raise money through the first months of 2015.
But in October 2014, SEC accountants began to send the firm — then called GASE Energy— interrogatory letters addressed to Khromaev, citing irregularities in the firm’s 2013 financial statements.
Specifically, the letter requests that the company “explain in necessary detail” how it accounted for elements of the purchase from Epsilon, as well as for $1.25 million that went to a Khromaev-controlled company called Synerdal Services Ltd., which directly owns the Lysychansk assets.
Khromaev resigned from GASE in February 2015, giving up his position as CEO but retaining his ownership of the firm through 2016. He left the American firm by exchanging the shares for the shares of a Ukrainian company of exactly the same name, where Primenko now works.
One week after his resignation, the SEC sent another inquiry, this time to Primenko. The US government accountants said that its comments were “outstanding and unresolved,” and demanded another response.
Primenko dismissed this as related to “questions over the company’s reserves,” but GASE’s responses failed to satisfy the SEC.
In June 2015, an SEC official sent a letter to the firm saying that the regulator would cut off contact and was prepared to “act consistent with our obligations under the federal securities laws.”
“As you have not provided a substantive response, we are terminating our review and will take further steps as we deem appropriate,” the government added.
One month after the letter, the company ended its registration with the SEC.
