Former Poseidon executive deemed ‘obviously deceitful’
ASC panel finds Kostelecky’s records to be ‘grossly’ deficient, misleading
A former officer with failed Calgary oilfield services firm Poseidon Concepts Corp. exhibited “deliberate and obviously deceitful” conduct that led to the company grossly overstating its revenue and accounts receivable, an Alberta Securities Commission panel has determined.
Joseph Anton Kostelecky, the former executive vice-president of Poseidon responsible for overseeing the company’s U.S. operations, was found to have contravened the Alberta Securities Act by failing to maintain necessary books and records; perpetrating a fraud; causing, authorizing, permitting or acquiescing in Poseidon’s failure to provide prescribed disclosure; and acting contrary to the public interest.
The ASC proceedings will now enter a second phase to determine what, if any, penalties will be levied against Kostelecky.
The allegations against Kostelecky stem from a February 2015 notice of hearing that also named Poseidon and three of its other executive officers as respondents.
The allegations against the three other men were resolved through settlement agreements in June 2016, and allegations against Poseidon itself were withdrawn.
In the case against Kostelecky, who is a North Dakota resident, the ASC panel found Poseidon’s books and records related to its U.S. longterm rental contract business in 2012 were “grossly” deficient and misleading.
The panel found that supposed contracts for Poseidon’s oilfield tanks were entered into the books sometimes without any supporting documentation; that the very existence of some of the supposed contracts could not be established; and that there were indications that one or more contracts supposedly signed by customers had actually been falsified with a signing page taken from another agreement.
In a 2012 email exchange entered into evidence, Douglas Robinson — the company’s operations controller who soon after he was hired was tasked with getting a handle on the state of Poseidon’s U.S. customer contracts — told its CFO that going through the large amount of outstanding accounts receivables gave him “no confidence” that Poseidon would ever see any of the contract revenue recorded.
“In a lot of cases I have been talking to customers who we have millions of dollars in receivable balances who have no idea (of) who Poseidon is,” Robinson wrote.
In their own settlement admissions, the three other officers charged by the ASC over the Poseidon debacle acknowledged they played a part in the misinformation that appeared on the company’s interim financial statements, either through giving their permission or authorization, or acquiescence.
In a lot of cases I have been talking to customers who we have millions of dollars in receivable balances who have no idea (of) who Poseidon is.
However, the ASC panel concluded Kostelecky was the “source” and “primary cause” of Poseidon’s breach of securities laws, and stated in its written decision that his conduct went beyond anything that might be ascribed to mere carelessness or even negligence.
Poseidon was created by Open Range Energy Corp. in November 2011 to develop and market its unique oilfield liquid storage systems. The value of the company’s shares soared to $1.3 billion, but fell quickly after February 2013 when it announced that about $94 million to $102 million of the company’s $125.5 million accounts receivable for the first nine months of 2012 should not have been recorded.
The company did not survive for long after that. In April 2013, a court granted Poseidon protection from its creditors and the company effectively ceased business.
A class-action lawsuit in Quebec, Ontario and Alberta has been filed on behalf of Poseidon shareholders. However, that legal action is on hold until CCAA protection expires. In February 2015, Kostelecky was charged by the U.S. Securities and Exchange Commission with enabling a financial fraud in connection with Poseidon.
He settled with the SEC by agreeing to pay a $75,000 penalty and being barred from serving as an officer or director of a U.S. publiclytraded company.
Kostelecky is also facing criminal charges in relation to Poseidon. In January, the U.S. Department of Justice filed an indictment in the District of North Dakota charging him with five counts of wire fraud and one count of securities fraud for his alleged role in the scheme.
Kostelecky plead not guilty, according to the Bismarck Tribune, and is awaiting trial. If convicted, he faces a maximum penalty of 20 years in jail on each count and maximum total fines of $6.25 million.