As Magellan Offshore Services is launched Greg Stemm makes a direct appeal to potential investors
[Images in the public domain via Wikipaedia used for news and comment by thePipeLine]
In a spectacular flourish of smoke and mirrors the treasure hunting financial magician, who makes [other people’s] money disappear, the Great Stemmgali of Tampa, Florida, has done it again!
thePipeLine investigates the implications of the spectacular sale of Odyssey Marine Exploration’s shipwreck expertise and the granting of certain financial rights over the HMS Victory 1744 project, to an affiliate of a California based coin dealer.
The first reaction to the 16 December announcement that not only had Odyssey Marine Exploration [OMEX] found a way to offload the catastrophic bank debt incurred by the company’s ailing shipwreck business; but that company co-founder and former CEO Greg Stemm had, Houdini like, escaped the boardroom [or broom cupboard] where he had been locked away as a non-person since October 2014 and was once again back on the quarter deck and ready to swash his self-styled entrepreneurial buckle on the high seas, hunting for lucrative shipwrecks as a generously remunerated “consultant” and “project manager”, was; “Clever boy!”
There are not many CEO’s who could build a corporate image around their own vision and personality and then suffer;
- multiple defeats in the courts which trashed the reputation of their company;
- oversee the share price tank from a high of $7.01 in September 2007 to just $0.26 today [22 Dec 2015];
- accumulate losses of $228 million, and
- see the collapse of a twenty year campaign to establish a profitable NASDAQ quoted treasure hunting company at the cost of hundreds of millions of dollars,
…only to be sent back out to play with the same toys and virtually the same business model, but that is what Greg Stemm achieved in Tampa this week.
Indeed, just like the latest incarnation of that enigmatic science fiction hero Dr Who, Mr Stemm has regenerated the world’s favourite maritime treasure hunters, so that while the OMEX operation looks completely different at one level, at a more functional level the old familiar characters and story lines are still there to reassure the regular speculators that, like the chaotic, third rate Sally Bowles in the musical “Cabaret”, maybe this time, they’ll be lucky.
In Britain a scary Dr Who Christmas Special is now very much a seasonal tradition, and on close inspection this weeks OMEX Christmas Special is a particularly scary variation on the theme. Scary that is for UNESCO, mainstream archaeologists and the long suffering investors who sank money into Mr Stemm’s company when the share price bought you more than 1/15th of a Big Mac. This latest regeneration sees Odyssey Marine Exploration’s shipwreck business transformed from the NASDAQ listed reality TV action heroes of Discovery’s much missed infomercial series “Treasure Quest,” to becomes a mere jobbing service provider, paid on a costs plus percentage basis, just like the rest of the marine salvage industry. A case of “Have big blue boat and cute anthropomorphisised ROV. Will travel. No job too small.”
However, the genuinely scary part of the new incarnation [scary to UNESCO and mainstream maritime archaeology that is], is the identity of OMEX’s new, sharply suited Doctor’s assistant with a useful line in the kind of telesales which requires a call centre rather than an old blue police call box. That assistant is an “affiliate” of California based rare coin dealer and wholesaler Monaco Financial LLC called “Magellan Offshore Services”. Almost certainly named to make it sound like an established part of the offshore industry, the new affiliate actually has no known public presence before 16 December 2015 and is almost certainly straight out of the shell company replicator, set up specifically as a vehicle for Monaco to compartmentalise and handle the relationship with OMEX’s shipwreck arm.
OMEX must also have offered Monaco/Magellan an unbeatable deal to win the service contract because there is no record that the contract was ever put out to tender. Although the award of the contract might also have something to do with the fact that Monaco were already selling coins and bullion from OMEX projects, including the recoveries from SS Republic and SS Gairsoppa, and had previously loaned the Florida company at least $8 million. That gives the game away. Far from being a carefully structured, strategic refocussing of the business by OMEX management, it was OMEX’s debts which dictated the nature and timing of the whole Monaco deal.
OMEX owed over $11 million in debt repayments on bank loans from Fifth Third Bank which were due on 17 December and which the cash strapped company almost certainly could not have paid. Had Odyssey defaulted on the loans and the bank forced the Tampa treasure hunters into receivership, Monaco would have become just another creditor.
Taking all this information together the underlying message of the OMEX/Monaco deal is clear. Forget the veneer of archaeology. The OMEX crew have been forced to jettison everything overboard to stay afloat from the galley sink to the corporate Crown Jewels [the shipwreck database] and the corporate distress signal is being broadcast in clear.
The signal reads: The OMEX shipwreck operation is now primarily the recovery and supply arm of a coin dealer.
Current OMEX CEO Mark Gordon put a brave face on what was then in effect a fire sale of damaged good, describing the Monaco deal and the rationale behind it in a conference call on 16 December;
“…we didn’t sell our marine operations capabilities. Our ship, the Odyssey Explorer, and our offshore equipment were not included in this sale and we have an exclusive contract to provide shipwreck search and recovery services to the buyer of our shipwreck database. This services contract provides for a reasonable profit on our offshore work. In addition, Odyssey will retain a 21.25% interest of the proceeds generated from any of these shipwreck projects after the costs.”
Mr Gordon added;
“The bottom line: we’re still in the shipwreck business, but we’ve reset the risk and reward profile so Odyssey will not risk significant capital in the shipwreck business but will generate cash flow and will still have a potential upside from the assets we’ve created over the past 20 years. To be clear, we remain a marine exploration company and we have retained all the capabilities to continue to be a leader in this sector.
http://www.sec.gov/Archives/edgar/data/798528/000119312515406011/d107406dex991.htm
In fact, for all their protestations about retaining capability and the company’s shipwreck roots, the current OMEX senior management seem much more interested in their seabed phosphates project code named “Don Diego”, which led to the effective take over of OMEX by Mexican mining conglomerate MINOSA during a previous cash crisis in March this year. MINOSA, which now has seats on the OMEX board, seems to have said enough is enough and they were not prepared to subsidise the shipwreck part of the business.
However, unlike Dr Who, where the BBC showrunners do at least cast a different actor after each regeneration, once all the flashy special effects of the transformation fade away, the new look Magellan/Odyssey relationship begins to look a lot like the old OMEX shipwreck business model with the same old actors, led by Mr Stemm.
The business model was first designed by OMEX co-founders Greg Stemm and John Morris almost thirty years ago, mirroring that created by fellow Florida resident Tommy Thompson of SS Central America fame, who eventually went on the run accused of defrauding share holders. Stemm and Morris first operated the model with OMEX’s predecessor company Seahawk [until an unfortunate run in with the Securities and Exchange Commission over allegations of insider trading of which both men were eventually acquitted]. It is even the case that as “consultant” and possibly in future, project manager, Mr Stemm is apparently more overtly in a position of influence and control over the shipwreck operation than he has been for the last year and a half while it was still entirely under the control of OMEX as part of the OMEX core business.
The only difference between OMEX on 15 December 2015 and OMEX/Magellan on 16 December 2015 is that, with the exception of certain excluded projects, which include the HMS Sussex and HMS Victory 1744 projects, which involve exisitng contracts and sensitive relations with the UK Government and regulators, shipwreck projects have to be conducted through Magellan. What is not clear is which personnel control Magellan.
It is this aspect of the new arrangement which is the most public admission that Greg Stemm’s dream and UNESCO’s nightmare, of a financially successful, high profile, NASDAQ listed commercial treasure hunting company simply has not worked. It appears that to survive the Winter as a going concern OMEX management had to find a way to stop the hugely expensive, speculative shipwreck business draining the company’s resources and painting the bottom line deep red, so they offloaded it to Monaco/Magellan.
Essentially the arrangement works like this;
- First a company, previously Seahawk, then OMEX now Magellan, use OMEX’s former propriety database of ships which are alleged to have been lost while carrying valuable cargoes to attract multi-million dollar investments on the promise of a substantial upside to investors if the wreck is located and the purported cargo recovered and “monetised”. For the serious players in the wider salvage and treasure hunting industry, this phase is often facilitated through the creation of a bespoke or shell company, often with a would be glamorous/mysterious code name like Firebrand or Enigma. This has the effect of carrying and compartmentalising still further the financial risk. The shell company can “hire” the service providers, OMEX again.
- Next the company, previously Odyssey Marine Exploration, now still Odyssey Marine Exploration but this time under an “exclusive contract to provide shipwreck search and recovery services” to Magellan, will set off on the high seas in search of the loot, usually at a costs plus a percentage mark up, day rate, while the company executives are also generously remunerated. In the current case Greg Stemm will receive $20.8k [£13k+] per month as a “consultancy fee” plus numerous lucrative project related bonuses suggesting his influence and control will be considerable.
- If a shipwreck is found, salvaged and “monetised”, OMEX gets a further percentage of the proceeds [although the reward of 21.25% of the proceeds generated after costs as reported by Mark Gordon in the 16 December conference call is far less than the up to 100% of the proceeds company claimed in its pre Monaco contracts]. A successful project would also see shareholders get dividends, executives and employees a win bonus, the OMEX share price would rise and everyone is happy [except UNESCO, ICOM, and mainstream, pro bono archaeologists]. Happy that is unless, like the 17 tons of silver lifted by OMEX from the Spanish Frigate Nuestra Senora de las Mercedes in 2007, the salvage was unlawful or is otherwise challenged in the courts by anyone who can come up with a claim on the goodies. Claims against the contents and cargo of a shipwreck can come from individuals, insurance companies, the lost ship’s flag state and even former colonial nations claiming their stolen resources back. This has the result cynics would claim that the only way to ensure making money from shipwrecks is to became a specialist in maritime law.
- Meanwhile if nothing is found the search and salvage company, OMEX, is still happy because the investors, not OMEX, have paid the bills meaning the shipwreck service can look commercial, the overall company share price is not hit by losses and failures, and the executives can continue to live in the attractive corporate lifestyle to which they wish to become accustomed.
The only substantive break with the past is that under the new model, where previously it was the company bottom line and Odyssey’s long suffering private investors who took the hit when nothing was found or Odyssey overreached itself legally and lost substantially in the Courts, now it will be Magellan’s investors who will pay the bills for the marine diesel and, if necessary, the lawyers.
Of course there are even some investors will be quite happy to lose money on this highly speculative area of the investment market. As “the Times” reported in 2012, a previous high risk shipwreck investment scheme operated by Robert Fraser Marine, for which OMEX was a legitimate service provider, was linked to aggressive tax avoidance by Her Majesty’s Revenue and Customs.
Away from the OMEX portfolio other shipwreck investment have schemes worked to fleece investors. Aside from professional “pump and dump” operations where genuine or fraudulent inside information and news is used to artificially raise the share price, which all volatile shares are prone to, a scheme in Australia, unconnected to OMEX, led to the conviction and imprisonment of executives for breaches of the law relating to financial services. While in the US State of Maine, treasure hunter Greg Brooks obtained an estimated $6 million from investors after he told them the SS Port Nicolson, torpedoed in 1942 and at least twelve other wrecks, contained as much as $12 billion in cargo at modern values. Brooks later admitted in court there was no treasure on the Port Nicolson, but claimed that he had been misled by his researcher who had faked documents suggesting the Port Nicolson was carrying platinum. That case is subject to an ongoing Grand Jury investigation.
In the case of the Port Nicolson the British Government also intervened to claim any recovered cargo, although it stated it did not believe there were valuable materials on board the vessel when she sank.
This scenario of conflicting claims between Government and the would be salvor in search of investment is mirrored in the case of HMS Victory 1744 where it has been stated in both an independent technical report by Wessex Archaeology and by Ministers in a written answer to the UK Parliament, that the Government does not believe any of the $250 million plus treasure, repeatedly claimed by OMEX executives including Greg Stemm and Mark Gordon, was ever on board the ship.
Where then does this weeks corporate spectacular of financial special effects and prestidigitation leave the OMEX saga?
First of all the company has lived to fight another day. Odyssey staff [those that are left] can now decorate the office Christmas Tree in the knowledge that they should still be in post to collect their parcel from Secret Santa on Christmas Eve [A gift wrapped Odyssey share certificate anyone?]. However, in the longer term the company suffers the humiliation of being mere tenants in the Laurel Street, Tampa HQ that it once owned.
The company had already offloaded its stores and conservation laboratory and with them went any pretence of being a serious archaeological contractor.
Not only that the lease for Laurel Street is currently only for one year and costs a princely $19k per month. Still, on the bright side it means the shipwreck business does not actually have to physically move the famed shipwreck data base. All Mr Stemm’s office support [also part of his consultancy agreement] have to do is change the letterhead.
So far so simple, but more worryingly the company’s wider financial situation remains very fragile. Although the threat of the debt to banks has been retired, and for the time being the Odyssey Explorer seems to be covering her approximately $35k per day costs on contract work, there is still a cash burn from the day to day running of the company. This may be why the Monaco deal included the odd $1 million in petty cash for corporate use. Equally OMEX still owe Monaco $5 million to be repaid from the proceeds of certain unspecified projects at some point in the future and a further $2.8 million due for repayment in two years.
Of even greater concern is the fact that still looming over the company balance sheet is the $14.75 million at 8% interest owed to MINOSA. Another financial pinch point comes at the end of March 2016 when repayment of the MINOSA loan falls due, by which time OMEX hopes the “Don Diego” project will get the go ahead from the Mexican Government environmental agency SEMARNAT. However, approval is far from a foregone conclusion with the project facing considerable opposition from local people and environmental campaigners.
The Don Diego project is all about fertiliser production and if the project does not receive the approval of the Mexican Government then it will be once again OMEX shareholders, not Mexican fields, who will have fertiliser dumped on them.
The next question is that, for all that the company assets including wreck database, had a book value of $12 million as part of a $21 million deal, what is that shipwreck database really worth?
Reports from the USA suggest some shareholders are delighted with the Monaco deal because they see a positive cash flow fed by a series of projects from Magellan. However, if all those lucrative, viable projects exist in the database, why were they never executed by Odyssey when the company had the chance?
Indeed, why were there just two profitable projects, the SS Republic and the SS Gairsoppa, in the entire history of the company? Remembering of course the reports that Odyssey are alleged to still owe the UK Government around $5 million, derived from the sale of silver from the Gairsoppa project, which, it is claimed, the company improperly withheld as costs in breach of the contract with the UK Department for Transport.
It must also be remembered that while the SS Republic and SS Gairsoppa projects did make a profit, those profits were then swallowed up in the overall financial swamp of accumulated losses and corporate debt. In the case of the SS Gairsoppa, OMEX reported that the project undertaken in 2012-2013 was the most successful in the company’s history, costing $27mm, but bringing about cash inflows of $67 million suggesting OMEX made a profit of $40 million. However, the OMEX SEC filings for the same period show that the company still accumulated overall losses of more than $10 million per year. The sums just never added up.
NB: If the British Government wants to get back the $5 million it allegedly owed on the SS Gairsoppa salvage civil servants at the Department for Transport could do worse than give Magellan’s owner Monaco a ring as the company is currently selling .999 pure silver ingots stamped by the Royal Mint in Bombay [Mumbai], which were salvaged from the Gairsoppa by OMEX. They can speak to a Monaco Shipwreck Treasure Specialist on 001-888-422-1929. Even if they cannot persuade Monaco/Magellan to ask client, or is it affiliate, OMEX to cough up the missing cash they could purchase a few ingots. If the international price for silver bullion rises enough they might eventually get the money back that way.
That said there are ways to make money in marine treasure hunting. However they are somewhat counter intuitive in that it can be more lucrative not to find what you say you are looking for. One veteran observer of the marine salvage industry told thePipeLine; You can make a lot of money out of salvage and treasure hunting until you actually have to lift material which costs a lot, then conserve it, store it and market it, which costs even more. It is also a truism of the commodities and treasure trade that the more valuable items are raised, the lower prices become as the market is flooded. However, money can be made if all the time you say you are looking for a treasure wreck, but not quite finding it, you can attract further investment. If your company is traded, smart investors can also ride the share price up and down. It is that factor which led to Mr Ernest Tapanes, a senior Odyssey staffer, reaching a settlement with the US Securities and Exchange Commission after he was accused of insider trading in 2008. While not admitting guilt, the settlement saw Mr Tapanes repay his entire profit of $107,000, made on the sale of OMEX shares purchased just before the discovery of the Mercedes silver was made public, to the SEC and a pay further penalty of the same amount. Mr Tapanes continued to be employed by OMEX and was a senior project manager on the SS Gairsoppa salvage. Indeed, he is pictured in this role on the web site of Odyssey Explorer’s new boss Monaco.
However, as our expert explained, if you do actually find your target that cash burn immediately increases exponentially because not only must you recover the material, perhaps hiring a specialised vessel to do so as OMEX had to when they chartered the Swire Seabed Worker for the SS Gairsoppa salvage at a reported $100k per day, you must also store the recovered material and conserve it for the long term which involves people, plant and a delay in “monetising” the material.
The bottom line for an investor hoping to make an informed judgement as to the risks of investing in shipwreck hunting is that a toxic blend of hype and a paranoid application of commercial secrecy make secure profit and loss figures for commercial treasure hunting projects hard to come by meaning that the last person you should listen to when deciding whether to invest in a shipwreck project is the person promoting the project. However an authoritative paper by John M Kleeberg, published in the journal Technical Briefs In Historical Archaeology, [2013, 7: 19–30] was able to analyse a series of six headline making treasure recoveries and concluded that five of the six, and quite probably all six, made substantial losses.
Finally, in the wake of the Magellan deal, all eyes in the UK maritime archaeology community will be on what happens to the HMS Victory 1744 contract.
The contract to salvage the HMS Victory 1744 wreck site in the English Channel, which OMEX announced in early 2012, is currently held up because the project is mired in a protracted application for a marine licence to work the site which OMEX’s apparent employer, or as some allege front company, the Maritime Heritage Foundation, first lodged with the UK Marine Management Organisation [MMO] precisely one year ago on 19 December 2014.
The delay has come about for three reasons. Firstly the permission granted in October 2014 by the Secretary of State for Defence Mr Michael Fallon to excavate at-risk surface artefacts was withdrawn in February 2015 under threat of Judicial Review and has not been re-instated.
Secondly the thePipeLine can reveal that as soon as the licence application went out to full consultation [after a delay because the Maritime Heritage Foundation failed to publish the required documentation including a project design], the MMO received a series of full broadsides aimed at the application and double shotted with technical and legal objections from a roll call of experts and expert bodies in the maritime archaeology sector.
Finally, as thePipeLine revealed in October, a letter released under the Freedom of Information Act [FOIA], written by the Chair of the MHF Lord Lingfield, to Defence Secretary Michael Fallon in July 2014, demonstrated that the project would be funded by a search for valuable cargo on the HMS Victory wrecksite in breach of UK maritime heritage policy under the Annex to the UNESCO Convention on the Protection of the Underwater Cultural Heritage.
Add to these existing trenchant objections and legal obstacles the clear references in Odyssey’s 8K filing that, although HMS Victory 1744 is an “Excluded Project” outside the direct control of Magellan;
” Once valuable trade cargo is recovered from such Excluded Project [i.e. HMS Victory 1744] and monetized by Odyssey, Odyssey will pay Magellan a commission…”
…and it becomes clear that the arrangement with Magellan also represents a clear breach of the UNESCO Annex and is thus not compliant with UK policy for underwater cultural heritage.
Of particular concern to both the archaeological community and to the many who would be concerned about disturbance to the grave and memorial to over one thousand members of the Royal Navy, will be the possibility that in order to promote its financial interests Magellan, which remember is an affiliate of a commercial dealer in rare coins, will attempt to exert control or influence over Odyssey in terms of what is recovered from the wreck site and how it is “monetised”.
This fear is all too real because thePipeLine understands that there is already concern among mainstream maritime archaeologists that the published HMS Victory project design seems to be more concerned with speculative excavations which would destabilise the site, but which might uncover the coins and personal property which Odyssey could attempt spuriously to describe as “trade cargo”, rather than the limited recovery of “at risk surface items, ” for which permission was granted, albeit briefly.
The surface items are primarily the ship’s cannon, which are owned by the Maritime Heritage Foundation under the Deed of Gift and as part of the ship’s equipment would generate a lower percentage of salvage award under the terms of the salvage contract between Odyssey and the MHF which was published in 2012. That assumes that the MHF would even have sufficient money to even pay such an award when it’s published accounts showed it only had just over £50,000 to its name in March 2015.
Astonishingly, the MHF accounts also show that the supposed educational charity had made no efforts to raise funds in the year to March 2015, even though in the Autumn of 2014 the Foundation had been given permission to work on the wreck site and has known it was embarked on a multi-million pound project since January 2012 at the latest.
To be clear. The prospect of an American coin dealer profiting from the personal property and coins in the purses of dead Royal Navy sailors is something no British Secretary of State for Defence could contemplate. It would be a public relations disaster. In other words if the compliance of the HMS Victory 1744 Project with the UNESCO Annex and UK policy was questionable before the December 16 announcement, the moment that 8K describing the details of the deal with Monaco was released the prospect of a successful outcome for the HMS Victory licence application receded even further into the distance.
thePipeLine asked the Maritime Heritage Foundation if it had been consulted in advance about the Monaco deal and about concerns that a coin dealer was now in a position to profit from and even influence the HMS Victory 1744 project. However, up to the time of publication the MHF has chosen not to respond.
Switching to look at the issue from a US perspective, given the previous arguments and repeated statements of position on this matter for the agreement with Odyssey to once again raise the issue of monetising “valuable trade cargo” taken from HMS Victory must call into question the scope of any due diligence undertaken by Monaco prior to the deal being signed off and the judgement of the company’s officers. If they had done their research it must have been clear to them that the chances of their being allowed to market and profit from “valuable trade cargo” from HMS Victory 1744 are somewhere between zero and nought in which case why refer to it in the agreement set out in the 8K.
Indeed, to suggest the HMS Victory project in its current form could lead to that “valuable trade cargo” being monetised, could be construed as misleading under SEC rules.
At a deeper level the inclusion of such red flags as the terms “monetisation”, “valuable trade cargo” and “commission” in the 8K filing describing the deal also calls into question how serious Odyssey actually are about working on the HMS Victory site.
As with so much of the story of OMEX, this latest twist in the saga of OMEX and Greg Stemm is down to nuances of language and decoding back stories, sub texts and the subliminal messages in play. After all Mr Stemm began his career as a PR man and the history of OMEX is full of classical, historical and literary allusions, some, perhaps like the latest, shotgun marriage which has seen Odyssey Marine Exploration regenerate into a contracting arm of Magellan Offshore Services unintended.
Historians will recall that the real Ferdinand Magellan who lends his name to Monaco’s new affiliate was indeed a great explorer and initiated the first circumnavigation of the earth by a European power. However, Magellan himself was killed after pointlessly taking sides in a tribal war and it can be argued that his voyage and others like it, while a great technical achievement, accomplished by a courageous and long suffering group of seafarers, also initiated over three hundred years of colonial oppression and the exploitation of native peoples and the natural resources of the lands they inhabited. That is certainly how the Filipinos see it as the warrior who defeated and killed Magellan, Lapu Lapu, is seen as a national hero.
Even more pertinent, it is also often forgotten that, while like some Hellenic incarnation of failed energy giant Enron, Odysseus was the smartest Greek in the room at Troy, he also managed to get on the wrong side of various Gods and as a consequence was forced to wander the ocean for ten years, stealing property, ignoring warnings, taking unnecessary risks and ultimately losing his ship and getting his crew killed.
It is also worth remembering that in a classical echo of Judge Stephen D Merryday’s damning judgement on Odyssey’s corporate conduct in the Mercedes case, the Roman poets saw Odysseus as less a hero than something of a confidence trickster.
In September 2013 Judge Merryday wrote;
Three hundred years earlier the English poet John Dryden’s translation of the Roman poet Virgil warned even more succinctly that people should beware ” the frauds of sly Ulysses”.
The OMEX/Monaco deal may not be fraudulent, but analysis and past experience suggests potential investors should certainly beware.
