Citron Updates Home Solutions of America. (Nasdaq:HSOA)

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“Fraud and falsehood only dread examination, Truth Invites it”
Samuel Johnson

Among the accounting scandals that wrecked Wall Street titans like Enron, WorldCom, Adelphia, Rite-Aid, and Refco one of the recurring themes was an all-too-cozy relationship between management and directors and the business that they did. The specific channel through which many of their fraudulent transactions were pushed was the vehicle of so-called “related party transactions”.

Why? When control persons or large shareholding parties in a publicly traded company create transactions with themselves, or non-reporting entities that they control, they have the power to control prices on both sides of the transaction, and therefore create artificial profits on one side or the other. This just seems to be moving dollars from one pocket to another. But because valuation of publicly traded companies is often estimated on the basis of a multiple of profits, which can be 10x, 20x or more, this artifice can exert huge leverage on the market’s expectation for the stock. And if those control persons are large shareholders or hold sizable options, dishonesty that inflates current profits can pay off in those multiples and more…..until the music is stopped by auditors or the authorities.
Related party transactions are potentially so toxic to fair and accurate accounting on which our markets depend, that the SEC and the Financial Accounting Standards Board (FASB) demand especially stringent treatment of all related party transactions, and even the potential for them. Specifically, all related party transactions must be reported as such in corporate filings according the Statement No. 57 according to SEC rule SK 404. For those of who would like more reading on the topic, here is a sampler.

At Home Solutions of America we are seeing the same issue with related party transactions that are not disclosed. Specifically, Home Solutions of America has never reported any related party transactions.

Related Party Transactions at Fireline

The bulk of the revenue from Home Solutions is currently being generated by their Fireline subsidiary. In our last report we detailed how any company with allegedly 400% internal growth plus staggering margins of 50% will be an obvious target of suspicion to any short seller or skeptical shareholder. It is the opinion of Citron that much of these revenues are either fake or belong to related parties.

What makes this an easy one to call is that Fireline, as a general contractor has to file permits with the county on projects they are working on…and look what we found.
The below three projects have all been worked on in the past 5 months without ever being disclosed as related party:

  1. Villas of Tampiana
    http://pubrec3.hillsclerk.com/oncore/showdetails.aspx?id=12191572&rn=6&pi=0&ref=search
    Note it is the same address for the owner and the contractor. The owner is Brian Marshall as stated in this state filing
    http://www.sunbiz.org/COR/2007/0428/00484660.tif
  2. Fireline’s Restoration Office (owned by Brian Marshall)
    http://pubrec3.hillsclerk.com/oncore/showdetails.aspx?id=12434573&rn=5&pi=0&ref=search
    The location of their office is 107 South Willow Ave
  3. Brian Marshall’s 12,000 square foot French Château
    http://pubrec3.hillsclerk.com/oncore/showdetails.aspx?id=12504035&rn=4&pi=0&ref=search
    http://www.sptimes.com/2007/09/14/Citytimes/Construction_trailer_.shtml

And this is our favorite..

http://pubrec3.hillsclerk.com/oncore/showdetails.aspx?id=12837091&rn=0&pi=0&ref=search

A contractor’s lien filed on the Fireline office by Graybar Electric. But if you look who owes Graybar the money, it is BSR Electric, a company owned by Brian Marshall, which never paid its bill. So what we get here is 2 related party transactions in one swoop. Fireline hires a Marshall-owned company to work on its own headquarters (owned by Brian Marshall). And because the contract is with himself, we will never know if it will get paid or if it is for fair value… NONE OF THIS IS DISCLOSED. This is black and white fraud, and this is one of many.

All of this affirms what was stated in the New York Post

“He claims he is owed $51,000 and that the quality of his company’s work received high marks from Fireline.
Vicente also said that every new construction project he worked on for Fireline was generated from properties owned at least partly by Fireline Executive Vice President Brian Marshall or other executives.
“I haven’t seen [Fireline] construct anything that their management has not owned or had a stake in,” Vicente said.
Among the Fireline projects that Vicente worked on was the company’s new headquarters in Tampa, Fla., a warehouse, and the personal residence of Group Vice President Tom Davis”

http://www.nypost.com/seven/08232007/business/builder_may_be_going_bust.htm

LET US NOT FORGET….there is history here. The company has not been what you would call forthcoming about their relationships — as evident in the American Renaissance Homes fiasco, the “alleged” Tampa project, and other questionable press releases over the years.

Well, here comes a call to action for all investors. Here is a list of questions that Home Solutions must answer for shareholders on their upcoming September 27th conference call.

  1. How did the company book the $12 million from RG America in 2nd quarter?  Why did they not disclose it?  Where did they put it on their balance sheet?
  2. Does the company plan to use the RGMI receivable in their borrowing base?
  3. How much related party work has been performed in the first 2 quarters of the year?
    Will they have to restate financials to account for the related party work? Will they disclose the margins they booked on this work?
  4. How much money has been paid to subsidiaries owned by related parties? How much in receivables is currently booked from related parties?
  5. Will the company book any other revenue from “other companies” in Q3 of this year?
  6. Does the company use any related party transactions in their borrowing base?
  7. Please break down the revenue for the coming quarter and for last quarter. Not just give numbers from operating sectors, but give details on the specific projects from which this revenue derives.
  8. Does the company currently have permission to borrow additional money on its line of credit? If so, how much?
Conclusion

While it took years and forensic accountants to find and prove the fraud in names like Enron and Adelphia, Home Solutions has made it plain in black and white. There is no debate whatsoever the work done in the above permits is for related parties. Just another chapter in what we believe is going to be a bankruptcy sooner than later.