Windswept Environmental Group, Inc

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Windswept Environmental Group, Inc.

100 Sweeneydale Avenue
Bay Shore, New York 11706
Telephone: (631) 434-1300
Toll Free: (800) 282-8701
Fax: (631) 435-4337
Web site: http//

Public Company
1986 as International BankCard Service Corp.
Employees: 101
Sales: $32.9 million (2002) Stock Exchanges: Over the Counter (OTC)
Ticker Symbol: WEGI
NAIC: 3344512 Automatic Environmental Control Manufacturing for Residential, Commercial, and Appliance Use

Windswept Environmental Group, Inc., operating out of Bay Shore, New York, is a holding company whose subsidiaries offer a wide range of environmental services, including emergency response and catastrophe restoration; site restoration; mold contamination remediation; commercial drying; wetlands restoration; asbestos abatement; fire and flood restoration; lead abatement; underground storage tank removal; spill remediation; oil spill response; chemical spill response; duct cleaning; microbial remediation; and environmental services. Approximately one-fifth of Windswept's revenues are derived from insurance customers.

1980s Origins

The origins of Windswept date back to 1986 and the incorporation of International BankCard Service Corporation, which marketed credit card and consumer services to financial institutions. Over the next few years the company also became involved in a number of divergent businesses, such as video advertising and gaming machine manufacturing. To reflect this diversity, the company changed its name to Integrated Resource Technologies (IRT) in July 1992. During the course of fiscal 1993 it divested itself of its financial services assets. In fiscal 1994 IRT completed several acquisitions to move into the environmental cleanup business, focusing initially on asbestos remediation, transportation, and disposal. In October 1993 it acquired a 51 percent stake in Dicar Asbestos, followed a month later by the purchase of Phoenix Dismantling, a hazardous waste transporter operating in Queens, New York. Then, in December 1993, IRT used stock to acquire Trade-Winds Environmental Restoration, Inc., the subsidiary that today provides the bulk of Windswept's revenues and brought with it the company's current chief executive, Michael O'Reilly.

O'Reilly studied marine biology in college in Puerto Rico while he worked for the family's charter boat operation. He also worked as a diver on marine salvage crews as well as on some marine cleanup jobs. He then moved his family to Long Island and launched Branch Services, Inc. to provide environmental cleanup services. In 1990 he went to work for North Shore Environmental Remediation, Inc., serving as a vice-president for the company, which was involved in environmental cleanup services and lead and asbestos removal. O'Reilly next established Trade-Winds Environmental Restoration in 1993 and was soon approached by IRT to sell the business in exchange for stock and a seat on the board. Trade-Winds proved to be a solid source of profits for IRT over the next two years. IRT then completed a number of other acquisitions between 1993 and 1995 as part of an effort to achieve vertical integration in the environmental industry. The company bought a controlling stake in Kimberlyn Trading Inc., a start-up commodity brokerage that dealt in environmental paints and crumb rubber. In early 1994 IRT bought Eastgate Removal Inc., and in 1995 acquired New York Testing Laboratories Inc., which permitted the company to perform in-house and third-party testing, of blood lead levels for lead-abatement workers. Despite these advances, the parent company, renamed Comprehensive Environmental Systems in 1995, posted overall losses, a situation that prevented O'Reilly's Trade-Winds from fully investing in its expansion, and also put it in arrears with vendors.

O'Reilly joined forces with other unhappy shareholders to buy out the contracts of senior management, spending more than $1 million drawn from operating funds. Although it may have simply appeared that the management team was incompetent, O'Reilly, and the world at large, would soon learn that, in fact, the officers were engaged in criminal activity and had essentially hijacked the corporation in order to bilk unsuspecting investors. Three weeks after O'Reilly appointed himself president of Comprehensive Environmental, members of previous management were indicted and charged with securities fraud, the result of an investigation that originally focused on the conduct of Dan Dorfman, a CNBC financial commentator and writer for Money magazine.

Roots of Stock Fraud Scheme Dating to 1993

Comprehensive's connection to a massive stock fraud scheme began in mid-1993 when Leo J. Mangan was named the company's chief operating officer. What investors did not know, and what should have been revealed in SEC filings, was that Mangan had a criminal record, including eight arrests, the earliest dating to 1972 and the most recent in 1991. Most of the arrests involved drug possession and distribution. Mangan's two colleagues, Grant Curtis and Timothy Masley, had their own questionable backgrounds. Curtis had been convicted of bank fraud in 1994 and, according to Business Week, Masley was a "former broker with North American Investment Corporation, a controversial Hartford brokerage firm that ceased operation in 1988 amid stock-manipulation investigations and a class action by investors. his record with the National Association of Securities Dealers shows disciplinary problems, including a suspension." According to the Wall Street Journal, the three men controlled Comprehensive, as well as Alter Sales Co., a Florida auto parts company, by issuing stock to "bogus companies around the world that were allegedly created by co-conspirators Ray Irangy and Pedro Gomez to hide the group's control of the two companies, the indictment says. The phony foreign companies purportedly rendered services in exchange for the stock, but the indictment says they never did."

In essence, the scheme called for a reverse split of the company's stock, which reduced the number of shares in the marketplace, thus raising its price. The group then issued millions of shares of stock to themselves for little or no consideration, some of which were used to procure favorable television coverage to pay brokers to tout the stock. "But investors didn't learn about the new shares until months later, when the moves showed up in the company's quarterly SEC reports," reported the Wall Street Journal. According to Business Week, "Mangan hired stock-promoter Donald Kessler, an acquaintance, who was reputed to have an ability to get plugs from his close friend Dan Dorfman. On April 18, [1995,] Dorfman gave a positive CNBC report on Alter. About that time, Kessler became CEO of Comprehensive."

Another member of the scheme that enveloped Comprehensive was a rogue SEC enforcement attorney named James W. Nearen. Business Week reported that, according to a federal indictment, in 1994, "Nearen began looking for work in the private sector. He approached a brokerage, which sources say was Chatfield Dean & Co., an Englewood (Colo.) penny-stock firm that then was the target of an SEC probe. To ingratiate himself, Nearen allegedly fraternized with the 'lead target' at the firm and disclosed nonpublic information to help the target firm defend the SEC action. That same year, Nearen became involved with the probe of Comprehensive Environmental." In 1995 he left the SEC to work with Comprehensive as "a special regulatory consultant." In February 1995 Comprehensive completed a 1-for-10 stock split. Then in June 1995 the little-known company caught the attention of the press when the price of its stock increased by 50 percent over the course of two trading sessions on heavy volume. The company issued no news to account for the sudden interest, although Mangan noted that "business is booming," and the chairman maintained that Comprehensive was "the most undervalued stock on the exchange." It was later determined that from 1994 until October 1996, when O'Reilly succeeded in taking control of the company, Comprehensive issued more than four million shares of stock to participants in the stock manipulation scheme. Ultimately, seven people pleaded guilty and were imprisoned for their role in the fraudulent activities surrounding the company, with the various charges including stock fraud, income tax evasion, insider trading, and money laundering. Dorfman was never charged with a crime.

O'Reilly may have succeeded in removing Comprehensive's management team, but he had no idea what had been going on in the shadows. O'Reilly told Long Island Business News, "I learned about the charges from the papers. One of the people indicted was a former enforcement agent for SEC. There was just no reason to suspect anything was off-color." With the company already strapped for cash because of the management contract buyouts, O'Reilly now faced a long-term effort to rebuild the company's tarnished reputation and answer charges leveled at the company. The price of its stock dropped precipitously, and because of the indictments of Mangen and Nearen the company was delisted by NASDAQ. Reduced to penny stock status, Comprehensive now traded over-the-counter. A name change to Windswept Environmental Group in 1997 was of limited help, and certainly did nothing to end three federal investigations into the company's fiscal operations during the Mangan-Kessler-Nearen era. It was not until June 1999 that the company reached a settlement, which did not include any fines or penalties.

Company Perspectives:

When a catastrophe of any kind occurs, whether it is fire, smoke, water, wind, oil/chemical spill, biological hazard, explosion or radiological release, Trade-Winds is committed to providing the highest quality, immediate response, remediation, and restoration services. Our goal is simple: To significantly reduce an owner's loss. Trade-Winds knows that it is essential to have a complete understanding of what the owner and the insurance company requirecomplete restoration of facilities and equipment to productivity with minimal down time. Our hands-on approach is what sets us apart.

New Management Team Following the 1996 Indictments

In the wake of the 1996 indictments, O'Reilly installed a new management team, oversaw the election of a new board of directors, instituted better internal control procedures, and established an audit committee. Operating under a cloud, however, proved difficult. Spending some $2 million in legal and accounting fees was burdensome enough, but he also had to deal with the loss of Windswept's $10 million bonding capacity, which prevented the company from bidding on major contracts. To guarantee $2 million in bonding O'Reilly had to put up his own assetsessentially everything he owned, including his house. In addition to money problems, he had to deal with what he called soft costs. According to a 1999 profile of Windswept in Crain's New York Business, "It is the soft costsall of the time he has had to spend away from operations defending himselfthat Mr. O'Reilly terms 'devastating.' He estimates that nearly half of his time and that of other key executives was spent not on getting the business done but in desperately trying to keep it from fleeing. 'We also had to take on lower-quality work and become more aggressive in our pricing in order to show the industry as a whole that we're not going to go out of business,' says Mr. O'Reilly."

Despite a lack of resources, Comprehensive was able to achieve some external growth through an acquisition in 1997. It paid $1.5 million in cash and stock for North Atlantic Laboratories, Inc., which served the New York metropolitan area offering certified environmental training, laboratory testing, and consulting services. But Comprehensive continued to struggle. Because working capital was limited, in the first quarter of 1998, O'Reilly had to lay off about 20 percent of his 100-person workforce. In September 1999 O'Reilly gained some financial cushion by selling a controlling interest in the company to Australia-based Spotless Plastics for $2.5 million. In addition, Spotless lent the company $2 million. As a result of this change in ownership, O'Reilly stepped down as chairman, replaced by Peter A. Wilson, a director of Spotless's parent company, Spotless Group Limited.

With this infusion of cash, O'Reilly was able to broaden Windswept's emergency response and disaster recovery services and invest in the equipment needed to perform wildlife rehabilitation and wetland restoration. According to Long Island Business News, "Using a portable lab, company technicians are now able to do wildlife blood work-ups in the field, to allow for better triage efforts. The company also specializes in the area known as hazing: preventively driving wildlife out of a distressed area."

A major development in 1998 that helped Windswept a great deal was the opening of a second operation, located in Brooklyn within the Bayside Fuel Oil terminal near the East River, at a cost less than the market rate. Not only did the site allow Windswept to better serve Bayside Fuel, a new client, but it also acted as an operational hub for oil spill cleanup projects. The metropolitan area included some 30 tank farms, which offered the potential for a lucrative revenue stream. The second office was especially useful because Windswept had recently signed four new oil spill response agreements with area companies: Castle Oil, Staten Island Ferry, Northrop Grumman Corporation, and Warex Terminal Corporation.

In 1998 Windswept recorded revenues of nearly $12 million and a net loss of more than $5.6 million, but the company appeared to be turning the corner. In 1999 revenues grew to nearly $14 million and the loss was trimmed to $1.3 million. Unfortunately, in 2000 Windswept suffered a setback. A drop in asbestos and construction/renovation projects had an adverse impact of the balance sheet, leading to a falloff in sales, which totaled less than $12.9 million in 2000 and a net loss of more than $2.25 million. On a positive note, the company saw an increase in emergency response and environmental remediation/compliance projects, a development that reinforced management's decision to de-emphasize asbestos abatement and to transform Windswept into a full-service emergency response provider. The success of this strategy was established in 2001, as the company saw revenues improve to $22 million and it turned a profit in excess of $1 million.

The tragic events of September 11, 2001, when terrorists leveled the twin towers of the World Trade Center, provided a major boost to Windswept's business. The company's largest project to this point had been a 600-worker toxic mold cleanup assignment. Now Windswept put together a team of 2,000 workers to clean a number of corporate offices and the New York City mayor's office. For fiscal 2002, which ended July 31, 2002, the company enjoyed a 34 percent increase in sales over the previous year, totaling $32.9 million. Net income grew to $3.5 million.

A sound business model, as well as the confluence of world events, allowed Windswept to overcome the shadow cast upon it in the mid-1990s, but perhaps the company's greatest asset was its CEO, O'Reilly. Chris Seniuk, a principal at a consulting firm that did business with Windswept, told Long Island Business News, "There are a lot of what are called shirt-and-tie companies who come in (to a waste spillage situation) and will give you a plan of action. Mike, he gets his fingernails dirty. He doesn't just give you a plan of action. He gets it done."

Key Dates:

International BankCard Service Corporation isfounded.
To reflect its divergent businesses, the company changes its name to Integrated Resource Technologies.
Company enters the environment cleanup business through several acquisitions, including Trade-Winds Environmental Restoration, Inc.
The company is renamed Comprehensive Environmental Systems.
Company is taken private through a managementled buyout.
The company's name is changed again, to Windswept Environmental Group.
Revenues improve as the company transforms itself into a full-service emergency response provider.
Sales total $32.9 million, a 34 percent increase over the previous year.

Principal Subsidiaries

Trade-Winds Environmental Restoration, Inc.; North Atlantic Laboratories Inc.

Principal Competitors

CET Environmental Services, Inc.; Clean Harbors, Inc.; Professional Service Industries, Inc.

Further Reading

McMorris, Francis A., "Ex-SEC Lawyer, 5 Others Are Indicted for Fraud, Following Dorfman Probe," Wall Street Journal, October 7, 1996, p. B12.

Schroeder, Michael, "Caveat Entrepreneur," Business Week, October 14, 1996, p. 114.

Shane, Alice, "Windswept Finds a Better Climate," Crain's New York Business, October 26, 1998, p. 17.

Strugatch, Warren, "Fraud Flurries Clear for Windswept," Long Island Business News, July 2, 1999, p. 1A.

Ed Dinger