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Post by fastwalker on Jun 20, 2005 7:51:21 GMT -5
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Post by fastwalker on Jun 20, 2005 8:14:47 GMT -5
I. INTRODUCTION
The common stock of CMKM Diamonds, Inc. (hereafter CMKM) has been registered under Section 12(g) of the Exchange Act since 1999. CMKM is a mining company with mineral claims in Ecuador and Canada as well as significant joint venture investments domestically. (Exh 54 at 2). The Commission instituted proceedings against CMKM on March 16, 2005 for the company’s failure to file periodic reports since 2002.
The undersigned counsel currently represents approximately 5,400 shareholders of CMKM. This brief is filed on behalf of this group of shareholders in the nature of an amicus curae brief. Although the arguments set out in this brief may generally benefit all CMKM shareholders, the undersigned counsel presents these comments only on behalf of those shareholders that have desired representation by the undersigned.
The shareholders of this company for the most part have a strong belief that CMKM is a viable company with significant assets. According to press releases, the company has been attempting to restore this company to proper reporting status since at least January of 2004 yet no financial reports have been filed by the company. The shareholders believe properly audited financial reports will be filed by the company if given sufficient time to make such filings.
The stock of CMKM has traded literally billions of shares daily beginning in 2004. (Exh 17) The Company has over a million acres of mineral claims and has invested in numerous joint ventures that purport to have significant value. CMKM blames the failure to timely file reports on poor record keeping and untimely departures of accountants, auditors and other key personnel.
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II. STATEMENT OF THE CASE
The Shareholders have reviewed the Statement Of The Case as offered by both the SEC and CMKM. Each party has offered a Statement Of The Case highlighting certain facts of the proceedings which are significant to the arguments and positions they take before this Court. Both versions are factual and properly reference the testimonial evidence introduced at the hearing and through stipulations of evidence. The Shareholders do not offer any additional comments as it does not appear there is significant dispute over the facts.
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III. SHAREHOLDERS ARGUMENT
A. The Shareholders Concede the Company Has Yet to File Required Financial Reports But Requests Additional Time For Compliance and Equitable Relief From This Court
The Shareholders do not agree the SEC has sustained its burden of proof that CMKM filed a fraudulent Form 15 when the company elected to change its reporting status. The SEC had the authority at the time of the filing to determine if such form was accurate and proper.
(4) Registration of any class of security pursuant to this subsection shall be terminated ninety days, or such shorter period as the Commission may determine, after the issuer files a certification with the Commission that the number of holders of record of such class of security is less than three hundred persons. The Commission shall after notice and opportunity for hearing deny termination of registration if it finds that the certification is untrue. Section 12(g) 15 U.S.C. 78l (g) (4)
The SEC did not take action at the time to verify the accuracy of the Form 15 statement filed by CMKM. An investigation into the Form 15 filing should have taken place in 2003, but such never occurred.
The SEC has conducted Form 15 filing investigations in the past. In 1987 a dispute arose among the famous Bacardi rum family owned company. The majority stockholders announced a 1,000 for 1 reverse split of the stock much to the chagrin of some minority shareholders of the Bacardi name. The company filed a Form 15 on the same day of the split and ceased reporting per 12(g) of the Exchange Act. The same minority stockholders (members of the Bacardi family) created 238 trusts and transferred shares into the trusts and claimed the company thus had more than 300 shareholders. The SEC ordered administrative proceedings one year later. Hearings took place over the next couple of years and in 1990 the administrative law judge issued an initial decision and found that there were more than 300 shareholders and the Form 15 should be denied. In the Matter of Bacardi Corporation, 1992 SEC LEXIS 1087 (May 8, 1992)
Don Stoecklein, as the newly hired counsel of CMKM, sought advice from the SEC on how to resolve the question of an erroneously filed Form 15 and he acted pursuant to the SEC’s instructions by filing the Form 15A. (Hearing Tr 321-323)
Since the filings of the company were not due until April 17, 2005, this OIP was premature. Instead of beginning the task of becoming reporting, immediate efforts were needed to respond to this proceeding. I ask the court to apply some equitable relief in this regard. This Court can take judicial knowledge of the time and money spent by CMKM and a like amount of man hours spent by Don Stoecklein preparing a defense to the SEC’s 12(j) proceeding. If the Court finds the OIP was premature, it would seem equitable to grant additional time to CMKM to prepare its filings.
B. Discussion of Steadman Factors in Opposition to Revoking of CMKM Registration
(1) CMKM Acts Are Not Egregious.
The Steadman case gives guidelines to this court for determining proper sanctions. Steadman v. SEC, 603 F.2d 1126(5th Cir. 1979), aff’d on other grounds, 450 U.S. 91 (1981) This author has not found a legal definition of the term egregious in the context of failing to file financial reports. Roget’s Thesaurus lists the following synonyms for the word egregious. Atrocious, deplorable, flagrant, heinous, monstrous, preposterous and scandalous. Roget’s New Millennium Thesaurus, First Edition by Lexico Publishing Group, LLC (2005). The shareholders find no acts of an egregious nature committed by CMKX. Evidence of fraud simply has not been established. All evidence suggests the company was not required to report but the company was making efforts to return to proper reporting status.
(2) CMKM Failure To Report Was Recurring.
Shareholders agree with the SEC that CMKM is seriously in violation of securities laws by not filing timely and accurate financial reports. Financial reports by CMKM should be filed and it is believed that extensive work is ongoing to bring this company into compliance. It appears to the shareholders that proper filing will eventually occur and the past failures to report are a result of many factors. Professional negligence may well be part of the cause of the company’s filing problems. The shareholders are hopeful that this Court will give some consideration to the company and allow for additional time to become current in its reports in light of the problems caused by various paid professionals. It is evident from the record that a host of accountants, financial officers, former management people and hired attorneys have created quite a nightmarish scene for any reputable auditor. We would ask this court to consider these factors while we admit reporting laws are currently being violated.
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Post by fastwalker on Jun 20, 2005 8:15:17 GMT -5
(3) Shareholders Do Not Believe Scienter Has Been Proven
The attorney for CMKM correctly sets out in his brief several examples which the Courts have recognized to establish scienter. The courts do not cite assumptions, inferences and possibilities when they are faced with a scienter determination. There have been no facts presented in this hearing which prove a culpable mental state such as an intent to deceive by CMKM. To most shareholders, it appears the company has spent nearly two million dollars in less than 2 years on accountants, lawyers, auditors and other professionals who were supposed to perform the acts that clearly have not been done. It is shocking to hear we can’t get proper accounting records gathered for an audit. Egads, doesn’t the company keep books and file corporate returns to the IRS? Why are we in a position to have our registration revoked for non filing when we hired an ex-SEC enforcement attorney a year ago for the sole purpose of making us compliant?
We pay $100,000 to an auditor that bails out the day before our hearing on deregistration. (Hearing Tr 100 ) His excuse for withdrawing is the company’s delay in getting the records to him and he is busy with other clients. Can one company be a victim of such dumb rotten luck? Or is there a strategy to this madness somewhere and the shareholders just happen to be an unwilling participant?
In the many exhibits proffered by the SEC, you will see David DeSormeau listed as our Chief Financial Officer for 2002, 2003 and 2004. The 14C filed by the company in January of 2003 confirmed Mr. Desormeau’s position with the company. (Exh 3) He was paid 1.5 million dollars to run the business end of our company. (Hearing Tr 347-348) A press release dated December 3, 2002 offered in evidence by the SEC promotes him as a financial systems consultant and a veteran of 32 years of financial accounting systems. (Exh 28) His system was supposed to feature coordination capabilities with the current auditor and seamless integration with the newly enacted Securities and Exchange Commission auditing practices.
The SEC is very much aware of Mr. DeSormeau. They obtained records from our now ex-auditor Mr. Neil Levine. The letter from Mr. Desormeau to Mr. Levine clearly indicates he was cooperating with the audit. The records obtained by the SEC revealed Mr. DeSormeau was providing stock transfer records as far back as 2002 to Mr. Levine while the auditor was awaiting our other company records. (Exh 26)
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A CPA-auditor named David Coffey is referenced in the 14C. Mr. Coffey resigns per a letter in the 14C. (Exh 3 at page 43) Mr. Desormeau was appointed to find an independent auditor to replace Mr. Coffey. (Exh 3 at page 9 & 10) Why did the SEC fail to depose Mr. DeSormeau or subpoena him and his records to the hearing? Why was Mr. Coffey not questioned or subpoenaed to the hearing?
An attorney regularly used by the company to issue letters of opinion to the transfer agent was Brian Dvorak. Mr. Dvorak, according to the 14C, was general counsel for CMKM and prepared corporate resolution documents and letters for the company. This 14C was filed a few months before the questioned Form 15. No one seems to know who prepared the Form 15. There is a subpoena for Mr. Dvorak, but there was no production of any materials by this witness. There was no deposition taken of Mr. Dvorak. Mr. Dvorak’s appearance was not requested by either party.
I am not making these comments to be critical of the SEC in the presentation of their case. Their case was very organized and very persuasively presented. I am compelled to point out missing evidence if it appears significant to any proof that may be required in this case to justify revocation. Does Mr. DeSormeau have the company’s needed financial records and what actions did he take towards retaining an auditor? Why was there no evidence from this key witness presented to the Court by either the Company or the SEC? When Mr. Desormeau responded to Neil Levine’s request for records, the response was on the letterhead of a company called Business Works. (Exh 26) Business Works received 63 billion shares of CMKM stock in 2003 and 2004 according to the master shareholders list. (Exh 14) By August of 2004 all stock belonging to Business Works had been sold or transferred out of this company.
(Exh 14) This highly paid chief financial officer seemed to be unimportant to these proceedings for some reason. Is the company’s objection to revocation the equivalent of Brer Rabbit telling Brer Fox, “Please, oh please, whatever you do, please don’t throw me in that briar patch!”.
The Steadman case asks the Court to consider scienter and proof of the same before considering appropriate sanctions. The SEC has the burden of proof to establish scienter on the part of CMKM. This burden of proof was not sustained by the SEC. (4) Evidence Clearly Proves CMKM Is Aware Of Its Wrongful Conduct.
There is no dispute that Don Stoecklein and his firm brought the defective Form 15 to the attention of the SEC. This was done without knowledge by Mr. Stoecklein that prior discussions were had between the SEC and Roger Glenn (the previous CMKM attorney). Mr. Stoecklein sought advice from an acquaintance at the SEC on how to deal with an erroneously filed Form 15. Mr. Kevin Oneil responded on behalf of the SEC to Mr. Stoecklein’s inquiry. (Hearing Tr. 322). There appears to be no dispute regarding these communications. Mr. Stoecklein followed the directions of Mr. Oneil and filed the Form 15A. A wise old farmer once said, “When you find yourself in a hole, the first thing you do is quit digging.” The actions of Urban Casavant in bringing in a new attorney and appointing a Co-Chairman of the Board are important on the issue of awareness. When one considers the immediate action of Mr. Stoecklein and all subsequent work being done by his firm and associated bookkeeping entities to remedy the wrongs, the evidence establishes adequate awareness of any wrongful conduct.
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Post by fastwalker on Jun 20, 2005 8:15:50 GMT -5
Common sense suggests that if work on the missing records is ongoing the company is aware of its wrongful conduct. Is the company making efforts to comply? What is the evidence of ongoing work?
A) We know the first three quarters of 2002 are already audited but have not yet been filed. See letter from David Coffey in Exh 6 at Disclosure page 21.
B) We know our previously hired auditor Neil Levin was getting cooperation from our Chief Financial Officer David Desormeau. See Exh 26. A very detailed 26 page spreadsheet documenting stock issuance matters for 2002 and 2003 was produced to Mr. Levine.
C) We know everyone is being paid by the company. $40,000 per month to Mr. Maheu, $1,500,000 to our Chief Financial Officer, $100,000 to our ex-auditor Neil Levine. There is testimony that Mr. Stoecklein and the employees of Opus Pointe are being paid.
D) New corporate governance requirements dictated by Sarbanes Oxley are being complied with such as the hiring of Mr. Maheu and the Stoecklein Law Group.
E) The SEC and Mr. Stoecklein have all procured the 500 page master shareholder report for audit purposes.
F) Neil Levine shows many hours of work since January of 2005 on this audit according to his billing statement. (Exh 25)
G) There is testimony by Suzanne Herring and Kristen Buck about the efforts which have already produced a partially complete general ledger for 2002, 2003 and 2004. (Exh 58) (Tr 167 and 314) This exhibit refers to backup documents and lists checks and their recipients and numbers. The memo section refers to payees and the names of recipients of wire transfers. It is therefore safe to assume that the people working on these records have adequate bank records. Thus it appears the company’s books are auditable.
There is certainly some evidence that CMKM is aware of the error of its ways. We ask the Court to protect the current investors and allow the filing process to continue.
(5) CMKM’s Violations Are Not Likely To Reoccur.
The shareholders are convinced that Urban Casavant is aware of past violations. The shareholders remain confident that Don Stoecklein and Robert Maheu will be on hand to complete the filings and return CMKM to current filing status.
The company is spending serious money on audits and auditors. Testimony was offered at the hearing by two of the individuals doing the audit preparation work under Mr. Stoecklein’s direction. (Suzanne Herring at Hearing Tr 167 and Kristen Buck at Hearing Tr 314)
I have reviewed every 12(j) proceeding since 1995. In the administrative law decisions I have read, I cannot find one case where a non reporting company has expended sums even close to the kind of money spent by CMKM to become compliant. The involvement of the Stoecklein law group and Opus Pointe clearly demonstrates the company’s commitment to become compliant.
C. The Public Interest Is Not Best Served by Revoking the Registration of CMKM Diamonds
(1) Discussion On Revoking Registration Vs. Suspension
The SEC tells this court in its brief that Steadman factors should be resolved in favor of revoking the registration of CMKM. The Fifth Circuit while explaining its reason in the Steadman case made the comment:
“We subscribe to the common-sense notion that the greater the sanction the Commission decides to impose, the greater is its burden of justification. Where, as here, the most potent weapon in the Commission’s arsenal of flexible enforcement powers, Ernst & Ernst v. Hochfelder, 425 U.S. 185, 195, 96 S.Ct. 1375, 1382, 47 L.Ed. 2d 668 (1976), is used, the Commission has an obligation to explain why a less drastic remedy would not suffice”.
You don’t always have to throw out the baby with the bath water. I have heard it said as a side bar comment and certainly revealed by implication that the concern in this case is not for the current shareholders, but for future shareholders. I do not find such language in the mission statement of the SEC nor do I find such language set out statutorily. Most cases talk of protecting the investing public. The investing public in this case happens to be thousands of individuals who have already purchased stock in this company as well as prospective purchasers.
The severity of a sanction depends on the facts of each case and the value of the sanction in preventing a recurrence. Berko v. SEC, 316 F.2d 137, 141-42 (2d Cir. 1963) This court should take into account the large number of shareholders and the very real possibility that reports will be filed in short order. Judge Kelly in the Neurotech case referred to a “post hearing telephone conference” to monitor the status of the company’s progress in auditing the overdue reports. In the Matter of Neurotech Development Corp., 2005 SEC Lexis 447 (March 1, 2005) There is dicta in the e-Smart case which suggests the Commission can issue an order requiring the issuer to comply with certain reporting requirements within a specified time. e-Smart, supra, n. 17. The shareholders would ask this Court to conduct such monitoring if the Court is so inclined or consider making specific orders compelling the production of all records needed for filing. These sanctions provide more investor protection than the registration revocation sought by the SEC.
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Post by fastwalker on Jun 20, 2005 8:16:44 GMT -5
(2) Naked Short Selling And Its Relevance To This Proceeding
I was informed by this Court at the evidentiary hearing that this Court’s policy is to accept post trial exhibits until it enters its final ruling in this matter. (Hearing Tr 22) This Court ruled that evidence of naked short selling would not be allowed at the hearing and the Court granted the SEC’s Motion in Limine. This writer recognizes that naked short selling is not a part of the pleadings in this case. However, at the beginning of the public hearing of this matter, the Court referred to the e-Smart case. In the Matter of e-Smart Technologies, Inc., 2004 SEC LEXIS 2361 (Oct. 12, 2004).
Judge McEwen held in her conclusions of law that “Generally, arguments and factual matters falling outside the scope of the order instituting proceedings are considered only for limited purposes, such as background”. Int’l S’holders Servs. Corp., 46 S.E.C. 378, 386 n.19 (1976) The Court held that conduct outside the scope of the order instituting proceedings may also be relevant for purposes of assessing sanctions. Robert Bruce Lohmann, 80 SEC Docket 1790, 1798 n.20 (June 26, 2003); J. Stephen Stout, 73 SEC Docket 1441, 1467 n. 64 (Oct. 4, 2000); Joseph J. Barbato, 53 S.E.C. 1259, 1282 (1999).
I ask this court to consider evidence of the naked short selling of this stock for the purpose of assessing sanctions. The chaos created in the market place by naked short selling is an obvious incentive for the SEC to hope CMKX never survives.
The DTCC with the supervision of the SEC has allowed a “Stock Borrow” program to permit short selling of a stock without ever owning the stock. Proponents of the present system claim the need for liquidity in the market validates the need for such borrowing program. The law allows for such borrowing but mandates that valid stock be obtained from the market place and delivered to the seller. Such deliveries (usually electronic entries) are mandated by law. The SEC acknowledged the problems caused by certain entities abusing this short selling technique and enacted Regulation SHO effective January 5, 2005. A daily list of “fails to deliver” such stock is generated by the DTCC and sent to the SEC once such deliveries have reached a threshold level of abuse. The “borrowing” of stock by the millions, and in this case by the billions, with no attempts to obtain valid shares (covering), has caused an evil in the market place that needs removing.
These shares are counterfeited because they have never been authorized by the company and have never been issued by the company, yet they remain as electronic entries in brokerage and clearing firms. Investors like many of the shareholders in this company have taken their hard earned funds to the brokerage desk and receive at the end of a month their statement from the broker indicating their ownership of such phantom shares. It is not uncommon for a brokerage house to observe an open position (failed delivery of a stock) and demand that someone cover if it remains open for too long. As the short sellers’ conspiracy with others of like mind continues, these short positions are replaced by other short positions and the cycle continues. The short sellers dream of bankruptcy and business failure by the targeted companies. When the business fails, the shorts reap their profits.
An exhibit (hereafter referred to as SH Exhibit 1)which the court will receive as a post trial exhibit will prove to this court that billions of shares of this company stock have been sold by third parties and such shares are above and beyond the number of shares issued and outstanding by the company. A plan began several months ago to ask shareholders to send their monthly statements from their brokers to this office so that we can generate proof of shares being sold that do not exist. SH Exhibit 1 is an accumulation of over 10,500 accounts documented in the monthly statements of CMKM shareholders.
SH Exhibit 1 is an accumulation of 10,500 accounts which total 455 billion shares. CMKM has provided us with a NOBO/OBO list which is recognized in the industry as an accurate list of street name share owners. We have also obtained a list of current certificates (hereafter certs) of ownerships which have been issued by the transfer agent. The current cert list from the transfer agent confirms that stock certificates issued by the company total 320,350,228, 958. The number of shares reported by the NOBO/OBO list tell us that 67,009,739,337 shares are being held in brokerage accounts of Objecting Beneficial Owners. There are 6,993 registered OBO accounts in this stock. This total of 837,359,968,295 exceeds the reported issued and outstanding 703 billion shares of the company by approximately 134,000,000,000. This alone is a staggering number of shares which have been sold by various third parties but do not exist except as electronic entries.
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As we worked to compile these numbers we saw an increasing number of summaries that were not being reported on the NOBO/OBO list. We soon learned that our NOBO list does not include stocks which have been sold through most overseas brokers. We have also learned that most Canadian brokerage houses have shares that are not represented in the OBO list. This stock has traded in 64 countries around the world. When you add the shares which are being represented by electronic entries in foreign countries our total of outstanding shares will approach one trillion shares.
The NOBO list tells us there are 52,676 accounts in various brokerage institutions that report to the NOBO service. Our figures are a tally of only 10,500 of those accounts at the brokerage houses. The true tally of shares in the market place will not be known until we add the remaining 42,000 accounts owned by CMKM shareholders that have not yet responded to our request. We ask this Court to consider that revocation of this stock may have more to do with the naked shorted shares than a concern over late filings.
This may explain what I perceive to be a rush to judgment. I have never seen a case with so much at stake where there has never been one word of negotiating a settlement. At least on the surface, the only problem here is the filing of some financial reports and obtaining the time necessary to prepare such reports. Why did the SEC choose the shortest possible time period to obtain a ruling from this court? Rule 360 of the SEC Rules of Practice provides for a decision in 12(j) cases to be rendered in either a 120, 210 or 300 day time frame “at the discretion of the Commission”. Why not extend this matter into the 210 or 300 day provisions instead of the lightning fast 120 day program we are under at this time so that filing might protect this large group of shareholders? Why was this proceeding filed prematurely (at least by our interpretation)? Can the Court assist us in this regard? Why does the SEC resist the company’s request to view the “open fails to deliver” which are given to them daily from the SEC? If the naked short position in this stock has any bearing whatsoever on this rush to judgment, I implore this court to slow down the judgment train.
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Post by fastwalker on Jun 20, 2005 8:17:11 GMT -5
IV. CONCLUSION This Court should consider all of these reasons as it ponders the sanctions to be placed on the company for non reporting. As I review the SEC brief and the CMKM brief I see very few references to the real victims of deregistration in this security. There is a noticeable lack of discussion about the affects of deregistration on the investing public. In this regard, these shareholders look to this Court for protection. Respectfully submitted, ______________________________ Bill Frizzell Attorney for John Martin, and the CMKX Owners Group 305 S. Broadway, Suite 302 Tyler, Texas 75702 (903) 595-1921 Phone (903) 595-4383 Fax State Bar No. 07484500   |
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