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Former Client Sues Jenkens Over Reverse-Merger Work
Brenda Sapino Jeffreys
Texas Lawyer
June 15, 2007
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A former client of Jenkens & Gilchrist sued the Dallas-based firm in federal court in New York on June 8 alleging malpractice and breach of contract in connection with the firm's work on a reverse merger in 2004.
The former client alleges in Tactica International Inc., et al. v Jenkens & Gilchrist that Jenkens' negligence on the merger caused its stock price to drop and ultimately led to financial difficulties that forced it to file for bankruptcy.
The complaint was filed in the U.S. District Court for the Southern District of New York by Tactica International, a New York distributor of personal care products; the Tactica Creditor Trust; Joseph E. Myers, the creditor trustee; and IGIA Inc., a New York company related to Tactica.
The plaintiffs seek a minimum of $10 million on the malpractice cause of action and a minimum of $10 million for breach of contract from Jenkens.
But Jenkens, once a 600-lawyer firm, closed its doors on March 31, five days after its leaders signed a nonprosecution cooperation agreement with the U.S. Attorney's Office for the Southern District of New York to resolve alleged criminal tax violations linked to the firm's former Chicago-based tax-shelter practice.
John Gilliam, a retired Jenkens partner who is working on the firm's wind down, and Roger Hayse, a former executive at Jenkens who is president of the firm for the wind down, did not return telephone calls seeking comment. Patrick Mitchell, former chairman of Jenkens, says he has no knowledge of Tactica v. Jenkens and he refers questions to Gilliam or Hayse. Mitchell is now managing partner of the Dallas office of Hunton & Williams.
As alleged in the complaint, Tactica was a private company that sold household and personal products using the IGIA name through direct marketing and through sales to retailers. Tactica alleges that pursuant to advice from Jenkens, it agreed to a deal calling for it to merge into Diva Entertainment Inc., a shell company that once operated as a modeling agency in South Florida. After the reverse merger was completed, Diva changed its name to IGIA and Tactica became a wholly owned subsidiary and the entity through which IGIA conducts its operations.
The plaintiffs allege that after the deal closed, investors unrelated to the Tactica group who owned 100 shares of Class A preferred stock in IGIA converted the shares into 4.6 million shares of common stock in IGIA and sold them on the open market. The plaintiffs allege that the investors' action caused the IGIA stock price to fall and the company lost more than 90 percent of its capitalization in a short period, which in turn made it difficult for the company to raise capital.
Ultimately, the plaintiffs allege, the warehouse where Tactica stored its products refused to continue offering services on credit terms, asserted a warehouse lien and refused to release the merchandise, and IGIA subsidiary Tactica filed a Chapter 11 in October 2004.
"Unfortunately the results were catastrophic for the company," says attorney Richard Morris Mortner, of the Mortner Law Office in New York City who represents the plaintiffs.
The plaintiffs allege Jenkens advised Tactica to accept the deal that Jenkens negotiated.
The defendant failed to advise Tactica that the terms of the transaction made the transaction "unconscionable and exposed Tactica to the overwhelming likelihood that it would become the victim of a 'pump and dump' scheme," the plaintiffs allege in the complaint.
The plaintiffs allege that during negotiations on the deal, the president and CFO of Tactica were fearful that the outside investors who owned the 100 shares of Class A preferred stock would convert them into common stock and sell them on the open market, but Jenkens assured the corporate executives that would not occur.
According to the complaint, the company's common stock was 9 cents a share on June 3, 2004, before the reverse merger, and it closed at $4.25 a share on June 18, 2004, the day the deal was announced.
"As soon as the reverse merger closed, however, the price of the stock began to decline steadily. Upon information and belief, the decline in price was caused by the liquidation of Class A [preferred stock] holdings in the public markets," the plaintiffs allege, noting that the stock price declined to 45 cents a share by early September 2004.
S.E.C. Ends Decades-Old Price Limits on Short Selling
By FLOYD NORRIS
June 14, 2007
The Securities and Exchange Commission voted yesterday to end price restrictions on short selling, meaning that investors seeking to sell a share that they do not own will no longer be barred from doing so because the price of the stock is falling.
The 5-to-0 vote, ending a rule that had been in place since 1938, when short sellers were blamed by some critics for having caused the 1929 market crash and the Depression that followed, came as the commission also voted to make it harder to engage in naked shorting, the practice of selling shares that have not been purchased or borrowed.
Christopher Cox, the S.E.C. chairman, called naked short selling “a fraud that the commission is bound to prevent and to punish.”
When a naked short sale is made, it leads to a failure to deliver the stock when the trade settles three business days later. There are many other reasons for fails, but such sales are believed to be the primary one for many stocks.
The S.E.C. adopted a rule, known as Regulation SHO, in 2004 that was intended to reduce naked short selling by requiring the publication each day of a list of securities with heavy fails. Brokers are required to cure the fails within 13 days. But fails existing before the stock went on the list were grandfathered.
Yesterday’s vote will remove the grandfather provision, and the commission said it was also considering removing an exemption from the rule for options market makers who need to sell short to hedge an options position.
The new rule will take effect 60 days after it is published in the Federal Register, and traders will have 35 days after that to clear up fails that had been grandfathered.
The commission says naked short selling has been reduced by Regulation SHO, but some stocks have remained on the Regulation SHO list for many months. The leader in that regard is Overstock.com, which has appeared for 538 consecutive trading days. It has also been the leader in condemning such sales and has sued many Wall Street firms for facilitating such trades.
The commission does not regularly release the exact number of fails in stocks on the list, although figures can be obtained on a delayed basis through the Freedom of Information Act.
James A. Brigagliano, an associate director of the commission’s division of market regulation, said that the S.E.C. would release such numbers on a quarterly basis, with a delay, as soon as details were worked out.
The ban on selling short while a share price was declining, called the tick test since it barred selling unless the last change in price was an uptick, had come to seem irrelevant. A test that repealed the rule for many stocks seemed to make little difference in their trading, and that part of the rule change was adopted with little controversy.
The commission said that it was proposing for comment a rule to eliminate the exemption to Regulation SHO for options market makers, but it would also ask for comments on possible ways to narrow the exemption.
CMKX $300 worth of FTD's
CMKX $300 worth of FTD's
[charti114.photobucket.com/albums/n273/rics1997/ftd.jpg
Bud Burrell's felon investor:
Key Developers
Terence P. Ramsden
The PETS System was originally devised by Mr. Ramsden and until 23 May 2005 he was a director of PTML
Mr. Ramsden pleaded guilty to offences of dishonesty relating to a failure to disclose assets to his trustee in an individual bankruptcy. The offences, which did not involve shares or securities in any company public or private, were committed between April 1992 and December 1993 and Mr. Ramsden was sentenced on 6 May 1998. The conviction and prison sentence will be over ten years old on 6 May 2008 and Mr. Ramsden will therefore be subject to the Rehabilitation of Offenders Act 1974.
Mr. Ramsden owns a 9.4% shareholding in the Company. His suitability to be a controlling shareholder of listed companies in the United States had been subject to review by the Securities and Exchange Commission and no objections were raised to this nor to his being in control of that company's European operations.
Mr. Ramsden holds no controlling influence over the Company which is run independently of him.
Private Trading Systems Plc Lists on PLUS Markets, Admitted for Trading
Tuesday June 12, 2:15 pm ET
SCOTTSDALE, Ariz.--(BUSINESS WIRE)--Private Trading Systems, Inc. (OTC:PVTM - News) today announced its UK-based subsidiary Private Trading Systems Plc has been admitted for listing on PLUS Markets. Private Trading Systems Plc is the parent of The Private Treaty Market Limited, a UK company that has designed, developed and will operate a trading system known as the Private Equity Trading System ("PETS").
ADVERTISEMENT
Private Trading Systems Plc's ("PTS" or the "Company") entire ordinary share capital of 426,280,354 ordinary shares of nominal value GBP 0.001 pence each has been admitted for trading on PLUS Markets as of Thursday June 14, 2007 at which time a stock symbol will be assigned. The shares are initially priced at 5 pence per share ("Admission Price") and the Company anticipates that it will have an initial market capitalization of approximately GBP 21,314,017.
The Company has raised GBP 1.25 million by way of a private placement with an existing institutional shareholder and will be used to further develop the Company.
PTS has offices in London and Geneva and a representative office in New York.
Atlantic Law LLP is acting as the Company's PLUS Advisor.
The PETS Trading System can be used for trading securities, instruments or any financial asset capable of being converted into electronic form. Offering straight through processing and instantaneous settlement, PETS closely combines the exchange and settlement functions and links with custodial functions through regulated banks.
PETS will enable the Company to offer world-wide, real-time, instantaneous trading and settlement in any financial instrument 21 hours per day, allowing time for maintenance on the system. Following detailed investigation and to the best of their knowledge, the directors are not aware of any other system that offers the complete, seamless, real-time integration of the trading process.
The business strategy is to develop strategic partnerships, initially with international banks, trust companies, brokers and exchanges. Other key users are issuers of all forms of securities, including private equities, public equity, convertible and straight bonds, asset-backed securities, and insurance products.
PETS will bring together buyers and sellers on a global scale providing them with the ability to complete direct, real-time transactions. By eliminating delays, PETS will significantly reduce costs to traders and trading activity on PETS will be difficult to manipulate as it is processed in real time. Customers will be able to open a PETS account online and fund their accounts through banks or other financial institutions.
The Company plans to focus on operating the PETS system, finding suitable niche financial markets where the performance of PETS can offer significant commercial advantage to its customers, widening the number of different types of tradable instruments that are available on PETS, and widening the number of settlement processes and custodian operations connected to the PETS system.
The PETS system will be operated through the Company's subsidiaries. PTS will seek to have a substantial interest in the long-term growth of the trading volumes across all of the distributed trading platforms that utilize the PETS system. A formal patent application on the PETS system was filed on 31 August 2006, which is now patent pending.
PETS is designed to be modular so that any part of the system can be hosted anywhere worldwide. This enables PTS to take advantage of different regulatory regimes for different parts of the system, and meet different commercial needs. PTS must obtain regulatory approval in each jurisdiction in which the PETS system is to operate. PTS will initially focus on operating the PETS system in suitable European financial markets. PTML's subsidiary PETS (Geneve) SA intends to apply for approval from the Swiss Federal Banking Commission for operating an exchange in 2007. The first major contract for PETS is to trade specialized insurance products, and this should become active during 2007.
The listing will help facilitate the roll out of PETS internationally. Listing on PLUS will enable the Company to grow initially in Europe and in the US. It will help to raise the Company's profile in the market to potential clients and investors, and allow the Company to raise funds in the future.
History and Corporate Structure
PTS was incorporated in England and Wales on 16 November 2006, as a Public Limited Company and its purpose is to act as the holding company of Private Treaty Market Ltd ("PTML"). It has not traded to date and its purpose is to act as the holding company of PTML. PTML was incorporated in 2003, to develop the proto-type of the PETS system. PTML has a wholly owned subsidiary in Switzerland, PETS (Geneve) SA.
The primary assets of Private Trading Systems, Inc ("PVTD") are the 100% holding of PTML and the intellectual property rights which were acquired by the Company in exchange for all of the issued share capital in the Company on admission to PLUS ("Admission").
The existing business of PTML will continue unchanged, under the control of the Company.
Reasons for the Admission to PLUS
The Directors believe that the benefits of being listed on PLUS include raising the Company's profile; and the ability to raise additional funds in the future.
Beneficial Ownership of Directors and Substantial Shareholders
The table below sets out the number of shares of ordinary shares owned of record and beneficially by the Directors based upon the 426,280,354 shares of the Company's ordinary shares that were issued and outstanding at the date of Admission.
Unless otherwise indicated each person or entity has sole voting and investment power, or shares such powers with his or her spouse, with respect to the shares shown as beneficially owned.
Name Number of Shares Beneficially Owned Shareholding (%)
Robert J Stevens 9,649,000 2.08
The Company has granted the following options, which are exercisable at the Admission Price.
Name Number of Options Exercise Period from the date
granted (years)
Atlantic Law Llp 3,000,000 3
Mr. Burrell 23,333,333 7
Mr. Smith 15,000,000 7
Mr. Stevens 5,000,000 7
Mr. Goldsmith 3,000,000 7
Mr. Liker 2,000,000 7
Mr. Bandy 4,000,000 7
TOTAL 55,333,333
The following shareholders each have a beneficial interest in more than 3% of the issued share capital of the Company:
Name Number of Shares Beneficially Owned
Shareholding (%)
Brent Anderson (1) 17,465,000 3.8
Chart Investments Limited -
beneficiary is
Christopher Potts 16,796,610 3.6
Mercurius Capital
Partners Ltd 31,154,410 6.7
(1) Includes 935,000 shares held in the name of BA Associates, in which Mr. Anderson has a beneficial interest.
Industry Overview
The overall market continues to grow with over 7,000,000 individual securities available for electronic trading worldwide. New classes of securities emerge every year, one example being the rise in esoteric asset-backed securities over the last few years. New services such as Arca Ex® or Instinet® cover different parts of the trading lifecycle. However, no one service currently available offers all the necessary components of the trading lifecycle in a seamless, integrated fashion.
The financial markets have seen considerable change in recent years arising from technological development, principally in electronic trading. This has enabled markets to operate at a much faster rate than was previously feasible and has led to an expectation of continued improvement in the speed of transactions.
While a number of participants in the financial markets operate trading systems, none offers an integrated solution such as the PETS and PTS is in a strong position to withstand competition and regulatory changes.
Board of Directors
Walter K Goldsmith FCA - Chairman
Mr. Goldsmith joined the board of the Company in November 2006 as Chairman. He is a Chartered Accountant and has extensive experience as a director and Chairman of companies, both public and private, and currently serves on the board of a number of companies in industries as diverse as banking, motor and leisure and property. From 1979-1984 he was Director General of the Institute of Directors. He is a published author notably of "The Winning Streak" series of books on management.
C. Austin Burrell BS - Non-Executive Director
Mr. Burrell joined Private Trading Systems, Inc. in December 2004 as Chairman of the Board, President, Chief Executive Officer, Corporate Secretary, and Treasurer. He is now a consultant to the Company on marketing exchange facilities to US companies. Prior to joining the Company, Mr. Burrell worked as a consultant for Quantum Matrix, Inc. from July 2000 to December 2004. From December 1999 to July 2000, he served as President, Chief Operating Officer, and a director of What's For Free Technologies, Inc. Mr. Burrell also serves as a director of Windergy, Inc.
Lindsay M. Smith BA ACA - Chief Executive Officer and Director
Mr. Smith was appointed Chief Financial Officer and a Director of Private Trading Systems Inc. in November 2005. He joined PTML in May 2005 as Chief Executive Officer and also serves on the board of directors of PTML. Mr. Smith is a U.K. qualified Chartered Accountant. From July 2004 to March 2005, he served as a director of Caplay Plc, a U.K. listed company. Prior to that, Mr. Smith had been a director of a number of venture capital start up and recovery companies having previously spent 11 years with Henry Ansbacher & Co Limited, merchant bankers, both in the U.K. and the U.S. Mr. Smith is also a non-executive director of DeMatco Inc. and Globalink International Plc.
Robert J. Stevens - Non-Executive Director
Mr. Stevens has been a Director since November 2005. He has served on the board of directors of PTML since 2003. Prior to joining PTML as a director, he co-founded Betting Markets Ltd. in 2000. Mr. Stevens also serves on the boards of directors of Griffin Investments Ltd. and DeMatco Inc.
Past and Present Directorships
Appendix 1
Director Current Directorships
Lindsay Smith Purewater Holdings Plc
Globalink Plc
DeMatco Inc
PVTD
PTML
C. Austin Burrell PVTD
Robert Stevens PTML
Griffin Leisure Ltd
Griffin Holdings U.K Ltd
Griffin Bloodstock Ltd
DeMatco Inc.
DeMatco Ltd
Walter Goldsmith Asite Plc
British Food and Farming Ltd
NRC Group Plc
Beagle Holdings Ltd
Bank Leumi (UK) Plc
The Fitness Connexion
(Hartlepool) Ltd
Visonic Ltd
KBH Transport Media Ltd
Jewish Music Institute
Estates and Management Ltd
Songs of Freedom Ltd
Elmerin Ltd
Mercury Group Plc
Director Previous Directorships
Lindsay Smith Pureflo Ltd
Roof Revivers Ltd
Strat-tel.com Ltd
Caplay Plc
Kingston Capital
Partners Ltd
Movies on the Move Ltd
Baden Associates Ltd
Baden Consultants Ltd
C Austin Burrell Vocal Communications, Inc
Windergy, Inc
Robert Stevens Consortium Investments Ltd
Walter Goldsmith Jumbo International Plc
Guiton Group Ltd
Royal Stafford Tableware Ltd
Procurecard Ltd
Union Group Ltd
SCS Upholstery Plc
Fitness First Plc
Key Developers
Terence P. Ramsden
The PETS System was originally devised by Mr. Ramsden and until 23 May 2005 he was a director of PTML
Mr. Ramsden pleaded guilty to offences of dishonesty relating to a failure to disclose assets to his trustee in an individual bankruptcy. The offences, which did not involve shares or securities in any company public or private, were committed between April 1992 and December 1993 and Mr. Ramsden was sentenced on 6 May 1998. The conviction and prison sentence will be over ten years old on 6 May 2008 and Mr. Ramsden will therefore be subject to the Rehabilitation of Offenders Act 1974.
Mr. Ramsden owns a 9.4% shareholding in the Company. His suitability to be a controlling shareholder of listed companies in the United States had been subject to review by the Securities and Exchange Commission and no objections were raised to this nor to his being in control of that company's European operations.
Mr. Ramsden holds no controlling influence over the Company which is run independently of him.
Risk Factors
A new system
1. The PETS System has not yet been commercially tested in the market, and as the Company expands the system will have to cope with increasing numbers of transactions while servicing customers. In order to minimize this risk PTML are refining the system and running tests to ensure the system remains sufficiently robust to handle such expansion.
Regulatory Approval in Jurisdictions
2. The area of business in which PTML operates is highly regulated and requires regulatory approval in each of the jurisdictions in which it operates. It is possible that the Company will not be able to obtain regulatory approval in a timely manner or at all in certain jurisdictions where it intends to operate. In order to counter this risk PTML is working to ensure that the PETS System and the internal control systems operated within it are of the highest standards demanded by the regulators.
Changes in Legislation
3. Changes in legislation may require changes to the PETS System which the Company may not be able to accomplish in a short period of time or at all, which would damage the Company. In order to ensure that this risk is reduced PTML constantly reviews the legislation being introduced or proposed which may impact our business and adjust plans accordingly.
Competition
4. Although the Directors consider that direct competition is limited, they anticipate that as the PETS System becomes more widely known, there may be competitive pressure from large and entrenched companies that are vendors of trading systems or order book matching systems. Many of theses companies have greater financial resources and may attempt to hinder the implementation and expansion of the PETS System in order to protect their market share.
Contact:
For Private Trading Systems Plc, Scottsdale
Emerson Gerard Associates
Jerry Jennings, 561-881-7318
mediareply@emersongerard.com
--------------------------------------------------------------------------------
Source: Private Trading Systems Plc
Langley Park IT Plc - EGM Statement
RNS Number:2662X
Langley Park Investment Trust PLC
25 May 2007
HEADLINE - PROPOSALS REGARDING VOLUNTARY WINDING-UP
LANGLEY PARK INVESTMENT TRUST PLC ('Langley' or the 'Company')
Proposals for the winding up of the Company
Introduction
Further to the Company's announcement on 28 March 2007, the Board has taken the
decision today to put to Shareholders proposals for the Voluntary Liquidation of
the Company.
This announcement (and the circular to be sent to Shareholders) sets out the
terms and conditions of the proposed Voluntary Liquidation of the Company and
the subsequent appointment of the Liquidators.
This announcement sets out the background to and the reasons for each of the
Proposals and why your Board believes convening the EGM to consider the
Proposals is required at this time.
In its announcement on 28 March 2007 the Company stated that it had received
notice from Weiss Capital LLC suggesting that the Board should put forward
Proposals for the liquidation of the Company, including negotiating a management
termination fee with the Investment Manager.
Following receipt of this notice, another Shareholder indicated that they would
support the suggestions made by Weiss. The percentage holdings of the
Shareholders that have indicated to the Board, or their advisers, their support
for these proposals is approximately 44% of the total Shareholders.
On the basis that shareholders representing a substantial percentage of the
Company's share capital would like the Board to convene an EGM to consider the
Proposals made by Weiss, the Board has resolved that it would be only right and
proper to convene an EGM to allow Shareholders to consider, and if thought fit
pass resolutions, to put into effect the proposals suggested by, inter alia,
Weiss Capital LLC as set out in the Notice at the end of this Document.
Background to and summary of the Proposals
The 2006 Report and Accounts of the Company, approved by the Board on 23 March
2007, outlined the substantial gain realised in the year with over £7 million
received from the sale of the investment in NutraCea, Inc. Following the
completion of this sale the Company took the decision to re-invest the proceeds
of this sale into appropriate smaller-cap companies. At the same time a new
Investment Manager was appointed and, as outlined in the Company's Accounts for
the year ended 31 December 2006, two new investments were made with a combined
value of £1,014,611. Notwithstanding these investments, the Board was made
aware that Shareholders representing a substantial percentage of the Company's
share capital wanted to see the Company realise its investments at the earliest
opportunity and return cash to Shareholders in the fastest and most cost
effective way.
The Board had not anticipated receiving notice that it should consider putting
the Company into voluntary liquidation, however after due and careful
consideration of these proposals the Board has resolved to put the Proposals to
Shareholders and has also resolved to recommend that Shareholders vote in favour
of the Proposals on the basis that the recent performance of certain investments
in the Company's portfolio (as referred to in the preceeding paragraph) taken
with the large amount of cash that is the Portfolio's composition (as mentioned
later in this letter), would allow a substantial return of cash to Shareholders
in the short and medium term if the Proposals are approved at the EGM.
Under the Proposals the Company would be wound up by means of a members'
voluntary liquidation in accordance with its Articles. In accordance with
section 86 of the Insolvency Act 1986 the Proposals require the consent of
Shareholders passing a resolution in general meeting. Provided all of the
Resolutions are passed, the winding up of the Company would become effective
immediately upon the passing of the first resolution put to the EGM. Further
details of the EGM are contained below and in the Notice, which is set out at
the end of this Document.
The Voluntary Liquidation is conditional upon the passing of the Resolutions set
out in the Notice of Extraordinary General Meeting at the end of this Document.
A voluntary liquidation can only take place if the Company is solvent and the
Directors confirm that they have made a full investigation of the Company's
assets and liabilities and sworn a declaration of solvency.
In a Voluntary Liquidation the powers of the Directors cease and the Liquidators
assume responsibility for the Company's affairs. Liquidators deal with the
realisation of assets, the agreement and settling of liabilities and the
distribution of the Company's surplus assets to the Shareholders, as and when
funds permit.
The Board will be proposing that Gareth Rutt Morris and Simon Peter Bower of RSM
Robson Rhodes LLP be appointed as Liquidators of the Company with immediate
effect upon the passing of the Resolutions.
After payment of all known liabilities, the Proposed Liquidators have indicated
that an amount sufficient to meet all the unknown liabilities of the Company
will be required to be retained by the Company, likely to be not less than
£100,000, however the final amount cannot as yet be determined.
The Proposed Liquidators have also indicated that they anticipate being in a
position to distribute part of the Company's assets arising from the liquidation
to Shareholders on or around 20 July 2007, assuming that the Voluntary
Liquidation is approved at the EGM on 20 June 2007. The remainder of the
Company's assets, if any, would be distributed after paying the costs of the
Company's liquidation and settling all other liabilities of the Company.
The precise timing of any further distribution would depend upon the Liquidators
establishing that the Company has no outstanding liabilities.
The Board has been notified that the Liquidators would hope to make a first
interim distribution within one month of their appointment, being on or around
20 July 2007. The amount of this distribution will be equal to the Company's
cash resources at that time less all known liabilities (including any
liquidation costs remaining unpaid) and the retention for unknown liabilities.
Based on the information currently available, the Board estimates this first
distribution to be approximately £3,134,500.
The total distribution would be equal to the net asset value less legal and
advisory costs and the Termination Fee subject to any realised investment
values. The unaudited net asset value at close of business on 18 May 2007 (being
the latest date of calculation of the net asset value) was £14,947,226, and if
this net asset value was used as the base position, this would give an estimated
distribution per Ordinary Share of approximately 24p, with an estimated first
distribution per Ordinary Share of approximately 5p.
Given the final distribution will be calculated at a future date after the
initial distribution proposed at on or around 20 July 2007, it is difficult at
this stage to estimate the final position. Actual payments to Shareholders will
depend, inter alia, on movements in the Company's net assets from 18 May 2007
and the date that such assets are realised and on whether any unforeseen
liabilities arise as well as the actual realised values of the investment
portfolio. Most of the portfolio represent smaller-cap companies based in the
USA.
One of the largest liabilities will be a termination payment to Garrison, as a
result of the early termination of the Investment Management Agreement in the
event that the Resolutions are passed.
The liability of the Company under this agreement is a payment to Garrison of a
termination fee equivalent to an amount calculated by the aggregate fees paid or
payable to Garrison under the Investment Management Agreement in the year
preceeding such termination multiplied by the number of years from the date of
such termination to the fourth anniversary of the Listing of the Company, being
7 October 2004. As at 30 April 2007, being the date of the last set of
unaudited management account, the Termination Fee calculated in accordance with
the terms of the Investment Management Agreement is £358,077.
If the Company should be wound up, under the terms of its Articles the holders
of the Redeemable Preference Shares shall be entitled to, prior and in
preference to any distribution of any of the assets of the Company to holders of
Ordinary Shares, an amount equal to the par value of the Redeemable Preference
Shares. There are currently 500,000 of partly paid Redeemable Preference Shares
of 10p each in issue, which are partly paid and have a value of £12,500.
In the event that the Resolutions to be proposed at the EGM are not passed, then
the winding up of the Company will not proceed. In those circumstances, the
Board has resolved to continue managing the Company as an investment trust on
the same basis as it is currently managed.
Composition of the Portfolio
As at 18 May 2007 (the last date of calculation of the Portfolio prior to the
publication of this Document) approximately 26% of the Company's Portfolio is
held in cash and 74% is held in equities.
Legal and Advisory Costs
The legal and advisory costs in connection with the Proposals are expected to
amount to approximately £110,450 (inclusive of VAT).
The Directors
The payment of directors' fees to the Directors by the Company will cease when
the Liquidators are appointed and the directors shall be entitled to payment for
loss of office in accordance with their contractual terms of office as follows:
Robin Bolton £2,500
Louis Cooper £2,500 plus VAT
Colin John Lumley £8,750 plus VAT
Desmond Charles Anthony Magrath £3,750
Christopher Harwood Bernard Mills £2,500 plus VAT
TOTAL £20,000 (plus VAT where applicable)
Arrangements with the Manager and the Company Secretary
Assuming the Proposals proceed, both Garrison and the Company Secretary's
appointments respectively, will be terminated with effect from the date that the
Company goes into Voluntary Liquidation. The Company will be liable to pay to
Garrison a termination fee in respect of the termination of the Investment
Management Agreement, as referred to above in this letter.
There is no compensation for loss of office in respect of the Company Secretary.
Significant Changes
The only significant changes since the release of the 2006 Report and Accounts
has been: (a) the continued loss of value of the investment held in Consolidated
Energy and Technology Group, Inc, which between 1 January 2007 and 18 May 2007
has seen a fall of over £1,900,000 (further details are set out in Part 2
Section 9); and (b) the appreciation in the value of the investment held in
Commercial Group Properties Plc, which between 21 February and 18 May 2007, saw
an increase in value of over £680,000.
The unaudited net asset position at the close of business on 18 May 2007 (being
the latest date of calculation of the net asset value) was £14,947,226 and
accordingly the unaudited net asset value per Ordinary Share as was reported as
24p.
Taxation
The information below, which is intended as a general guide and which relates
only to United Kingdom taxation, is applicable only to Shareholders who are
resident or ordinarily resident in the United Kingdom for tax purposes or who
are carrying on a trade in the United Kingdom through a branch or agency (or in
the case of a corporate Shareholder, a permanent establishment) with which their
investment is connected and who hold their Shares beneficially as an investment;
it does not apply to certain classes of persons such as securities dealers. This
information is based on existing United Kingdom law and HM Revenue and Customs
practice and is subject to subsequent changes therein and does not constitute
legal or tax advice.
Any Shareholders who are in doubt as to their tax position or who are not
resident in the United Kingdom or who are subject to taxation in any
jurisdiction other than the United Kingdom should consult their own independent
professional advisers immediately.
Depending on their individual circumstances, Shareholders who are resident, or
in the case of individuals, ordinarily resident, in the United Kingdom for
taxation purposes may realise an allowable loss where the consideration received
by such Shareholders in respect of their shareholding in the Company is less
than the base cost of their Shares. However, it is possible that a gain may
arise where the proceeds received in respect of the shareholding are in excess
of the base cost of that shareholding.
In the situation where a Shareholder has already made a successful claim to HM
Revenue and Customs that his shareholding was of negligible value, the
Shareholder will have been deemed to have sold and immediately reacquired the
shareholding for a consideration equal to the value specified in that claim.
Therefore, under these circumstances a Shareholder may be subject to capital
gains tax (or in the case of a corporate Shareholder, corporation tax on
chargeable gains) in respect of any gain arising, being the excess of
consideration received in respect of his shareholding over the value specified
in the claim.
For Shareholders who are individuals, taper relief, and for Shareholders within
the charge to United Kingdom corporation tax, indexation allowance, may reduce a
chargeable gain but will not create or increase an allowable loss. The
availability and rate of taper relief will depend on the period of ownership of
the Shares and whether the Shares are held as business assets or non-business
assets. Any Shareholder who is in doubt as to their tax position or requires
more detailed information than the general outline above should consult his
independent professional adviser immediately.
No stamp duty or stamp duty reserve tax should be payable by the Company in
connection with the Proposals.
Dealings, Settlement and Cancellation of the Listings
Application will be made to the UK Listing Authority for the suspension of
dealings in the Ordinary Shares of the Company from 7.30 am on 20 June 2007.
The share register of the Company will be closed and Ordinary Shares will be
disabled from CREST at 5.00 pm on 19 June 2007. The last day for dealings in
Ordinary Shares on the Official List for normal account settlement will
accordingly be 13 June 2007. After 13 June 2007, dealings should be for cash
settlement only and will be registered in the normal way if the transfer,
accompanied by documents of title, is received by the Registrar by 5.00 pm on 19
June 2007. Transfers received after that time will be returned to the persons
lodging them. If the Proposals are approved at the EGM the original holder will
receive any proceeds to be distributed as a result of the implementation of the
Proposals.
Application will be made to the UK Listing Authority to cancel the Listing of
the Ordinary Shares from the Official List which is expected to take effect from
the commencement of business on the next Business Day following the passing of
the Resolutions, expected to be with effect from 8.00am on 21 June 2007.
Overseas Shareholders
Persons who are citizens or nationals of, or resident in, jurisdictions outside
the United Kingdom or custodians, nominees or trustees for citizens, nationals
or residents of jurisdictions outside the United Kingdom may be prohibited, or
affected, by the laws of the relevant overseas jurisdiction in respect of their
full participation in the Proposals.
Overseas Shareholders should inform themselves about, and observe, any
applicable or legal regulatory requirements. If you are in any doubt about your
position, you should consult your professional adviser in the relevant
territory.
Notice of Extraordinary General Meeting
The Proposals require the approval of Shareholders. Accordingly, there is set
out at the end of this Document the Notice convening the Extraordinary General
Meeting to be held at 10.30am on 20 June 2007. At the EGM, a special resolution
will be proposed, inter alia, for the members' voluntary winding up of the
Company, to appoint the Proposed Liquidators and fix their remuneration. An
extraordinary resolution will be proposed to authorise the Liquidators to divide
and distribute among the members of the Company all or part of the assets of the
Company in specie or in kind in such proportions as among the members of the
Company as they may decide and to sanction the use of powers set out in Part I
of Schedule 4 of the Insolvency Act.
The special resolution for the members' voluntary liquidation is conditional on
the passing of Resolutions 2.1, 2.2, 2.3, 2.4, 3.1 and 3.2 (as set out in the
Notice), which are the resolutions to appoint the Liquidator and, inter alia, to
allow the Liquidator to carry out his duties.
An ordinary resolution requires the approval of a majority of the votes cast and
a special and an extraordinary resolution require the approval of a majority of
three quarters of the votes cast to be passed.
Action to be taken
Shareholders will find enclosed a Form of Proxy for use in connection with the
Extraordinary General Meeting.
Whether or not you intend to be present at the Extraordinary General Meeting you
are requested to complete and return the Form of Proxy sent to you as soon as
possible and, in any event, to be received by Share Registrars not later than
10.30 am on 13 June 2007 in respect of the Extraordinary General Meeting.
The completion and return of the Form of Proxy will not preclude Shareholders
from attending the Extraordinary General Meeting should they wish to do so.
The return of a completed form of proxy will not prevent a Shareholder from
attending the Extraordinary General Meeting and voting in person if the
Shareholder wishes to do so.
Recommendation
The Board considers the Proposals set out in this Document to be fair and
reasonable and for the reasons stated in this letter consider the Proposals to
be in the best interests of Shareholders as a whole.
Accordingly the Board recommends that Shareholders vote in favour of the
Resolutions to be proposed at the Extraordinary General Meeting.
The Board will be send out a copy of the circular to Shareholders by post today.
For further information please contact:
Colin Lumley
Administrative Director
0207 569 0044
25 May 2007
END
This information is provided by RNS
The company news service from the London Stock Exchange
END
Puppy, you ever see this one before?
DaVinci was also vital in introducing Medsonix to Stoecklein Law Group, a law firm specializing in federal securities matters, which will assist Medsonix in structuring follow-on rounds of financing with an ultimate goal of going public by the end of 2005. "Our practice is solely focused on assisting small to mid-cap companies through the going public process. With DaVinci's investment, Medsonix is on a fast track towards completing its goal," stated Don Stoecklein, principal of the firm.
DaVinci-Franklin Fund I, Led by Chairman Robert A. Maheu, Announces Initial Seed Round Equity Investment in Medsonix, Inc
LAS VEGAS -- Investment Drives Growth Of Innovative Therapeutic Technology Company; Provides Insight Into Future of Non-Invasive Pain Management Therapy; Reinforces VC Commitment to Las Vegas
DaVinci-Franklin Fund I, LLC. ("DaVinci") today announced completion of an initial seed round equity investment in Medsonix, Inc., a Nevada Corporation, ("Medsonix"). Proceeds will be used to fund Medsonix's growth plans and initial marketing programs.
Medsonix, headquartered in Las Vegas, has developed a state of the art technology for non-invasive, therapeutic pain relief method titled the Medsonix Therapy System. This patented technology utilizes a low frequency sound wave generated by an electro-acoustical transducer, also referred as the Cassone transducer, which emits an acoustic energy field on the "whole body" simultaneously. This technology is not to be confused with ultrasound therapies or procedures. This technology introduces a range of patented frequencies that Medsonix controls through an innovative computer and power source system. A therapy session consists of clients simply sitting comfortably in a chair for 25 minutes in their street clothes, listening to music, reading a book or simply relaxing.
Robert Maheu, chairman of DaVinci, stated, "There is nothing more important in life than family and health. Medsonix's system is amazing and provides remarkable results for numerous aches and pains and circulatory problems."
The Medsonix Therapy System, developed by Alphonse Cassone, has received a patent as a medical method from the U.S. Patent Office, is registered as a Class I medical device by the FDA and has completed two successful University studies on its unique treatment for various diseases. A copy of the published study is available at www.medsonix.com.
"We are extremely honored to be affiliated with such a high-quality firm," said Alphonse Cassone, Chief Executive Officer of Medsonix. "Mr. Maheu's illustrious background combined with DaVinci's significant experience in working with start-up and early stage growth companies really set them apart from other venture capital firms."
Medsonix has signed Television Host and former news anchor John Daly (www.johndaly.tv) as the company's spokesperson. "John is the innovative, credible person that can help us promote this cutting edge technology," says Mr. Cassone. "We are fortunate to have John as he is well-known and respected not only here in the Las Vegas Valley, but also around the country."
"I'm astonished at what Medsonix and the technology has done for people. Even in my personal experience, I had a knot in my back from golf and working out and within a few hours of my Medsonix treatment, it was totally gone," Daly says. "We can help those with minor aches and pains and circulatory problems with this patented therapeutic procedure."
According to a nationwide government survey, 36 percent of U.S. adults aged 18 years and over use some form of complementary and alternative medicine (CAM). CAM is defined as a group of diverse medical and health care systems, practices, and products that are not presently considered to be part of conventional medicine. Integrative medicine, as defined by NCCAM, combines mainstream medical therapies and CAM therapies for which there is some high-quality scientific evidence of safety and effectiveness.
"Our philosophy is to market the newly patented Medsonix Therapy System in the Complementary/Alternative Therapy industries. The technology will be available through corporately owned Medsonix facilities and Franchise and Stand-alone units. Each product shall be priced to appeal to both the Complementary and Alternative markets as well as the managed-care industry," stated Bruce Benson, vice president of marketing for Medsonix.
"We are extremely excited about our investment in Medsonix due to its extraordinary growth prospects, health benefits of its technology and its commitment to providing non-invasive therapy at reasonable prices to the masses," said Anthony DeMint, CEO and president of DaVinci. "Our decision to fund Medsonix was relatively easy, their growth potential is immeasurable, their technology has a wide and adaptable market focus and its first facility is already in operation. Further, as a Las Vegas-based company we are continuing our commitment towards fostering small business growth and development in the Las Vegas area."
DaVinci was also vital in introducing Medsonix to Stoecklein Law Group, a law firm specializing in federal securities matters, which will assist Medsonix in structuring follow-on rounds of financing with an ultimate goal of going public by the end of 2005. "Our practice is solely focused on assisting small to mid-cap companies through the going public process. With DaVinci's investment, Medsonix is on a fast track towards completing its goal," stated Don Stoecklein, principal of the firm.
About DaVinci-Franklin Fund I, LLC (DaVinci)
DaVinci is a private equity firm providing capital to start-up and development stage companies with strong growth potential, reliable management teams and the desire to be a publicly traded company. DaVinci's primary goal is to make investments in a broad range of growth industries, without a specific emphasis on any one sector. Based in Las Vegas, DaVinci focuses on structuring its portfolio companies for a public exit within 12-18 months and fostering small business growth in the Las Vegas market.
About Robert A. Maheu
Maheu is probably most famous for his role with Howard R. Hughes. Maheu served as the alter ego to Hughes. Maheu negotiated for the purchase of many Nevada properties on behalf of Hughes and the Hughes Tool Co. As a consequence, seven hotel/casinos, one airport and millions of dollars of raw land were acquired. In each case, Maheu became the chief operating officer. Additionally, he was responsible for the acquisition of an airline. He also represented the Hughes' interests before local, county, state and national regulatory bodies for many years. At an earlier time in his life, Maheu served as supervisor of the administrative section of the New York City Federal Bureau of Investigation Office and special assistant to Assistant Director E.J. Connelly, who was in charge of major cases for the entire Federal Bureau of Investigation.
About Medsonix
Currently, Medsonix has one location in Las Vegas, located at 2626 South Rainbow Blvd. The company is looking to open additional locations across the country using its unique patented therapeutic process to help increase circulation and reduce pain.
About Stoecklein Law Group
The Stoecklein Law Group (SLG), of San Diego, California, is dedicated to providing corporate and securities legal services to emerging growth companies. SLG specializes in assisting companies going public, mergers and acquisitions, corporate structuring, initial public offerings, direct public offerings and maintaining reporting requirements with appropriate governing agencies.
About John Daly
Daly is internationally known as the host of Real TV, the first all video magazine show, distributed by Paramount Domestic Television, and now airing daily on Spike TV. Before Real TV, Daly was the lead anchor and managing editor at KTNV-TV 13 from 1990 to 1996. He has lived in Las Vegas since 1990.
Bud Burrell on CMKX payout. Could bankrupt the whole financial system!!
http://www.heavensembrace.org/debibudcfrn.mp3
From May 04, 2006
Also discusses USPX with DEBI
"Outside the courthouse, passers-by stopped to gawk at news cameras. One of them was Moses Baltazar, who was attempting to clear up his own traffic ticket. He said he was no fan of Hilton, noting she once tipped him only a dollar when he worked as a valet, even though he helped keep paparazzi away from her."
Crying Paris Hilton Returned to LA Court
By LINDA DEUTSCH 06.08.07, 3:03 PM ET
A crying Paris Hilton was taken to court in a police car Friday for a hearing on her early release from jail, heightening the struggle between the judge who sentenced Hilton and the sheriff who turned her loose.
Hilton appeared to be in handcuffs when she was placed into a black-and-white patrol car, which sped away from her Hollywood Hills home with lights flashing. Paparazzi sprinted in pursuit and news helicopters pursued overhead, broadcasting live TV coverage.
The police car arrived at the courthouse and disappeared into the underground parking lot. Inside, Superior Court Judge Michael T. Sauer was to listen to the city attorney's complaint that Sheriff Lee Baca did not have the right to reassign Hilton to electronically monitored home detention after only three days in jail for violating probation in a reckless driving case.
Outside the courthouse, passers-by stopped to gawk at news cameras. One of them was Moses Baltazar, who was attempting to clear up his own traffic ticket. He said he was no fan of Hilton, noting she once tipped him only a dollar when he worked as a valet, even though he helped keep paparazzi away from her.
He thought she should be returned to jail. "Driving like that, you have to behave. If you're rich, you have money, you have to respect yourself."
The frenzy began early Thursday when sheriff's officials released Hilton because of an undisclosed medical condition and sent her home under house arrest. She had been in jail since late Sunday.
Hilton was fitted with an electronic monitoring ankle bracelet and was expected to finish her 45-day sentence for a reckless driving probation violation at her four-bedroom, three-bath home.
The decision by Sheriff Lee Baca to move Hilton chafed prosecutors and Sauer, who spelled out during sentencing that Hilton was not allowed to serve house detention.
Late Thursday, Sauer issued the order for Hilton to return to court after the city attorney filed a petition demanding that Hilton be returned to jail and to show cause why Baca shouldn't be held in contempt of court.
Baca does not have to be in court, and it was unclear who would represent the Sheriff's Department.
At first Hilton was going to be allowed to take part in the hearing by telephone, but that decision was soon reversed.
The home detention also was met with outrage from the sheriff's deputies union, members of the Los Angeles County Board of Supervisors, civil rights leaders, defense attorneys and others.
"What transpired here is outrageous," county Supervisor Don Knabe told The Associated Press, adding he received more than 400 angry e-mails and hundreds more phone calls from around the country.
Hilton's return home "gives the impression of ... celebrity justice being handed out," he said.
Baca dismissed the criticism, saying the decision was made based on medical advice.
"It isn't wise to keep a person in jail with her problem over an extended period of time and let the problem get worse," Baca told the Los Angeles Times on Thursday.
"My message to those who don't like celebrities is that punishing celebrities more than the average American is not justice," Baca said.
California Attorney General Jerry Brown criticized the Sheriff's Department for letting Hilton out of jail, saying he believed she should serve out her sentence.
"It does hold up the system to ridicule when the powerful and the famous get special treatment," Brown told The Associated Press before testifying at a congressional hearing in Washington.
"I'm sure there's a lot of people who've seen their family members go to jail and have various ailments, physical and psychological, that didn't get them released," he said. "I'd say it's time for a course correction."
Hilton's path to jail began Sept. 7, when she failed a sobriety test after police saw her weaving down a street in her Mercedes-Benz on what she said was a late-night run to a hamburger stand.
She pleaded no contest to reckless driving and was sentenced to 36 months' probation, alcohol education and $1,500 in fines.
In the months that followed she was stopped twice by officers who discovered her driving on a suspended license. The second stop landed her in Sauer's courtroom, where he sentenced her to jail.
Associated Press Writer Erica Werner in Washington contributed to the report.
Mother of all diluters
CMKM Diamonds Inc., Saskatchewan native Urban Casavant's now revoked pink sheet dog of dogs, offers another fine example of a provincial regulator's limited reach.
Mr. Casavant, whose experience includes jobs as a Prince George prison guard and operator of a small Saskatchewan U-Haul outlet, cut his promotional teeth in the 1990s with junior mining companies listed on the former Alberta Stock Exchange (ASE) and VSE.
Some of Mr. Casavant's early promotional exploits did not pass unnoticed by Canadian regulators, though they were remarkably quiet with respect to any public claims about those promotions.
In 1996, for example, he was either pushed or jumped from Petro Plus Inc. after an 11-month stint as president of the junior mining company.
During his tenure, Petro Plus issued a number of fluffy news releases including chatter about "visible gold" in drill samples from one of the company's properties.
At the time of Mr. Casavant's surprising and abrupt departure on Oct. 25, 1996, Petro Plus was halted by the ASE, though the regulator did not make any specific public claims about the company's touting president.
Trading did not resume until almost a month later, after Petro Plus hammered out a deal that included severing all ties to Mr. Casavant and certain members of his family.
The Petro Plus affair marked the end of Mr. Casavant's involvement as an officer or director of a public company for several years, but a number of subsequent Saskatchewan lawsuits against him, along with members of his family and several business associates, indicate that he continued to hone his promotional skills with other junior companies.
With the lawsuits piling up, Mr. Casavant assembled a package of Saskatchewan moose pasture and headed to Las Vegas, Nev., where he folded the mineral rights deals into a public shell that he took over in November of 2002.
In the early days, CMKM was little more than a garden-variety mining promotion churning out some rather laughable news releases and hiring tout sheets to spread the word of its purportedly immense Saskatchewan diamond mining potential.
As the promotion ramped up, however, Mr. Casavant took pink sheet paper hanging to an entirely new level, peeling off hundreds of billions of shares that were issued to himself, family members, friends and business associates while attracting a large, gullible, cult-like following to sponge up the massive dilution.
By early 2004, CMKM was regularly notching daily trading volumes of billions of subpenny shares and frequently exceeding the daily share volumes of all the major exchanges in the world combined.
On Oct. 26, 2004, the Saskatchewan Financial Services Commission (SFSC), perhaps alerted in part by the fact that the SEC was sniffing around some of CMKM's shady deals, issued a cease trade order against the company, Mr. Casavant and two associated individuals.
Many of CMKM's cultish followers brushed the Saskatchewan regulatory action off as insignificant, if not entirely irrelevant.
The respondents, including Mr. Casavant who was then living in a $3.5-million house in Las Vegas, did not even bother to request a hearing regarding the cease trade order, which is still outstanding.
Apart from trapping many Saskatchewan investors and possibly effectively removing many billions of shares from circulation in the process, arguably a boon to the paper-hanging promoters including Mr. Casavant, the SFSC cease trade order had little, if any, effect on CMKM's pink sheet trading.
In fact, naive investors continued to sop up billions of CMKM shares on a daily basis.
On Dec. 9, 2004, just over six weeks after the SFSC issued its cease trade order, CMKM recorded its highest trading volume ever as a staggering 36.9 billion shares changed hands.
In spite of the fact that Stockwatch had been reporting since at least Oct. 1, 2004, that CMKM had issued almost 780 billion shares, the company's starry-eyed Internet followers, many of whom believed that Mr. Casavant had bought up all the outstanding shares, clung to the fantasy that only naked short selling could account for the whopping trading volumes.
On Dec. 18, 2004, CMKM announced that it had "repurchased" 75 billion shares that had been issued to an associated company six months earlier.
On March 3, 2005, the SEC finally stepped in and suspended trading in CMKM.
The following day, CMKM belatedly got around to disclosing the massive dilution that Stockwatch had been reporting for months, acknowledging that the company had more than 703.5 billion shares issued and outstanding.
The SEC followed up with an administrative proceeding against CMKM that resulted in a hearing where Mr. Casavant asserted his Fifth Amendment privilege and refused to answer any questions.
After Judge Brenda Murray issued a ruling against CMKM on July 12, 2005, the company managed to drag things out until Oct. 28, 2005, when the SEC entered a final order revoking the pink sheet woofer's stock registration.
That finally marked the end of CMKM's trading, though not the end of the story, which is still unfolding.
Earlier this year, Mr. Casavant handed control of the company off to a previous cultish follower and former Las Vegas houseguest, Kevin West.
Apparently Mr. West, who previously served up estimates of CMKM's value ranging from $64-billion to $1-trillion and proclaimed that Mr. Casavant was a godly man doing God's work in redistributing the wealth of the world, has experienced at least a partial epiphany.
Mr. West is now directing a CMKM lawsuit against Mr. Casavant and other key players for allegedly looting at least $200-million from the company coffers.
Mr. Casavant has scurried back to Saskatchewan where he is reportedly busy working on another promotion and dodging service of the Nevada lawsuit.
Given that Mr. West, after getting possession of some boxes of company documents, discovered an unanswered Wells Notice from the SEC, frequently the harbinger of an imminent civil action by the regulator, Mr. Casavant may soon be dodging another process server.
In any event, returning to the OSC's temporary orders and notice of hearing against Select American and its coterie of pink sheet companies and associated players, it does not seem likely that the Ontario regulator's actions will have much effect on those companies' mighty pink sheet trading.
Moreover, given the different jurisdictions and the apparent complexity of some of the issues involving the respondents, it is far from assured that the OSC investigation will shed much public light on the whole mess.
At some point, however, the SEC might step in with its own regulatory action.
In a following article, Stockwatch will pick up its review of the respondent pink sheet companies in the OSC proceeding.
Comments regarding this article may be sent to lwebb@stockwatch.com.
(More information regarding the Ontario Securities Commission action against Select American Transfer Co. and associated respondents is available in a Stockwatch article published on May 31, 2007.)
Stockwatch > News > News Item
============================================================
OSC targets Toronto transfer agent's pinky players
2007-06-07 14:32 ET - Street Wire
by Lee M. Webb
The Ontario Securities Commission (OSC) has extended its temporary cease trade orders against Toronto-based transfer agent Select American Transfer Co., six associated individuals and 10 companies allegedly linked to corporate identity theft traded on the largely unregulated U.S. pink sheets.
The temporary orders issued against the respondents on May 18 and May 22 have been extended until the OSC reconvenes its hearing into the corporate identity theft allegations on June 25.
In addition to the transfer agent Select American, the companies named in the OSC proceeding include The Bighub.Com Inc., Advanced Growing Systems Inc., LeaseSmart Inc., Cambridge Resources Corp., NutriOne Corp., International Energy Ltd., Universal Seismic Associates Inc., Pocketop Corp., Asia Telecom Ltd. and Pharm Control Ltd.
Among the individual respondents are four alleged principals or former principals of Select American including Amy Giles, Nathan Rogers, David Watson and Jason Wong.
The Ontario regulator also identifies Kervin Findlay and John Sparrow as participants in the allegedly fraudulent scheme.
According to the OSC allegations, the corporate identities of the pink sheet companies were hijacked with the help of Select American, its principals, former principals and others including Mr. Findlay and Mr. Sparrow.
The regulator claims that, as part of the scheme, Select American, "acting as the transfer agent to these companies, may have issued false certificates for trading in securities of these issuers."
The OSC further alleges that it appears that Select American and the individual respondents may have breached Ontario securities law and engaged in "acts, practices or courses of conduct" that "resulted in or contributed to a misleading appearance of trading activity in, or an artificial price for, the securities."
After issuing a notice of hearing on May 22 in connection with its two temporary cease trade orders, the OSC convened a hearing on June 1.
According to the OSC, nobody appeared for BigHub, Advanced Growing Systems, LeaseSmart, Cambridge Resources, NutriOne, International Energy, Universal Seismic, Pocketop or Asia Telecom.
Submissions of some sort were reportedly made on behalf of Mr. Wong, NutriOne and Select American and a lawyer did appear for Pharm Control. All of those respondents consented to an extension of the temporary orders until June 25.
As noted in the first article in this series, because of Canada's patchwork of provincial securities regulators and because those regulators do not have any jurisdiction over the U.S. pink sheets trading venue, the OSC's temporary orders only have effect in Ontario.
For the most part, trading in the respondent companies continues unabated on the mighty pinks.
Before returning to a review of the pink sheet companies identified in the OSC notice of hearing, Stockwatch will provide some background regarding Canadian regulatory actions involving companies that trade in the U.S.
For the most part, those actions have little effect beyond the provincial boundaries of the regulatory agency that institutes them.
Not in my backyard
There is nothing new about Canadian regulators tending to their own backyards and issuing orders that effectively create "stuckholders" within provincial jurisdictions while trading, often including transactions by principals and promoters of the targeted issuers, continues on the scandal-ridden pink sheets and equally lively OTC Bulletin Board.
For example, Stockwatch readers may recall the case of Medical Services International Inc., a Canadian-based pink sheet promotion headed by Alberta resident Robert Talbot.
Medical Services, which has been touting rapid test kits for HIV and a number of other diseases for years, was listed as a reporting issuer in Ontario. Indeed, the company actually used the fact that it was filing financial statements with the OSC as part of its promotional pitch.
Alas, at least with respect to any promotional mileage, Medical Services became delinquent with its dubious financial reporting and the OSC issued a cease trade order against the company on Nov. 25, 2003.
The 2003 OSC order against Medical Services is still in effect, though it certainly has not hindered trading by Mr. Talbot or anyone else outside of Ontario.
Medical Services continues to change hands on the mighty pinks, though it has been deep into the subpenny range for several years.
With 9.8 million shares changing hands, the stock closed at one-100th of a U.S. cent on June 6.
Of course Ontario is not the only provincial jurisdiction that issues cease trade orders that have little, if any, noticeable impact on OTC-BB and pink sheet trading.
Beautiful British Columbia
While British Columbia's provincial motto is "splendor without diminishment," the province's vehicle licence plates are emblazoned with "Beautiful British Columbia."
Over the years, many stock promoters, perhaps drawn at least as much by the perceived beauty of the provincial regulatory regime as any undiminished splendor or natural beauty, have made B.C., particularly Vancouver, their home.
The British Columbia Securities Commission (BCSC), after chest-thumping about its role in cleaning up the local market formerly sullied by promotions on the former Vancouver Stock Exchange (VSE) and its successors, the Canadian Venture Exchange and then the TSX Venture Exchange, has made tackling smelly OTC-BB and pink sheet promotions one of its key priorities.
That, at least, has been the BCSC's claim dating back a number of years in annual reports and service plans in which the regulator identifies abusive junior market practices as the first of three key risks affecting the market.
By the B.C. regulator's count, more than 400 OTC-BB listings representing approximately 10 per cent of the companies quoted on that trading venue have connections to B.C.
"Securities regulators and exchanges have made great progress in cleaning up the Canadian venture capital markets," the B.C. regulator boasted in a service plan published in 2005. "Yet, a small number of individuals in British Columbia have continued carrying out abusive stock promotions through markets outside Canada.
"They move from market to market to avoid regulatory scrutiny or because they have been banned from particular markets.
"Any misconduct originating from British Columbia threatens our junior markets and the reputation of British Columbia as a good place to invest and raise capital. So we must pursue misconduct based here regardless of what market it occurs on or where the victims live.
"The US Over-The-Counter Bulletin Board (OTCBB) has become the market of choice for much of this abusive activity.
"Therefore, we need to strengthen detection of OTCBB activity connected to British Columbia and look for opportunities to break the chain of abusive promotion of junior companies."
Much the same rhetoric appeared in service plans published in 2006 and 2007.
Interestingly, the website for the Canadian Securities Administrators, which hosts a database of cease trade orders issued by nine Canadian regulators, identifies B.C. as the only jurisdiction where, in some cases, residents can sell cease-traded shares into foreign markets.
Meanwhile, the Vancouver Sun's award-winning financial journalist David Baines has been vigorously prodding the B.C. regulator to get on with the job of rooting out Vancouver-spawned OTC-BB and pink sheet promotions that continue to bring disrepute to the province's capital markets.
When the BCSC issued its annual report for the year ending March 31, 2006, it reported that it expected to see tangible results from its efforts to curb abusive stock promotions within the following year.
To this point, the BCSC's expected "tangible results" might charitably be characterized as modest, though the regulator has been acknowledged for providing assistance to the U.S. Securities and Exchange Commission (SEC) in enforcement actions such as "Operation Spamalot."
In that action, the SEC, which probably ranks as the securities watchdog most respected by Canadians, suspended trading in 38 pink sheet companies, at least 12 of which had ties to Vancouver.
More recently, the BCSC has launched a copycat initiative called SpamWatch.
On May 18, the B.C. regulator notched its first modest SpamWatch coup by halting trading in Compliance Systems Corp., a New York spam stock with B.C. investors that burst onto the OTC-BB on May 7.
By the time the BCSC halted trading in Compliance Systems by British Columbians just 11 days after its debut on the OTC-BB, the stock had plummeted from $1.55 per share to 17 cents per share. (All amounts are in U.S. dollars.)
The stock recorded its highest volume the day before the BCSC stepped in, with more than 1.1 million shares changing hands on May 17.
"The Executive Director considers that circumstances exist that could result in other than an orderly trading of Compliance Systems Corporation's securities," the BCSC order noted after tagging the stock as the subject of a promotional e-mail campaign in B.C.
When contacted by Stockwatch, the BCSC's director of corporate finance, Martin Eady, declined to identify the Vancouver brokerage that had been on the sell side for trades originating in B.C. Mr. Eady also remarked that no particular B.C. investors had caught the regulator's attention.
It is not clear how the BCSC halt, which only lasted for three trading sessions and did not stop OTC-BB trading in Compliance Systems by anyone with an account outside of B.C., might have had some impact on circumstances "that could result in other than an orderly trading" of the shares.
In any event, in the wake of the BCSC halt, Compliance Systems's share price has bounced around between 2.5 cents and 12 cents and the daily trading volume has swung wildly between a meagre 1,140 shares and a more substantial 807,377 shares.
With only 11,300 shares changing hands in three trades, Compliance Systems closed at seven cents on June 6.
Mother of all diluters
CMKM Diamonds Inc., Saskatchewan native Urban Casavant's now revoked pink sheet dog of dogs, offers another fine example of a provincial regulator's limited reach.
Mr. Casavant, whose experience includes jobs as a Prince George prison guard and operator of a small Saskatchewan U-Haul outlet, cut his promotional teeth in the 1990s with junior mining companies listed on the former Alberta Stock Exchange (ASE) and VSE.
Some of Mr. Casavant's early promotional exploits did not pass unnoticed by Canadian regulators, though they were remarkably quiet with respect to any public claims about those promotions.
In 1996, for example, he was either pushed or jumped from Petro Plus Inc. after an 11-month stint as president of the junior mining company.
During his tenure, Petro Plus issued a number of fluffy news releases including chatter about "visible gold" in drill samples from one of the company's properties.
At the time of Mr. Casavant's surprising and abrupt departure on Oct. 25, 1996, Petro Plus was halted by the ASE, though the regulator did not make any specific public claims about the company's touting president.
Trading did not resume until almost a month later, after Petro Plus hammered out a deal that included severing all ties to Mr. Casavant and certain members of his family.
The Petro Plus affair marked the end of Mr. Casavant's involvement as an officer or director of a public company for several years, but a number of subsequent Saskatchewan lawsuits against him, along with members of his family and several business associates, indicate that he continued to hone his promotional skills with other junior companies.
With the lawsuits piling up, Mr. Casavant assembled a package of Saskatchewan moose pasture and headed to Las Vegas, Nev., where he folded the mineral rights deals into a public shell that he took over in November of 2002.
In the early days, CMKM was little more than a garden-variety mining promotion churning out some rather laughable news releases and hiring tout sheets to spread the word of its purportedly immense Saskatchewan diamond mining potential.
As the promotion ramped up, however, Mr. Casavant took pink sheet paper hanging to an entirely new level, peeling off hundreds of billions of shares that were issued to himself, family members, friends and business associates while attracting a large, gullible, cult-like following to sponge up the massive dilution.
By early 2004, CMKM was regularly notching daily trading volumes of billions of subpenny shares and frequently exceeding the daily share volumes of all the major exchanges in the world combined.
On Oct. 26, 2004, the Saskatchewan Financial Services Commission (SFSC), perhaps alerted in part by the fact that the SEC was sniffing around some of CMKM's shady deals, issued a cease trade order against the company, Mr. Casavant and two associated individuals.
Many of CMKM's cultish followers brushed the Saskatchewan regulatory action off as insignificant, if not entirely irrelevant.
The respondents, including Mr. Casavant who was then living in a $3.5-million house in Las Vegas, did not even bother to request a hearing regarding the cease trade order, which is still outstanding.
Apart from trapping many Saskatchewan investors and possibly effectively removing many billions of shares from circulation in the process, arguably a boon to the paper-hanging promoters including Mr. Casavant, the SFSC cease trade order had little, if any, effect on CMKM's pink sheet trading.
In fact, naive investors continued to sop up billions of CMKM shares on a daily basis.
On Dec. 9, 2004, just over six weeks after the SFSC issued its cease trade order, CMKM recorded its highest trading volume ever as a staggering 36.9 billion shares changed hands.
In spite of the fact that Stockwatch had been reporting since at least Oct. 1, 2004, that CMKM had issued almost 780 billion shares, the company's starry-eyed Internet followers, many of whom believed that Mr. Casavant had bought up all the outstanding shares, clung to the fantasy that only naked short selling could account for the whopping trading volumes.
On Dec. 18, 2004, CMKM announced that it had "repurchased" 75 billion shares that had been issued to an associated company six months earlier.
On March 3, 2005, the SEC finally stepped in and suspended trading in CMKM.
The following day, CMKM belatedly got around to disclosing the massive dilution that Stockwatch had been reporting for months, acknowledging that the company had more than 703.5 billion shares issued and outstanding.
The SEC followed up with an administrative proceeding against CMKM that resulted in a hearing where Mr. Casavant asserted his Fifth Amendment privilege and refused to answer any questions.
After Judge Brenda Murray issued a ruling against CMKM on July 12, 2005, the company managed to drag things out until Oct. 28, 2005, when the SEC entered a final order revoking the pink sheet woofer's stock registration.
That finally marked the end of CMKM's trading, though not the end of the story, which is still unfolding.
Earlier this year, Mr. Casavant handed control of the company off to a previous cultish follower and former Las Vegas houseguest, Kevin West.
Apparently Mr. West, who previously served up estimates of CMKM's value ranging from $64-billion to $1-trillion and proclaimed that Mr. Casavant was a godly man doing God's work in redistributing the wealth of the world, has experienced at least a partial epiphany.
Mr. West is now directing a CMKM lawsuit against Mr. Casavant and other key players for allegedly looting at least $200-million from the company coffers.
Mr. Casavant has scurried back to Saskatchewan where he is reportedly busy working on another promotion and dodging service of the Nevada lawsuit.
Given that Mr. West, after getting possession of some boxes of company documents, discovered an unanswered Wells Notice from the SEC, frequently the harbinger of an imminent civil action by the regulator, Mr. Casavant may soon be dodging another process server.
In any event, returning to the OSC's temporary orders and notice of hearing against Select American and its coterie of pink sheet companies and associated players, it does not seem likely that the Ontario regulator's actions will have much effect on those companies' mighty pink sheet trading.
Moreover, given the different jurisdictions and the apparent complexity of some of the issues involving the respondents, it is far from assured that the OSC investigation will shed much public light on the whole mess.
At some point, however, the SEC might step in with its own regulatory action.
In a following article, Stockwatch will pick up its review of the respondent pink sheet companies in the OSC proceeding.
Comments regarding this article may be sent to lwebb@stockwatch.com.
(More information regarding the Ontario Securities Commission action against Select American Transfer Co. and associated respondents is available in a Stockwatch article published on May 31, 2007.)
Stockwatch > News > News Item
Daffy was a CMKX stockholder http://www.barbneal.com/wav/ltunes/daffy/Daffy46.wav
Naked Short Sellers Under Attack On YouTube
nufsed, You ever hear of the name James Farrell? James it appears is still in the stock transfer business. Ever hear of Nettel Holdings Corporation?
www.nettelholdings.net Nettel Holdings Corporation is a holding company owning subsidiaries engaged in a number of diverse ... Transfer Agent: Florida Atlantic Stock Transfer Inc. ...
www.nettelholdings.com/investor.jsp - 24k - Cached - Similar pages
=============================================
Title S
FARRELL, JAMES
7130 NOB HILL RD
TAMARAC FL 33321
FLORIDA ATLANTIC STOCK TRANSFER, INC.
Filing Information
Document Number J62412
FEI Number 592818374
Date Filed 03/18/1987
State FL
Status ACTIVE
Effective Date NONE
Last Event NAME CHANGE AMENDMENT
Event Date Filed 10/14/1987
Event Effective Date NONE
Principal Address
7130 NOB HLL RD
TAMARAC FL 33321 US
Changed 05/20/1998
Mailing Address
7130 NOB HILL RD
TAMARAC FL 33321 US
Changed 05/20/1998
Registered Agent Name & Address
GARCIA, R
7130 NOB HILL RD
TAMARAC FL 33321 US
Name Changed: 05/20/1998
Address Changed: 05/20/1998
Officer/Director Detail
Name & Address
Title S
FARRELL, JAMES
7130 NOB HILL RD
TAMARAC FL 33321
Title P
GARCIA, RENE
7130 NOB HILL RD
TAMARAC FL 33321
Annual Reports
Report Year Filed Date
2005 03/19/2005
2006 04/03/2006
2007 04/16/2007
Document Images
04/16/2007 -- ANNUAL REPORT
04/03/2006 -- ANNUAL REPORT
03/19/2005 -- ANNUAL REPORT
04/16/2004 -- ANNUAL REPORT
04/21/2003 -- ANNUAL REPORT
04/01/2002 -- ANNUAL REPORT
04/07/2001 -- ANNUAL REPORT
04/18/2000 -- ANNUAL REPORT
04/01/1999 -- ANNUAL REPORT
05/20/1998 -- ANNUAL REPORT
04/16/1997 -- ANNUAL REPORT
04/23/1996 -- ANNUAL REPORT
05/01/1995 -- ANNUAL REPORT
Note: This is not official record. See documents if question or conflict.
nufsed, ALEX stung like a scorpion. Thats why Terry Marsh had his account there Behind the Veil of Secrecy.
DTOX
CITA BIOMEDICAL INC OTCBB
Notices of Proposed Sale Reported on Form 144 of MARSH TERRY Description
Click on the column header links to resort ascending () or descending ().
Company
Select a company below for more information. Relation File Date Shares Broker
CITA BIOMEDICAL INC N 3/7/2000 500,000
J ALEXANDER SECURITIES INC
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Prison awaits in stock fraud case
Three Silicon Valley executives face years in prison when they are formally sentenced later this month after pleading guilty to stock fraud, according to the U.S. Attorney's Office for Northern California.
The guilty pleas were entered earlier this year but just made public.
Terry G. Marsh, 57, and Richard Bauer, 60, both of San Jose, and James T. "Tracy" Marsh, 59, of Mission Viejo, were first indicted by a federal grand jury in August 1996 on fraud charges in connection with the offer and sale of securities of Scorpion Technologies, Inc.
Under the plea agreement, Terry Marsh, former president of Scorpion, pleaded guilty to one count of conspiracy to commit securities fraud and one count of making false filings with the Securities and Exchange Commission (SEC).
Mr. Bauer, formerly a director of Scorpion and later its president, pleaded guilty to one count of conspiracy to commit securities fraud and one count of money laundering.
Tracy Marsh, formerly a vice president of Scorpion, pleaded guilty to one count of conspiracy to commit securities fraud.
Prosecutors say the three inflated the reported revenues, earnings and assets of Scorpion and, based on this false information, sold millions of shares of Scorpion stock.
The statutory maximum penalty for the conspiracy count is five years in prison and a $250,000 fine plus restitution of at least $16.5 million. The statutory maximum penalty for the filing false statements with the SEC count is five years in prison and a $250,000 fine. The statutory maximum penalty for the money laundering count is 20 years and or a $500,000 fine.
© 2001 American City Business Journals Inc.
===============================================
Monday, August 25, 1997
Buyer, Beware!
Dizzying deals raise questions about California's fast-growing Osicom Technologies
By Bill Alpert
Behind the Veil of Secrecy
Just a few years ago, Barry Witz and Parvinder Chadha were ponytailed promoters of penny stocks. By early this year, though, the ponytails were gone and the duo had transformed Osicom Technologies Inc., into one of California's fastest-growing companies, with $120 million in annual revenues. Chadha was being hailed as a technology visionary, and he boasted that Osicom had better technology for computer networking than its far-larger rival, Cisco Systems. Witz and Chadha also liked to note that Osicom had won multimillion-dollar orders to supply equipment to the likes of MCI Communications, GTE and NASA.
But close scrutiny of Chadha, who is Osicom's chief executive, and Witz, who until June served as an Osicom director, reveals a series of deals that have left investors tens of millions of dollars poorer over the past five years. Neither Witz nor Chadha has been charged by regulators or prosecutors with benefiting at the expense of other shareholders. But both are subjects of active criminal investigations on both sides of the Atlantic because of the pair's extensive dealings with one John J. O'Carroll, whom British investigators describe as a henchman for a guy who's been convicted of laundering $136 million for the Cali drug cartel. On top of that, a variety of firms run by Witz and Chadha, including Saratoga Brands, Builders Warehouse and Osicom, have failed to tell their shareholders that Witz was named an unindicted co-conspirator in a fraud prosecution of stock promoters linked to the Mafia.
The very first stock deal that brought Witz and Chadha together five years ago is still the object of an enforcement suit by the Securities and Exchange Commission as well as a federal criminal prosecution and two class-action suits by disappointed investors. That 1992 deal concerned Scorpion Technologies, a software firm that engaged in a massive fraud, according to testimony by former employees.
In March 1991, when Scorpion's shares were languishing, along came Barry Witz offering to remedy the situation by introducing Scorpion to the brokerage community. The genial attorney's background was impressive. He had worked at the SEC, the New York Stock Exchange and some Chicago law firms. A 350-pound workaholic who was often on the road, Witz had also worked for Carl Icahn, run an ice cream franchise, and even helped produce such movies as the 1984 Mob spoof, Johnny Dangerously.
The Scorpion board hired Witz the day before the firm's chief executive, Terry Marsh, announced new image-scanning software that would generate $12 million in revenues for the firm. With products like that, Scorpion was beginning to sound like a stock that would almost sell itself.
Soon, Scorpion President Marsh was bragging that his software was becoming "the de facto standard in the image-conversion business." Before 1991 was out, Scorpion's shares soared from 48 cents each to $7.59.
Strong earnings would appear to explain the surge. Scorpion reported 55 cents a share in earnings for 1991, on $12.5 million in sales. But come the spring of 1993, as investors awaited Scorpion's financial results for 1992, the FBI raided the company's offices and seized dozens of boxes of financial records. The National Association of Securities Dealers halted trading in the stock. When it resumed trading, it fetched a mere 19 cents a share.
Three years passed before Scorpion investors learned why the feds busted their software company. In February '96, the SEC finally accused Marsh and five others of a massive fraud that had used bank accounts and companies located in 20 countries. In a complaint filed in Manhattan's federal court, the Commission said that nearly 80% of Scorpion's reported software sales had been shams. The enthusiasm generated by those fake sales reports gave Scorpion's promoters the chance to unload 22 million of the company's shares at prices as high as $2.50 apiece, the complaint says.
The SEC also says that most of those shares were quietly distributed overseas via Regulation S of the Securities Act of 1933. Until it was tightened late last year, Reg S allowed companies to sell unregistered stock at a discount to foreigners without telling U.S. shareholders. After a brief waiting period, the foreign holders could then freely sell the shares back into the U.S., often reaping handsome profits in the process ("Easy Money," Barron's, April 19, 1996). Many Reg S violations involve foreigners acting as frontmen for U.S. investors, which is patently illegal. This is what the government says happened in the Scorpion deal.
Specifically, the SEC charges that the foreign buyers of Scorpion's Reg S shares illegally split their profits with Scorpion itself, allowing the company to get its hands on some real cash and perpetuate the ruse that it was selling lots of software. In August of '96, federal prosecutors in San Francisco brought criminal stock-fraud and money-laundering charges against Marsh and eight others. But juries will have to wait until next year to weigh the government's evidence in these cases, which are contested by all but two minor defendants.
Two class-action suits by Scorpion shareholders are also proceeding in federal courts in Manhattan and San Francisco, and one of those suits names Witz as a defendant. Roomfuls of brokerage firm records and deposition transcripts put the San Francisco class-action attorneys at Lieff Cabraser Heimann & Bernstein ahead of the government in unraveling Scorpion's dealings. The names of Par Chadha and Barry Witz appear frequently in these materials, which include recent testimony by Scorpion's ex-controller, Eric C. Brown.
"There was just massive fraud on behalf of management," Brown says in his deposition. He tells of counting the company's share of illicit stock sales and trying to figure out how much of the loot to mislabel as "software sales." Brown's sworn deposition gains credibility from the unsparing way he admits his own wrongdoing, which included phonying financial reports, lying to Scorpion's auditors and smoking pot. Such admissions can only hurt Brown's criminal defense.
Brown tried to explain his acts by noting his history of manic depression, for which he sometimes took medication. "I had just gotten over being extremely sick ... . I just wanted a job, a stable place to work," he says of his Scorpion tenure. Witz and Chadha contend that Brown's testimony is not credible.
To get Wall Street behind Scorpion's stock, Witz and an associate bribed brokers with free or discounted shares, Brown says he was told. Brown says Marsh told him "they were going out to different brokerage firms and priming the market. They would be giving shares away to different brokers." In an interview with Barron's, Witz denied this.
In his testimony, Brown describes how Scorpion made the money from stock sales appear to be the receipts of software sales. In the June 1991 quarter, Brown testified, true profits were lower than Marsh liked, so Marsh's brother Tracy sat down at his computer and printed out counterfeit purchase orders in the names of two ersatz Hong Kong distributors. "You'd better not ever tell anybody you've seen this," he says Tracy Marsh warned him.
Shortly after Brown saw Tracy Marsh forge the purchase orders, Scorpion received three cashier's checks worth over $1.2 million. Copies of the checks in the class-action evidence show they were drawn on the Chekiang First Bank accounts of two Hong Kong firms, Polastra and Rykoff, which were supposedly software distributors.
Scorpion's outside auditors from Grant Thornton once sent an assistant to visit those Hong Kong distributors, according to the depositions of Grant Thornton partners. But at the supposed address of the software firms, the auditors instead found a personnel agency owned by Michael Horne, whom Eric Brown identifies in his deposition as a "puppet" of Marsh and a Scorpion lawyer named Jack T. Dawson. The SEC has charged that the Hong Kong firms funded their $1.2 million in cashier's checks not from distribution of Scorpion software but from distribution of Scorpion stock by Horne and a sidekick. Brokerage records, included as evidence in the Scorpion shareholder suit, support that allegation. Today, Horne is a fugitive from the Scorpion criminal indictment.
Other funds flowing into Scorpion indicate the involvement of Witz. Later in 1991, in fact, Scorpion got three more cashier's checks totaling $686,000, all on the same day and all from the same Chekiang bank. This time, the money came from the bank accounts of Argyle Partners, Edgewood Partners and Helton Ventures. Signed forms and letters at U.S. brokerage firms show that these entities were all partnerships of Witz, a lawyer named Ed Fisch and a more notable third partner: Richard Kirschbaum, a man who had cut a destructive swath through the stock market in a career-long team-up with the swindler Ramon D'Onofrio.
Witz told Barron's he'd known Kirschbaum since 1987 and that the two shared an office suite in Los Angeles. But Witz says he was not aware of the man's sordid past, nor of Kirschbaum's no-contest plea to criminal stock fraud and conviction for embezzlement, until sometime after the Scorpion debacle. "With me he was a straight guy," says Witz.
Brokerage records show that Witz's Edgewood partnership contributed significantly to trading volume in Scorpion shares during the summer of '91, with Edgewood making day trades in the tens of thousands of shares. The partnerships sold almost $1.8 million of Scorpion shares through just one brokerage firm. Brown attests that the Witz partnerships split the proceeds from those stock sales with Scorpion, again to help substantiate the fake software sales. Witz flatly denies sending any money to Scorpion beyond the cash required to convert some Scorpion preferred stock to common shares. Fisch told Barron's that he had nothing to do with the trading of the partnership accounts.
In 1992, Scorpion attempted a stock registration, but official notice of an SEC investigation of the firm scared off underwriters. "Scorpion was in real trouble at this point, because it was running out of funds," Brown testified.
That's when Scorpion began issuing lots of shares offshore by using the Reg S loophole. Most of Scorpion's Reg S investors flunk a smell test. For example, an Iranian corporation called Mahsa Poust, which got 4.5 million shares, was represented by the wife of Denver stockbroker Mike Zaman, who would subsequently gain fame in 1997 when the SEC charged an assistant U.S. Attorney, Drew Pitt, with conspiring to commit stock fraud with Zaman. When deposed about the deal, Mrs. Zaman took the fifth amendment.
Two other purported buyers of Scorpion's Reg S shares were Mayfair Financial and FRM Commodities, which were represented by John J. O'Carroll, the Irishman of such keen interest to British money-laundering investigators. Before 1992 was finished, Mayfair had received almost two million shares of Scorpion stock and then sold it through a small New York broker, Green-Cohn, no doubt reaping hefty profits. The other firm O'Carroll represented, FRM Commodities, was a British corporation whose letterhead showed offices in Dublin, Geneva, London and Kuwait. FRM got even more Scorpion shares -- four million, to be exact -- and these were also sold through Green-Cohn.
It was Scorpion's biggest Reg S deal that brought Barry Witz together with Parvinder Chadha. Since 1989, Chadha and his wife Sharon had been struggling against declining sales at their publicly held maker of personal computers, Osicom Technologies. By mid-1992, the New Jersey firm had defaulted on its bank loan and was on the verge of going under. The Chadhas' lawyer brought in Witz, who knew an overseas investor willing to buy a piece of Osicom's floundering business.
That investor was a British Virgin Islands corporation called Saturn Enterprises Ltd. In exchange for a $1.25 million note and assumption of $2.5 million of Osicom bank debt, Saturn got Osicom's British computer division, which accounted for most of Osicom's revenues. Saturn turned right around and passed Osicom's U.K. unit through to Scorpion in a deal that left Saturn holding 10 million shares of Scorpion, enough to effectively control the company.
Chadha made out well, too. He got one million shares of unregistered Scorpion stock, plus a consulting contract that paid $175,000 a year. Chadha returned the million shares, which couldn't trade without being registered with the SEC, and told Scorpion to reissue the stock as Reg S shares so they could be unloaded without being registered. Chadha tells Barron's that he got $100,000 for directing the one million shares to a British firm called Wellcome-Mason, which was owned by a friend of his in London named Raghbir Singh Lamba.
The SEC alleges in its 1996 complaint that Scorpion's convoluted purchase of the Osicom subsidiary was part of the Scorpion Reg S fraud, and Eric Brown testifies that the deal's intent was to overvalue the barely profitable Osicom UK and thereby bolster Scorpion's balance sheet and place a heap of Scorpion shares in Saturn's friendly hands. Twice in his deposition, Brown says he believed that Chadha knew about the fraudulent nature of the Reg S deal, although elsewhere in his testimony Brown can't specifically recall Chadha saying he was in the know. Chadha, in an interview with Barron's, absolutely denied knowledge of any fraud.
A look at Scorpion's tortuous machinations makes clear why it has taken investigators on both sides of the Atlantic years to unravel the case. When Chadha sent the SEC a copy of the contract covering the sale of Osicom UK to Saturn, for example, the signature of Saturn's president was that of a Bolivian national, Mario V. Andrade. Curiously, in an identically dated copy of the same contract between Saturn and Chadha, one that Chadha subsequently filed with the SEC, the signature of John J. O'Carroll appears on the line where Andrade's had been. Yet Chadha says he's never dealt with O'Carroll and that the Irishman's signature must have been added sometime after Chadha himself signed the page.
What's beyond dispute is that after Saturn sold off almost all of its 10 million shares of Scorpion in the open market, whoever owned Saturn reaped millions of dollars in profits. And much of that money was wired to the Bolivian bank accounts of Andrade, Saturn and two other entities, Tecnica Asociados and Interex. Brown testified that Scorpion CEO Terry Marsh said Andrade took orders from Marsh and Scorpion attorney Jack Dawson. Andrade is now a fugitive from the Scorpion prosecution, and friends say they hear he's in Colombia.
As for Witz's role in all of this, Brown attests that two of the early Reg S investors, Mayfair and FRM, weren't really controlled by O'Carroll at all but were run by "the Three Stooges," his nickname for Witz, Fisch and Kirschbaum. Asked who had masterminded Scorpion's Reg S scheme, Brown testifies: "I think that Barry Witz came up with the idea, presented it to Terry, and Terry ran with it." Witz says he never advised Marsh to do anything illegal.
As evidence, Brown shows a July 1992 letter to Switzerland in which Witz orders O'Carroll to sign and send to Scorpion the authorization for the sale of specific Scorpion share certificates supposedly held by FRM Commodities. "It just shows that Witz is calling the game for FRM," Brown testifies. "It shows Witz has the FRM shares."
Furthermore, a January 1993 letter from O'Carroll instructs an American broker to wire FRM's profits from U.S. stock sales to a London bank account in the name of Edgewood Partners. Witz told Barron's that in Scorpion's Reg S deals, he was only acting as O'Carroll's lawyer. He suggests that FRM's wire transfers to Edgewood Partners might have been O'Carroll's way of paying one of the Edgewood partners, specifically Kirschbaum, for finding stockbroker Green-Cohn to dispose of the Reg S shares.
Witz describes O'Carroll as a professional commodities trader who at one time was the largest commodities broker operating out of Switzerland and the Middle East, with clients like the French government. A very wealthy individual, Witz adds, with an art collection, a chauffeur, homes in London and Geneva, and investments around the world. For a big-time commodities man, some of O'Carroll's investments were pretty junky, judging from the O'Carroll account statements introduced as evidence in the class-action suits against Scorpion. Besides dealing in Scorpion stock, O'Carroll was trading shares of Saratoga Brands, Luxcel and Las Vegas Entertainment Network.
The latter two stocks were underwritten by another of FRM's brokers, Westfield Financial, a now-defunct firm run by Salvatore Mazzeo, previously described by Barron's as a ringleader in stock promotions that involved associates of the Gambino and Genovese crime families (Barron's, March 21, 1988). Trading tickets show that the other side of O'Carroll's sales were often taken by Mazzeo, at Westfield, or by Mike Zaman, the indicted Colorado broker. The SEC suspended Mazzeo from the brokerage business last year, citing abuses of Reg S.
O'Carroll is also the subject of a money-laundering investigation by the U.K.'s Crown Prosecution Service, according to a memo filed in federal court in May 1996 by the U.S. Attorney for the Eastern District of New York. U.K. authorities believe O'Carroll was laundering money for Stephen Saccoccia, a Cranston, R.I., gold dealer convicted in 1993 of laundering over $136 million for the Cali drug cartel. Saccoccia, who customs officials said was tied to the Patriarca crime family, is serving 660 years in federal prison.
The memo also mentions a London bank account controlled by an O'Carroll partner that contained more than $660,000 from the 1995 sale of shares in Saratoga Brands and Hillside Bedding. Both Witz and Chadha had ties to Hillside, and during 1995, when O'Carroll's partner was apparently profiting on Saratoga shares, both Witz and Chadha were directors of Saratoga.
The memo further says that authorities are probing the involvement of O'Carroll and some unnamed U.S. citizens with offshore companies registered in the British Channel Islands and the British Virgin Islands. Persons with knowledge of the investigation say that two of the U.S. citizens being studied for their dealings with O'Carroll are Chadha and Witz.
A subpoena issued from the Brooklyn federal court demands documents showing relationships involving Saccoccia, O'Carroll, Kirschbaum, Lamba, Witz and Chadha. Witz and Chadha told Barron's that they aren't aware of any investigation of them. But authorities in both countries verify that the U.K. money-laundering investigation involving Witz and Chadha is continuing, as is at least one other criminal investigation involving Witz, Chadha and their various companies.
Without question, Chadha saw his fortunes improve after he met Witz. After selling Osicom's U.K. business to Saturn in 1992, Chadha found a new business for Osicom to get into in May of '93. Using Rand Research, a company owned in partnership with his wife, Sharon, Chadha bought a maker of fiber-optic devices, Meret Optical Communications, and then sold it to Osicom in exchange for 810,000 Osicom shares.
In September 1993, Witz asked Chadha for help with a troubled public company called Phoenix Laser Systems. The Silicon Valley firm had run through tens of millions of dollars promising to build eye-surgery lasers based on Star Wars technology. Chadha became Phoenix's chairman and went to work on a Reg S stock placement with a group of investors led by O'Carroll, who in this instance was representing Hibernian International Financial Services Co. In an interview with Barron's, Chadha said he was really trying to sabotage the Reg S deal, which he said had been put in motion by his Phoenix predecessor. The deal never did get off the ground.
By November 1993, Chadha stepped down from the chairman's post of Phoenix. He notes that he received a commendation from the Delaware Chancery court for his brief management of the company. But eventually Phoenix filed for bankruptcy protection. Early this month, an SEC complaint in a Manhattan federal court against the Phoenix managers who preceded Chadha charged that the company's laser claims and some of its stock sales were frauds.
In 1994, Witz and Chadha further revved up their deal-making, helping in the takeover of an unprofitable mattress business called Hillside Bedding. The company proceeded to sell an avalanche of stock to offshore shells. Witz, Chadha and their associates also took control of Saratoga Brands, an unprofitable public company that sold gourmet potato chips and lots of Reg S stock. This takeover maneuver was particularly dizzying. Agama Inc., which was controlled by Chadha's first cousin, Ike Suri, and Scott Halperin, a former manager of Osicom, received a $2.2 million block of Saratoga shares through an intermediary, in exchange for $67,007 of assets to be used in "designing, marketing and selling microcomputers."
Halperin acknowledges that these $67,007 in assets were the remains of Osicom's unprofitable personal-computer business, which had been transferred to Agama six months before the Saratoga transaction.
After the Saratoga Brands manuevers, Witz and Chadha came to the rescue of Builders Warehouse Association, an Arkansas building-supply chain that was failing in its quest to become another Home Depot. Again, the pair took control through complex moves, but this time, Witz and Chadha managed to be on both sides of the transaction, and in the middle, too.
In early '95, the faltering building-supply firm took a $100, 000 loan from a British Virgin Islands company called Jardine Cho. The named director of Jardine was a London accountant, Stephen Ian Tarn. Chadha and Witz were Jardine shareholders, too, though the exact size of their holdings couldn't be learned. Witz and Chadha then became an officer and a director, respectively, of Builders Warehouse, which subsequently purchased Relialogic Technology, a computer-graphics business that was managed by the two men and partly owned by Jardine. In exchange for Relialogic, which wasn't earning any money, Builders handed over a controlling $3 million chunk of its stock to Relialogic and Jardine.
Witz took time off from his deal-making in June '95 to testify in the criminal stock fraud trial of another business associate, Eric Wynn, a young man who had served his apprenticeship in the 'Eighties as a player in the stock manipulations of Tommy Quinn and John Bertoli, two convicted men whose exploits are legends on the seamy side of Wall Street. Wynn had just finished serving two years in prison for a jewelry fraud when Witz signed on as a lawyer for a merger that Wynn was secretly orchestrating with another notable stock swindler, Barry Davis.
When federal prosecutors in Newark subsequently charged in 1993 that the merger had been a fraud, Witz testified on Wynn's behalf, to prove that it had been legit. Unfortunately for Witz, his consultations with Wynn had been picked up on wiretaps. In an embarrassing cross-examination, a prosecutor confronted Witz with a phone call that the government said showed Witz knew the deal was phony. Witz also had to admit that he allowed Wynn to trade stock in Witz's name, stock that Witz had gotten with a loan from Joe Garofalo, a pornography producer and disbarred stockbroker who pleaded guilty to racketeering for an 'Eighties stock swindle involving Kirschbaum and D'Onofrio.
Wynn was convicted in July '95, after other evidence showing he'd been trading on behalf of Richard Tienken, a business partner of Lucchese crime family capo Peter Chiodo, and Frank Coppa Sr., a Bonanno crime family capo who helped Wynn gently convince stockbrokers not to let clients sell Wynn's stocks. When Barron's asked Witz if he was just a bystander to Wynn's conspiracy, Witz attorney Lawrence S. Feld, of New York's Tenzer Greenblatt, dispatched a stern letter saying that "there is no basis whatsoever to support any accusation that Mr. Witz was identified by the government as an unindicted co-conspirator." None, except the government's bill of particulars filed April 22, 1994, in the Wynn prosecution, which lists Witz as an unindicted co-conspirator to conspiracy and securities fraud. When informed of this document, Feld said that he was unaware of it and that Witz may have forgotten about it.
Witz wasn't the only one embarrassed by his association with Wynn. Five months after Wynn's conviction, while free on bond during his appeal, Wynn attended a White House "coffee," as well as four other Clinton fundraising meetings.
Witz subsequently served as CEO of Builders Warehouse, board chairman of Saratoga Brands and director of Osicom Technologies. But none of these public companies ever disclosed Witz's role in the Wynn stock-fraud prosecution. Even today, Chadha denies knowledge of it.
Osicom, meanwhile, was busy with a string of acquisitions that included Builders Warehouse and Rockwell Network Systems, a large but unprofitable subsidiary of the aerospace firm. Thanks to such purchases, Osicom today calls itself the 15th-largest networking company in the U.S. Although each acquisition was, in Osicom's words, a turnaround situation, it's remarkable how the company somehow seems to have ended up with what it calls the best technology in the networking industry and the ability to offer customers one-stop shopping for networking gear. "If you look at our product breadth we're actually wider than Cisco," says Ron Mackey, president of Osicom's switching division. "Probably 3Com is the only one that would be comparable."
Mackey's switching unit, which also sells networking cards and hubs, has revenues running along at a $44 million annual rate, says Chadha. Another big hunk of Osicom sells remote access routers, a market that is also served by Cisco, 3Com and Ascend Communications. Osicom shares jumped nearly two points to just under $12 in April, when Chadha's firm announced it would provide products to MCI for a U.S. Postal Service contract that could be worth $3 billion. But in reality, Osicom got only a part of that $3 billion contract, and a small part, at that: $18 million over several years, Osicom officials said in an interview.
Osicom last year also acquired an unprofitable business called DPI, which is run by Cornelius "Pete" Peterson, a lanky world champion at Masters rowing. DPI's sales of print servers, which attach a printer to a network instead of just one computer, could be $25 million for the fiscal year ending in January '98, Peterson says, and he expects that figure to rise to $100 million in three years" time. Chadha has pulled together "a tremendous group of synergistic companies," says the rowing champ, who sold DPI to Osicom for stock.
Osicom may deliver the $170 million in current-year revenues that Chadha and his team hope for, and they may come through with planned products like a satellite downlink for the Internet. But shareholders would no doubt like to see profits too, and Chadha's record of delivering tangible gains to outside shareholders does not inspire confidence. Shareholders in Osicom during its PC incarnation, for example, saw their equity drop to a negative $12 million. After Osicom became a networking firm in '93, its profits seemed to reappear, however.
Still, through Osicom's latest fiscal year, which ended in January, none of the company's reported profits have been cash from operations. Rather, they've been the intangible product of Osicom's accounting methods. In the January '93 year, for instance, Osicom's $2.09 in earnings per share came from the "extinguishment of debt" through Chadha's 1992 deal with O'Carroll, or Andrade, or whoever really controlled Saturn Enterprises. In subsequent years, earnings have come from "amortization of negative goodwill," an accounting device rarely encountered in manufacturing businesses, that says, in effect, Osicom acquisitions were worth more than Osicom paid for them. Osicom then credits its earnings with the purported difference.
A succession of three outside auditors has approved Osicom's financials, which show that operating cash flow has been heavily negative all the while. In the latest reported quarter of April '97, the negative cash flow continued, but Osicom reported earnings nonetheless. Those earnings wouldn't have been possible, however, if Osicom hadn't made several changes to its balance sheet: It increased its payables to trade creditors from 65 days of sales costs in January to 88 days in April; the company also boosted the percentage of research and development expenses that it capitalized from 24% a year earlier to 46%. The higher capitalization of R&D costs, Osicom officials say, reflected nine promising products under development.
If cash earnings haven't yet come through, then have Chadha's acquisitions boosted balance-sheet value for Osicom shareholders? Not if investors like things tangible. Taking the "new" Osicom as the starting point, Chadha says shares outstanding grew from two million in January '94 to 14 million in April '97, while book value went from $2 million to $50 million. Yet April's tangible book was really $25 million, and if one accepts Osicom's "negative goodwill" accounting, the initial $2 million was understated, making the firm in January '94 actually worth nearly $5 million.
So, thanks to Chadha's ministrations, Osicom shareholders have gone from holding more than $2.40 of tangible equity per share to $1.79. At Saratoga Brands, where Witz was board chairman, cash flow has been similarly negative and March's tangible book value this year was a penny a share.
After Barron's started placing phone calls on this story, Witz stepped down from his positions at Saratoga and Osicom, for health reasons, he says. A number of Osicom shareholders also registered their shares for sale, as the price of Osicom slid to $6 on the Nasdaq small-cap market. Osicom wants its shares listed on Nasdaq's National Market, but the request has yet to be approved.
Investors may want to wait around to see if Chadha and Witz's good works produce a profitable networking firm with technology to rival Cisco's. They may want to hold on to their Osicom shares in the hope that the Crown Prosecution's Money Laundering Investigation Team never affects Witz or Chadha. Perhaps investors can take reassurance from Pete Peterson, who says his rowing experience has made him a particularly good judge of people. "I've known Par and Barry now for almost a year," says Peterson. "They are ethical to a fault, they are visionary, they are excellent managers and they are collaborators."
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UNITED STATES SECURITIES AND EXCHANGE COMMISSIONLITIGATION RELEASE NO. 14814 / February 9, 1996SECURITIES AND EXCHANGE COMMISSION v. SCORPION TECHNOLOGIES,INC., TERRY G. MARSH, RICHARD BAUER, ERIC C. BROWN, DUDLEY MIHRANFREELAND, J. GORDON NEVERS, AND ALBERT TERRANOVA, 96 Civ. 1005(LMM) (S.D.N.Y.)The Securities and Exchange Commission announced the filingof a Complaint in the United States District Court for theSouthern District of New York alleging a massive financial fraudinvolving bank accounts and companies located in 20 countriesaround the world. The Commission charged that the defendantsunlawfully distributed millions of shares of stock in ScorpionTechnologies, Inc. ("Scorpion") to the public, while certaindefendants inflated Scorpion's stock price by releasingfraudulent financial results, based upon reported revenues thatwere as much as 80% fictitious. Named as defendants were: SCORPION, a corporation located in Los Gatos, California, that was purportedly engaged in the image processing technology and personal computer businesses; TERRY G. MARSH ("Marsh"), president, chief executive officer, and a director of Scorpion until late 1993; RICHARD BAUER ("Bauer"), a director of Scorpion, who succeeded Marsh as president and chief executive officer; ERIC C. BROWN ("Brown"), a certified pu
ALEX was also involved in the famous "One Big Scam"
"To generate the $150,000 purchase price, defendants placed sell orders for the shell corporations' shares on the OTC bulletin board through brokerage accounts they controlled at J. Alexander Securities, Inc., including the corporate accounts of EFI, Barclay Bankcard, Canyon Vista, and Salteaux. Defendants determined the amount, price and timing of these sell orders in consultation with Lybrand. (A227-28, SA798-800, SA820, SA922.) Richard Kern testified that Lybrand instructed him to "[c]all your broker and put in a sell order and I'll make sure that somebody buys them." (SA797.) On other occasions Richard Kern would call Lybrand to report that buy orders were coming in. According to Lybrand, he and Kern would "discuss the price at which the buys came in. And then we'd determine where to sell it." (SA 925.)"
SEC v. Lybrand
200 F.Supp.2d 384 (SDNY2002)
United States District Court,
S.D. New York.
SECURITIES AND EXCHANGE COMMISSION, Plaintiff,
v.
Peter C. LYBRAND, f/k/a Peter C. Tosto, Richard S. Kern, Donald R. Kern,
Charles Wilkins, Admiral Investments Ltd., Compulink International Corp.,
Drawbridge Investments Ltd., Glittergrove Investments Ltd., Grafton Investments
Ltd., Greenford Investments Ltd., McDonalds Ltd., Oasis Enterprises Ltd.,
Investor Relations, Inc., Tellerstock, Inc., Conversant Enterprises, Inc., EFI
Corp. a/k/a Electronic Funds, Inc., Barclay Bankcard, Inc., Canyon Vista Corp.,
Salteaux Ltd. a/k/a First American Security Corp. a/k/a First American
Securities Corp., Defendants,
and
Hannah G Irrevocable Trust and Hannah R Trust, Relief Defendants.
No. 00 CIV.1387 SHS.
May 10, 2002.
OPINION & ORDER
STEIN, District Judge.
The Securities and Exchange Commission ("SEC") brought this civil enforcement action charging Peter C. Lybrand, Richard S. Kern, Donald R. Kern and Charles Wilkins with violations of the securities laws in connection with the public sale of shares in three "shell" corporations. The SEC alleges that 1) Lybrand, Wilkins and the Kerns illegally traded securities in interstate commerce without filing the registration statements required by Sections 5(a) and (c) of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. § § 77e(a) and 77e(c); and 2) Lybrand, aided and abetted by Wilkins and the Kerns, defrauded investors by engaging in matched trades of shares in those corporations in order to create the appearance of voluminous trading and artificially inflate the value of the shares in violation of Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78j(b), and Rule 10(b)-5 thereunder, 17 C.F.R. § 240.10b-5. The corporations employed in the scheme and two trusts that received a portion of the proceeds were also named as defendants. Lybrand and the entities he controlled did not file or serve an answer to the complaint and the Court entered a default judgment against these defendants on March 29, 2002. [FN1] The SEC has now moved for summary judgment against defendants Richard Kern, Donald Kern, Charles Wilkins, EFI Corp., Barclay Bankcard, Inc., Canyon Vista Corp., and Salteaux Ltd. on the Section 5 claim and against relief defendants Hannah G Irrevocable Trust and Hannah R Trust on the grounds that they received ill-gotten funds. Defendants have cross-moved for summary judgment on the aiding and abetting claim. For the reasons set forth below, the SEC's motion is granted and defendants' motion is denied.
FN1. The defaulting corporate defendants were: Admiral Investments Ltd., Compulink Int'l Corp., Conversant Enterprises, Inc., Drawbridge Investments Ltd., Glittergrove Investments Ltd., Grafton Investments Ltd., Greenford Investments Ltd., Investor Relations, Inc., McDonalds Ltd., Oasis Enterprises Ltd., and Tellerstock, Inc.
I. BACKGROUND
A. Cast of Characters
Lybrand, formerly known as Peter Tosto, is a stock promoter and recidivist securities law violator who has participated in more than 22 separate incidents of illegal stock manipulation. See United States v. Browne, 130 F.Supp.2d 552, 554 (S.D.N.Y.2001). In May 1994, Lybrand entered into a plea agreement with the United States Attorney for the Southern District of New York that obligated him, among other things, to truthfully respond to any inquiries the government made of him and to "not commit any further crimes whatsoever." (Simpson Dec. Ex. E, 12.) Notwithstanding this agreement, in April 1998 Lybrand began concealing from the government his ownership of eight foreign and three domestic entities originally named as defendants in this action. He continued to make false statements to the U.S. Attorney's Office and the SEC throughout their investigation of the transactions at issue in the present complaint until his arrest in February 2000. (Simpson Dec. SA1109-10.)
Richard Kern and his brother Donald have engaged in a number of small business ventures together. The Kerns jointly owned or controlled corporate defendants EFI Corp., also known as Electronic Funds, Inc. ("EFI"), Barclay Bankcard, Inc., and Canyon Vista Corp. (Simpson Dec. A265-67.) They also created relief defendants Hannah G Irrevocable Trust and Hannah R Trust, both of which are trusts benefitting the Kerns' respective children. (A269, B194.) Charles Wilkins owned and controlled corporate defendant Salteaux, Ltd., also known as either First American Security Corp. or First American Securities Corp. (A306- 07.)
In the mid-1990s, the Kerns and Wilkins were jointly engaged in the business of creating and selling publicly traded "shell" corporations. (A140- 45, A1026.) A "shell" corporation is one that has neither assets nor revenues and generally exists as a vehicle for another company's business activities. See Black's Law Dictionary 344 (7th Ed.1999). Once approved for public trading, such corporations could be sold for between $200,000 and $500,000, typically for merger with companies that were not approved for public trading. (See Bromberg Aff. B127.) In 1997 and 1998 defendants secured listings on the over-the-counter ("OTC") bulletin board market operated by the National Association of Securities Dealers ("NASD") for seven shell corporations, including the three corporations at issue in this action: Polus, Inc., Citron, Inc., and Electronic Transfer Associates, Inc. ("ETA"). (B194- 95.)
Defendants followed essentially the same procedure for all the shell corporations they sold. (A148-53, B194-95.) First, they created a corporation or acquired a majority interest in an existing one and distributed its shares among friends and associates. After some time had elapsed, they submitted Form 211 filings pursuant to SEC Rule 15c2-11 for the corporation in order to register it on the NASD bulletin board. Defendants then sought a buyer for the corporation. After locating a buyer, defendants would gather the corporation's shares from their friends and associates, who in most cases had held the shares for more than two years, and transfer ownership of the company in exchange for an agreed purchase price.
B. The Shell Corporations
Richard Kern founded Citron in 1993 and served as its president. (A418.) Richard Kern and his wife Debra were the company's only officers and directors. (A185-86, A413.) Shortly after its incorporation Citron issued 150,000 of the five million outstanding shares to Richard and Debra Kern, and the remainder to friends and associates of the Kerns. (A147, A188, A429-32.) Donald Kern incorporated ETA in 1996. (A481.) ETA issued 1.5 million shares to Richard and Debra Kern and another half million shares to friends and associates of the Kerns. (A505-08.) Wilkins purchased 98 percent of the outstanding common stock of Polus in July 1996. (A293.) He distributed the stock as gifts to relatives, friends, and business associates, including EFI, which acquired 12,000 shares. (A305, A307, A369-76.) Wilkins appointed Scott French, an acquaintance of his son, as president. (A5, A309-10.) Debra Kern, using her maiden name Debra Martinez, served as secretary, treasurer and director. (A345.)
In 1998, defendants submitted Form 211 statements for Polus, Citron and ETA to the NASD so that the companies could be listed on the bulletin board for public trading. (A183, SA 828, A339-529.) Defendants submitted the materials for Polus and Citron in March 1998, and the companies were cleared for public trading in June. (A342, A400, A409, A467.) They filed the Form 211 statement for ETA in September 1998 and received approval for public trading on October 6, 1998. (A476, A529.)
C. The Agreement with Lybrand
As defendants awaited approval for public trading of Polus and Citron, Lybrand contacted Thomas C. Laucks of Holladay Stock Transfer, the transfer agent for the shell corporations, and inquired if he knew of any public shell corporations for sale. (B120.) Laucks referred Lybrand to Wilkins, who in turn referred him to Richard Kern. In late May or June 1998, Lybrand spoke with Richard Kern and informed him that "he wanted to buy a shell corporation for his clients and he had a purpose that he wanted to use it for." (A166.) Richard Kern then negotiated with Lybrand, on behalf of himself, Wilkins and Donald Kern, to arrive at terms for the sale of Polus. (A167.)
Kern and Lybrand subsequently agreed that Lybrand's clients would pay $150,000 for as close to 90 percent of Polus' outstanding shares as defendants could deliver, and Lybrand's clients would have an option to buy an additional 5 or 6 percent of Polus for another $150,000. (A168.) Rather than transmitting the purchase money directly to defendants, Richard Kern and Lybrand agreed that Lybrand's investors would purchase Polus shares through the OTC bulletin board, with the money generated by such sales credited toward the $150,000 purchase price. (B23-24.)
Several weeks after beginning negotiations over Polus, Kern and Lybrand agreed on terms for the acquisition of Citron through essentially the same procedure. (A56-57, A107, A192, A197, A226.) The parties' subsequent agreement for ETA followed the same pattern, except that Lybrand agreed to pay $200,000 rather than $150,000 in the event his clients decided to acquire an additional 5 percent of ETA. (A240-41.) Unlike defendants' previous sales of shell corporations, none of the agreements to sell Polus, Citron or ETA to Lybrand was memorialized in writing. (A174-75, A242, SA881, SA951.)
D. Collection of Shares
To acquire the promised shares for Lybrand, Wilkins and the Kerns began collecting the shares of the three shell corporations they had previously distributed among friends and relatives. (A60-64, A202.) Richard and Donald Kern collected Citron and ETA shares. (A60-64, A75-76, A202, A251.) Donald Kern testified that he purchased Citron shares for cash from shareholders "that I had a good rapport with from the past, friends, family, that I knew well and were in my travels." (A61.) In some instances the share certificates were already in the possession of the Kerns because the shareholders had never received them. (A43, A45, A48, A51-52, A69, A95-96, A116, A133, A135.) Wilkins collected Polus shares by instructing the shareholders to bring their shares to him or the transfer agent. (A300, A327.) None of the defendants informed the shareholders that the shares they were surrendering were to be sold on the public market. (A67-68, A78, A105-06, A251, A301, A327-28.) The process of collecting the outstanding shares of the three companies continued through January 1999. (A118-19; see A532-60.)
At Lybrand's request, Richard Kern effected ten-for-one stock splits in Polus and Citron on June 19 and July 10 respectively, increasing the outstanding number of shares from 500,000 to five million for each corporation. (A119-20, A210, A224.) These splits occurred shortly before the beginning of public trading in the companies. Richard Kern effected an identical split of ETA on his own initiative, increasing the outstanding shares from 2 million to 20 million because "I thought I had learned something in the two previous transactions and I just thought it was a good idea." (A238-39.)
E. The Matched Orders [FN2]
FN2. Matched orders are "orders for the purchase [or] sale of a security that are entered with the knowledge that orders of substantially the same size, at substantially the same time and price, have been or will be entered by the same or different persons for the sale [or] purchase of such security." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 205 n. 25, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976); 15 U.S.C. § 78i(a)(1).
To generate the $150,000 purchase price, defendants placed sell orders for the shell corporations' shares on the OTC bulletin board through brokerage accounts they controlled at J. Alexander Securities, Inc., including the corporate accounts of EFI, Barclay Bankcard, Canyon Vista, and Salteaux. Defendants determined the amount, price and timing of these sell orders in consultation with Lybrand. (A227-28, SA798-800, SA820, SA922.) Richard Kern testified that Lybrand instructed him to "[c]all your broker and put in a sell order and I'll make sure that somebody buys them." (SA797.) On other occasions Richard Kern would call Lybrand to report that buy orders were coming in. According to Lybrand, he and Kern would "discuss the price at which the buys came in. And then we'd determine where to sell it." (SA 925.)
Defendants made no effort to ascertain the identity of the "investors" on the other side of the transactions arranged by Lybrand. (A81-82, A104.) In fact, the initial buyers of the shell corporations' stocks were brokers, friends and acquaintances of Lybrand--including his wife and hairdresser--whom he encouraged to buy stock in the companies through telephone calls and press releases. (SA904-06.) Lybrand orchestrated the matched orders in the early days of trading in a deliberate effort to "jump start" the market in the shell companies by giving the appearance of an active trading market. (SA911-12.)
Lybrand created the illusion of an active market by incrementally increasing the share prices for the matched orders. (A230.) On the first day of trading in Polus, Lybrand directed the defendants to place sell orders at $2 a share. (SA909.) On that day, EFI sold 15,500 Polus shares in three separate transactions. (See A563-64.) The next day, EFI sold 20,300 shares in eleven transactions at progressively higher prices. (See A564.) By the fifth day of trading defendants were offering the shares for $4.25 a share. (See A564.) Similarly, ETA shares rose from $.625 to $8.125 in the first ten days of trading through a series of matched trades involving Salteaux and Canyon Vista. (B04; see A684-85, A729-730.)
F. Transfer to Lybrand's Entities
When the market sales of a corporation's shares totaled $150,000, Lybrand directed the defendants to transfer additional shares of the corporations to him by issuing share certificates to entities he designated. (A110-12, SA799.) Between June 1998 and January 1999, defendants transferred approximately 85 percent of Polus, 85 percent of Citron, and 90 percent of ETA to Lybrand's entities. (SEC Statement of Material Facts 14; see A530-61.) Defendants withheld some of the securities because they anticipated that the prices would go up in the public market. (A71.)
After acquiring the shares of the shell corporations Lybrand continued to manipulate the share prices through misleading press releases and wash sales of the shares among the entities he controlled. [FN3] (Compl. 47-62; SA1108.)
FN3. Wash sales are "transactions involving no change in beneficial ownership." Ernst & Ernst, 425 U.S. at 205 n. 25, 96 S.Ct. 1375; 15 U.S.C. § 78i(a)(1).
G. Market Sales
The scheme was wildly successful. By January 22, 1999, the stock prices of the three corporations--none of which had any assets or revenues--had climbed to $9.50 per share for Polus, $13.75 per share for Citron, and $26.50 for ETA. (SEC Summ. J. Brief at 7.) At this time, Wilkins and the Kerns sold into the public market thousands of shares of the shell corporations that they had withheld from the transactions with Lybrand. (A71-72, A260-62; see A563- 744.) In all, defendants realized profits of $6,029,169 as a result of their sales into the public market. (A562; see A563-744.)
On January 29, 1999, the SEC ordered a ten-day suspension of trading in the securities of Polus, Citron, and ETA. (A745-47.) Subsequent investigation by the SEC revealed that by February 2000 defendants had transferred most or all of the proceeds from their sales of the shell corporations' shares to various business ventures and estate planning devices. See SEC v. Lybrand, No. 00 Civ. 1387, 2000 WL 913894, at *2 (S.D.N.Y. July 6, 2000). Relief defendants Hannah G Irrevocable Trust and the Hannah R Trust received nearly $1 million of the trading proceeds. (SEC Statement of Material Facts 21.)
The SEC filed the complaint in this action in February 2000. Counts One and Two charge Lybrand with fraudulent and deceitful market manipulation in violation of Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), SEC Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, and Section 17(a) of the Securities Act, 15 U.S.C. § 77q(a). (Compl. 71-76.) Count Three charges Wilkins and the Kerns with aiding and abetting Lybrand's violations of Section 10(b) and Rule 10b-5 through their participation in matched trades of the shell corporations' shares in the first days of trading. (Com pl. 77-79.) Count Four alleges that Lybrand, Wilkins, and the Kerns illegally sold restricted securities without filing the registration statements required by Sections 5(a) and (c) of the Securities Act, 15 U.S.C. § § 77e(a) and 77e(c). (Compl. 80-85.) Count Five charges that the two trust defendants received a portion of the illegal trading proceeds. (Compl. 86-88.) The complaint seeks a permanent injunction against future securities violations, disgorgement of the illegal proceeds, and other civil penalties. In July 2000, this Court granted the SEC's motion for a preliminary injunction freezing the assets of Wilkins and the Kerns, ordering an accounting from them and the two trusts, and prohibiting the destruction of documents. See Lybrand, 2000 WL 913894 at *12-*13.
On the same day the SEC filed its civil complaint, the U.S. Attorney for the Southern District of New York filed criminal charges against Lybrand for his role in the trades in Polus, Citron and ETA. In October 2000, Lybrand pleaded guilty to securities fraud, perjury, obstruction of justice, and false statements to government officials. (SA1090-1118.) In March 2001 he was sentenced to 87 months' imprisonment. (SA1119-39.)
II. DISCUSSION
A. Summary Judgment Standard
Summary judgment may be granted "only when the moving party demonstrates that 'there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.' " Allen v. Coughlin, 64 F.3d 77, 79 (2d Cir.1995) (quoting Fed.R.Civ.P. 56(c)); see also Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). The Court must "view the evidence in the light most favorable to the non-moving party and draw all reasonable inferences in its favor ... and may grant summary judgment only when 'no reasonable trier of fact could find in favor of the nonmoving party.' " Allen, 64 F.3d at 79 (quoting Lund's, Inc. v. Chemical Bank, 870 F.2d 840, 844 (2d Cir.1989)).
Once the moving party meets its initial burden of demonstrating the absence of a genuine issue of material fact, the non-moving party must come forward with specific facts to show there is a factual question that must be resolved at trial. See Fed.R.Civ.P. 56(e); see also Legal Aid Soc'y v. City of New York, 114 F.Supp.2d 204, 213 (S.D.N.Y.2000). A non-moving party must produce evidence in the record and "may not rely simply on conclusory statements or on contentions that the affidavits supporting the motion are not credible." Ying Jing Gan v. City of New York, 996 F.2d 522, 532 (2d Cir.1993). In short, a nonmoving party must "do more than simply show that there is some metaphysical doubt as to the material facts." Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986).
B. Section 5 Claim
Section 5 of the Securities Act prohibits the sale of securities in interstate commerce unless the issuer has filed a Form S-1 Registration Statement with the SEC. Section 5 provides:
Unless a registration statement is in effect as to a security, it shall be unlawful for any person, directly or indirectly -
(1) to make use of any means or instruments of transportation or communication in interstate commerce or of the mails to sell such security through the use or medium of any prospectus or otherwise; or
(2) to carry or cause to be carried through the mails or interstate commerce, by any means or instruments of transportation, any such security for the purpose of sale or for delivery after sale.
15 U.S.C. § 77e(a). The purpose of the registration requirement, and of the Securities Act as a whole, is to "protect investors by promoting full disclosure of information thought necessary to informed investment decisions." SEC v. Ralston Purina Co., 346 U.S. 119, 124, 73 S.Ct. 981, 97 L.Ed. 1494 (1953). Section 5 requires issuers of securities to disclose "information about the issuer's financial condition, the identity and background of management, and the price and amount of securities to be offered." SEC v. Cavanagh, 1 F.Supp.2d 337, 360 (S.D.N.Y.) (citing 15 U.S.C. § § 77g, 77aa), aff'd, 155 F.3d 129 (2d Cir.1998).
To establish a prima facie case that defendants violated Section 5, the SEC must prove three elements: "first, that no registration statement was in effect as to the securities; second, that the defendant[s] sold or offered to sell these securities; third, that there was a use of interstate transportation, or communication, or of the mails in connection with the sale or offer of sale." Cavanagh, 1 F.Supp.2d at 361 (citing Neuwirth Investment Fund, Ltd. v. Swanton, 422 F.Supp. 1187, 1193 n. 8 (S.D.N.Y.1975)). The SEC is not required to prove scienter. SEC v. Softpoint, Inc., 958 F.Supp. 846, 859-60 (S.D.N.Y.1997) (citing SEC v. Universal Major Indus. Corp., 546 F.2d 1044, 1047 (2d Cir.1976)), aff'd, 159 F.3d 1348 (2d Cir.1998). Once the SEC makes out a prima facie case, defendants bear the burden of showing that the securities sold were exempt from the registration requirement. Ralston Purina Co., 346 U.S. at 126, 73 S.Ct. 981; Lybrand, 2000 WL 913894 at *10.
The SEC has established a prima facie case. It is undisputed that none of the three corporations ever filed a registration statement, and shares of all three corporations were traded in interstate commerce over the NASD bulletin board. (A212-14, A225, A254.) The SEC argues that it is entitled to summary judgment on the Section 5 claim because defendants will not be able to sustain their burden of proving that they were exempt from Section 5's registration requirement.
Defendants respond that summary judgment is inappropriate because of disputed issues of material fact as to their eligibility for the exemption provided by Section 4(1) of the Securities Act, 15 U.S.C. § 77d(1). Section 4(1) excludes from the registration requirement "transactions by any person other than an issuer, underwriter or dealer." Defendants claim that they were not "underwriters" with respect to Polus, Citron and ETA because at all times they viewed their transactions with Lybrand as private sales, not public distributions. In support of their claim, defendants further argue that they "substantially complied" with the requirements of Rule 144, 17 C.F.R. § 230.144, with regard to sales made in the first 90 days of trading and fully complied with Rule 144(k) with regard to sales made thereafter.
a. Section 4(1)
As noted above, defendants contend that disputed issues of fact exist as to whether they were "underwriters" for the purposes of the Section 4(1) exemption. Section 2(11) of the Securities Act defines an "underwriter" as:
any person who has purchased from an issuer with a view to, or offers or sells for an issuer in connection with, the distribution of any security, or participates or has a direct or indirect participation in any such undertaking, or participates or has a participation in the direct or indirect underwriting of any such undertaking .... As used in this paragraph, the term 'issuer' shall include, in addition to an issuer, any person directly or indirectly controlling or controlled by the issuer, or any person under direct or indirect common control with the issuer.
15 U.S.C. § 77b(a)(11). Thus, securities holders may be considered "underwriters" and thus ineligible for the Section 4(1) exemption if they either 1) purchase securities from an issuer "with a view to" offering the securities in a distribution or 2) sell securities "for an issuer in connection with" a distribution. See Ackerberg v. Johnson, 892 F.2d 1328, 1336 (8th Cir.1989). A "distribution" is equivalent to a public offering of securities. Id.
Congress enacted a broad definition of underwriter status in order to "include as underwriters all persons who might operate as conduits for securities being placed into the hands of the investing public." Thomas Lee Hazen, The Law of Securities Regulation 431 (4th Ed.2002). The Section 4(1) exemption is intended to "exempt only trading transactions between individual investors with respect to securities already issued and not to exempt distributions by issuers or the acts of individuals who engage in steps necessary to such distributions." SEC v. Culpepper, 270 F.2d 241, 247 (2d Cir.1959) (citing SEC v. Chinese Consol. Benev. Ass'n, 120 F.2d 738, 741 (2d Cir.1941)). A control person, such as an officer, director, or majority shareholder, is "treated as an issuer when there is a distribution of securities" and therefore "ordinarily may not rely upon the Section 4(1) exemption." Cavanagh, 155 F.3d at 134 (citing United States v. Wolfson, 405 F.2d 779, 782 (2d Cir.1968)).
Defendants argue that they conceived of their transactions with Lybrand as private sales rather than public distributions of the shell corporations, and therefore they did not acquire the shell corporations' shares "with a view to" distribution. They do not, however, dispute that they acquired the shares with the intention of transferring them to Lybrand, in part through sales on the OTC bulletin board. Defendants have not adduced any evidence that these public sales should not be considered a "distribution" within the meaning of the Securities Act. Moreover, defendants ignore the fact that Section 2(11) is written in the disjunctive. See 15 U.S.C. § 77b(a)(11); 17 C.F.R. § 230.144, Preliminary Note. Their mental state at the time they acquired the shell corporations' shares is therefore not dispositive; they may still be considered underwriters if they sold shares "for an issuer in connection with" a public distribution of securities. Defendants fail to address this prong of the underwriter definition entirely, instead arguing that they fall within the Rule 144 safe harbor. The Court now turns to that issue.
b. Rule 144
The SEC promulgated Rule 144 to clarify the statutory definition of "underwriter" for the purposes of the Section 4(1) exemption. The rule provides that an individual who sells restricted shares will not be considered an underwriter or involved in a distribution if the following conditions are met: adequate current public information is available concerning the issuer; the restricted securities have been held at least one year; no more than 1 percent of outstanding shares are being sold within a three-month period; the shares are sold as "brokers' transactions" within the meaning of Section 4(4) of the Securities Act; and if the amount of securities sold in any three-month period exceeds 500 shares or has an aggregate price in excess of $10,000, notice of such proposed sales has been given to the SEC. See 17 C.F.R. § 230.144(c)-(f),(h). The above requirements do not apply if the seller has not been an affiliate of the issuer for the preceding three months and a period of at least two years has elapsed since the later of the date the securities were acquired from the issuer or from an affiliate of the issuer. See 17 C.F.R. § 230.144(k).
In granting the SEC's preliminary injunction motion, the Court found that defendants' sales of the shell corporations' securities failed to meet any of the requirements of the Rule 144 safe harbor. The unregistered sales to Lybrand did not qualify because at the time of the sales defendants were affiliates of the shell corporations, the sales were for over 80 percent of each issuer, the sales were not conducted through "brokers' transactions" and no notice of the proposed sales was filed with the SEC. Lybrand, 2000 WL 913894 at *11. The unregistered sales to the public failed to satisfy the one-year holding requirement of 17 C.F.R. § 230.144(d)(1) since the defendants had acquired the shares from affiliates of the issuer between June 1998 and January 1999 and resold the shares during the same period. Id. Finally, defendants could not rely on Rule 144(k) because they "remained affiliates within three months of the final transactions in January 1999" and because the securities had not been held for the requisite two-year period. Id.
In the face of this formidable evidence against them, defendants advance two arguments. First, defendants contend that, with respect to shares sold within 90 days of the respective sale agreements with Lybrand, they "substantially complied" with Rule 144, and this compliance is evidence that they did not acquire the shares "with a view to" distribution and therefore are not "underwriters" within the meaning of Section 4(1). Defendants' "substantial compliance" argument relies on the following premises: 1) in the instant they agreed to turn over the shell corporations to Lybrand, defendants ceased being affiliates or control persons; 2) they are entitled to tack on the holding period of the original shareholders to meet the one-year holding requirement; and 3) the number of shares sold during the first 90 days after their agreements with Lybrand, while slightly higher than the 1 percent limit set by Rule 144, is sufficiently limited to satisfy the purposes of Section 4(1). Alternately, defendants contend that they ceased being affiliates or control persons of Polus, Citron, and ETA when Lybrand gained a majority of shares in the corporations, and the shares transferred in the 90 days after this date amounted to less than 1 percent of outstanding shares, bringing them into substantial compliance with Rule 144 with respect to these transactions.
Defendants' "substantial compliance" argument is nothing more than an extension of their claim that they did not acquire the shell corporations' securities "with a view to" participating in a distribution. Since the Court has already concluded that the alleged dispute over defendants' mental state cannot defeat the SEC's motion for summary judgment, it need not examine the merits of the defendants' claims that their transactions involving the shell corporations amounted to "substantial compliance" with Rule 144.
Second, defendants argue that they are entitled to rely on the Rule 144(k) exemption for sales made more than three months after Lybrand gained control of Polus, Citron, and ETA. As noted above, to qualify for the protection of Rule 144(k), defendants must establish that at the time they sold the corporations' shares they had not been affiliates of the issuer for the preceding three months and a period of at least two years had elapsed since the later of the date the securities were acquired from the issuer or from an affiliate of the issuer. See 17 C.F.R. § 230.144(k). Defendants claim that they meet the first requirement because they ceased being affiliates when they resigned as officers and directors of the corporations, or, alternately, when Lybrand gained a majority of shares. They argue that they meet the second prong because the original shareholders were not affiliates of the shell corporations. Both contentions are wrong.
i) Defendants Were Affiliates of the Shell Corporations
Rule 144 defines an affiliate as "a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, [an] issuer." 17 C.F.R. § 230.144(a)(1). "Control" is defined as "the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise." 17 C.F.R. § 230.405. The determination of whether a person occupies a "control" position does not turn upon a single factor such as stock ownership, but rather "depends upon the totality of the circumstances, including an appraisal of the influence the individual has on the management and policies of a company." Cavanagh, 1 F.Supp.2d at 366 (citing United States v. Corr, 543 F.2d 1042, 1050 (2d Cir.1976)). For the purposes of Section 5's registration requirements, courts have looked to whether the person in question is " 'in a position to obtain the required signatures of the issuer and its officers and directors on a registration statement.' " Id. at 362 (quoting Louis Loss & Joel Seligman, Fundamentals of Securities Regulation 247 (3d ed.1995)). See also SEC v. American Beryllium & Oil Corp., 303 F.Supp. 912, 915 (S.D.N.Y.1969).
The defendants in Cavanagh contended that they were exempt from Section 5's requirements because they sold the unregistered shares at issue shortly after entering into a merger agreement on behalf of the company. The court determined that the merger and the sale of shares should be viewed through an "integrated" analysis, since the evidence supported a finding that the merger and sales constituted a single transaction, both in the minds of the parties and in terms of the effect on the investing public. See Cavanagh, 1 F.Supp.2d at 363-66. " 'The concept of "integrating" offerings is intended to prevent an issuer from avoiding registration by structuring a transaction in two or more apparently exempt offerings ... when they actually should be considered a single nonexempt transaction.' " Id. at 363 (quoting Loss and Seligman, supra, at 278). Applying this "integrated" analysis, the District Court found that even if at the time they sold the shares the defendants had resigned as officers and directors and no longer controlled a majority of shares, they were still control persons for the purposes of Section 5. Id. at 366-67.
The Kerns and Wilkins first argue that they ceased being affiliates of the shell corporations on the dates they resigned as officers and directors of the corporations, namely June 22, 1998 for Polus, June 13, 1998 for Citron, and November 6, 1998 for ETA. (Def. Rule 56.1(a) Statement 6, 18, 30.) These dates roughly coincide with the first day of trading in each corporation. Alternately, defendants contend that they were no longer affiliates by the time they had transferred a majority of shares to Lybrand, since at that time Lybrand was effectively in control of the companies. They claim that this occurred on July 14, 1998 for Polus and August 18, 1998 for Citron. (Def. Rule 56.1(a) Statement 11, 24.) Therefore, sales of Polus made after October 14, 1998, and sales of Citron made after November 18, 1998 complied with Rule 144(k) and defendants were not required to file registration statements in connection with these sales. Defendants concede that this argument does not apply to ETA, since defendants controlled approximately 80 percent of the outstanding stock up until the period from November 17, 1998 to November 23, 1998, when they transferred nearly 17 million shares to Lybrand. (See A553-54.)
Defendants' attempts to distance themselves from Polus, Citron and ETA are unavailing. Their agreements with Lybrand provided that the sale of each corporation was to be effected through the initial sale of shares on the OTC bulletin board and the subsequent transfer of shares to Lybrand's entities. Applying the principles set forth in Cavanagh, the sales and transfer should be viewed as part of a single transaction for each entity, and since the transfer of shares in each corporation continued through January 1999, defendants were still affiliates at that time. (See A540, A549, A560.) In addition, defendants continued to make policy decisions on behalf of the companies even after transferring a majority of shares to Lybrand. Richard Kern signed a merger agreement as president of Citron in January 1999. (A200.)
Moreover, "[t]o accept [defendants'] argument that the literal transfer of majority ownership constitutes the moment at which a former affiliate may sell freely into the market is to ignore the guiding purpose of the Securities Act--the protection of 'those who do not know market conditions from the overreachings of those who do,' " Cavanagh, 1 F.Supp.2d at 366 (quoting Charles Hughes & Co. v. SEC, 139 F.2d 434, 437 (2d Cir.1943)). In January 1999, defendants sold thousands of shares of the shell corporations' stock at prices which had been set in large part through defendants' participation in a series of matched orders with Lybrand's entities. The investors purchasing these shares had no access to information about the agreements with Lybrand or the nature of these early transactions. The evidence clearly indicates that, as the Court found in the preliminary injunction decision, defendants remained affiliates at the time of their sales in January. Lybrand, 2000 WL 913894 at *11. Their contention that they were no longer affiliates 90 days prior to these sales must therefore fail.
ii) The Original Shareholders Were Affiliates
Nor can defendants tack on the holding period of the original shareholders in order to meet Rule 144(k)'s two-year holding requirement on the grounds that the original shareholders were not affiliates of the shell corporations. All of the shareholders in the three shell corporations were family members, friends, acquaintances and associates of Wilkins and the Kerns. The corporations failed to observe corporate formalities. No directors' or shareholders' meetings ever took place, and on several occasions defendants invented minutes for imaginary meetings and forged the signatures of the officers. (A13-14, A243-46, A270, A336.) Polus' nominal president, Scott French, testified that he knew nothing about Polus' business or the pending sale to Lybrand, had never attended any shareholder or board meetings, and his only duty as president was "to sign documents from time to time." (A3-10, A4.) At the time of their agreements with Lybrand, the defendants owned approximately 2 percent of the outstanding shares of Polus, 30 percent of Citron and 78 percent of ETA. (SEC Statement of Material Facts 14; A203- 04, A237; see A369-76, A429-32, A505-08.) Yet they were sufficiently confident of their control over the shell corporations that they promised to deliver 90 to 95 percent of each. Defendants claim that the fact that they ultimately transferred slightly less than this amount to Lybrand indicates that they lacked control over the shareholders, but this contention carries little weight in the absence of evidence that these shareholders played any role in the shell corporations' affairs whatsoever.
Since defendants remained affiliates within 90 days of the final transactions in the shell corporations' shares and since the original shareholders were affiliates of the corporations, defendants do not qualify for the Rule 144(k) exemption.
Finally, it is worth noting that the purpose of Rule 144 is to provide clear guidelines to investors who wish to trade restricted securities, not to serve as a springboard for convoluted post hoc arguments by affiliates seeking to justify an impermissible transaction. In interpreting exemptions to Section 5, courts look to the statutory purpose of promoting adequate disclosure to the investing public, "rather than engage in strangulating literalism." SEC v. Harwyn Indus. Corp., 326 F.Supp. 943, 954 (S.D.N.Y.1971). Thus, as with any safe harbor provision, "technical compliance" with Rule 144 will not protect sellers of a security if such compliance is part of a scheme to evade the Securities Act's registration requirements. See Hazen, supra, at 450.
The SEC addressed this very issue with respect to transactions similar to those under discussion here in two no-action letters issued in 1999 and 2000. In Harmony Trading Corp., SEC No-Action Letter 1999 WL 1059812 (Nov. 22, 1999), a shell corporation transferred shares to a large number of individuals shortly before obtaining permission for public trading. The SEC warned that "n situations of this kind, resales of such securities in claimed reliance on rule 144 raise questions whether the transfers involve an evasive scheme to avoid registration under the Securities Act of 1933." Id. at *7. In a second no-action letter responding to an inquiry from the NASD's OTC Compliance Unit, the SEC wrote that neither Section 4(1) nor Rule 144 would apply to situations in which stock promoters sought to sell the unregistered shares of shell corporations after the lapse of some period of time following the issuance of shares to other persons. NASD Regulation, Inc., SEC No-Action Letter 2000 WL 64968 (Jan. 21, 2000). Emphasizing that purchasers who are "mere conduits" for a wider distribution of securities are not eligible for the Section 4(1) exemption, the SEC concluded that "the promoters or affiliates of the [shell] companies as well as their transferees, are 'underwriters' of the securities issued." Id. at *3. Sellers of the securities could not rely on Rule 144, "regardless of technical compliance with that rule, because these resale transactions appear to be designed to distribute or redistribute securities to the public without compliance with the registration requirements of the Securities Act." Id. Defendants incorrectly argue that since the SEC's no-action letters had not issued at the time they entered into their arrangements with Lybrand, the transactions were legal. The SEC's no-action letters do not change the substantive law and are not binding on courts, though they may be treated as persuasive. See New York City Employees' Ret. Sys. v. SEC, 45 F.3d 7, 13 (2d Cir.1995).
In sum, defendants' transactions fall squarely within the ambit of Section 5 and are not entitled to exemption pursuant to Section 4(1) or Rule 144. Defendants have not identified any factual issues that would allow them to prove that they did not sell shares in Polus, ETA, and Citron "for an issuer in connection with" a public distribution. They created or controlled each of the shell corporations, secured their listings on the OTC bulletin board and sold their shares into the public market without filing a registration statement. They acquired the shares from the original shareholders pursuant to their agreements with Lybrand and sold them on the bulletin board in a series of matched trades that artificially inflated the price of the stock. Neither the original shareholders nor the investors who purchased the shares on the bulletin board had access to information regarding defendants' agreements with Lybrand and their effect on the share price of the securities. Defendants reaped profits of millions of dollars from their public sales. It is precisely this type of conduct that the registration requirement aims to prevent.
The SEC's motion for summary judgment against defendants Richard Kern, Donald Kern, Charles Wilkins, EFI Corp., Barclay Bankcard, Inc., Canyon Vista Corp., and Salteaux Ltd. is therefore granted.
C. Relief Defendants
Summary judgment is also appropriate against the Hannah G Irrevocable Trust and the Hannah R Trust, which received almost $1 million of defendants' illegal trading proceeds. A court may order "equitable relief against a person who is not accused of wrongdoing in a securities enforcement action where that person: (1) has received ill-gotten funds; and (2) does not have a legitimate claim to those funds." Cavanagh, 155 F.3d at 136. Defendants do not dispute that the relief defendants received a portion of their profits from the trades in Citron, ETA, and Polus. Since these trades violated the Securities Act's registration provisions, the trusts do not have a legitimate claim to these funds. The SEC's motion for summary judgment against the two trusts is granted.
D. Aiding and Abetting Claim
Section 10(b) of the Exchange Act forbids the use of manipulative or deceptive devices in connection with the purchase or sale of securities. See 15 U.S.C. § 78j(b). Rule 10b-5, promulgated pursuant to Section 10(b), provides that it is unlawful
(a) To employ any device, scheme or artifice to defraud, ... or
(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.
17 C.F.R. § 240.10b-5. Section 104 of the Private Securities Litigation Reform Act of 1995 ("PSLRA") authorizes the SEC to seek injunctive relief against parties who aid and abet primary violations of certain provisions of the securities laws, including Section 10(b) and Rule 10b-5. Section 104 provides:
(e) For purposes of any action brought by the Commission under paragraph (1) or (3) of Section 78u(d) of this title, any person that knowingly provides substantial assistance to another person in violation of a provision of this chapter, or of any rule or regulation issued under this chapter, shall be deemed to be in violation of such provision to the same extent as the person to whom such assistance is provided.
15 U.S.C. § 78t(e). Congress passed Section 104 to clarify that the SEC retained the authority to bring such actions after the U.S. Supreme Court in Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 177-78, 114 S.Ct. 1439, 128 L.Ed.2d 119 (1994), held that private civil liability for Section 10(b) violations extended to primary violators only. See SEC v. Fehn, 97 F.3d 1276, 1282 (9th Cir.1996). Courts applying Section 104 have generally analyzed the provision in light of pre-Central Bank aiding and abetting case law. See id. at 1286; Graham v. SEC, 222 F.3d 994, 1000 (D.C.Cir.2000).
[8] An individual may be liable for aiding and abetting a securities violation where there is "(1) a primary violation by another party; (2) knowledge of the violation by the aider and abettor and (3) substantial assistance by the aider and abettor." In re Gas Reclamation, Inc. Sec. Litig., 733 F.Supp. 713, 720 (S.D.N.Y.1990) (citing IIT v. Cornfeld, 619 F.2d 909, 922 (2d Cir.1980)). Defendants maintain that they are entitled to summary judgment because the SEC cannot establish that they had actual knowledge of Lybrand's stock manipulation scheme or that they substantially assisted the violations. The SEC counters that there is ample evidence in the record from which a jury could conclude that defendants "knew, or were generally aware, of their roles in Lybrand's matched transactions, and knowingly or recklessly rendered substantial assistance in the manipulation." (SEC Opp. Brief at 4.)
1. Primary Violation and Substantial Assistance
There is no question that Lybrand committed primary violations of the securities laws. Lybrand pleaded guilty to, and was convicted of, manipulating the markets for Polus, Citron and ETA securities in violation of Section 10(b) and Rule 10b-5. His manipulation included the placement of matched orders. In his plea allocution, Lybrand admitted that
at my direction, people who I knew purchased shares of each stock at manipulated prices I determined, again giving the false impression of increased interest in the stock. I did this intentionally to fraudulently induce investors to purchase these stocks, so that I could unlawfully profit.
(SA 1108.) Defendants were on the other side of these transactions.
Defendants provide no support for the assertion that their placement of coordinated sell orders did not "substantially assist" Lybrand's manipulation of the market. Defendants placed at least 51 directed trades in the shell corporations at Lybrand's behest. [FN4] They also effectuated a stock split for each of the corporations shortly before public trading began. The coordinated orders caused the share prices of the corporations to rise dramatically in the first days of trading. Since no prior market existed in the corporations' shares, defendants' participation in the matched orders helped to establish inflated prices for the securities that appeared to outside observers to be the result of market forces. The SEC has produced more than enough evidence to withstand defendants' summary judgment motion on the primary violation and substantial assistance elements of the aiding and abetting claim.
FN4. While Richard Kern and Wilkins effected the actual sales (A216- 17, A227), Donald Kern acted in a partnership relationship with Richard Kern and Wilkins and played a significant role in acquiring the shares of Citron and ETA that were used in the matched orders. (A145-46, A266, SA784-85, SA788.)
2. Scienter
[10] The parties disagree on the necessary level of scienter to sustain a Rule 10b-5 aiding and abetting claim. Defendants contend that the SEC will have to establish that they had actual knowledge that Lybrand intended to manipulate the market, while the SEC maintains that it need only prove that defendants acted with recklessness with respect to Lybrand's violations.
Section 104 of the PSLRA provides that the aider and abettor must "knowingly" provide substantial assistance to the primary violator but does not define "knowingly." See SEC v. Moskowitz, No. 97 Civ. 7174, 1998 WL 524903, at * 3 (S.D.N.Y. Aug. 20, 1998) (declining to decide whether recklessness or actual knowledge required). In this circuit, it is well-established that recklessness satisfies the scienter requirement for aider and abettor liability when the alleged aider and abettor owes a fiduciary duty to the defrauded party. See, e.g., Ross v. Bolton, 904 F.2d 819, 824 (2d Cir.1990); IIT, 619 F.2d at 923. Generally, where there is no fiduciary relationship, "the scienter requirement scales upward--the assistance rendered must be knowing and substantial." In re Laser Arms Corp. Sec. Litig., 794 F.Supp. 475, 491 (S.D.N.Y.1989) (citations omitted), aff'd, 969 F.2d 15 (2d Cir.1992). Courts in this district have also held that recklessness satisfies the scienter requirement where the plaintiffs were third parties whose reliance on the defendant's fraudulent conduct was foreseeable or where the defendant owed a duty of disclosure to the defrauded party. See In re Leslie Fay Cos., Inc. Sec. Litig., 835 F.Supp. 167, 175 (S.D.N.Y.1993); In re Gas Reclamation, 733 F.Supp. at 720.
The SEC contends that recklessness meets the scienter requirement here. First, the SEC claims that defendants, as corporate insiders, owed a fiduciary duty to shareholders in the shell corporations. See O'Connor & Assocs. v. Dean Witter Reynolds, Inc., 529 F.Supp. 1179, 1184-85 (S.D.N.Y.1981). Second, in SEC v. U.S. Environmental, Inc., 155 F.3d 107, 108 (2d Cir.1998), the U.S. Court of Appeals for the Second Circuit held that a broker could be directly liable for violating Section 10(b) when he followed a stock promoter's directions in executing trades that he knew, or was reckless in not knowing, were matched orders, even if he did not share the promoter's overall objective to manipulate the market for the stock. The broker's placement of matched orders fell "well within the bounds of primary liability," despite "the fact that someone else directed the market manipulation scheme." Id. at 111, 112. The court further observed that the broker might alternately be liable under the aiding and abetting provisions of the PSLRA. Id. at 113.
While the SEC's arguments are compelling, the Court need not resolve the scienter issue here. Even adopting the more demanding scienter standard urged by defendants, there is sufficient evidence from which a jury could conclude that the defendants had actual knowledge that the sell orders orchestrated by Lybrand were intended to manipulate the market. In his deposition Lybrand was asked if he ever said anything to Richard Kern that indicated that Lybrand was manipulating the market for the shell corporations' securities. (SA986-88.) Lybrand responded that when ETA began trading in November 1998, "the first few days when the stock was going up [Richard Kern] questioned like why are you taking it up so fast." (SA988.)
In addition, there is ample circumstantial evidence that could give rise to an inference of actual knowledge of Lybrand's manipulative intent. See Moskowitz, 1998 WL 524903 at *3. Unlike their previous merger transactions, defendants made no written agreement with Lybrand. The share prices directed by Lybrand steadily increased. The sell orders placed by defendants in the early days of trading were all limit orders, which meant that the shares could only be sold at the quoted price or higher. (SA762-63.) The prices at which defendants were selling the shares on the public market were considerably higher than the price per share they were receiving for selling 90 percent of the companies. (SA955-57.) [FN5] Defendants withheld a substantial number of shares from the transactions with Lybrand that they later sold into the market at greatly inflated prices.
FN5. For example, on November 23, 1998, the publicly quoted price for ETA stock was $7.46 per share. The terms of defendants' agreement with Lybrand provided that they would receive approximately $.008 per share for delivering 90 percent of ETA. (SA957.)
While defendants maintain that the general public could not view which shares were being traded on the OTC bulletin board, defendants knew that anyone in the United States could trade on the bulletin board and the going prices for the shell corporations could be viewed by anyone who knew the trading symbol. Richard Kern testified that he was aware that anyone who knew the stock symbols for the corporations could see the price at which the shares were trading and that the sales were "there for the world to see what was going on." (SA796, SA839-40.) Donald Kern testified that he could access the current trading price of Citron by typing its trading symbol into America Online. (SA792.) Wilkins was also aware that anyone who had access to the bulletin board could view the prices of the shell corporations' shares. (SA1040-41.) A jury could conclude that the defendants knew that the steadily increasing share prices and matching sell orders orchestrated by Lybrand were intended to drive up the price of the shell corporations' stock. Thus, defendants are not entitled to summary judgment in their favor on the SEC's claim that they aided and abetted primary violations of the securities laws.
III. CONCLUSION
Because defendants have not come forward with a triable issue of fact that would prove their public sales of Polus, Citron and ETA securities were exempt from Section 5's registration requirement, the SEC's motion for summary judgment against defendants Richard Kern, Donald Kern, Charles Wilkins, EFI Corp., Barclay Bankcard, Inc., Canyon Vista Corp., and Salteaux Ltd. is granted. Summary judgment is also granted against relief defendants Hannah G Irrevocable Trust and Hannah R Trust since it is undisputed that the trusts received a portion of the proceeds from the illegal trades. Defendants' motion for summary judgment on the aiding and abetting claim is denied because there are issues of fact as to whether defendants knew of Lybrand's scheme to manipulate the market.
SO ORDERED.
More evil from J. Alexander Securities http://ftp.sec.gov/litigation/opinions/34-51974.pdf
Have you read this story about MM ALEX? http://www.nasd.com/web/groups/enforcement/documents/nac_disciplinary_decisions/nasdw_014491.pdf
West America Securities Corp. (CRD #35035, Westlake Village, California) and
ROBERT Brian KAY (CRD #1133657, Registered Principal, Westlake Village,
California) submitted a Letter of Acceptance, Waiver, and Consent in which they
were fined $51,371, jointly and severally. In addition, the firm was suspended
from engaging in any penny stock business for one year, except the firm may
effect transactions for its proprietary account and effect transactions for customers
that are non-recommended. KAY was suspended from association with any NASD
member as a general securities principal for 30 days. Without admitting or
denying the allegations, the respondents consented to the described sanctions and
to the entry of findings that the firm, acting through KAY, failed to comply with all
of the provisions of the SEC's Penny Stock Rules with respect to securities
transactions as a result of the firm's failure to establish and maintain a system to
supervise the activities of various registered persons that was reasonably designed
to achieve compliance with the Penny Stock Rules.
The firm's suspension began November 5, 2001, and will conclude at the close of
business November 4, 2002. KAY's suspension began November 5, 2001, and will
conclude at the close of business December 4, 2001. (NASD Case #C02010051)
http://www.nasdr.com/pdf-text/0111dis.txt
Robert Kay was connected to a company called Ziasun. Did you ever hear of them?
SEC Info - Ziasun Technologies Inc - 10SB12G - On 9/16/99 - EX-10.17As Of Filer Filing On/For/As Docs:Pgs Issuer Agent 9/16/99 Ziasun Technologies .... California 91362 Fax: 805-777-1744 Attention: Robert Kay If to Swiftrade ...
www.secinfo.com/d11bF9.62.j.htm - 31k - Cached - Similar pages
From Kevin M. West"s old web site Americaneedstoknow.com
"CMKM Diamonds Inc (CMKX) finds a way to battle naked short selling. Their shareholders are uniting in an owner's group at www.CMKXownersgroup.com"
"Another company, CMKM Diamonds Inc (OTCPK: CMKX) of Las Vegas, is currently facing problems that may be related to having already fallen victim to this counterfeiting crime. A large group of extremely loyal CMKX shareholders have formed an owner?s group. These loyal shareholders are going after the very Wall Street insiders that want to see this company fail. If the company fails, then traditionally the NSS problem goes away for those that perpetuated the problem. But not this time, the shareholders are fighting back and supporting their company."
http://web.archive.org/web/20050506202814/www.americaneedstoknow.com/fuego.htm
U.S. Canadian Minerals Inc. Chris Hanneman, 303-220-8476
U.S. Canadian Minerals Inc. Announces Initiation of Sarbanes-Oxley Compliance Preparations
Monday October 25, 12:52 pm ET
LAS VEGAS--(BUSINESS WIRE)--Oct. 25, 2004--U.S. Canadian Minerals Inc. (OTCBB: UCAD - News) announced today that it has initiated preparations for compliance with the upcoming additional requirements under the Sarbanes-Oxley Act of 2002. The initial step in this process for the company will be the formation of a corporate advisory board which shall report directly to the board of directors.
The company is currently performing due diligence on several potential candidates for the board. The company expects to have an announcement in regards to the selection of the initial members to the corporate advisory board within the next several days.
Further details relative to this matter can be found at http://www.uscanadian.net/.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995: Statements contained in this document which are not historical fact are forward-looking statements based upon management's current expectations that are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by forward-looking statements.
Contact:
U.S. Canadian Minerals Inc.
Chris Hanneman, 303-220-8476
Source: U.S. Canadian Minerals Inc.
Reg T Solutions Nevada filing showed Christina Hanneman as a corporate office with Daryll Pryor. Check this out. Remember this scam company?
"On July 29, 1999, E-Rex, Inc. signed a one year contract with the Marketing/Public Relations firm of Hanneman Group from Highlands Ranch, Colorado. Contact: Christina Hanneman at 888/226-6588 for information about E-Rex, Inc. and its revolutionary "DragonFly.""
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E-Rex Unveils 'DragonFly' Prototypes with 'Instant' Satellite Internet Access at JavaOne; Signs Agreement with Sun Microsystems
Business Wire, August 3, 1999
SEATTLE--(BUSINESS WIRE)--Aug. 3, 1999--
E-Rex, Inc (OTC BB:EREX) announced the dawning of a new age of portable, high-speed internet products with the successful unveiling of the Java technology based E-Rex "DragonFly" prototype at the JavaOne Conference in San Francisco.
The DragonFly is a portable "electronic briefcase" that allows the user to access, store, e-mail, scan, fax, copy or print with copy machine simplicity that combines internet technology, document solutions and portability.
"It was very gratifying to receive such overwhelming praise for our product at the JavaOne conference. As a result of constructive input for Sun technicians, and a multitude of developers at the conference, we have now been able to even further miniaturize the original DragonFly laptop prototype by more than 80%," said Dr. Bauer, president and CEO of E-Rex.
"Sun is excited to bring the capabilities of the Java and Jini technologies to E-Rex's DragonFly," said Greg Wolff, group marketing manager, Sun Microsystems (Nasdaq:SUNW). "E-Rex can now leverage the power and scalability of the Java language into their acclaimed DragonFly technology."
Corporate Developments
E-Rex, Inc. is pleased to announce the following corporate developments:
On June 15, 1999, E-Rex, Inc. unveiled its "DragonFly" prototypes at Sun Microsystems JavaOne conference. Attendees at JavaOne Conference gave the DragonFly rave reviews for its simplicity of use, instant satellite Internet access, and technology breakthrough.
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On June 18, 1999, E-Rex, Inc. signed a Final Joint Licensing Agreement with Sun Microsystems whereby E-Rex will license Sun Microsystems' Java and Jini technologies for final production, marketing and sale of the DragonFly.
On June 19, 1999, E-Rex, Inc launched its company webpage. E-Rex plans to market its products directly through the internet, as well as through other avenues, during the second half of 1999. Anyone interested in viewing the DragonFly and specifications, as well as company profile, may do so at www.e-rex.net.
On July 29, 1999, E-Rex, Inc. signed a one year contract with the Marketing/Public Relations firm of Hanneman Group from Highlands Ranch, Colorado. Contact: Christina Hanneman at 888/226-6588 for information about E-Rex, Inc. and its revolutionary "DragonFly."
On Aug. 6, 1999, E-Rex, Inc. will be filing its registration statement with the Securities and Exchange Commission to be a fully reporting company in compliance with recent SEC regulations. On Jan. 4, 1999, the SEC approved the National Association of Securities Dealers (NASD) OTC Bulletin Board (OTC BB) Eligibility Rule. In summary, this rule requires all Bulletin Board listed companies to file a variety of documents including certified financial statements in order to keep their Bulletin Board trading status.
Finally, E-Rex, Inc. is in negotiation to obtain all financing necessary to enter the manufacturing and marketing phases of its business plan. Details will be released in the near future when finalized.
About E-Rex, Inc.
Further information about E-Rex and its innovative "smart" products may be obtained from Hanneman Group at 888/226-6588.
Safe Harbor Act Disclaimer
The statements contained in this release and statements that the Company may make orally in connection with this release that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projected in the forward-looking statements, since these forward-looking statements involve risks and uncertainties that could significantly and adversely impact the company's business. Therefore, actual outcomes and results may differ materially from those made in forward-looking statements.
Sun, Sun Microsystems, Java, Jini, and The Network is the Computer are trademarks or registered trademarks of Sun Microsystems, Inc. in the United States and other countries.
COPYRIGHT 1999 Business Wire
COPYRIGHT 2000 Gale Group
REG T SOLUTIONS, INC.
Business Entity Information
Status: Default on 12/1/2006 File Date: 11/21/2003
Type: Domestic Corporation Corp Number: C28930-2003
Qualifying State: NV List of Officers Due: 11/30/2006
Managed By: Expiration Date:
Resident Agent Information
Name: CORPORATION TRUST COMPANY OF NEVADA Address 1: 6100 NEIL ROAD
Address 2: STE 500 City: RENO
State: NV Zip Code: 89511
Phone: Fax:
Email: Mailing Address 1:
Mailing Address 2: Mailing City:
Mailing State: Mailing Zip Code:
View all business entities under this resident agent
Financial Information
No Par Share Count: 0 Capital Amount: $ 1,000,000.00
Par Share Count: 100,000,000.00 Par Share Value: $ 0.01
Officers Include Inactive Officers
President - DARYLL PRYOR
Address 1: 1885 MOUNTAIN LAUREL CIRCLE Address 2:
City: HIGHLANDS RANCH State: CO
Zip Code: 80126 Country:
Status: Active Email:
President - DARYLL PRYOR
Address 1: 1885 MOUNTAIN LAUREL CIRCLE Address 2:
City: HIGHLANDS RANCH State: CO
Zip Code: 80126 Country:
Status: Historical Email:
Director - DARYLL PRYOR
Address 1: 1885 MOUNTAIN LAUREL CIRCLE Address 2:
City: HIGHLANDS RANCH State: CO
Zip Code: 80126 Country:
Status: Active Email:
Secretary - LINDA EVANS
Address 1: 6700 W 111TH AVE UNIT 110 Address 2:
City: LAKEWOOD State: CO
Zip Code: 80214 Country:
Status: Active Email:
Secretary - LINDA EVANS
Address 1: 1050 17TH ST STE 1940 Address 2:
City: DENVER State: CO
Zip Code: 80265 Country:
Status: Historical Email:
Treasurer - CHRISTINA HANNEMAN
Address 1: 1885 MOUNTAIN LAUREL CIRCLE Address 2:
City: HIGHLANDS RANCH State: CO
Zip Code: 80126 Country:
Status: Active Email:
Treasurer - CHRISTINA HANNEMAN
Address 1: 1885 MOUNTAIN LAUREL CIRCLE Address 2:
City: HIGHLANDS RANCH State: CO
Zip Code: 80126 Country:
Status: Historical Email:
Actions\Amendments
Click here to view 4 actions\amendments associated with this company
Puppy, who gave Kevin West these CMKM shares?
"We here at "Foundation of the Heart" have a few million donated shares of CMKM Diamonds (from individuals and not from CMKM Diamonds, Inc.)"
From Kevins charity website
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Foundation of the Heart
Please Help by giving "A Hand Up" today
Do a Kind Deed for Someone Today and help "MAKE THE WORLD A BETTER PLACE"
CMKM Diamonds, Inc.
Most people don't realize the financial condition of our stock markets. If they did, and if they took action, we would not allow our president to go forward with his Social Security plans of moving a percentage of our retirement money into the stock market. Although the plan may have merit, the markets must be cleaned up first!
The SEC has recently put a new regulation into effect to help combat this problem (naked short shares and/or counterfeit shares... see links at bottom of page to explain) called Regulation SHO and we now are waiting, as the people of the United States of America, to see if our governmental agencies will enforce the new rules and force a cleanup in the market place. If they don't, then we cannot support moving our Social Security monies into a corrupt market!!!
We here at "Foundation of the Heart" have a few million donated shares of CMKM Diamonds (from individuals and not from CMKM Diamonds, Inc.), a mining company from Las Vegas that has over 1.4 million acres of possibly the "richest land in the world" that surrounds diamond bearing land in Canada. This investment is what we have chosen to be the key to funding our goals. CMKM Diamonds, Inc., that goes by the stock symbol of CMKX, is presently trying to fight the corruption that has been placed on them by various companies and agencies in the stock market that have been responsible for destroying as many as 7,500 companies since 2000 through illegal activities that have gone un-contested by the governing agencies like the Securities Exchange Commission.
CMKX has quite possibly been the target of the largest fraudulent attempt to bankrupt and destroy a company in the history of the markets. But, CMKX is fighting back and have hired one of the top legal guns, Roger Glenn of Edwards and Angell law firm, (we like to say our investment is protected by an Angel) in our country along with hiring the former managing director for Howard Hughes, Robert Maheu as co-chairman. Although anyone can purchase 1 million shares of CMKX today (2-06-05) for $200, it is only that low (in our opinion) because of the extreme illegal manipulation that is taking place in our American markets. CMKX is fighting this problem and have dedicated themselves to correcting the injustice that has been done to them and all of their shareholders. CMKX could have well over 50,000 investors today and they have more investors than any other Pink Sheet trading company in the history of our market place. Because they have this huge investor base (VOICE) and because they have the goods (diamonds, gold and silver and possibly several other minerals), they also have been able to get the financial backing to continue their business plans and combat the illegal activities that have been waged against them in the market place. We believe, (do not take our opinion as investment advice. You must do your own investigation into the facts to make your investment decisions) that this company is worth in excess of $1 per share and will soon be able to move to that price once the corruption against it has been managed.
Some recent articles and news stories about the "Market Place Corruption" that may enlighten you to what is happening in our American markets
http://web.archive.org/web/200502082...m_diamonds.htm
Video: CMKX Rally at the Depository & Trust Corporation
Diamonds (and Conspiracy Theories) are Forever
By Christopher Faille, Senior Financial Correspondent | Thursday, May 24, 2007
Some have blamed the collapse of CMKM Diamonds on short selling and on the practice of ‘naked shorting' in particular. But that contention has morphed into a more desperate delusion, the idea that there is a ‘sting' under way, and that the company collapsed on purpose.
CMKM Diamonds Inc. is a penny-stock company with, in essence, no assets. It is also a classic case of a company whose (former) managers blamed a short-selling hedge fund conspiracy for its problems—the real cause of which seems to have been their own larcenous tendencies.
Apparently, during the last several years, CMKM, which purported to be a mining company, sold a total of $200 million worth of stock to the public. It isn't clear exactly where the money went, but it didn't go into building a self-sustaining corporation. There is now just $558 in the corporate treasury. Aside from the petty cash, the only asset consists of an interest in another quite-speculative mining company.
Nonetheless, the founder of CMKM, Urban Casavant, had and still has some vocal defenders who claim that he is either: (a) the victim of a naked short-selling conspiracy, or (b) a brilliant sting artist who is working with government agencies to snare such conspirators, and who in the process will yet make money for his trusting investors.
Diamonds in the Springtime
On March 29, Mr. Casavant resigned the posts of chairman of the board, sole director, and secretary of CMKM Diamonds Inc.
In a release, he said that health issues were forcing him to step down, but that he was confident he had found the right man to take over, naming Kevin West, then the interim chief executive, as chairman of the board.
"Mr. West has proven his tenacity along with his care and concern for the shareholders of the company over and over again through an extremely difficult time," according to the release.
On April 4, a self-identified software engineer, John A. Rayo Jr., commenting on an SEC rule proposal, said that he had lost $100,000 on two stocks recently—CMKM was one of them. He blamed the losses on naked short selling, and he demanded that the "grandfather clause" of Reg SHO be eliminated to reduce this activity.
The SEC has received many such comments. Naked short selling has generated heat for some time now. In brief, it is the practice of shorting a stock without first borrowing it, and it creates a risk of a "failure to deliver" (FTD). FTD statistics are often used as a proxy for the practice of naked shorting itself in debate over the latter. That brings us to Reg SHO, a regulation that includes provisions intended to reduce FTDs, and the SEC's recent deliberations on amendments that would close "loopholes" in the regulation as it stands.
Although Mr. Rayo's losses on CMKM (and those of other commenters) would seem to be an example of victimization by an old-fashioned pump-and-dump scam to which the grandfather clause of SHO is irrelevant, his demand does reflect an important political or psychological point. Such scammers (or, in some cases perhaps, simply incompetent managements) have proven willing and able to deflect shareholder anger at their activities in the direction of alleged short seller conspiracies. CMKM shows both the prevalence of this sort of magical thinking, and its futility.
Just two weeks after Mr. Rayo's comment, CMKM's new chairman, Mr. West, posted a message on the company web site that indicated the extent of his frustration with certain message board posters who were encouraging fellow investors to believe in the "sting" theory, and thus in "fortunes waiting just around the corner … accounts that have been set up with money or other assets to be delivered to shareholders. These rumors are simply not true," he said.
He also gave the screen names used by the posters: Abadgoodgirl, Jay Adobe, and Acca Dacca.
On April 30, a state court judge in Las Vegas issued a temporary restraining order prohibiting Mr. Casavant from hiding, altering, or destroying any records, or disposing of certain assets that may rightly belong to the company. A hearing is scheduled for May 15, before Nevada state judge Mark R. Denton, on CMKM's motion for preliminary injunction. Mr. Casavant couldn't be reached for comment, and the court records still list "Unknown" where the defendant's attorney's name should be.
On May 4, in an exchange of e-mails, Mark Faulk, who has written a book (not yet published) about CMKM, said that the book "started out to be a story about people from outside the company naked shorting the company to death, but once I started digging into it, I realized that it was far uglier than that. While I still believe that a naked short does exist in CMKX [the stock symbol], it's a very small part of the problem in this case. With 703 billion real shares, any naked short added to that total is just a piling-on effect."
Hundreds of Billions of Real Shares
In 2002, Mr. Casavant accumulated more than one million acres of mineral-rights claims in and around Saskatchewan, Canada. Then he came to Las Vegas and encountered two penny-stock promoters: John Edwards and Gary Walters. They offered to raise $100 million for him so that he could develop his mineral claims.
Together, through the acquisition of a publicly traded shell company, the three men created CMKM Diamonds Inc. They issued press releases telling the shareholders that CMKM had found promising kimberlite pipes, (subterranean geological structures that frequently hold diamonds), and that it possessed zinc claims, uranium claims, and gold mines in South America. They began selling stock for 1/100th of a penny per share.
In December 2002, in a press release, CMKM said it was instituting a new accounting system "to insure seamless integration with newly enacted Securities and Exchange Commission auditing practices for public companies." Pursuant to that plan, CMKM hired David Desormeau as treasurer in January 2003. Mr. Casavant also made him secretary and treasurer of a related company, Casavant International Mining, in July 2004. Together, Messrs. Desormeau and Edwards directed the stock trading activities of the CMKM—under the stock symbol CMKX.
The new management of CMKM charges that, between his hiring and April 2004, Mr. Desormeau had sold more than 20 billion shares of company stock "through a maze of third-party companies." But on April 5, 2004, Mr. Desormeau, apparently dissatisfied, wrote a letter to Mr. Casavant demanding $1.5 million for his "work in the past three years." Mr. Casavant apparently decided to grant him his wish through further issuances of company stock. CMKM transferred an additional 40 billion shares to a company Mr. Desormeau controlled, Business Works Inc., subsequent to that demand.
Through 2003 and 2004, the management group promoted the idea that a major buyout was forthcoming. They did manage to simulate a good deal of buying—and they sold their own shares into it.
While they were doing this, they didn't bother with little details like filing audited reports as required by law. The Securities and Exchange Commission instituted a 12J proceeding in March 2005. This is an action (pertaining to a delisting) brought when a company has failed to file audited reports in a timely manner. Although 12J proceedings usually involve merely the SEC's enforcement division attorneys and the corporation's attorneys, in this case a shareholders group hired counsel and asked to intervene. The administrative law judge allowed the intervention, by an order signed April 12, 2005.
Delisting and Protest
In connection with the 12J proceeding, Mr. Casavant asserted his Fifth Amendment right to refuse to testify. CMKM requested that the Depository Trust & Clearing Corporation be ordered to turn over all "customer account service reports for receipt and delivery of CMKM Diamonds [securities]; all reconciliation clearing sheets for CMKM Diamonds; all documents that show the daily closing position for each ‘Participant'; stock borrow activity reports and all records related to borrowing of CMKM Diamond shares under the [National Securities Clearing Corporation] Automated Stock Borrow Procedures," and much else.
The chief administrative law judge, Brenda P. Murray, denied this request on the ground that it concerned matters "not at issue in this proceeding." Since CMKM acknowledged that its stock was registered with the SEC, and that it had failed to file the documents required of a registered issuer, the only question left for Ms. Murray was whether "necessary and appropriate for the protection of investors, to suspend for up to 12 months or to revoke the registration of a security."
On July 12, 2005, she ordered the registration revoked in a scathing 14-page opinion in which she strongly suggested that everything about the company—even its alleged headquarters address—was phony. The address of the supposed headquarters was, she wrote, "occupied only by a hot rod shop."
The ruling had an air of inevitability to it. Nonetheless, it inspired a protest, convened in lower Manhattan on July 29, in front of the DTCC offices. According to journalist and columnist Gary Weiss, the protestors carried placards saying things like "Counterfeiting Stocks is a Crime." The spectators were "mostly office workers on rational errands" who were "puzzled by all the bizarre anger being directed in their general direction."
Skipping forward to February 2007. That was when one shareholder—G. Gene Hurd, acting as his own attorney—brought a lawsuit in federal court. He alleged that he had purchased more than 200 million shares of CMKM stock between June and October 2004, and that its value had been undermined by Mr. Casavant's fraudulent misrepresentations, and by the company's inability or unwillingness to file the required documentation with the SEC. Furthermore, one count in Mr. Hurd's complaint attempts to do what is known in the law as "piercing the corporate veil."
Mr. Casavant, the complaint alleges, "through his actions, including the loans, advances, and transfers to himself and [another corporate entity], maintenance of all records in his home, his appointment as the sole director, officer, and employee at most times relevant to this action, and appointment of only immediate family members to corporate officer positions, is for all intents and purposes the alter ego of CMKM and is thus personally responsible for all debts of the corporation…."
It was also in this February that an investor message-board service hosted a poll on the question of CMKM's failure. The question was worded: "What do you really believe about the whole NSS [naked short selling] issue?" Participants were given the following options: NSS is the standard scam excuse to fool idiots; CMKX maybe NSS'd but failure NOT due to any NSS; NSS is EXACTLY the reason CMKX failed; CMKX failed on purpose to catch NSS'ers.
The most popular of those answers was the first—that NSS is the standard excuse. This poll caused Mr. Weiss to comment, on his blog, that "microcap investors aren't fools."
Creating A New CMKM
So we come full circle. In the final days of March, Mr. Casavant resigned, citing health concerns. At this time, CMKM was a defendant in three lawsuits—Mr. Hurd's, a separate lawsuit brought by an alleged creditor, and another filed by one-time joint-venture partners. According to the new management, CMKM had no attorneys actively involved in defending these actions at the time of Mr. Casavant's departure.
On April 20, the new management—which had by now relocated the headquarters from Las Vegas to Tyler, Texas, to better communicate with William Frizzell, the attorney in charge of efforts to recover assets for the company—put out an extraordinary press release.
CMKM, according to the release, had just received "several boxes of corporate records revealing evidence not previously known to new management." The documents show the forfeiture of all claims and mineral rights, and paint a picture of a company where the only tangible asset is a 45 million share certificate of another penny-stock company, Entourage Mining Ltd. (OTCBB: ETGMF).
Mr. West has also recently expressed his frustrations with the sting theory that some message-board posters continue to promote. "The former Chairman stepping down last month had absolutely nothing to do with a plan. There is no secret sting in place, compartmentalized management or any other such secret operation. This is a very critical time, and if we don't correct the problems from the past, we will further delay our move into the future."
Perhaps more fittingly the last word should belong to Mr. Faulk, the author who once saw this as a naked-shorting issue, but who now regards it as an inside job. He suggested several possible reasons for the persistence of the "sting" theory, one of which is that the theorists are "emotionally unbalanced individuals who feed off the adulation that so-called ‘guru' status affords them."
Whether that's the case or not, he said, such theorists are "toying with people's lives."
CFaille@HedgeWorld.com