Selling Shares by the Billions to Racing Fans
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By FLOYD NORRIS
Published: September 29, 2006
Was this stock being traded by crooks? Should the brokers have noticed? How about the regulators, who now charge that the brokers missed “red flags” but may have missed a few themselves.
The story of a tiny Nevada company that claimed to be in the diamond mining business but spent the little money it had on sponsoring a race car, sheds light on the market for small stocks that can fly below the radar for years.
It is a story that involves a former F.B.I. agent and associate of Howard Hughes, who was promised a lot of money for doing very little but says he did not get the cash, and an auditing firm that was fired 11 days after it was hired. There is a claim that the Patriot Act — the law passed after Sept. 11, 2001, as a way to fight terrorism — was violated.
The company, CMKM Diamonds, never traded for as much as 2 cents a share, and most of the trades were for about a fifth of a penny. But that did not stop one trader from taking in an impressive $53 million. He sold more than 259 billion shares from 2003 to 2005, a vast majority of them before the company had bothered to let investors know so many shares existed.
All that from stock in a company that, when it last filed a balance sheet with the Securities and Exchange Commission, in 2002, reported total assets of $344.
After that, the company went into the diamond business, or at least said it did, acquiring some mineral claims in Canada. Some of those claims were later given away because the company could not come up with the money needed to work on them, but it did spend $4 million to promote itself at “funny car” races by sponsoring the CMKXtreme car, which had a drawing of a diamond and a miner on its side.
The S.E.C. later concluded the company had lied when it claimed it did not have to file reports with the S.E.C., and revoked its registration. The company said that it made an honest mistake when it filed a form claiming the exemption, and that the S.E.C. should have noticed that the form was obviously in error.
While it was not filing financial statements, it was seeking publicity, both through the race car and through press releases.
One of them reported the hiring of Robert Maheu, a former F.B.I. agent who it said had “served as an adviser to many great men and companies throughout the history of America.” It listed some of those he had been associated with, including Howard Hughes and the C.I.A., adding, “To list all of Maheu’s accomplishments would turn this brief announcement into a novel.”
Mr. Maheu became co-chairman of the board and chairman of the audit committee, at a salary of $40,000 a month, but his testimony before the S.E.C. convinced an administrative law judge that he was not very well informed. He did not know how many employees the company had, or what they did. He was not familiar with the company’s assets or liabilities.
Nor had he ever visited the company’s offices. But that is no surprise. One address it gave to the S.E.C. was actually the home of a hot-rod shop.
When I reached Mr. Maheu this week, he said his lawyer had told him not to comment, but he did say the company had not paid him what he was owed.
Perhaps the highlight of this story was the audit firm that left quickly, after warning the company’s board of possible criminal activities. The company’s lawyer protested that the auditor could not know any such thing, given that so many of the company’s records could not be found.
This week, NASD, the regulatory agency for the over-the-counter and Nasdaq markets, filed a disciplinary complaint against NevWest Securities, the small brokerage firm that handled the trades for the man who sold more than 30 percent of the shares in the company, giving the firm an address that was a postal box. As it happened, the company used the same address.
The NASD claimed NevWest, which is based in Las Vegas, should have filed reports of “suspicious activity” with the Treasury Department, as required by the Patriot Act. That section is supposed to deal with money laundering, but it requires brokers to report evidence of violation of any federal law.
Sergey Rumyantsev, NevWest’s president, told me his firm did nothing wrong. Anyway, he said, NASD examiners did not complain when they learned of some of the trades in 2004.
What does all this prove? It may indicate that the Patriot Act gives regulators an unexpected tool to force brokers to tell the government when they see funny business. It may also reflect the fact that regulators do not even look at many filings.
And it shows that this can go on and on. CMKM has reached a deal to sell what assets it has to Entourage Mining, a penny stock company based in Vancouver, British Columbia, which will pay with shares that will be distributed to CMKM holders.
Looks like a hot stock to me.
