UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK
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MADISON STOCK TRANSFER, INC.,
CV 06-3926
Plaintiff,
-against-
NETCO INVESTMENTS, INC., and
MARCO CHAVARRIA, ANSWER AND COUNTERCLAIM TO
Defendants. THE CROSS-CLAIM
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Defendant Marco Chavarria (“Chavarria”) files this, his answer and counterclaim to the cross-claim filed by intervenors AJW Partners LLC, New Millenium Capital Partners II, LLC, AJW Offshore, Ltd., and AJW Qualified Partners, LLC:
ANSWER TO CROSS-CLAIM
1-13. Paragraphs 1 through 13 are intentionally left blank.
14. Chavarria lacks specific knowledge as to the averments in paragraph 14 of the cross-claim and therefore denies the allegation.
15. Chavarria lacks specific knowledge as to the averments in paragraph 15 of the cross-claim and therefore denies the allegation.
16. Chavarria lacks specific knowledge as to the averments in paragraph 16 of the cross-claim and therefore denies the allegation.
17. Chavarria lacks specific knowledge as to the averments in paragraph 17 of the cross-claim and therefore denies the allegation.
18. Denied. Based on information, the cross-claimants entered into a conspiracy with individuals to defraud the shareholders Privada Inc. The money was paid, not to the benefit of the shareholders, but to the benefit of officers of the company now known as Privada, Inc., and the cross-claimants unlawfully induced said officers as part of a fraudulent scheme to obtain unregistered securities so they could “dump” them onto the market rather than hold them as a legitimate financing vehicle.
19. Denied. Based on information, the entity now known as Privada, Inc., never received any benefit from the payments and the funds, with the knowledge of the cross-claimants, were diverted for the personal use of individual officers of the corporation.
20. Denied as stated. The agreement constitutes a lengthy document that must be read as a whole. Citing portions thereof creates a misleading understanding of the terms. Moreover, the conversion terms constitute a fraudulent scheme known as “death spiral financing” whereby shareholders of public corporations are defrauded through the printing and dumping of shares on the public market by debenture holders. The “death spiral financing” provisions are against public policy and should not be enforced. On the contrary, if the cross-claimants are owed money, it should be reduced to a monetary judgment.
21. Denied. It is denied that the text of the debenture is representative of the text in all of the convertible debentures and Chavarria requests that the cross-claimants immediately produce all of the alleged agreements. Moreover, it is denied that the debenture was duly authorized by the corporation and its shareholders, or a bona fide officer of Privada Inc.
22. Denied. It is denied that Privada, Inc., has any obligation to the cross-claimants. On the contrary, as stated above, the debenture constituted a part of an elaborate “death spiral financing” scheme perpetrated by the cross-claimants and a single person who was not duly authorized to execute the agreement. Finally, as the “death spiral financing” instrument plainly violates public policy and constitutes a fraud upon the shareholders of Privada, Inc., any amount due should be reduced to a monetary judgment and no other relief should be granted.
23. Denied as stated. It is admitted that the cross-claimants unlawfully, and in violation of federal securities laws, obtained billions of shares of Privada, Inc., to the detriment of the shareholders, and “dumped” them onto the public stock market all while being a control person and affiliate of Privada, Inc., which effectively meant that the securities should have been restricted. Based on information, the cross-claimants earned hundreds of thousands of dollars and created a virtual automated teller machine by printing the shares and dumping them onto the market for the sole purpose of monetary gain and not as a bona fide investment into Privada, Inc. It is further averred that the cross-claimants effectively engaged in a racketeering scheme through multiple and ongoing violations of federal securities laws through the conversion of the instruments. It is noted that some of the “conversions” were forged by parties unknown, possibly agents of the cross-claimants, and not actually signed and executed by Rodrigo Calderon Araya, the duly authorized officer at the times material. Mr. Calderon Araya has publicly announced that his name was forged on conversion instruments involving the shares provided to cross-claimants.
24. Denied as stated. Cross-defendant Chavarria has no knowledge of any request made to him, as sole authorized officer, for the conversion of any notes. Prior to Chavarria’s tenure as authorized officer, rather than make demands on the former authorized officer, Rodrigo Calderon Araya, the cross-claimants obtained shares through forged conversion documents whereby a facsimile of Rodrigo Calderon Araya’s signature was transposed onto the documents in question.
25. Denied as stated. The terms of the convertible debenture do not authorize any third-party, including the transfer agent of Privada, Inc., to issue shares. The only person authorized to issue shares is Marco Chavarria, the sole authorized officer of the corporation.
26. Admit. It is admitted that Madison Stock Transfer has not issued shares. Madison Stock Transfer does not have authorization to issue shares to the cross-claimants. Furthermore, Madison Stock Transfer resigned as the corporation’s transfer agent. Presently, Privada, Inc., conducts its own share transfers. The only authorized person to issue a certificate is Chavarria. No request has ever been made upon Chavarria. In the event Chavarria received a demand, he would make an executive decision whether to issue shares.
27. Admit. It is admitted that Madison Stock Transfer lacks authority to issue shares to the cross-claimants. Even if authority existed, said shares must be restricted.
28. Denied. As stated, no controversy exists because no request has been made on the proper parties. The cross-claimants are attempting to bootstrap their claims into this action instead of filing a separate action against Privada, Inc., for breach of contract.
29. Denied. A simple breach of contract action in a court of competent jurisdiction would adjudicate the rights of the parties. The former transfer agent is not a proper party to any dispute between the cross-claimant and the cross-defendants.
30. Denied. A corporation cannot sign any document, it must act through its officers. The only person who can sign the requested document would be cross-defendant Chavarria. Furthermore, the plaintiff cannot be required to issue shares since it is not an agent of Privada, Inc., or Chavarria. Finally, such a declaration would evade federal securities laws in that any shares that the cross-claimants are entitled to should be restricted non-trading stock as a result of the control status and insider knowledge which the cross-claimants have.
31. Denied. Even if the cross-claimants can show that their agreements are valid, which they cannot, the proper remedy is a money judgment as enforcement of the “death spiral financing” arrangement constitutes a fraud against the public. If shares are required to be issued, they should be restricted securities as the cross-claimants are control persons of Privada, Inc., by virtue of their superior position.
First Affirmative Defense
32. The requested relief would require that Chavarria engage in money
laundering activities as the funds allegedly paid constitute criminally derived proceeds from various fraud, tax evasion, and securities fraud schemes. That is, based on information, the cross-claimants operate various international funds to avoid taxation by the United States Government and to conceal the identities of the investors who may have obtained said funds from fraud, narcotics violations, tax shelter schemes, and other illegal conduct. Furthermore, the payment to Privada, Inc., was part of an elaborate securities fraud scheme and any payment back to the cross-claimants, if any payment was actually made to Privada, Inc., may violate 18 USC §§1956, 1957.
Second Affirmative Defense
33. Any issuance of shares to the cross-claimants would violate the
corporate charter duly filed with the Secretary of the State of Texas and exceed the lawful limits of the corporation. As such, if it is found that the cross-claimants are entitled to relief, the amount owed should be reduced to a money judgment bearing a lawful rate of interest.
Third Affirmative Defense
34. Any issuance of shares to the cross-claimants should be deemed to be restricted shares as the cross-claimants are control persons of the company.
Fourth Affirmative Defense
35. The agreement for shares at a value below the market rate constitutes a scheme known as “death spiral financing” that effectively guarantees financial losses to the investment public. Thus, the terms of the agreement are against public policy.
Fifth Affirmative Defense
36. The convertible note agreement may have been fully satisfied and the cross-claimants have not specifically stated how much remains due on the convertible notes.
Sixth Affirmative Defense
37. Based on information, no money was actually paid by the cross-claimants.
Seventh Affirmative Defense
38. Based on information, Privada, Inc., never received any money or consideration from the cross-claimants.
Eighth Affirmative Defense
39. The claims are barred by fraud and the unclean hands of the cross-claimants.
Ninth Affirmative Defense
40. No agreement other than the agreement filed with the Court are in existence and in order to proceed with their claims, the cross-claimants must immediately provide a true copy of each executed agreement.
Tenth Affirmative Defense
41. No person authorized by Privada, Inc., executed the agreements in question. Based on information, the documentation was executed by a third-party who falsely represented his status as an authorized agent of Privada, Inc.
Eleventh Affirmative Defense
42. This Court lacks jurisdiction over this action since no adverse claimants exist and the intervenors have not laid any claim to the res in dispute in this intervenor action.
WHEREFORE, Cross-Defendant Marco Chavarria respectfully demands that this Court dismiss or deny the requests of the Cross-Claimants, award costs and fees to the Cross-Defendants, and grant any further relief that is appropriate and just.
COUNTERCLAIM AGAINST AJW PARTNERS LLC, NEW MILLENIUM CAPITAL PARTNERS II LLC, AJW OFFSHOE LTD, AND AJW QUALIFIED PARTNERS LLC
43. Chavarria incorporates paragraphs 14 through 42 above by reference as if fully restated again.
44. Based on information, the cross-claimants induced, without solicitation, former officers and control persons of Privada, Inc., to enter into a contract whereby money would be given to the control persons in exchange for a convertible debenture known as “toxic financing” or “death spiral financing.”
45. Under the terms of the note, shares are issued to the cross-claimants for a small fraction of the market price of the securities.
46. As a result, the share price continuously plunges because the cross-claimants dump the shares onto the market.
47. As the price of the shares goes down, the cross-claimants receive additional and larger amounts of shares.
48. In this case, the former officer of Privada, Inc., determined that the cross-claimants were only entitled to restricted shares of stock because they were affiliates and control persons of the corporation by virtue of their ability to effectively control the management of the corporation at their whim.
49. That is, the note holders were effectively the majority shareholders of the corporation because, at any time, they could control the company by simply requesting a conversion of shares.
50. Based on information, the cross-claimants received insider information about the affairs of the company and could predict the pricing of the shares based on the amount of shares they caused to be issued and subsequently released onto the market place.
60. After the officer of Privada Inc. stopped authorizing shares to the cross-claimants and others, forged authorizations to issue shares were made containing a facsimile version of Araya’s signature.
61. Based on information, the cross-claimants were aware that they received share certificates pursuant to a forged share authorization.
62. In addition, the cross-claimants apparently mislead and misrepresented their control person and affiliate status to their legal counsel to obtain legal opinions denoting that the shares could be issued as “free trading” shares.
63. Based on information and belief, the cross-claimants have formed offshore corporations in an effort to conceal the origination of the assets of their funds. On information, some of the money in the funds were derived from criminally activities such as fraud, tax fraud, and narcotics violations. By creating offshore vehicles, the cross-claimants continue to conceal their liabilities to the United States Government and the criminal origins of the funds in question.
64. Based on information and belief, the cross-claimants earned hundreds of thousands of dollars over the past several years through securities fraud and other criminal behavior associated with the notes.
COUNT I – Accounting in Equity
65. Paragraphs 14 through 64 are hereby incorporated by reference and are realleged as if fully set forth again.
66. As explained above, the cross-claimants received hundreds of thousands of dollars pursuant to the “death spiral” financing notes they offered.
67. The cross-claimants refuse to provide an accounting of the money and shares they received as a result of the notes in question.
68. The cross-claimants refuse to provide Chavarria with the records he needs to determine whether additional payments are due to the cross-claimants.
69. As an officer of the company, Chavarria is the person that has the responsibility to sign any request for the issuance of shares.
70. As a result, Chavarria has a fiduciary duty to the company, the shareholders, and to the cross-claimants to assure that the requests are valid and that money is owed.
71. Chavarria also needs to be provided with evidence that the convertible notes in question resulted in consideration to the corporation before he can issue shares.
72. Chavarria demanded an accounting from the cross-claimants.
73. The cross-claimants have failed to provide an accounting.
74. It appears that fraud has occurred and it is impossible to reconcile the records. That is, many of the shares that the cross-claimants received were the result of forged directions issued in the name of Rodrigo Calderon Araya to the plaintiff, but which Araya neither executed nor authorized.
75. Based on the above, Chavarria, as the only person who can authorize the shares to be issued on a request by the cross-claimants, is entitled to an equitable accounting.
WHEREFORE, Cross-Defendant Marco Chavarria respectfully demands that this Court direct an audited accounting in equity for the purpose of determining: (1) The identity of the parties who paid consideration that resulted in the debentures; (2) The amount of the original consideration; (3) The recipient of the original consideration; (4) The amounts and consideration received by the noteholders during the material times; and (5) The remaining amount due to the noteholders.
COUNT TWO – Action for Declaratory Relief
76. Paragraphs 14 through 75 are hereby incorporated by reference and realleged as if fully set forth again.
77. A justiciable controversy existed between Chavarria and the cross-claimants as Chavarria is the only officer duly authorized to issue and execute Privada, Inc., shares.
78. The cross-claimants have demanded, through the course of this action, that the Court enter a direction that shares of Privada Inc. stock be issued to them.
79. However, Chavarria has made the determination that any shares that the cross-claimants may be entitled to should be restricted pursuant to 17 CFR §230.144.
80. Pursuant to 17 CFR §230.144(a)(1), an “affiliate” of an issuer is a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the issuer.
81. In this case, by being the largest creditor of Privada Inc. other than Chavarria, and having the entitlement to convert shares to the point of taking over a substantial portion of the corporation, well in excess of 10%, at its whim, the cross-claimants are “affiliates” as they control the issuer.
82. In addition, pursuant to 17 CFR §230.144(a)(2)(iii), the cross-claimants effectively are beneficial owners of more than a ten percent equity interest in the corporation, deeming them to be affiliates.
83. As such, the securities that should be issued to the cross-claimants are “restricted securities” within the meaning of 17 CFR §230.144(a)(3).
84. All of the requirements of 17 CFR §230.144(b) have never been met which would allow the sale of the securities without a restricted legend.
85. Nevertheless, in an effort to evade the various rules governing the issuance of securities, the cross-claimants have requested that this Court direct the issuance of shares of stock at the whim of the cross-claimants.
86. Therefore, Chavarria is entitled to a declaration that any shares he is required to issue pursuant to a debenture held by the cross-claimants be restricted notwithstanding any paid legal opinion to the contrary.
WHEREFORE, Defendant Marco Chavarria respectfully demands that this Court declare and adjudge that any shares that are required to be issued by him as officer of Privada Inc. to the cross-claimants be deemed “restricted” pursuant to 17 CFR §230.144.
Respectfully submitted,
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Marco Chavarria
