Conversion Solutions founder pins losses on SEC lawyer
2008-04-04 14:53 ET - Street Wire
Also Street Wire (U-*SEC) U.S. Securities and Exchange Commission
by Lee M. Webb
Conversion Solutions Holdings Corp.'s founder Rufus Paul Harris claims that naked short sellers and the U.S. Securities and Exchange Commission (SEC), in particular one SEC attorney, bear the blame for hundreds of millions of dollars in investor losses following the collapse of his OTC Bulletin Board promotion.
The semi-literate promoter with a criminal record and a history of promotional debacles makes those claims in pleadings filed in connection with the U.S. regulator's securities fraud lawsuit against him, which has been languishing in a Georgia court.
The SEC filed its civil suit against Conversion and Mr. Harris in the U.S. District Court for the Northern District of Georgia on Oct. 24, 2006.
According to the SEC, Conversion and Mr. Harris filed fraudulent regulatory reports and issued false and misleading press releases claiming that the company owned billions of dollars worth of bonds, fraudulently boosting the share price in the process.
Neither Mr. Harris nor the company, which was touted as being worth $7.3-billion, bothered to file a timely answer to the SEC complaint and defaults were entered against both defendants in November of 2006. (All amounts are in U.S. dollars.)
In April and May of last year Mr. Harris tried to get back in the game by filing a confused and belated answer to the lawsuit, but Judge Clarence Cooper issued an order striking the answer on Oct. 30, 2007.
As discussed in a preceding article, Mr. Harris followed up with a motion for reconsideration of Judge Cooper's order on Nov. 7, 2007. The SEC filed a brief in opposition along with its own motion for a default judgment against Mr. Harris and Conversion on Nov. 16, 2007.
Before returning to an examination of subsequent outstanding pleadings, some examples of the Georgia promoter's penchant for shifting blame may be instructive.
Blame game
Mr. Harris's rather remarkable, and often wildly imaginative, attempts to avoid responsibility for his actions extend far beyond the events that resulted in Conversion's implosion.
For example, when the Georgia promoter was arrested and tossed in jail in January of last year, he put it down to the unfair consequences of his valiant efforts to break up a bar fight. While Mr. Harris may well have been involved in a New Year's Eve brawl, he actually spent most of the month in the slammer because of a probation violation.
When Mr. Harris was arrested and charged with 16 counts of animal cruelty in June of last year after Bartow county officials seized about a dozen horses that were dying of starvation in his care, the promoter put the blame on conspiratorial adversaries including "the Feds" and naked short sellers.
The ubiquitous "Feds" and other evil forces were supposedly behind yet another arrest and charge for drunk driving against Mr. Harris last year. It is not exactly clear who was responsible for his failure to appear in court on that matter, or for him subsequently dodging the bail bondsman who put up the $5,000 to spring him from jail following his arrest.
Among other things, an assortment of "Demons" ultimately connected to short sellers and other conspirators were apparently also behind Mr. Harris's eviction from his rented home.
In keeping with his habit of evading responsibility, Mr. Harris pins the blame for Conversion's collapse on an evil host comprising nasty naked short sellers, crooked hedge funds, manipulative market makers, corrupt regulators and a motley assortment of other perceived miscreants.
Much to the delight of Conversion's few remaining zealots and the amusement of other observers, Mr. Harris incorporated elements of some of his blame-shifting rants into his most recent court filings.
Snookered
On Dec. 17, 2007, Mr. Harris filed a document styled "Supplemental Affidavit in Support of Motion for Reconsideration and in Opposition to Plaintiff's Motion for Default Judgment and Supporting Memorandum of Law."
The filing is a tortured 18-page hodgepodge of irrelevant claims and unsupported allegations interspersed with mangled renderings of the rules of civil procedure and similarly mutilated interpretations of securities regulations.
Mr. Harris begins the affidavit in support of his Nov. 7, 2007, motion for reconsideration of the order striking his answer to the complaint by claiming that he has "a meritorious defense to all of the allegations."
Alas, more than 17 months after the SEC filed suit, the meritorious defence has yet to be seen because, according to Mr. Harris, all of his "records were seized and are in the possession and control of the plaintiff and its attorneys."
The U.S. regulator has previously denied that unsupported allegation and evidently the fact that the SEC does not even have the power to arbitrarily seize records escapes Mr. Harris.
The promoter claims that he was further stymied from filing a timely proper answer by the SEC's refusal or failure to make required disclosures.
Mr. Harris goes on to apparently take issue with Judge Cooper's interpretation of the rules of civil procedure in denying his May 15, 2007, motion to set aside the entry of default filed in November of 2006.
The literacy-challenged promoter claims that his appearance and submission of documents at an Oct. 25, 2006, hearing on the SEC's motion for a temporary restraining order and his subsequent consent to a preliminary injunction constitute enough of a defence under Rule 55 to preclude the entry of default.
Somewhat amusingly, when Mr. Harris filed his motion to have the default set aside, he incorrectly appealed to Rule 60. Judge Cooper noted Mr. Harris's blunder and graciously went on to base his deliberations on the appropriate standard under Rule 55.
Moving on, Mr. Harris says that he "furnished a deposition and otherwise provided all relevant information and documents in the defendants (sic) possession to the plaintiff" on Oct. 30 and Nov. 1, 2006.
Evidently the fact that this claim directly contradicts his earlier allegation that all of his records were "seized" escapes Mr. Harris, as does the fact that nobody with a lick of sense would hand over the only copies of relevant documents to the opposing side in a legal dispute.
Mr. Harris goes on to say that the SEC promised to send him "a copy of all depositions, affidavits, statements and other documentation obtained from any other source, including third parties."
Apparently Mr. Harris believes that the plaintiff was going to conduct, and presumably pay for, much of the groundwork for his defence, which would certainly be a novel approach to litigation.
In any event, the promoter says the U.S. regulator broke that alleged promise.
Mr. Harris moves on to an irrelevant discussion of a so-called "halt" and then segues into an equally irrelevant discussion of a proposed 6-for-1 additional issuance of shares and a thwarted plan to trap naked short sellers, which provides some insight to the promoter's peculiar interpretations of securities regulations and ignorance of basic market operations.
"The halt by the plaintiff and its attorneys has caused the loss to CSHD shareholders of hundreds of millions of dollars and it also raises more than the mere suspicions that the halt by the plaintiff was for improper reasons with no evidentiary basis at all," Mr. Harris proclaims.
Evidently Mr. Harris confuses a "halt" with a "trading suspension." The SEC does not "halt" stocks, but it can issue a 10-day trading suspension, as it did against Conversion.
The Georgia promoter suggests that the trading suspension, which does not form part of the lawsuit, was somehow connected to an attempt to thwart his cockamamie plan for a 6-for-1 additional issuance of shares as part of some scheme for a wacky "price reset" to $15 per share.
Apparently Mr. Harris does not understand that the market determines the share price and, moreover, the massive dilution proposed under his goofy plan would have driven the price down, not up.
The fact that any such share issuance would have to take the form of a dividend distribution is also apparently lost on the Georgia promoter, as is the fact that any such distribution requires some preliminary paperwork, which he never filed.
"The merger and the 6 additional shares, as I had it set up, would have exposed those who had 'Naked Shorted' hundreds of millions of illegal shares of FHAL and CSHD and further exposed the fact that the SEC has knowingly allowed this practice to go on unregulated and with no prosecutions and just looked the other way," Mr. Harris rambles on.
In order to protect "the influential 'Naked Short Sellers'" and save itself from embarrassment, Mr. Harris claims that the SEC "halted the stock (CSHD) and allowed those participating in the illegal activity to get rich, protecting those involved in the illegal activity, all at the expense of the innocent shareholders."
Turning to matters of arguably more relevance to the lawsuit, Mr. Harris claims that he was in settlement talks with SEC attorneys before and after the default was entered by the court clerk.
"Alana Black and Bill Hicks (both SEC lawyers) told me that if I agreed to return the CSHD Convertible Note Holders money that they would drop everything and dismiss the case," Mr. Harris alleges. "I responded by asking her to provide me the violated regulation by and through issuing the Convertible Notes.
"She never returned or discussed the issue again."
Interestingly, while a number of investors claim that Mr. Harris stiffed them in some Conversion-related convertible note scheme, the company's regulatory filings do not contain any disclosures regarding such a financing, something the promoter might want to consider when musing about securities violations.
After some more irrelevant discussion of the 10-day suspension and subsequent resumption of trading, Mr. Harris returns to his alleged "negotiations" with the SEC.
During those negotiations, the promoter claims that he told the SEC lawyers that he "was going to draw down on one of the bonds in question to prove it was real and valid," but Ms. Black told him that it would be considered fraud.
There is no indication whether Mr. Harris expressed his gratitude to the SEC attorney for that sage advice.
Apparently staggering amounts of money continued to fall into Mr. Harris's hands like manna from heaven, even after the wheels came off the promotion.
During the alleged negotiations, Mr. Harris says that he "supplied $2,000,000,000.00 ($2-billion) in treasury checks to Alana Black and her assistant."
"I asked Alana to work with me and place them into CSHD to fund it and she stated that she would talk with the higher up's (sic) and contact me back," Mr. Harris says. "She never made the return call or followed up."
After chastising the SEC for its "poor effort to prove the allegation of 'Pump and Dump' filed against the defendant," Mr. Harris claims that the trading records that the plaintiff allegedly promised to obtain will show that he, and the company, "have a valid defense to the Complaint that was filed."
Among other things, Mr. Harris apparently still has not come to terms with the fact, or Judge Cooper's early admonishment, that Conversion must be represented by an attorney.
Mr. Harris then serves up an imaginative interpretation of the preliminary injunction against the defendants and then rambles on about alleged roadblocks to his efforts to operate Conversion after the lawsuit was filed.
"This Court entered a consent order on November 7, 2006, allowing CSHD and myself to continue in business as usual subject to certain restrictions, however, the Transfer Agent, Atlanta SEC, Alana Black and Bill Hicks would not release the EDGAR codes to me so we could continue normal business without them and the Transfer Agent would not recognize me as the CEO with the EDGAR Codes, further harming the interests of the shareholders and violating the disclosure requirements of Rule 26 F.R.C.P.," Mr. Harris says in a rambling statement.
Among other things, the Nov. 7, 2006, preliminary injunction basically enjoined the defendants from engaging in any further fraudulent activity, which Mr. Harris candy-coats as permission "to continue in business as usual subject to certain restrictions." Conversion had no business outside of its fraudulent activities.
It is difficult to know what to make of the rest of Mr. Harris's run-on claims about the transfer agent, SEC lawyers, EDGAR codes, and so on, beyond the fact that it appears to be just another attempt to shift blame.
In rounding out the portion of the 18-page filing devoted to his affidavit in support of his motion for reconsideration of the order striking his answer, Mr. Harris attempts to summarize his excuses for failing to file a timely response.
"The failure to file an answer by Conversion Solutions and myself was not due to excusable neglect or inadvertence but was a result of the unethical and inappropriate actions of the Plaintiff, Alana Black and Bill Hicks in order to prevent me from obtaining the information necessary to file an answer and defenses and they kept the negotiations open until well after they obtained the unauthorized default," the promoter claims.
In short, Mr. Harris says that he was snookered by the SEC.
Mr. Harris devotes the remainder of the filing to "affirmations" in opposition to the U.S. regulator's motion for a default judgment, taking particular aim at the SEC's senior trial lawyer Alana Black.
Fade to Black
With respect to all of the substantive allegations concerning fraudulent SEC filings and false and misleading press releases in which Conversion claimed to own billions of dollars worth of bonds, Mr. Harris repeatedly serves up essentially the same response.
"Everything contained in any filings, reports or releases was true and correct to the best of my knowledge and belief at the time they were filed," Mr. Harris proclaims.
That oft-repeated response invites questions from some critics about the extent of Mr. Harris's previously touted knowledge of bonds and whether his beliefs have changed since the bogus bond claims were made.
Oddly, Mr. Harris attributes many of the SEC's allegations directly to Ms. Black, variously claiming that those allegations are "false," "totally false," "untrue" or "self-serving."
"I have proof and witnesses to substantiate the truthfulness of every release, report and filing," Mr. Harris insists.
Turning to a discussion of investor losses and the SEC's request for civil penalties, Mr. Harris is again seemingly preoccupied with Ms. Black.
"Alana Black prevented me from drawing down on the bonds which would have funded the business," Mr. Harris says. "Alana Black is responsible for any shareholder loss.
"Alana Black makes an erroneous statement that there were fraudulent misrepresentations that caused shareholder losses rather than her own unethical and fraudulent actions.
"I also request a hearing to present witness testimony to show that all filings, reports and releases were truthful and accurate and that no fraud or misrepresentation was done by Conversion Solutions or by me, as well as testimony to show that any and all shareholder loss was due to the unethical actions of the Plaintiff and especially attorneys Alana Black and Bill Hicks."
With that, Mr. Harris closes out his rant.
AI
