Conversion Solutions leader seeks sanctions against SEC
Conversion Solutions Holdings Corp (U:CSHD)
Shares Issued 103,135,657
Monday April 07 2008 - Street Wire
Also U.S. Securities and Exchange Commission (U:*SEC) Street Wire
by Lee M. Webb
Conversion Solutions Holdings Corp.'s founder Rufus Paul Harris is seeking sanctions against the U.S. Securities and Exchange Commission (SEC) and its attorneys for allegedly engaging in unethical practices in the regulator's fraud lawsuit against the Georgia promoter and his virtually worthless company.
The U.S. regulator filed its securities fraud suit against Mr. Harris and the purported $7.3-billion OTC Bulletin Board promotion in the U.S. District Court for the Northern District of Georgia on Oct. 24, 2006. (All amounts are in U.S. dollars.)
The SEC claims that Conversion and Mr. Harris inflated the company's share price by filing fraudulent regulatory reports and issuing false and misleading press releases that, among other things, touted bogus bond assets that supposedly ran to billions of dollars.
Mr. Harris did not bother hiring legal counsel for the company or himself and neither defendant submitted a timely answer to the SEC complaint, so entries of default were filed against the semi-literate Georgia promoter and Conversion in November of 2006.
Between arrests, jail time, evictions, dodging creditors and, among other things, spending considerable time trying to mollify the dwindling flock of Conversion zealots who congregate on his members-only Internet message board, Mr. Harris belatedly got around to filing some pleadings with the court last year.
Before continuing with a review of the remaining outstanding filings awaiting rulings from Judge Clarence Cooper, Stockwatch would like to offer a clarification regarding an April 2, 2008, article.
In reviewing the SEC's Nov. 16, 2007, motion for a default judgment, Stockwatch reported that, as part of the requested sanctions against the defendants, the U.S. regulator is seeking civil penalties reflecting the larger of the ill-gotten gains or as much as $130,000 against Mr. Harris and $650,000 against Conversion.
As pointed out in a telephone call from SEC senior trial counsel Alana Black, the requested civil penalties are per violation.
"The potential civil penalties that might be assessed against Mr. Harris when the hearing is ordered by Judge Cooper are per violation of the law, not total, so there is the effect for them to multiply out to almost $1-million, if the judge were to assess the maximum amount on each of the violations that has been charged in the complaint," Ms. Black noted.
Stockwatch regrets any confusion that may have resulted from the lack of clarity in the April 2 article.
Meanwhile, Ms. Black, and perhaps particularly Ms. Black, is one of the SEC attorneys that Mr. Harris wants Judge Cooper to sanction for alleged misconduct in the case.
Dirty deeds
On Dec. 17, 2007, Mr. Harris filed a verified motion to compel discovery and motion for sanctions for failing to disclose as part of his effort to derail the SEC's pending motion for a default judgment and possible civil penalties.
After repeating previous claims that he made a general appearance in the case in October of 2006, submitted documents to the court and executed a consent agreement with the plaintiff on Nov. 7, 2006, Mr. Harris goes on to quote extensively from Rule 26 of the Federal Rules of Civil Procedure.
Briefly, Rule 26 covers matters relating to discovery in civil litigation.
Mr. Harris claims that he held Rule 26 talks with the SEC's attorneys on Nov. 3 and Nov. 6, 2006, to discuss possibilities for a prompt settlement or resolution of the case, issues relating to preserving discoverable information and, among other things, to develop a discovery plan.
"Pursuant to the agreement at the aforesaid Rule 26 meeting, the defendant furnished a deposition and provided all relevant information and documents in the defendant's possession to the plaintiff," Mr. Harris declares.
In fact, Mr. Harris was actually deposed on Oct. 30 and Nov. 2, 2006, so that deposition was not "pursuant" to any agreement stemming from alleged meetings on Nov. 3 and Nov. 6.
Repeating an allegation from a previous filing, Mr. Harris claims that the SEC agreed to obtain trading records for Conversion and promised to send him "a copy of all depositions, statements and other documentation obtained from any other source, including third parties."
"The plaintiff and its attorneys failed to disclose or furnish anything at all to the defendant at the initial meeting as they are required to do, including, but not limited to the disclosure of everything that could have led to halting the trading of Conversion Solutions stock in the first place; said halt causing the loss to CSHD shareholders of hundreds of millions of dollars and raising more than mere suspicions that the halt by the plaintiff was for improper reasons with no evidentiary basis at all," Mr. Harris claims, parroting a run-on rant from an affidavit also filed on Dec. 17.
"The failure of the plaintiff to obtain and disclose the trading records for the defendant corporation (CSHD) shows a material and intentional disregard for the rights of the defendant and the shareholders of CSHD, or in the alternative, those records would vindicate this defendant and the corporation and would actually show that the plaintiff had absolutely no reason to halt the stock from trading and had no reason for the filing of the lawsuit, especially when those very trading records are needed by the plaintiff to prove the largest allegation of their complaint, which was a 'pump and dump' scheme by this defendant," the promoter rambles on.
"The plaintiff and its attorneys did none of the above; instead of furnishing any disclosure to the defendant, they just withheld disclosure and tricked him into a default situation so he wouldn't be able to file an answer," Mr. Harris subsequently alleges.
"The defendant needs the opportunity to have the plaintiff and its attorneys deposed to verify the facts contained in this motion, as well as secure the disclosure that he has been denied due to the unethical practices of the plaintiff's attorneys," he continues.
Mr. Harris claims that he has made "a good faith attempt on multiple occasions ... to confer with Alana Black and other attorneys in the office of the plaintiff in an effort to resolve the discovery dispute and secure copies of the CSHD trading records, depositions, statements and/or affidavits without court action but all efforts have been repulsed or just ignored by the plaintiff's attorneys."
In keeping with the grossly inflated clams that marked Conversion's overblown promotion, Mr. Harris goes on to offer an exaggerated assessment of the significance of the SEC fraud suit.
"This is a case of great public interest which affects thousands of innocent shareholders as well as the integrity of the plaintiff and its attorneys," Mr. Harris declares. "To avoid the appearance of any impropriety, favor or prejudice, this court must allow proper discovery and hold the plaintiff's attorneys accountable should it become known that this entire lawsuit was filed to protect large naked short sellers rather than to protect the innocent shareholders of CSHD.
"The actions and the integrity of the plaintiff (SEC) and its attorneys have come into public scrutiny recently and this case is a class example of the SEC 'unclean hands' and of some of the abuses of the court process that come into question.
"The failure of the plaintiff and its attorneys to allow or furnish any required disclosure to the defendant ... should be dealt with harshly by this court in the form of appropriate sanctions, fines, dismissal of the case or any such other punishment deemed appropriate by this court, along with a referral to the U.S. Attorney General and the Georgia Bar Association for investigation."
With that, Mr. Harris brings his lament about the SEC's allegedly dirty deeds to a close.
Beyond help
The SEC filed a brief in opposition to Mr. Harris's motion to compel discovery and for sanctions on Jan. 4 of this year.
While a significant portion of Mr. Harris's filing is related to what he mistakenly calls the "halt" of Conversion's trading in October of 2006, the U.S. regulator dispenses with its discussion of the matter in an early footnote.
"The trading suspension was never part of the instant lawsuit, and this brief does not address various issues raised by Defendant Harris concerning it," the SEC states.
Turning to a discussion of the relevant facts, the SEC paints a remarkably different picture of the case than the one served up by the Georgia promoter.
While Mr. Harris claims that he "furnished a deposition" pursuant to an agreement entered into during a Rule 26 meeting on Nov. 3 and 6, 2006, the U.S. regulator offers a contradictory account of that development.
"Defendant Harris appeared, under subpoena, for his own deposition on October 30, 2006," the SEC states. "Because Harris was over six hours late for his deposition, he returned to continue his testimony on November 1, 2006."
While Mr. Harris's filings seem to indicate that he was anxious to move the case forward and was diligent in his efforts to obtain information, the SEC's filing suggests otherwise.
In addition to Mr. Harris, the SEC claims that it deposed seven other witnesses pursuant to the expedited discovery authorized under two court orders.
"Defendant Harris was provided with advance notice of each of these seven depositions; however, he did not attend any of them, not even those conducted locally in Atlanta or telephonically, which he presumably could have attended at little or no cost," the regulator says.
Moreover, the SEC claims, it does not appear that Mr. Harris has conducted any type of discovery at all in the case.
"To date, plaintiff has not received notice of a single deposition, subpoena for documents, request for admission, or interrogatory by defendant Harris," the U.S. regulator notes. "Moreover, to the best of plaintiff's knowledge, Mr. Harris has not ordered any transcripts from the court reporting firm that transcribed the depositions taken by plaintiff."
According to the SEC, Mr. Harris's claim that he conducted a Rule 26 meeting with counsel for the plaintiff on Nov. 3 and 6, 2006, is false.
While SEC attorney Ms. Black acknowledges that, because Mr. Harris has represented himself throughout the lawsuit, she has accepted and responded to numerous phone calls and e-mails from him, none of those communications bore any resemblance to a conference pursuant to Rule 26 to develop a discovery plan.
The U.S. regulator says that Mr. Harris's claim that counsel for the plaintiff offered to send him copies of all evidence gathered concerning the case, including trading records and free copies of all deposition transcripts, is also false.
Similarly, the SEC says that the promoter's claim that he was tricked into a default situation is false.
The SEC also denies Mr. Harris's claim that the U.S. regulator seized his records and would not grant him access to them.
"Plaintiff has not obtained any evidence in this case from criminal authorities, through seizure or otherwise," the SEC claims.
SEC lawyer Ms. Black then goes on to direct a bit of a zinger at Mr. Harris, seeming to suggest that he is out of his depth and beyond help.
"It is possible, but not likely, that counsel for plaintiff could have helped defendant Harris understand these factual misstatements, had he conferred with her concerning the Verified Motion to Compel Discovery and Motion for Sanctions for Failing to Disclose before filing it," Ms. Black remarks. "However, Harris did not confer with counsel for plaintiff, and does not appear to have made any attempt to do so."
According to the SEC, Mr. Harris's motion should be denied because he has not complied with the requirement under federal rules of civil procedure that he certify that he has in good faith conferred or attempted to confer in an effort to secure the disclosures without court action.
"If the court nonetheless reaches the merits of Harris's motion, it should be denied because plaintiff had no obligation to make Rule 26(a) disclosures in light of the entry of default," the U.S. regulator concludes.
Stockwatch will continue to follow developments in the case.
Meanwhile, a meagre 10,000 shares changed hands as Conversion, which traded as high as $4 per share at the peak of the promotion, closed at one-10th of a penny on April 4.
Comments regarding this article may be sent to lwebb@stockwatch.com.
(More information regarding Conversion Solutions Holdings Corp. is available in Stockwatch articles published on Oct. 13, 16, 18, 20, 24 and 26; Nov. 2, 3, 7, 10 and 16; Dec. 5, 7 and 11, 2006; May 9, 10, 11, 14, 17 and 22; June 12; July 11, 2007; and April 1, 2 and 4, 2008.)
