CMKM Diamonds Inc. (fka CMKX)

[IQ1]

LEGAL DUTIES OF STOCKBROKERS!!!!!!!!!!

Brokers can lend your shares to other investors, who may want to "short sell" them. That is, they are betting your stock will fall. There is no danger you will lose your shares because the brokerage will make sure you are covered.

http://www.willkie.com/files/tbl_s29Publications%5CFileUpload5686%5C2572%5CSEC_Proposes_Naked_Short_Selling_Antifraud_Rule.pdf
"Naked" short selling refers to selling short without having stock available for delivery and intentionally failing to deliver stock withing 3 day settlement period.
On July 28, 2004 SEC adopted Regulation under the Exchange Act . To help avoid failed settlements

The SEC could bring a civil action agains violators of Exchange Act rules can result in criminal liability. The SEC also states that broker-dealers could be liable for aiding and abetting their customers' fraud under the RULE.

http://www.fend.com/ldos.html
A broker must refrain from making an unsuitable recommendation even if the customer expressed an interest in engaging in the inappropriate trade or asked the broker to make the recommendation. See, e.g. ,Dane S. Faber, Exchange Act Release No. 49216, 2004 SEC LEXIS 277, at *23-24 (Feb. 10, 2004).

DUTY TO PREVENT "FINANCIAL SUICIDE" - In the NASD Rules of Fair Practice - Rule 2310-2 (5) it states that, "recommending the purchase of securities or the continuing purchase of securities in amounts which are inconsistent with the reasonable expectation that the customer has the financial ability to meet such a commitment, exceeds the reasonable grounds of fair dealing". Further, a brokers responsibility goes beyond mechanical obedience to all customer demands As the S.E.C. stated in Clyde J. Bruff, 50 S.E.C. 1266, 1269 (1992) [h]aving undertaken to act as an investment counselor for the Pattersons, Bruff was required to make only such recommendations as were in their best interests. Thus, even if the Pattersons wished to engage in aggressive and speculative options trading, Bruff was obliged to counsel them in a manner consistent with their financial situation. (citations omitted). See Charles W. Eye, 50 S.E.C.655, 658 (1991) ("Her request for a plan to increase that income was not a warrant to escalate risks unduly. If the only approach capable of producing the desired income involved significant dangers, Eye should have advised against it"); Eugene J. Erdos, 47 S.E.C. 985, 988 (1983), aff'd, Erdos v. S.E.C.742 F.2d 507 (9th Cir. 1984) ("Even though Mrs. C. may have desired 'quick profits', that did not entitle Erdos to ignore her individual situation and place her limited assets in risky investments"); and District Business Conduct committee v. Michael R. Euripedes, No. C9B950014, 1997 NASD Discip. LEXIS 45 at *13(NBCC, July 28, 1997) (representative has consultative duty when customers wish to engage in trading that is inconsistent with their financial situation). In re John M. Reynolds, Rel. No. 34-30036, 1991: As a fiduciary, a broker is charged with making recommendation in the best interests of his customer even when such recommendations contradict the customer's wishes. Thus, even if the committee suggested that Reynolds engage in aggressive and speculative trading, Reynolds was obligated to counsel them in a manner consistent with their financial situation. Duffy v. King Cavalier (1989) 215 Cal. App. 3d 1517, defines a stockbroker's fiduciary duty as prohibiting the recommendations of unsuitable securities even if the customer requests the recommendations. See also Gordon Scott Venters, 51 S.E.C.292,294-5 (1993) (notwithstanding client's interest in investing in speculative securities, broker had duty to refrain from recommending such investments when he learned about his customer's age and financial situation); F.J.Kaufman and Company of Virginia, 50 S.E.C. 164,168 (1989) ("[t]he suitability rule...requires a broker to make a customer-specific determination of suitability and to tailor his recommendations to the customer's financial profile and investment objectives"); and as stated in James B. Chase, 2001 WL 9637888 (NASDR 2001); [The broker] argued that his recommendations of FHC, which he admitted was a speculative stock, were suitable in light of [the customer's] change in her stated investment objectives from "income" to "growth" and "speculation". A customer's investment objectives, however, are but one factor to consider in determining whether the broker's recommendations were suitable for the customer. Furthermore, a broker cannot rely upon a customer's investment objectives to justify a series of unsuitable recommendations that may comport with the customer's stated investment objectives but are nonetheless not suitable for the customer, given the customer's financial profile. Thus, even where a customer affirmatively seeks to engage in highly speculative or otherwise aggressive trading, a broker has a duty to refrain from making recommendations that are incompatible with the customer's financial situation and needs. See e.g., Paul F. Wickswat, 50 S.E.C. 785, 786-87 (1991) ("The proper inquiry is not whether [the customer'] viewed [the broker's] recommendations as suitable, but whether [the broker] fulfilled his obligation to his client."). Even in cases in which a customer affirmatively seeks to engage in highly speculative or otherwise aggressive trading, a representative is under a duty to refrain from making recommendations that are incompatible with the customer's financial profile.[FN14]. Danile Richard Howard, Exchange Act Rel. No. 46269 (July 26, 2002), 78 SEC Docket 427,429-30; See also Pinchas, 70 SEC Docket at 1526 (customer's desire to "double her money" does not relieve registered representative of duty to recommend only suitable investments); and William C. Pointek, 81 S.E.C. 2451, 2003 WL 22926821 at *7(2003).
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Geoffrey Brod, a former Aeltus Investment Management LLC portfolio manager has been charged by the SEC with concealing personal stock trades held by mutual funds that he was overseeing. The SEC is also charging him with falsifying internal reports. According to the SEC, Brod’s wrongful activities are in violation of his company’s ethics, as well as the antifraud and reporting provisions of the 1940 Investment Company Act.

SEC rules mandate that Brod turn in quarterly and yearly reports of personal securities transactions to Aeltus, which mandates pre-clearance of all portfolio managers’ securities trades, prohibits short-term trades, allows no more than 30 securities trades in a quarter, and requires both a 60-day holding period and a yearly certification of code compliance.

Brod is said to have actively taken part in personal, short-term trading in public company stocks. He had access on a regular basis to mutual fund holdings and their transactions in securities that were traded publicly. His method of trading, says the commission, required a very short-term trading pattern, and his holding period lasted about two to seven days. He engaged in about 3,5000 personal trades.

Brod is accused of making about $410,000 from his transactions. In addition, the SEC says Brod submitted bogus quarterly and yearly reports to Aeltus. In the reports, he stated that he had no securities holdings or transactions to report. According to the SEC, he also falsely certified his yearly compliance with Aeltus’ Code of Ethics.

A hearing will take place to determine the veracity of the SEC’s allegations against Brod. Aeltus, now called ING Investment Management Co., fired Brod in 2003.

For many years, Shepherd Smith and Edwards has helped investors who have lost money. because of the misconduct of brokers and other members of the securities industry, recover their losses. We have successfully represented many clients throughout the U.S. and internationally, and our offices are conveniently located in Phoenix, Chicago, New York, San Francisco, Dallas, New Orleans, Houston, and Mexico City. Contact Shepherd Smith and Edwards for your free consultation.


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Morgan Stanley & Co. Inc., the world’s second largest securities firm, will pay $7.9 million for its failure to provide best execution to certain retail orders for over-the-counter securities, the Securities and Exchange Commission announced today. Morgan Stanley embedded undisclosed mark-ups and mark-downs on certain retail OTC orders processed by its automated market-making system and delayed the execution of other retail OTC orders, for which Morgan Stanley had an obligation to execute without hesitation.

“By recklessly programming its order execution system to receive amounts that should have gone to retail customers, Morgan Stanley violated its duty of best execution and defrauded its customers,” said Linda Chatman Thomsen, Director of the regulator’s Division of Enforcement. ``Best execution is a fundamental duty of a broker- dealer,'' Thomsen, added. ``Morgan Stanley violated its duty'' and committed fraud by setting-up its order-execution system "to receive amounts that should have gone to retail customers.''

The company began overcharging clients after embedding undisclosed fees on some trades when it adopted a new computer system to handle transactions in 2001, the SEC said. The lapses affected more than 1.2 million transactions valued at about $8 billion from 2001 through 2004. A Morgan Stanley trader stumbled onto the problem in December 2004 when unusually high trading in a company's stock generated a $400,000 profit within a few minutes, the SEC said. The trader alerted his supervisor, and by that afternoon a technician pinpointed the programming “error”.

All of Morgan Stanley’s revenues from its undisclosed mark-ups and mark-downs will be distributed back to the injured investors through a distribution plan, according to the SEC. The order requires Morgan Stanley to pay disgorgement of $5,949,222, prejudgment interest thereon of $507,978, and imposes a civil money penalty of $1.5 million.

Without admitting or denying the commission’s findings, Morgan Stanley consented to the entry of an order by the Commission that censures Morgan Stanley.``$8 million isn't enough of an impact on their revenue or bottom line to have me worried too much,'' said Jeffery Harte, an analyst at Sandler O'Neill & Partners in Chicago who recommends buying Morgan Stanley stock. ``$8 million is a rounding error.''

The SEC may examine other firms' systems for similar problems, said Elaine Greenberg, an SEC official in Philadelphia overseeing the case.

If you or someone you know has been the victim of investment fraud, contact Shepherd Smith and Edwards today to schedule a free consultation with an attorney. For decades we have successfully assisted investors recover their losses. Visit our firm's Web site for more information.


The SEC or U.S. Securities and Exchange Commission is responsible for maintaining a fair, orderly and efficient market for anyone who trades in them. The SEC governs the rules and regulation that make markets fair and it also makes sure that the corporations that trade in those markets report financial information to the markets about the health and well being of their companies. The DTCC clears, settles and provides information services on the trades that get executed on those exchanges. At any one time the DTCC holds assets and provides custody to as much as $40 trillion dollars worth of securities. Which securities? Equities, corporate and municipal bonds, mortgage backed securities and many more.