CMKM Diamonds lawsuit filed against SEC in Kelowna
Ticker Symbol: C:CMKX U:CMKX
CMKM Diamonds lawsuit filed against SEC in Kelowna
CMKM Diamonds Inc (C:CMKX)
Shares Issued 703,518,875,000
Tuesday February 23 2010 - Street Wire
Also CMKM Diamonds Inc (U:CMKX) Street Wire
by Janice Shell
Stockwatch recently covered a Jan. 8, 2010, class-action lawsuit filed against U.S. Securities and Exchange commissioners by a Pasadena lawyer representing shareholders of CMKM Diamonds Inc. In fact, that lawsuit followed an earlier one filed Nov. 6, 2009, against the SEC itself by a Canadian shareholder named David Nelson. Mr. Nelson, a Kelowna resident, self-filed his lawsuit, with the plaintiff styled as the "CMKX Shareholders Coalition for Justice" at the Supreme Court of British Columbia in Kelowna, B.C. We will review Mr. Nelson's lawsuit below.
Both lawsuits have a similar theme that can be summed up in three words: the SEC dunnit; but each takes a different path to the same basic conclusion. It seems appropriate that Mr. Nelson of Kelowna filed his lawsuit before Mr. Hodges of Pasadena. After all, the CMKM promotion began in Canada.
Mr. Nelson had announced his litigious intentions in a press release issued on Oct. 27, about ten days before filing. In this communication, Mr. Nelson informed the public that his coalition would soon sue the SEC, "seeking restitution of seven hundred and fifty million dollars ($750,000,000) from the SEC and those they colluded with, along with a freeze on all CMKX assets including land rights past and present currently under regulatory control."
Mr. Nelson's statement of claim is presented as a class action that would benefit all CMKM shareholders though he submitted it acting in proper person, and can therefore represent only himself.
The statement of claim
Mr. Nelson's allegations are quite different from those made in the later suit filed by A. Clifton Hodges of Pasadena in U.S. Federal Court. Mr. Nelson makes no mention of an elaborate sting operation that supposedly resulted in the creation of one or more "frozen trusts" benefitting CMKM shareholders. He claims instead that the SEC, through negligence caused the CMKM Diamonds promotion to carry on, getting ever larger, until it eventually cost investors more than $250 million, as well as valuable land rights.
Unlike Mr. Hodges, Mr. Nelson does not assert that the management of CMKM Diamonds is innocent. Agreeing with the SEC's findings, he says the company's management was dishonestly issuing and selling into the market large amounts of unregistered stock, and profiting from those sales, though he names only John Edwards.
(For anyone new to this story, CMKM's John Edwards is not the disgraced former U.S. senator of the same name who ran for vice-president on the Democratic ticket with John Kerry in 2004 against George W. Bush and lost.)
In Mr. Nelson's statement of claim, both specific and general deficiencies are imputed to the SEC -- first some specifics.
Specific issues
Mr. Nelson's specific complaint is that the SEC did not act quickly enough to stop the CMKM perpetrators. It knew all along what was happening, yet did nothing, he charges. He acknowledges that while dishonest insiders "contributed" to the plaintiff's losses, that is all. "Had the SEC carried out its functions with even a minimum of reasonable due care, the CMKX shareholders would not have been victims of this fraud." He repeats it for emphasis: "... because those injuries would not have occurred but for the SEC's negligence."
He goes on to claim that "the SEC is mandated by the United States Constitution to enforce rule 17A of the 1934 Securities and Exchange act, and by purposely allowing that rule to be broken and by making rules that knowingly violate that mandate, the SEC violated fifty thousand shareholders rights in CMKX and millions of individual shareholders rights worldwide." (Rule 17A is an anti-fraud provision.)
As evidence, Mr. Nelson cites "records [subpoenaed by the SEC] that proved insiders of CMKX were laundering money through the Silver State Bank and selling counterfeit stock on September 5th 2004, they allowed the fraud to continue despite having this evidence and allowed hundreds of billions of unregistered shares to trade and cost CMKX shareholders hundreds of millions of dollars. The perpetrators moved sixty four million dollars out of CMKX bank accounts right under the nose of the SEC costing CMKX shareholders the entire sixty four million dollars."
As Mr. Nelson sees it, another consequence of the SEC's negligence was the loss of CMKM's mineral claims: "The SEC was aware of the potential value of CMKX's land right and allowed through their actions and inactions the loss to shareholders the right to most of those claims. The claims were not maintained due to lack of funds, those funds were lost as a direct result of the SEC's negligence and collusion with the perpetrators. In fact, evidence shows that corrupt insiders of CMKX transferred valuable land rights to partners."
General issues: naked shortselling
In addition to the SEC's specific failures to protect shareholders outlined above, Mr. Nelson presents a more general complaint involving the dreaded "NSS": naked shortselling. According to Mr. Nelson, "CMKX represents the largest counterfeited stock in history ... ." He says, "It was counterfeited by insiders of CMKX with the full blessing of the SEC. The SEC was fully aware of John Edwards laundering money (selling unregistered shares) though various accounts at [broker-dealer] NevWest years before they took action."
He goes on to assert that "trillions" of shares were shorted naked into the market, citing claims made in 2005 by Bill Frizzell, now CMKM's attorney, as evidence.
Enlarging on this jeremiad, Mr. Nelson points to what he sees as collusive actions on the part of the SEC going back many years: "The SEC has for decades colluded with Wall Street firms, the DTCC, the Federal Reserve, hedge funds, and others to defraud all shareholders. Between 1996 and 2001 the SEC and FBI were tracking Monday [sic] laundering through Canada, and knew crime families were trading naked short through Canada as Canada had no affirmative determination laws. In 1998 the SEC received over 3000 comment letters regarding the abuses of naked shorting "
And so on and on; no real connection to the CMKM story is demonstrated at any point.
Finally Mr. Nelson raises the question of fails-to-deliver (securities not delivered by their settlement date), or attempts to do so, quoting an unnamed and unsourced SEC official: "The SEC has recently been involved in a very proactive exercise with respect to the issue of fails in the OTC derivatives markets. In response to reports of widespread documentation problems in those markets, the SEC has joined force with other regulators, most notably the Federal Reserve Board and Britain's FSA, to encourage OTC market participants to clean up years of incomplete and inaccurate trade documentation."
Mr. Nelson's monetary demand is more modest than that promised in the October 27 press release: "The CMKX Shareholders Coalition for Justice asks for damages amounting to two hundred and fifty million dollars, stolen from investors due to the SEC's collusion and negligence."
He adds: "The CMKX Shareholders Coalition asks for damages that would amount to the short squeeze in CMKX's stock. To calculate the quantum of damages, the Coalition will need to subpoena records from the SEC that they have concealed from the public, including all CMKX trading records, the exact totals of counterfeit shares sold and by who, and the real outstanding share count. We request that the present and past land rights announced in press releases be frozen. A complete evaluation of those claims is necessary to complete the calculation to determine the quantum of damages, as the true value of a stock starts with the value divided by the share count."
Finally, Mr. Nelson asks that an "International Special Prosecutor or Commission" be created to investigate the SEC.
Questions raised
Some of Mr. Nelson's claims raise questions of logic and law. While it is easy for a layman to feel frustration when a regulator or law enforcement agency does not act immediately to stop infractions of rules or criminal acts, common sense suggests that time is needed to build a case. With CMKX, the SEC moved relatively quickly. Quiet for most of 2003, the stock began to build momentum in March 2004, when Urban Casvant announced that his company would be sponsoring a NASCAR Funny Car. As new shareholders came on board, Mr. Casavant, with the help of Mr. Edwards, issued and sold hundreds of billions of shares of unregistered stock. That did not go unnoticed by the SEC, which opened an investigation that became public knowledge in October 2004.
This is how investigations are conducted, and it is hard to see at this point in the lawsuit how normal delays could be construed as "collusion" with the perpetrators.
Another critical question is raised by Mr. Nelson's lengthy discussion of "NSS," which relies more on opinion than on evidence. He states that stock was "counterfeited by insiders of CMKX". In reality, "counterfeit stock" would be counterfeit stock certificates; none have ever surfaced in connection with CMKX. Stock that is shorted naked is not "counterfeit;" it simply does not exist. In the allegations Mr. Nelson raises against Mr. Edwards, Mr. Nelson has apparently confused the sale of unregistered stock with naked shortselling. The two are in no way similar. The SEC and the Department of Justice took action against Mr. Casavant, Mr. Edwards, and others, for securities fraud and collusion in a kickback scheme. They claimed that Mr. Casavant issued stock and gave it to Mr. Edwards or another crony. An attorney then wrote a fraudulent opinion letter stating that the stock in question was free trading. Mr. Edwards then sold the stock and shared a large part of his profit with Mr. Casavant, prosecutors said.
That is not naked shortselling, nor is it counterfeiting.
Similarly, Mr. Nelson is apparently not aware that over-the-counter penny stocks and the over-the-counter derivatives that greatly contributed to the worldwide market meltdown of 2008 are entirely different animals, unrelated to each other.
In the statement of claim, Mr. Nelson contends that the SEC should not be permitted to claim sovereign immunity as a way of extricating itself from the lawsuit, because "the SEC and their cohorts" used Canada to do much of their naked shorting. While sell orders could have been placed with Canadian brokers, it is more difficult to see how naked shorting could have happened, given that CMKM never traded on any Canadian market.
As to the "land claims", CMKM Diamonds never leased any Canadian mineral claims. What were announced in press releases as the company's holdings were actually leases obtained (and ultimately allowed to lapse) by Urban Casavant's partner Emmanuel Koch.
(Further information regarding CMKM Diamonds and associated companies can be found in 68 Stockwatch articles dated Oct. 21, 2003; June 22; Sept. 16 and 24; Oct. 1, 15 and 20, 2004; Feb. 11, 14, 18, 22 and 23; March 1, 3, 4, 7, 14, 15, 16 and 21; June 6, 8, 9, 10, 13, 14, 15, 16, 17, 20, 21, 22, 29 and 30; July 1, 4, 6, 12 and 13; Aug. 2, 5 and 9; Sept. 7, 12, 27 and 30; Oct. 24, 26 and 31; Nov. 7, 11, 22 and 25; Dec. 1, 6, 9, 15 and 22, 2005; Jan. 3; Sept. 29; and Oct. 4, 2006; Aug. 30, 2007; April 7 and 9; and Sept. 21, 2008; Feb. 17, 2009; and Feb. 17, 2010.)
AI
