CMKM Diamonds Inc. (fka CMKX)

[Ignutz]

STOCKGATE TODAY

An online newspaper reporting the issues of Securities Fraud

Call in the reinforcements. SEC is once again asleep at the switch. December 28, 2004.

By Dave Patch

So where is Eliot Spitzer?

In the New York Times this past week a front-page article claimed that NY Attorney General Eliot Spitzer was stepping down in his role of leader in the sanitization of the unattended fraud taking place on Wall Street. Mr. Spitzer’s Office has denied these allegations instead threatening that the AG’s office had more surprises still to come. And in this Industry riddled with conflicts and greed, the President of the Securities Industries Association (SIA), Marc Lackritz, was campaigning for a softer gentler Eliot Spitzer. Almost pleading Mr. Spitzer and the “Spitzer wannabe’s” to go away and let our negligent regulators play their games.

"The notion that he claimed that the S.E.C. was asleep at the switch, and therefore, that all enforcement activity should fall to the states, that took it too far," said Marc Lackritz, president of the Securities Industry Association. "All of a sudden you had lots of imitators, Spitzer wannabes."

All we need to do now is step back those 3- 4 years and take a closer look at what was taking place during these tumultuous times.

As Wall Street was embroiled in the Research Analysts conflicts, it was Attorney General Spitzer who took the evidence available and acted upon that evidence with swift and purposeful actions. He hurt the Industry who had been hurting investors. The regulators, on the other hand, ignored the e-mails of conflict and Congress shirked responsibility by ignoring the negligent actions of the Regulators. Eventually Senate Banking Chairman Richard Shelby, embarrassed, sat in front of a Wall Street Regulator panel of who’s who and vowed those errors of omission would never take place again.

How short a memory those in D.C. all have.

During this period in time whereby the regulators were meeting with congressional leaders and taking their dose of verbal punishment, the SIA was researching the affects of moving our trade settlement system from the present Trade plus 3 days (T + 3) to T + 1 or even T + 0. The desire was to make the markets more efficient. Unfortunately, the fictitious world the SIA, and Mr. Lackritz, lives in did not include evaluating and addressing the real world situations happening on Wall Street.

Trades are not being settled today at the required T+3 schedule in violation of several congressional laws within the Securities Act of 1934. Specifically Section 17A and Rule 15c6-1. Congressional oversight and the securities regulators know all about these violations. They have been informed time and time again over a span of some twenty years. They were being informed as they were being berated by congress for sleeping at the switch.

In June of 2004 the SEC put out a new reform package, Regulation SHO. This reform package was specifically directed at the short selling abuses, industry failures in compliance, and the ineffective trade settlement process. Regulation SHO defined a “threshold” of abuse, and identified that nearly 4% of all publicly traded companies were above that threshold. A quality level that would make even the most passive management team choke.

How have the members viewed the upcoming Regulation SHO? Listen to what the General Council for Bear Stearns had to say in a December 2004 conference call to prime brokers and clients.

"To give you that brief introduction in Reg SHO, the history how we got to where we are today. For the past few years we have been hearing from many different regulators regarding their concerns about the increase in the levels of fails that they are seeing. They believe, and they have stated on numerous occasions, that one of the primary causes of the high level of fails was that various participants in the short sale process, prime brokers, executing brokers, clients, were not following already established rules."

For several years the regulators have been secretly telling Wall Street that they are concerned about various participants not following established rules? Yet, no appreciable enforcement has been taken during this period in time. NONE! These water cooler conversations between Wall Street and the regulators equate to the e-mails the regulators neglected to address regarding analyst conflicts. The timing, "past several years", would also infer regulators did not learn from their mistakes even as they were living them. As they were being chastised for one indiscretion they were committing yet another.

Chairman Donaldson was making promises to the Chairman of the Senate Banking Committee that the SEC would do a better job while his “team” was secretly telling firms they were not complying with pre-existing laws. Secretly because there was neither SEC enforcement action taken nor changes in the industry practices as firms were being told of their compliance failures. The SEC even created a separate task force in early 2003 on this issue and has failed to publish the results of such a task force to the public. Who are they protecting?

How bad has it gotten?

In February 2003 the SEC took their single enforcement action regarding abuses in shorting. The enforcement came against Rhino Advisors for manipulating Sedona Corporation (OTCBB: SDNA) stock as the fraud was driving this small issuer from the NASDAQ Market to the OTCBB market. In the enforcement investigation the SEC came across evidence of wash trades by members to conceal the illegal trades, taped recordings of Rhino Advisors executives bribing several US Firms to collapse the stock, and yet these participating members have never seen any enforcement action against them. In a conspiracy by so many the SEC reduced it down to a single regulatory action.

Also in 2003 a small OTCBB issuer; Universal Express (OTCBB:USXP), began a very public battle with the SEC over their rights to fair market practices. The CEO, Richard Altomare, made public statements about the attacks levied against his company by "Naked Short Sellers". As USXP began to get more vocal the SEC began to initiate what was perceived to be retaliatory attacks on the company itself. The SEC did not take action to address the trade failures; they instead took action to try to quiet the company. Ultimately USXP filed a harassment lawsuit against the SEC in the State of Florida. The SEC in turn filed their own complaint against USXP and Richard Altomare for PR violations.

Soon, we will all know who was right as Regulation SHO requires the list of abused companies to be published daily. The data comes via a "Threshold List" calculated by the SRO’s based on NSCC trade settlement data. Will USXP be on that list? For the integrity of the SEC they better hope it is not.

But these are just the recent events of a timeline that dates back over two decades. The timeline includes Congressional Hearings and allegations of Criminal Elements manipulating our markets. The timeline is best captured in the link below.
http://www.investigatethesec.com/STOCKGATEtoday.doc

With that, what is this “threshold list” anyway?

The threshold list is a listing of all publicly traded reporting companies trading through the DTCC Continuous Net Settlement (CNS) System. To be on the list the SEC identified that an issuer must have fails that exceeds .5% of their outstanding shares and must have greater than 10,000 fails. The SEC has stated publicly that this represents 4% of all publicly traded companies. The list is not to be made available to the public until January 2005 when Regulation SHO comes into affect. It is a "confidential" list according to one SEC source that is not, at this time available to the public.

But is it really confidential? Again I will go back to the Conference call.

"Obviously the threshold security list will be the initial focus of the regulators. They are going to be concentrating on these securities, as these are the securities that are creating the fails in the industry. They have been giving us a list for the last month or so of; if this rule was in place what would the threshold securities look like. As it looks now there is approx 1000 securities that would satisfy, that would meet the threshold list if the rule was in place already."

This list, as it exists, is an accumulation of the book on every member firm trading through the CNS system. It is the accumulation of proprietary information until the laws make it something different. It is not a highlight of any specific firms’ liabilities but an aggregate of all firms' issues. Premature distribution of this list by the regulators to select or all members could be construed as providing inside information not available to the public. It provides each firm with the opportunity to evaluate their book, and their client’s positions, against the Industry as a whole and take action if necessary that best suits their financial interests. The investing public not entitled to that same information, is not granted similar opportunity for corrective action.

Under recent times, we have the regulators admitting that there have been on-going securities violations that are not being enforced. We have regulators providing the Industry with proprietary information to act ahead of the investing public. There is also evidence of false and misleading documents being submitted to Congress. Not just Congress but the Committee responsible for SEC oversight.

The easiest misstatement to prove are the public statements by the SEC claiming that this issue is a small issue that would impact some 4% of all companies. The SEC had a visiting scholar that evaluated Regulation SHO and was provided trade data by the NSCC on some 9000 companies that would be considered for Regulation SHO. By calculation, 4% of the 9000 companies affected by SHO would represent approx 360 firms. Yet, the regulators have been providing a list to members for the past month or more that add up to 1000 or more firms. That represents some 11% and a far cry from the 4% publicly being disclosed.

According to the aforementioned Conference call, of the 1000+ on the list, 800 firms are from the OTCBB/Pink Sheet Markets representing better than 25% of those eligible for this regulation in those trading markets. More than 1 in 4 are abused and yet no enforcement has taken place.
http://www.unm.edu/~boni/Fails_paper_Nov2004.doc

Additional challenges to confront the SEC will be their responses to members of Congress on behalf of Constituents. In June a Constituent of Senator Sarbanes sought answers to documented e-mails from Brokerage firms addressing their inability to settle trades on a security the constituent perceived as being abused by these failures. The Senator, from the Senate Banking and SEC oversight committee, requested of Chairman Donaldson to provide specific answers to potential naked shorting abuses on this security.

In response to the request, the SEC again provided inaccurate and misleading information to the Senator. The author, a Senior Manager at the SEC, identified that the April 2003 e-mails addressing fails and the inability to settle trades to be directly attributed to a June 2004 corporate action taken by the issuer. The timeline is way off. The direct answer to the request by Senator Sarbanes was hidden in a smoke and mirror sideshow. In the end the Senator never received an official answer that satisfied the direct question asked. Was the stock naked short abused as identified by the 2003 e-mails?

So why would the SEC mislead a member of the SEC oversight committee and then, why would the Senator accept such misinformation? Could it be that they are waiting for Attorney General Eliot Spitzer to come back and slap them around yet again?

As a non-political person living far outside the territories of Washington D.C., I am not typically acquainted with the workings of our Nations Government. What I keep hearing however is that our Nations Leaders will never actively address this issue until they are confronted with an embarrassing moment. That is how Washington operates! One of these days, that embarrassing moment will not only come but will put into question the ethics and integrity of their actions.

The threshold list is presently at 1000 companies with the demographics being heavily swayed in the direction of the small business issuers. According the Conference call earlier this month there are 50 - 60 NYSE Companies, 100 AMEX, 100 NASDAQ, and 800 OTCBB/Pink Sheet Companies. It is now the intent of the SEC to get this number reduced as much as possible prior to the January release into to the public. To do this Regulators have been providing this list to the Industry ahead of the public. The SEC has also begun an accelerated effort to de-list as many pink sheet companies as possible prior to January 10th in order to further reduce problem issuers. To date, they have taken better that 50 off the board in the past 6 months. A de-listed company, with excessive fails on the books, is a bailout of the financial liabilities to these Wall Street firms. They never have to settle bad trades. A de-listing will only leave investors suffering as they succumb to 100% losses in their investments.

Your Federal Tax dollars at work! Protect Wall Street elite at all cost.

Where is Eliot Spitzer? Hopefully he is sharpening his pencil for yet another attack on a misguided Federal Agency.

At the time of this report the SEC would not go on record to verify the distribution of the threshold list to Bear Stearns nor would they go on record defending allegations of accepted regulatory failures over these past years.

For more on this issue please visit the Host site at
www.investigatethesec.com .

Copyright 2004