CMKM Diamonds Inc (fka CMKX)

[matrix]

CMKM hearing told of high expenses, few results

2005-06-09 21:13 ET - Street Wire

Also Street Wire (U-*SEC) U.S. Securities and Exchange Commission

by Lee M. Webb

CMKM Diamonds Inc.'s May 10 hearing before the U.S. Securities and Exchange Commission (SEC) was kicked off at 9:34 a.m. by Chief Administrative Law Judge Brenda P. Murray. The evidently no-nonsense judge laid out some ground rules on how the hearing would proceed and took care of some legal housekeeping before inviting opening statements.

The SEC instituted the proceedings seeking the suspension or revocation of the registration of CMKM's securities for failing to file periodic reports as required.

In both its answer to the SEC order and in an April 13 prehearing conference CMKM acknowledged that the periodic reports have not been filed.

Leslie Hakala and Gregory Glynn appeared on behalf of the SEC's Division of Enforcement. Donald Stoecklein registered his appearance on behalf of CMKM.

In one of the unusual aspects of the case, lawyer Bill Frizzell registered his third-party appearance on behalf of a group of CMKM shareholders identified as the Owners Group.

Citing the court's ruling allowing him limited participation in the hearing, Mr. Frizzell asked the judge for permission to cross-examine the witnesses.

"We'll take it as it comes up," Judge Murray said. "You ask the question and then I will listen to it.

"I'm sure I'll get an objection from the Division of Enforcement, but you ask the question and we'll have a go at it."

The rules

As previously reported by Stockwatch, the hearing drew an unusually large number of spectators. For the benefit of the audience, Judge Murray explained how the hearing would be conducted.

The judge explained that the Division of Enforcement had to prove by a preponderance of the evidence that the allegations in the order instituting proceedings were true.

"For that reason the Division of Enforcement starts the case just like any U.S. District courthouse in a trial," the Judge said. "It puts on its witnesses and it has cross-examined, and then we have redirect, and then the witness is concluded.

"After the Division finishes its direct case, we turn to the Respondents. The Respondents then puts on its direct case.

"We turn then to the Division again, and the Division puts in its rebuttal.

"The reason that the Division starts and finishes is that the Division has the burden of proof."

The judge also had some words for the lawyers about how the case would proceed.

"And I would advise the lawyers in this case, I allow direct examination, cross-examination and then redirect and it's over," the judge said. "All right?

"We don't have prolonged examination of the witness.

"Direct, cross, redirect, end of examination, the witness steps down."

The judge moved on to resolve some preliminary matters involving receiving three stipulations into evidence before turning to another somewhat unusual aspect of the case.

The letters

As Stockwatch readers may know, CMKM has a very large Internet following, many of whom seem to think that the company is the victim of a massive conspiracy involving naked short selling.

In addition to expressing their opinions and fantasies on message boards such as Raging Bull, many of the company's devoted followers congregate by the hundreds on PalTalk, an Internet site that provides audio and text messaging in virtual rooms that can accommodate 1,000 people.

Some of the company's cult-like Internet followers have gained a reputation for being very "pro-active," for want of a better word. Indeed, many of them are known for making phone calls, sending e-mails, faxing and writing letters hither and yon to both gather information and offer their perspective on CMKM.

A May 2 prehearing ruling by Judge Murray disallowing acceptance of evidence of short selling was rather hotly criticized, particularly by CMKM's PalTalk followers, and apparently prompted the sending of a number of letters.

An administrator of a PalTalk room largely devoted to CMKM run by former securities violator Hal Engel penned what turned out to be an especially controversially letter, even among the PalTalk followers, to Judge Murray.

Not to put too fine a point on it, Mr. Engel's Willy Wizard's Underground administrator using the Internet alias "abadgoodgirl," who claims to be a certified public accountant (CPA), blasted Judge Murray.

Among other things, the purported CPA suggested that if the judge did not understand accounting, at least the peculiar interpretation advanced in the letter, then she had no business adjudicating the case.

As it turned out, the judge evidently received a number of letters about several matters.

"This is a bit unusual, but I received -- I think it's twenty letters in this case from concerned people about the outcome of the case," Judge Murray remarked.

The judge went on to note that "in the old days" the SEC had a special portion of the docket for such material, but that practice had been discontinued.

In the judge's opinion, however, the letters should be part of the official record, though they should not be used to decide the case.

"I want to put them in as exhibits that were proffered but were not allowed in evidence," the judge advised.

Judge Murray read out the names of the letter writers before handing the correspondence to the court reporter.

The judge received letters from Bruce and Jake Barrett, David Bartels, William Bodenmiller, Sandy Bose, Danny Caldwell, Mitchell Y. Cohen, Marco Boasso, Lucius Haley, Rufus Henscheid, Linda Jones, Don Larsen, Wladimir and Daria Leszenko, Jeff A. Oldford, Noel L. Perinotti, Laurel C. Richardson, John Dudley Roulston, Timothy J. Schedler and Charles J. Trachta.

"And the next one is -- this lady thought I was a dummy," Judge Murray remarked. "Her name is -- oh, I shouldn't say -- Sherri Turner, CPA, and her letter is dated May 4, 2005."

Michael Wontor rounded out the list of people whose correspondence became part of the record as exhibits not admitted in evidence.

Short order

As it turned out, none of the attorneys had received a copy of Judge Murray's May 2 order regarding the SEC's motion to exclude evidence of naked short selling, though the order was available on the SEC's website and had been widely circulated on the Internet.

"I think you're the only ones who don't know because people got upset," Judge Murray remarked, going on to read her ruling.

"CMKM Diamonds' answer does not allege that short selling was the reason CMKM Diamonds did not file the required reports," that ruling read in part. "Accordingly, I grant the Division's motion. I will not allow extensive evidence of short selling into evidence because it is irrelevant to the issue that I have to decide in this proceeding."

After reading the ruling, Judge Murray pursued the matter a bit further, remarking that it seemed to be "a subject of great interest of the people" and then directing a question to the SEC lawyers.

"Now, is the Division willing to stipulate orally that it appears that naked short selling has taken place in this stock?" the judge asked.

"No, Your Honor," Ms. Hakala replied.

"You're not?" Judge Murray queried.

"No, Your Honor," Ms. Hakala repeated.

"Okay," the judge said. "All right. If that's where we are, that's where we are."

As the discussion continued a bit further, Judge Murray remarked that the question to be decided was what was in the public interest in circumstances where CMKM admitted that its securities were registered with the SEC and admitted that they have not filed required reports.

"You all wanted -- you didn't want to have a public hearing," Judge Murray said, evidently a reference to the SEC.

"They wanted a public hearing," the judge continued, a reference to CMKM.

"And I determined that it was the best thing to have a public hearing, to put it all out for the public to see, and then I'll make a judgment," she said. "So that's why we're here."

With that, Judge Murray invited the SEC to present its opening statement.

Shadowy operation

Ms. Hakala began by remarking that periodic reporting obligations are the cornerstone of the system of investor protection through full disclosure.

"This is a case about a company that has failed utterly to fulfill its periodic reporting obligations," the SEC lawyer said. "CMKM Diamonds has not filed any annual reports on Form 10-K since May 2002 and has not filed any quarterly reports on Form 10-Q since November 2002."

Judge Murray interrupted in order to get a better understanding of exactly what reports had not been filed.

"So the public has no information about the finances or the status for those years of this company," the judge remarked after getting a handle on the number of missing reports. "People buying the stock have no information as to those facts; is that right?"

"Yes, Your Honor," Ms. Hakala replied.

"The Division believes the evidence will show that CMKM Diamonds has not filed periodic reports because it cannot," Ms. Hakala said, returning to her opening statement. "It has no audited or even auditable financial statements for the past three years."

Among other things, Ms. Hakala went on to claim that in a late filing notification submitted in May of 2003 CMKM misrepresented that it had filed all of its preceding periodic reports even though the annual report for 2002 was still outstanding.

The lawyer then turned to a Form 15 filed by CMKM and signed by Urban Casavant on July 22, 2003.

"In that Form 15, CMKM Diamonds represented that it was no longer subject to the periodic reporting requirements because it had approximately 300 shareholders of record," Ms. Hakala told the court. "In fact, the Division anticipates the evidence will show that the company knew or should have known that, as of that date, it had 698 shareholders of record."

Judge Murray intervened to flesh out the significance of the Form 15.

"So that's a special thing," the judge remarked. "On the Form 15, if you have less than 300 shareholders, you don't have to file reports."

"That's basically correct, Your Honor," Ms. Hakala said, adding that CMKM filed a registration statement during the year and that another section of the regulations requires periodic reports to be filed in the same year that a registration statement is filed.

"A year-and-a-half later, and almost two months after being contacted by the Division to inquire about their lack of periodic reporting, CMKM Diamonds filed an amended Form 15 admitting that it had misstated the number of shareholders of record and acknowledging its reporting obligations under the federal securities laws," the lawyer continued.

Ms. Hakala went on to say that the SEC expects that the evidence will show that, in spite of CMKM's announcement that it was "working towards completing an audit of its financial statements," that the company does not even have complete financial statements, so an audit has not even started.

According to Ms. Hakala, Mr. Casavant and others affiliated with the company "continually offered empty promises" that the company was working hard, close to becoming current in its reporting and even a little bit ahead of schedule.

"Despite these statements, the Division expects to show that during 2004, CMKM Diamonds took virtually no steps to prepare financial statements or retain an outside auditor," Ms. Hakala continued.

"Despite the lack of periodic reporting, CMKM Diamonds' stock has traded at very high volumes for at least the past year, and the company has purportedly engaged in multimillion-dollar transactions," the lawyer said.

"By failing to file the required periodic reports, CMKM Diamonds has been able to operate in shadows and in secret, relieved of the obligation to keep its shareholders, regulator and the investing public of its actual activities or lack thereof," Ms. Hakala said.

The SEC lawyer went on to say that the regulator expects the evidence to show that CMKM has still made little progress towards preparing its financial statements and is unable to provide a date by which it will be current in its reporting.

Judge Murray interrupted to ask about CMKM's trading volume and price.

Ms. Hakala informed the judge that CMKM traded at one-100th of a penny and the volume typically exceeded one billion shares per day.

"And the company currently -- the Division will introduce evidence suggesting that the company has over 700 billion shares outstanding," Ms. Hakala said.

"Isn't that extraordinary?" Judge Murray queried.

"The Division believes so, Your Honor," came the reply.

"Well, let me just ask you this, from my perspective," the judge said. "Who benefits from all of this? Why are people keeping this going? Who benefits from all this trading, one one-hundredth of a cent?"

"The Division believes, Your Honor -- and the Division doesn't anticipate introducing evidence on this because it's not particularly part of the required reporting, but the Division believes that certain individuals are liquidating substantial quantities of stock and pulling out the proceeds," Ms. Hakala replied. "Perhaps people related to the company."

Ms. Hakala returned again to her opening statement, remarking that for the foreseeable future the investing public will not have access to complete and reliable information about CMKM.

"In short, the Division of Enforcement believes that the public simply cannot make investment decisions regarding CMKM Diamonds," Ms. Hakala said.

Judge Murray posed another question.

"My understanding is that the whole gist of securities regulation in this country is disclosure; right?" the judge asked.

"Yes, Your Honor," Ms. Hakala replied.

"So the Commission doesn't tell people, as I understand it, what they can buy and what they can't buy," Judge Murray went on. "If they want to buy something that you might consider nutty or that I might consider nutty, that's perfectly all right. That's legitimate in this country.

"But what the security statutes say is that people have to have the facts, and so disclosure is the whole thing about securities law. That people have to disclose certain relevant information about the company.

"And if people look at that and decide they want to buy it, you know, well and good, but there has to be disclosure.

"And isn't that the gist of this case?"

"Yes, Your Honor," said Ms. Hakala.

"That this company has not made disclosure?" the judge further asked.

"The Division agrees," Ms. Hakala replied.

"Okay," Judge Murray said. "All right."

"For that reason, the Division asks this Court to revoke the registration of CMKM Diamonds' stock pursuant to Section 12(j) of the Exchange Act," Ms. Hakala said, wrapping up her opening statement.

Settlement interlude

Before Mr. Stoecklein rose to present his opening statement, Judge Murray initiated a brief discussion about the possibility of a settlement as an alternative to resolving the dispute by either a suspension or a revocation of CMKM's securities.

Mr. Stoecklein remarked that there had been some dialogue about a settlement.

"We just couldn't come to terms, Your Honor, because of these folks," Mr. Stoecklein said, an evident reference to the SEC.

"Well, listen, I should get into settlement," Judge Murray remarked a short time later. "You -- whether you settle this case is something else again. I mean I don't know why you settle or why you don't settle."

Bad luck

Mr. Stoecklein's opening statement was considerably shorter than Ms. Hakala's, even with some lengthy exchanges with Judge Murray.

CMKM's lawyer began by remarking that because CMKM was a development stage company, it would have to go back to 2002 to prepare financial statements.

"Listen, you hire a good accountant," Judge Murray said. "He can take -- or she can take care of you."

"Your Honor, we have, and I agree with you," Mr. Stoecklein said.

"You get what you pay for sometimes, but, I mean, I know what you're saying," the judge remarked. "But where there's a will, there's a way."

"Your Honor, obviously, we are here because there's an allegation by the Commission that this company hasn't complied with 13(a) of the Exchange Act," Mr. Stoecklein subsequently picked up his opening.

"Well, I don't want to press you, but didn't you admit in your answer that -- oh, you admitted in your answer that you haven't made the filings, but you did not admit that you violated the statute," Judge Murray interjected. "I remember that; right? And that's the line you're drawing?"

"That is correct, Your Honor," Mr. Stoecklein replied. "We are not denying that the reports have not been filed. We are trying to distinguish this company from other filers in a like position."

Mr. Stoecklein went on to tell the court that CMKM's Form 15 that had been filed on July 22, 2003, immediately suspended the company's reporting obligations.

"Now, from July 22 of 2003 to February 15th of 2005, our contention is that this filer was not required -- this issuer was not required to file those reports," Mr. Stoecklein said.

Judge Murray intervened with some questions, drawing from Mr. Stoecklein that CMKM was arguing that it did not have to file reports between the time it filed the inaccurate Form 15 in July of 2003 and when it discovered the error and filed an amended report on Feb. 15, 2005.

"Our belief is, irregardless (sic) of the accuracy of the statement in that filing, it was -- that filing was not denied and it was not revoked by the Commission," Mr. Stoecklein went on.

"I have to check on the case law," Judge Murray said to that suggestion. "But I believe the case law is if somebody files something that's wrong with the Commission, it's not the Commission's obligation to correct it. The Commission can't keep track that everything's accurate that anybody files with it.

"The case law is the parties are bound to file accurate reports with the Commission. The Commission -- it doesn't fall on the Commission to correct those inaccurate reports, but that's neither here nor there."

The judge pursued the suggestion that CMKM should have had 60 days to file its required reports from the time it filed its amended Form 15 on Feb. 15.

According to Mr. Stoecklein, April 17 would have marked the 60th day.

"So under your theory, you still haven't filed the reports," Judge Murray remarked.

"Well, under our theory -- under anybody's theory, you're correct, Your Honor," Mr. Stoecklein replied. "The reports are not filed. That's clear."

"So whether you didn't have to file them when -- because the Form 15 was wrong and said you had less than 300 shareholders, when you corrected it in April and said, whoops, we've got over 600 shareholders, the responsibility to file the reports came again, and you had 60 days to do it and you still can't do it," Judge Murray said. "Right?"

"That's correct, Your Honor," Mr. Stoecklein answered.

"Well, that's where I'm stuck," said the judge.

"Now -- well, let me explain, Your Honor," Mr. Stoecklein said. "Because we hear from the Commission, we hear from Your Honor, 60 days, short period of time, no problem.

"However, the day we get hired to handle this matter, we get a subpoena from the Commission asking for every document this company has ever filed, and, believe, there's lots of material out there.

"There's a lot of mining claims that we had to go back and pull up. So we get pretty busy handling this hearing.

"In the meantime, we have an accountant that's paid $1.5-million over a two-year period to process the accounting material for these people, for this client.

"We get 25 sheets of paper that is merely shareholders equity. We then find out the company on January 8th --"

"Wait a second," Judge Murray interjected. "You mean you spent $1.5-million and you didn't get what you paid for? You didn't get --"

"No, Your Honor, we didn't come close to what we paid for," Mr. Stoecklein said.

"I mean if you can't -- I mean -- that's not the SEC's problem if you wasted $1.5-million, is it?" the judge queried.

"I understand, Your Honor," Mr. Stoecklein acknowledged, moving on to another topic.

"We need this Court to understand that from the perspective of this company, as of today, they're 22 days late in their filing," Mr. Stoecklein said. "They're not three years late. It's 22 days."

Mr. Stoecklein went on to suggest that CMKM was not in a situation where it could not afford to have the work completed.

"They've put out $1.5-million over a two-year period to have an accountant do their work," Mr. Stoecklein said again. "They paid a law firm out of New York $250,000 to file reports.

"Just the other day, by the way, since I didn't get my Brady material from the Commission, which was in the other file we talked about in the conference -- in that file was a document that said that people were aware of this, this -- these -- some of these issues.

"There was $250,000 spent by the prior counsel to bring reports current. And you know what I get, Your Honor, when I asked for those files?

"I get a one-sheet letter that says, 'Dear Donald, we don't have any files.'"

"I'm sorry," said Judge Murray, perhaps in commiseration.

Mr. Stoecklein went on to sketch some more woes involving Neil Levine, an auditor hired by the company earlier this year and given a retainer of $100,000. CMKM had planned to have Mr. Levine as a witness, but he ended up as a witness for the SEC.

"What happens on Friday last week, the company gets a letter from Mr. Levine saying he's terminating his position as the auditor," Mr. Stoecklein continued. "And I assume he's going to send back the $29,000 out of the hundred that he received, because his billing shows he spent $70,000.

"Now, I don't know -- I don't know why this company has such bad luck.

"But what we're trying to establish today is there are accounting personnel, and one will testify today how much effort has been put in to getting this company cleaned up and getting it reporting.

"Mr. (Robert) Maheu will testify today as to what he's tried to accomplish in pursuing that goal, the team he's attempted to assemble. We believe that group is in place.

"An attorney will testify - Kristen Buck will testify today as to what she's accomplished in collecting all the matters required to prepare financial statements.

"And that's the goal here right now."

Mr. Stoecklein went on to point out that three years worth of information has to be assembled.

"So our point is, this process is moving forward, and it's just damned unfortunate that this company has hired some professionals that haven't supported it," Mr. Stoecklein said. "And we're on our way.

"I guess at this point, Your Honor, I've done my opening statement and I look forward to the testimony."

New crew

Judge Murray allowed Mr. Frizzell a few words, too.

"Just briefly, though, I would like to say this on behalf of the shareholders," Mr. Frizzell began, but was interrupted by the judge.

"Some of the shareholders, because some of the people in those letters made it specific that you were not representing them," Judge Murray said. "I'm sure you're probably representing some of them, but some of them made a specific point that they do not pay you the $25, or whatever it is, so that you are not their counsel."

"Some of the shareholders that are members of this group have wanted me to express to you that they appreciate you allowing them to have counsel for this hearing," Mr. Frizzell said, going on to indicate that he just wanted to offer a couple of remarks.

"Number one, Judge, there are records that were stipulated to in this evidence," Mr. Frizzell said. "There's 60,000 shareholders in this company. And what this Court does, of course, is going to affect those shareholders in that company.

"The SEC counsel has said there are 700 billion shares that have been issued by this company.

"I'm going to suggest to the Court that there are trillions of these shares that are in shareholders' hands."

Staying away from directly speaking about naked shorting, Mr. Frizzell went on to suggest that short sellers have benefited "by the millions it has in this stock at the expense of these shareholders."

"Are people buying stock in this company knowing that the company's under investigation, that it hasn't filed, it's in violation of the securities laws?" Judge Murray asked.

"Well, I think it's pretty clear that there's investigations going on, and if you're buying it now, they are buying it aware of that, yes, Your Honor," Mr. Frizzell replied. "But I'm just -- I'm saying there's some victims out here, too."

Mr. Frizzell said that he believes that the company's filing problems relate to short selling.

"And I'd just ask the Court to keep an open mind in that regard," Mr. Frizzell said.

"And, Judge, we have at the helm of this company now a new co-chairman of the board, Bob Maheu," Mr. Stoecklein continued. "He's going to be one of the witnesses who's going to testify for this company.

"I think the Court would be well to receive his testimony, and some problems that have gone on that have put this company in this position where it is today will be resolved.

"And on behalf of the shareholders, I look forward to the Court keeping the new people in charge now in mind when this Court renders a decision."

With that the opening statements were completed.

Stockwatch will pick up its coverage of the hearing with the first witness in a following article.

The saga continues.

Comments regarding this article may be sent to [e-mail].

(More information regarding CMKM Diamonds and associated companies can be found in 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; and June 6 and 8, 2005.)

Reader Comments - Comments are open and unmoderated, although libelous remarks may be deleted. Opinions expressed do not necessarily reflect the views of Stockwatch.

Urban is just trying to help people!

Urban is trying to create a million millionaires and you people are trying to stop him because of petty jealousy.

May God forgive all of you because I never will.

Aunt Fanny

Posted by Aunt Fanny @ 2005-06-09 20:50

What a gong show!

Posted by goLEEgo @ 2005-06-09 21:05

GO URBAN! SHOW THEM THE 4 ACES!

PENNYTRADERS!

Posted by PENNYTRADERS @ 2005-06-10 01:01

So the SEC lost Roger Glens PAPER WORK.

Oh my. SHOW THEM THE COPIES! LOL

Posted by PENNYTRADER @ 2005-06-10 01:06

What a bunch of goons. CMKX is a fraud ridden shop that THOUSANDS of people have bought into.

Shareholders are losing money, all the while Urban builds a 9500 sq foot house and enjoys his own sponsered racing team.

Will they make a movie about this when it's all over? Probably.

Lets take suggestions for the movie title...

Posted by Frank @ 2005-06-10 08:58

Ref: http://www.stockwatch.com/swnet/newsit/newsit_newsit.aspx?bid=B-457356-U:CMKX&symbol=CMKX&ne...