CMKM Diamonds Inc (fka CMKX)

[matrix]

CMKM hearing told of auditor's frustration, departure

2005-06-10 23:19 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) provided some surprising and disturbing revelations for the pink sheet company's faithful followers. Ironically, much of what some shareholders found troubling came from the company's own lawyer and others associated with CMKM.

The proceeding before Chief Administrative Law Judge Brenda P. Murray is to determine whether CMKM's stock registration should be suspended or revoked for failure to file required periodic reports with the U.S. regulator.

CMKM has a large group of devoted Internet followers among its shareholders, reportedly numbered at approximately 60,000 people. In a rather unusual development for an administrative proceeding, about 50 shareholders attended the hearing, with several of them posting their reviews and assessments of the hearing on Internet chat sites.

The SEC's opening statement delivered by Leslie Hakala received some criticism in those Internet reviews and subsequent discussion, but it appears, for the most part, that the U.S. regulator's claims held little surprise for CMKM's Internet followers.

That apparent lack of surprise may turn in part on the fact that many of CMKM's shareholders consider the SEC to be the enemy, so to speak. Indeed, a surprising number of the company's more cult-like followers believe that the SEC is part of a massive conspiracy to mask naked short selling, a practice they claim has damaged CMKM.

As it turned out, the opening statement by CMKM lawyer Donald Stoecklein evidently did hold some upsetting revelations for the company's devoted fans.

For example, shareholders were evidently more than a little shocked to hear Mr. Stoecklein claim that $1.5-million had been paid over two years to the company's accountant, who allegedly produced virtually nothing in return. (All amounts are in U.S. dollars.)

Perhaps even more troubling to CMKM's loyal Internet followers was Mr. Stoecklein's claim that $250,000 had been paid to the company's prior counsel to bring CMKM into compliance, but, again, virtually nothing had been done.

While Mr. Stoecklein did not identify the company's former lawyer, who is not a party to the proceeding, there was little doubt amongst CMKM's faithful followers that it was the once highly touted D. Roger Glenn.

Mr. Glenn was hired amid much fanfare in June of last year and was elevated to a rather lofty pedestal by CMKM's Internet followers. Indeed, many of them claimed that they invested in CMKM because of Mr. Glenn and many more claimed that they continued to hold their shares because of his association with the company.

After working Mr. Glenn into a number of their CMKM fantasies, it clearly came as something of a blow to hear Mr. Stoecklein allege that his request for files from the $250,000 attorney was met with a one-page letter that said, "Dear Donald, we don't have any files."

The SEC's first witness, an auditor hired by CMKM in January of this year, brought some further unsettling revelations.

The auditor's tale

Neil Levine, an accountant with Bagell, Josephs & Co. LLC, was hired to act as CMKM's auditor on Jan. 10. According to Mr. Stoecklein, CMKM had planned to call Mr. Levine as a witness, but he was subpoenaed to appear for the SEC.

"What audit procedures have you done so far for CMKM Diamonds," Ms. Hakala asked early in her direct examination.

"Currently no audit procedures have been performed," Mr. Levine replied.

"And what do you need to perform the audit?" the SEC lawyer queried a short time later.

"General ledgers, books and records, cash disbursements, bank statements," Mr. Levine said. "All sorts of documents. Corporate documents."

"Have any of these records been provided to you?" Ms. Hakala asked.

"No, ma'am," the witness replied.

Mr. Levine testified that he first heard about CMKM in December of last year through a referral from John Edwards. When asked about Mr. Edwards's role with CMKM, the auditor said that he was not sure, but he thought he was a business consultant.

The witness told the court that he met with CMKM's chief executive officer Urban Casavant, the company's chief financial officer David DeSormeau and John Edwards at the office of the former account David Coffey in Las Vegas, Nev., on Jan. 10.

According to Mr. Levine, Mr. Coffey had done an audit of the company in 2001. The auditor went on to say that it was his responsibility to get the prior accountant's work papers to continue.

"Has anybody been auditing CMKM Diamonds' records since Mr. Coffey resigned in 2001?" Ms. Hakala asked.

"Not to my knowledge," said Mr. Levine.

Mr. Levine went on to testify that CMKM explained that they had hired his firm to get compliant to move from the pink sheets to the OTC Bulletin Board or another exchange. He said they were "quite eager" for him to start.

"Did you ask the company if they had any outstanding regulatory issues?" Ms. Hakala asked.

"I said if they -- I did ask the question if they had any problems or any pending questions from the SEC or the Internal Revenue Service, and they said there was no problems," Mr. Levine testified.

"Did they tell you at that time there was an outstanding SEC subpoena to the company?" Ms. Hakala queried.

"No, they didn't," said Mr. Levine.

On further questioning, Mr. Levine said that he first found out about the SEC subpoena in February. He testified that he asked Mr. Glenn to provide him with a copy, but it was not promptly provided. He said he finally obtained a copy when he was in Mr. Stoecklein's office on March 7.

Ms. Hakala moved on to another subject, asking Mr. Levine about his return visit to Las Vegas on Jan. 17.

"What did you do then specifically?" the lawyer asked.

"I spent three or four days at the transfer agent's office going through the transfer agent documents," Mr. Levine replied.

"What did you find reviewing those documents?" Ms. Hakala asked.

"I just made noted and -- what do you mean, what did I find?" Mr. Levine replied. "I mean there was four binders of stock issuances."

"Did you identify what documents you'd need in order to audit the stock issuances?" the SEC attorney asked.

Mr. Levine testified that he told Mr. Glenn that he would need the backup to the opinion letters for the stock issuances. He further testified that they were never provided and he never got to audit the reason for any of the company's stock issuances.

Further into her examination, Ms. Hakala referred Mr. Levine to an exhibit of a draft of stock issuances and, in particular, to a Jan. 22, 2003, issuance, eliciting testimony from the auditor that 390 entities had received shares in that issuance.

That line of questioning drew an objection from Mr. Stoecklein about relevance and whether they were going to go through the whole list of issuances.

"We think it's important to note that the company issued shares to far more than 300 people in January of 2003, which calls into question whether they could in good faith believe that in July of 2003 they had less than 300 shareholders of record," Ms. Hakala replied to the objection.

"So it ties into the validity of the fallen 15," Judge Murray remarked, a reference to an inaccurate Form 15 filed by CMKM on July 22, 2003.

Judge Murray had a few questions of her own regarding something she had noticed in the draft report of stock issuances.

"Isn't it very unusual that a company would issue almost three billion shares and not list a reason?" Judge Murray queried, subsequently asking whether that struck Mr. Levine as being high.

"It strikes me as being high," Mr. Levine replied.

"I should think it would really strike -- I mean it's almost three billion shares," Judge Murray said. "Isn't that really high? Or do you see a lot of companies that issue three billion shares?"

"I don't, but if there was a reason for the shares to be issued that I could audit, I could given an opinion on it," Mr. Levine replied. "Right now, it looked -- yes it looks high to me, but I haven't audited it, so I don't know if it's accurate or not."

Judge Murray went on to ask whether a lot of companies that Mr. Levine audited issued three billion shares.

"No, they haven't," the witness replied.

"Have any of the companies that you've worked on ever issued 300 billion shares?" Ms. Hakala joined in with another question.

"No, they haven't," said Mr. Levine.

Moving to another line of questioning, Ms. Hakala referred Mr. Levine to a Feb. 21 e-mail he had sent to Mr. DeSormeau because he was concerned about not having received any information from CMKM.

Mr. Levine testified that he never received a response from Mr. DeSormeau, nor did Mr. DeSormeau return two or three telephone calls from the auditor.

Ms. Hakala then turned to some questions regarding Mr. Levine's subsequent March meeting in Mr. Stoecklein's office in Las Vegas.

"What happened at that meeting?" Ms. Hakala queried.

"We sat down and we discussed, you know, what I needed to perform an audit, and the law firm had a -- I believe a consultant there, slash, bookkeeper who had done purportedly SEC bookkeeping before," Mr. Levine testified. "And they were going to start gathering the records that I would need to perform an audit."

According to Mr. Levine, the company did not provide a firm date by which he would receive the books and records.

"Did they give you a general date?" Ms. Hakala asked.

"No," said Mr. Levine.

"Has Mr. Stoecklein ever told you that the company was about to send you anything?" the SEC attorney later asked.

"Yes, he did," Mr. Levine replied.

"When did he say that?" the lawyer asked.

"About a week ago before this hearing," Mr. Levine responded.

"Did you receive anything?" Ms. Hakala asked.

"No, I did not," said Mr. Levine.

Ms. Hakala went on to ask how long it would take Mr. Levine to complete an audit, if he received all the necessary financial records and backups.

"A loaded question," Mr. Levine remarked. "If I got everything on a silver platter with financial statements drafted like they're supposed to do and everything just so I could go take and, flick, it would take a couple of months. Maybe three months.

"Bank confirmations, you're talking about three years. You're talking about three audit reports. You're talking about three Q's for each year, so you're talking about nine, ten, eleven, twelve -- maybe twelve or so financial statements and the backup to those statements."

"What are your current plans regarding CMKM Diamonds?" Ms. Hakala asked a short time later.

"Professionally?" Mr. Levine queried.

"Yes," said Ms. Hakala.

"Professionally after this administrative proceeding, I will terminate the relationship with my firm and the company," Mr. Levine replied.

Ms. Hakala then referred Mr. Levine to an exhibit of a May 4 letter he had written to Mr. Casavant and asked him to read it into the record.

"Dear Mr. Casavant," Mr. Levine read out. "The company has not provided the requested documentation and information required for us to perform our audit work.

"As a result, we hereby terminate our engagement with the company effective after the completion of our involvement at the administrative hearing scheduled for May 10, 2005."

Before bringing her direct examination to a close, Ms. Hakala posed a number of questions regarding the $100,000 retainer CMKM had paid to Mr. Levine's firm in January.

According to Mr. Levine, approximately $70,000 of that had been spent through April 30. He testified that approximately $17,500 had been spent on legal fees and $53,000 had been spent on things such as conversations with other accounting firms, research and trips to see the client.

"It's all very well documented," Mr. Levine said.

Mr. Stoecklein rose for a relatively short cross-examination.

CMKM's lawyer asked Mr. Levine to explain a little bit about the relationship between an auditor and an accountant and, further, to flesh out his comments regarding having documentation served to him on a silver platter.

"Okay," Mr. Levine said. "Well, in October of '04 when the new Sarbanes-Oxley rules came out, they made it very restrictive for an audit firm to do anything really do the audit work.

"We're not -- we're not allowed to draft financial statements, we're not allowed to do the bookkeeping. It would be a violation of the independence rules.

"So if Suzanne (Herring) was capable to put together the books and records and write the financial statements, then we would be able to go to town, so to speak, and perform our audit procedures on the books and records for that particular period being audited."

"What would you call that silver-plattered package you were looking for?" Mr. Stoecklein went on to ask.

"Just the books and records," said Mr. Levine. "She was going to put together the books and records so we could do something."

"And in this company you've never received that, is that correct?" CMKM's lawyer asked.

"I have never received anything," Mr. Levine replied.

In subsequent cross-examination, Mr. Stoecklein drew from Mr. Levine that it would take longer to put together an auditable package for a brand new client that did not have accounting records on QuickBooks.

"Did you have an expectation from Suzanne Herring of a full package within some period of time?" Mr. Stoecklein went on to ask.

"No," Mr. Levine replied.

Turning to another line of questioning, Mr. Stoecklein asked whether any of the 60 or 70 public companies Mr. Levine represented traded on the pink sheets.

"Yes, they are," Mr. Levine replied.

"Are the Pink Sheets required to file reports with the SEC?" Mr. Stoecklein asked.

"They're not required, but there are some fully reporting Pink Sheet companies," Mr. Levine said.

"So if CMKM wasn't required by the issue of having greater than 300 shareholders, according to the rule, it would have no need to be filing reports," Mr. Stoecklein remarked.

"That's correct," Mr. Levine said.

With that, Mr. Stoecklein said he had no further questions.

Bill Frizzell, a lawyer representing a group of CMKM shareholders known as the Owners Group, was given permission to cross-examine the witness over the objection of the SEC. Some of the exchanges became a bit testy.

Mr. Frizzell began by remarking that Mr. Levine was represented by counsel at the hearing. He went on to ask whether CMKM was going to be billed for that attorney.

"Yes, sir," Mr. Levine answered.

Mr. Frizzell then put some questions to Mr. Levine about Mr. Edwards, the individual who had referred him to CMKM.

"Does Mr. Edwards have any current stock position in this company?" Mr. Frizzell asked.

"I'm not aware of it if he does," Mr. Levine replied. "I don't know."

"Are you testifying here under oath that you don't know if Mr. Edwards has any stock position in this company at this time?" Mr. Frizzell pressed.

"That's correct," Mr. Levine said. "I don't know if he does."

"Back in the year 2003 or 2004, do you know whether or not Mr. Edwards had any stock position in this company?" Mr. Frizzell queried.

"I don't know," Mr. Levine said. "I've never seen -- I have not seen his name in the stock books, if that's what you're asking."

"And do you do accounting work for Mr. Edwards?" Mr. Frizzell asked.

"No, I do not," said Mr. Levine.

"Would it surprise you that Mr. Edwards would own some companies, some LLCs or companies that might have substantial stock positions in this company?" Mr. Frizzell carried on.

"Would it surprise me?" Mr. Levine queried.

"Yes," said Mr. Frizzell.

"Not -- does it surprise you?" Mr. Levine shot back. "I mean -- "

"Can you answer my question?" Mr. Frizzell quizzed.

"Ask me again," said Mr. Levine.

The escalating exchange drew an objection from Ms. Hakala and an intervention from Judge Murray.

"What's the relevance of the question whether this fellow Edwards does or does not own other companies?" Judge Murray asked Mr. Frizzell.

"This immediate withdrawal of his services a day before this hearing, Judge, has us very concerned," Mr. Frizzell replied. "Mr. Edwards has substantial holdings and has had, over the course of this company's development, substantial stock positions in this company."

"Well," Judge Murray said.

"If there's some relationship between him and this sudden withdrawal of his services of this company, I would think the Court -- it might be helpful to the Court," Mr. Frizzell said.

"Let's ask the gentleman why he's terminating his relationship with the company," Judge Murray said.

"I was fixing to, Your Honor," said Mr. Frizzell.

"Okay," said the judge.

"Okay," Mr. Levine said. "Basically in 25 years of doing accounting and asking for records, this isn't a company that me and my firm wants to continue to represent. I've asked for records over and over. I don't get any records. And I'll leave it at that."

That, however, was not where it was left.

"You testified, Mr. Levine, that you got no records after a certain point in this investigation?" Mr. Frizzell queried a short time later, carrying on before the witness responded. "No records from Mr. DeSormeau or not many records from the company, and that's why you're no longer the accountant or the auditor for this company. Is that your testimony?"

"No," Mr. Levine said. "My testimony is this isn't the type of company that I want to typically represent, one where the owners take the Fifth Amendment and -- when I do ask for records, and it's frankly become problematic."

Mr. Frizzell segued into a few other questions before returning to the subject of Mr. Levine's break with CMKM.

"Is there any particular reason why you chose to withdraw your representation for this company or your attempts to audit this on the day before everyone is headed to Los Angeles for this de-registration hearing?" Mr. Frizzell asked.

"You want to ask me that again?" Mr. Levine asked in return.

"The timing of your resignation," Judge Murray offered.

"The timing is that we're a very busy accounting firm," Mr. Levine said. "I'm in the middle of a major Q season, which is the biggest May 15th deadline.

"And frankly, you know, I'm done playing around with whoever I'm going to get documents from or I'm not, and I have to be on standby.

"And we just don't want to represent a company like this anymore."

"Does it matter that there's 60,000 shareholders that could be affected by your decision?" Mr. Frizzell asked.

That drew an objection from Ms. Hakala and an admonishment from Judge Murray about keeping an air of civility.

Mr. Frizzell ended his cross-examination.

As part of her redirect, Ms. Hakala asked Mr. Levine how an auditor determines the number of outstanding shares for a company that is reported as part of the annual report on Form 10-K.

"We use third-party confirmation evidential matter with the transfer agent," Mr. Levine replied. "We would confirm the number of shares issued with the transfer agent."

Judge Murray allowed recross-examination on that point.

Mr. Stoecklein took the opportunity to pursue questions about whether there might be outstanding shares beyond the number issued by the transfer agent.

"How can you have outstanding shares that aren't issued?" Mr. Levine asked in response. "The issue -- "

Ms. Hakala objected that the question called for a fact not in evidence, but Judge Murray overruled the objection because it appeared that the witness was answering the question.

"It's not really an accounting question," Mr. Levine said. "First you issue the shares, then they become outstanding. You can't outstanding the shares and then say they're being issued."

Mr. Stoecklein passed the witness to Mr. Frizzell, who tried to come at the question differently without success.

"I think the witness's testimony, as I understand it, is you can't have something outstanding that hasn't been issued," Judge Murray remarked.

"We don't look at shareholders' or stockholders' brokerage accounts, Your Honor," Mr. Levine said. "And whatever the company authorizes to be issued, it only happens one time.

"The company makes an issuance, they have a board of directors, you know, approval and it gets issued once. We -- we don't audit or get into each individual stockholder's account."

Mr. Frizzell attempted to press on, but Judge Murray sustained an objection from the SEC lawyer.

"The gentleman's position is, he looks at -- you correct me if I'm wrong," Judge Murray began. "He looks at transfer documents that say 'issued.'

"He doesn't look in this bigger world that you're concerned about, shareholders, how much they say they own.

"He looks at actual records of where the company has issued securities through its board of directors. That's all he's concerned with.

"All this other shareholder stuff that you're aware of because of your clients, he only looks at the company's records and the transfer agent's. He uses the transfer agent to confirm that, as I understand it."

"That's exactly correct, Your Honor," said Mr. Levine.

Mr. Frizzell argued that he was just asking a general accounting question.

"It's not an accounting question," Judge Murray said. "This gentleman audits records. "You're talking about something -- other records outside the company's records. He audits company's records.

"The stuff you're talking about is stuff that isn't in the company's records, as I understand it. Company's records is issued securities."

"Thank you, Your Honor," Mr. Frizzell said. "That's all the questions I have."

With that, Mr. Levine was excused.

Stockwatch will continue its review of the hearing 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, 8 and 9, 2005.)

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

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