Transfer Agent Might Not Be Liable for Stock Scam
(CN) - The transfer agent of a diamond-mining company hyped in a penny stock scheme might not be liable for violating securities law, but the company's lawyer is, the 9th Circuit ruled Tuesday.
A three-judge panel in San Francisco partially reversed summary judgment for the Securities and Exchange Commission in its federal lawsuit against 11 people and three companies allegedly involved in the scam.
The SEC claimed the defendants took more than $64 million from 40,000 investors nationwide by selling unregistered, illegally issued shares of CMKM Diamonds, a purported gold- and diamond-mining company.
"CMKM in fact had no legitimate operations," according to the ruling.
"The company issued false press releases, operated a promotional racing team that traveled around the country, and provided investors with fake maps and videos of mineral operations in North and South America."
Acting as CMKM's attorney, defendant Brian Dvorak wrote 450 opinion letters stating that the stocks should be issued without a restrictive legend alerting buyers that the securities hadn't been registered under federal law.
The company's transfer agent, 1st Global Stock Transfer, and owner Helen Bagley relied on Dvorak's letters to issue 622 billion shares of unrestricted CMKM stock between 2002 and 2004.
The SEC said profits from the company's stock sales were used to fund the personal lifestyles of CEO Urban Casavant and John Edwards, CMKM's director of "post-merger matters."
Bagley testified that Global had issued the stock without a restrictive legend because she understood that the stock had already been paid for - or the stock split had occurred - at least two years earlier. While it seemed strange that CMKM had nearly 800 billion shares, she noted, nothing the company did "made sense" to her.
Global is "only the transfer agency," she testified. "That's all we do. If we get proper paperwork, we do what needs to be done."
Dvorak and five others were indicted in March 2009, and in December 2010 the SEC asked a federal judge in Nevada to grant summary judgment against Dvorak, Global and Bagley in the civil case.
U.S. District Judge Harry Licks ruled that all three defendants were liable for selling unregistered securities in violation of federal law. He ordered Dvorak to disgorge nearly $410,000, and Bagley and Global to disgorge more than $448,000.
Meanwhile, Dvorak lost his bid for a stay pending the outcome of his criminal case.
The 9th Circuit agreed with Global and Bagley's claim that they were not necessarily a "substantial factor" in the scheme to distribute CMKM stock.
"We reject the SEC's contention that Global and Bagley are necessarily liable under Section 5 [of the Securities Act] by virtue of their position as CMKM's transfer agent," wrote U.S. District Judge John Tunheim, who was designated to sit on the panel.
"A participant's title, standing alone, cannot determine liability under Section 5, because the mere fact that a defendant is labeled as an issuer, a broker, a transfer agent, a CEO, a purchaser, or an attorney, does not adequately explain what role the defendant actually played in the scheme at issue," he added.
"Instead, whether a defendant is a substantial factor in the distribution of unregistered securities is a question of fact requiring a case-by-case analysis of the nature of the securities scheme and the defendant's participation in it."
The court upheld the rulings against Dvorak, however, saying he "failed to meet his burden of showing that the disgorgement figure was not a reasonable approximation of his illegal profits."