SEC target Mrakuzic denies wrongdoing
2009-01-19 14:18 ET - Street Wire
Also Street Wire (U-*SEC) U.S. Securities and Exchange Commission
Also Street Wire (U-GDVE) Global Development & Environmental Resources
by Mike Caswell
Former Vancouver broker Darko Mrakuzic has filed his answer to allegations that he participated in the pump-and-dump of Global Development & Environmental Resources Inc., a pink sheets company. He denies any wrongdoing, and says he relied on opinions provided by the company's lawyer and transfer agent.
The U.S. Securities and Exchange Commission alleged that Mr. Mrakuzic fraudulently acquired 2.7 million shares of Global Development. It said he did this by having the company backdate a promissory note by two years, which allowed him to convert the note into free-trading shares. He then sold those shares for $1.2-million as others promoted the stock, the SEC claimed. (All figures are in U.S. dollars.) In his answer, Mr. Mrakuzic says that he relied on advice provided by the company's lawyer and transfer agent that the shares "were issued properly, without restrictive legend, in a transaction exempt from registration under the federal securities laws."
The SEC's complaint
The SEC filed civil fraud charges against Mr. Mrakuzic and others on May 22, 2008, in U.S. District Court for the Middle District of Florida. The other defendants were Michigan resident Anthony Cimini Sr., California securities lawyer Carmine Bua, Las Vegas residents Philip Pritchard and Pietro Cimino, and Florida resident Dante Panella.
The scheme began in June, 2005, when Mr. Mrakuzic allegedly arranged for his company, Quantumvest Holdings Ltd., to receive a promissory note purportedly showing that it was owed money by Global Development's predecessor. "Importantly, the draft Note was backdated by more than two years to December 2002, and included a provision granting the Noteholder the option to convert the debt into shares of Old Mission's stock," the complaint read. Global Development's lawyer, Mr. Bua, then authored a legal opinion allowing the note to be converted into 2.7 million unrestricted shares of the company, the SEC claims. He did this "despite a multitude of red flags pointing to a fraudulent scheme to evade the registration requirements," according to the SEC. These included a note agreement signed by somebody who was not a director or officer of the company on the date the agreement was signed.
The SEC claimed that Mr. Mrakuzic transferred half the stock to Mr. Panella. The two men then allegedly made $1.2-million and $1.1-million dumping the company, as it issued misleading news releases that boosted the price from $1.79 to $5.15. The SEC claims Mr. Pritchard, the company's chief executive officer, wrote a news release on Aug. 1, 2005, claiming that the company had more than $67-million in current projects, and that defence contracting firm Halliburton had bought its products.
At the same time, Mr. Panella allegedly arranged for a newsletter called The Grip to tout the stock. The SEC said The Grip published an article on Aug. 1, 2005, that falsely stated that Global Development had booked $67-million in sales, and it predicted the stock would go to $20. The SEC said the false news had "an immediate and substantial impact on the market demand for Global's stock." On the first day of trading, the company closed at $1.80. "Within three weeks, the price increased to $5.15 per share and daily trading volume peaked at more than 900,000 shares," the SEC said.
In addition to the pump-and-dump allegations, the SEC alleged that the company misappropriated investor money. According to the complaint, Global Development raised $2.1-million privately in July, 2005, telling investors that it had a $67-million contract backlog. The work included one contract worth $28-million with a company called Atlantic Land. The SEC said Global Development did not disclose that Atlantic Land was in fact owned by Mr. Cimino, who was also Global Development's president. The company allegedly said it would use investor money for salaries, equipment purchases, rent and other expenses. Instead, Mr. Pritchard and Mr. Cimino used the money to buy themselves residential properties, including a condominium at the Palms Casino in Las Vegas, the SEC claimed. They also used $1-million to pay for high-end Mercedes vehicles, according to the complaint.
The SEC sought penny stock bans, disgorgement of profits and appropriate civil penalties. It acknowledged the assistance of the B.C. Securities Commission in filing the case.
Mrakuzic's answer
Mr. Mrakuzic filed his answer to the complaint on Dec. 16, 2008. Most of the document provides bare denials of the allegations. He admits that his company, Quantumvest, sold shares of Global Development through a Canadian brokerage, and that he relied on an opinion prepared by Mr. Bua that said the shares could be traded. "Mrakuzic was a foreseeable third-party beneficiary of the legal opinion authored by Defendant Bua, an experienced securities law attorney, and Mrakuzic was entitled to rely upon that legal opinion," the answer reads. He also says that Quantumvest legitimately purchased a convertible debt security from a noteholder in a private sale. He later converted that security into the tradeable shares. Mr. Mrakuzic asks that the court "find in his favour and that Plaintiff will take nothing on its claims."
IDA fined Mrakuzic
The SEC case is not the first time a regulator has made allegations against Mr. Mrakuzic. Between 1990 and 2000, he worked at Wolverton Securities Ltd. and Pacific International Securities Inc. He was fired by PI for allowing a client to circumvent a debt, and later fined $30,000 (Canadian) by the Investment Dealers Association for the same transaction.
PI first disciplined him in January, 1999, after he executed 30 undeclared short sales in a client's account, including four stocks he sold short contrary to direct instructions from his supervisor. PI made him donate $2,500 (Canadian) to charity after it discovered the sales.
One year later, PI discovered that he had helped a client circumvent a debt owed to the brokerage. The client had wanted to transfer shares to PI and have Mr. Mrakuzic sell them, but the client's account had a debit of $61,449 (Canadian). To get around this, Mr. Mrakuzic allowed the client to deposit the shares in the account of Mr. Mrakuzic's father. He then sold the stock from the account and sent the proceeds to the U.S.
PI fired him when it found out what he did, and the IDA eventually investigated the case as well. On Feb. 3, 2004, he agreed to pay $30,000 (Canadian) to settle the case and to a one-year ban from working in the brokerage industry. According to BCSC records, he has not worked at a Vancouver brokerage since. |
