CMKM Diamonds features in NASD enforcement action
stockwatch.com
2006-09-29 14:46 ET - Street Wire
by Lee M. Webb
CMKM Diamonds Inc., Saskatchewan native Urban Casavant's revoked pink sheet woofer, features prominently in a National Association of Securities Dealers (NASD) disciplinary proceeding against Nevada-based NevWest Securities Corp. and two of its top officers.
The NASD complaint alleges that NevWest president Sergey Rumyantsev and vice-president Antony M. Santos violated anti-money laundering rules and failed to file suspicious activity reports (SARs) as a client with 32 accounts dumped 259 billion CMKM shares for proceeds of more than $53-million. (All amounts are in U.S. dollars.)
"Broker-dealers have an obligation to investigate 'red flags' indicating suspicious activity and, where appropriate file SARs," NASD enforcement head James Shorris said in a Sept. 26 news release. "Despite a multitude of very obvious red flags, NevWest chose to look the other way, earning millions for itself in the process."
The respondents have not yet filed a response to the NASD complaint and no findings have yet been made regarding the allegations.
The client
According to the NASD, the CMKM transactions executed on behalf of a NevWest client identified by the initials "JE" in the complaint were "highly suspicious" and should have caused the firm and its officers "to suspect that the customer was violating federal securities laws."
The client, who is known to many followers of the wild CMKM saga as John Edwards, is not a broker and is not a party to the NASD enforcement proceeding and there have been no findings that he violated securities laws.
(In a July 14, 2006, pleading in an unrelated criminal trial where Mr. Edwards's wife Diana Lee Flaherty is awaiting sentencing after being convicted of securities fraud in connection with Phoenix Metals U.S.A. II Inc.'s "gold from volcanic cinders" scam, the prosecution claims that "the source of wealth offered as bond by defendant's current husband is uncertain in light of the SEC's continuing investigation of reports that he has engaged in significant securities fraud."
Mr. Edwards was not implicated in the Phoenix Metals fraud and, as noted in a subsequent court order in Ms. Flaherty's criminal case, there has been no appropriate showing that the collateral offered by Mr. Edwards constitutes the illegal proceeds of criminal activity. Ms. Flaherty, who faces a sentence of 12 to 18 years in prison and forfeiture of $5.7-million, filed a motion for a new trial on Sept. 19.)
The NASD claims that Mr. Edwards opened five accounts at NevWest in 2002; 19 accounts in 2003; and another eight accounts in 2004. The regulator says that the same UPS postal box address was used for 30 of Mr. Edwards's 32 accounts in the names of various trusts and corporate entities.
"Shortly after JE began opening accounts at NevWest, he developed a trading pattern of physically carrying into the firm certificates of low-priced securities," the complaint alleges. "In February 2003, JE began to deposit shares of CMKM into the various accounts he opened at NevWest.
"JE instructed NevWest, through his registered representative, to expeditiously liquidate the certificates and to immediately wire all sales proceeds to various bank accounts.
"The bank account owner of record rarely matched the name of the NevWest account holders."
The NASD says that between January of 2003 and December of 2004, NevWest wired $43-million through 139 wire transfers from at least 28 of Mr. Edwards's accounts as he unloaded a staggering 259 billion CMKM shares.
The transactions
According to the allegations in the 27-page NASD complaint, the number of CMKM shares Mr. Edwards unloaded increased over time. During 2003, the regulator says that he sold 4.3 billion CMKM shares in 66 transactions for proceeds of $401,000.
Mr. Edwards allegedly ramped up his selling in 2004, "aggressively" implementing his CMKM trading strategy.
"In many instances, JE carried into NevWest billions of CMKM shares at a time," NASD claims. "Through NevWest he liquidated billions of shares per month."
The regulator says that as Mr. Edwards began dumping billions of shares per month in early 2004, NevWest's anti-money laundering compliance officer recommended to Mr. Santos that the firm file an SAR regarding his CMKM transactions. That recommendation was not followed, nor was a subsequent recommendation to file an SAR made by Mr. Edwards's registered representative in August of 2004.
During 2004, as sub-penny CMKM's promotion was ratcheting up, Mr. Edwards allegedly managed to unload 207 billion shares in 368 transactions for proceeds of more than $49-million. The complaint alleges that the busy CMKM seller wired $41.5-million from his NevWest accounts in 2004.
By 2005, the wheels were falling off Mr. Casavant's pink sheet promotion, particularly after the U.S. Securities and Exchange Commission (SEC) temporarily suspended trading in CMKM in March of 2005 and then followed up with an administrative proceeding against the company.
Notwithstanding the badly floundering promotion and the SEC investigation, Mr. Edwards allegedly managed to unload approximately 48.5 billion shares of CMKM in 133 transactions for proceeds of $3.7-million between January and May of 2005.
The red flags
According to the NASD complaint, Mr. Rumyantsev and Mr. Santos should reasonably have been aware of "red flags" with respect to Mr. Edwards's CMKM transactions and wire transfer activity, which should have triggered anti-money laundering procedures.
Among other things, the regulator says the fact that Mr. Edwards suspiciously refused to reasonably explain how he acquired his CMKM shares should have raised a red flag.
The regulator also says that Mr. Edwards "suspiciously opened and maintained 32 accounts at the firm for no business or apparent lawful purpose."
The NASD complaint suggests that Mr. Edwards hand-delivering CMKM certificates to the brokerage firm should have raised concerns.
"The CMKM certificates JE deposited for sale were not always registered in the name of a specific account holder with NevWest," the NASD continues. "Instead, beginning in or about August 2004 and continuing into 2005, JE began depositing certificates registered in the name of NevWest's clearing firm."
In addition to pointing to Mr. Edwards's wire transfer activity as another red flag, the regulator says that he "suspiciously exhibited a lack of concern regarding the commissions and other transaction costs relating to the liquidation of CMKM shares."
According to the NASD complaint, NevWest earned $2.5-million in commission revenue from Mr. Edwards's CMKM dumping, accounting for 36 per cent of the firm's total revenues during the relevant period.
Rounding out the list of red flags, the regulator goes on to say that the substantial number of shares unloaded by Mr. Edwards and the significant proceeds of those sales "should have prompted NevWest to conduct a searching inquiry to ensure that CMKM was complying with relevant laws and regulations."
Among other things, NASD claims that NevWest failed to conduct a reasonable inquiry to obtain specific details concerning how and when Mr. Edwards acquired his CMKM shares.
Moving on from the discussion of red flags, the NASD claims that Mr. Rumyantsev and Mr. Santos were, or should have been, aware of public information regarding CMKM.
Among other things, the regulator claims that the brokers should have known that the company had not filed any quarterly or annual reports for years, leaving investors in the dark as NevWest unloaded approximately 37 per cent of CMKM's outstanding shares for Mr. Edwards.
The regulator further claims that the respondents should have been aware of CMKM's NHRA funny car promotional campaign in which the company sponsored a car called the CMKXTREME vehicle. At the time, the company's trading symbol was CMKX.
"Promotional items such as T-shirts and hats with "Got CMKX?" written on the front were handed out at race events," the complaint notes. "All of this activity was used to encourage investors to purchase shares of CMKM through trading activity on the pink sheets."
NevWest should also have been aware of the SEC suspension and subsequent administrative proceeding against CMKM, which was initiated on March 16, 2005. The hearing was held on May 10, 2005.
"Despite the aforementioned events, NevWest from March 17, 2005, through May 11, 2005, continued to sell at least 22.5 billion shares of CMKM for JE's accounts in approximately 77 transactions," the complaint notes.
The SEC finally yanked CMKM's stock registration on Oct. 28, 2005.
According to the NASD, Mr. Rumyantsev and Mr. Santos should also have known that Mr. Edwards had liquidated a substantial number of shares of Pinnacle Business Management Inc., which later became Serac Holdings Inc., and Barrington Foods, which became U.S. Canadian Minerals Inc., a company with close ties to Mr. Casavant and his pink sheet dog of dogs.
The complaint alleges that Mr. Edwards deposited almost six billion Pinnacle shares with NevWest and approximately 6.2 million U.S. Canadian Minerals shares.
In May of 2002, the SEC temporarily suspended Pinnacle and subsequently filed fraud charges against the company. Pinnacle's stock registration was revoked in July of 2004.
The SEC temporarily suspended U.S. Canadian Minerals in October of 2004, just as the OTC Bulletin Board promotion that had traded as high as $18.75 per share was executing a 3-for-1 forward split. The company was booted down to the pink sheets where it now occasionally ekes out a trade for less than 10 cents.
It is not clear just what the NASD thinks NevWest and its senior officers should have drawn from Mr. Edwards's apparent penchant for dumping wads of shares of dubious penny and sub-penny companies with regulatory problems.
Indeed, in the absence of any evidence that Mr. Edwards did anything at all illegal while unleashing his flood of 259 billion CMKM shares that were apparently eagerly sponged up by naive investors, it is far from clear just how strong a case the NASD will be able to bring against Mr. Rumyantsev and Mr. Santos.
Among the proposed sanctions, the NASD wants the respondents to disgorge any ill-gotten gains and pay such costs of the proceedings "as are deemed fair and appropriate under the circumstances."
Stockwatch will follow developments in the NASD proceeding and the continuing CMKM saga.
Comments regarding this article may be sent to lwebb@stockwatch.com.
(Further 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; June 6, 8, 9, 10, 13, 14, 15, 16, 17, 20, 21, 22, 29 and 30; July 1, 4, 6, 12 and 13; Aug. 2, 5 and 9; Sept. 7, 12, 27 and 30; Oct. 24, 26 and 31; Nov. 7, 11, 22 and 25; Dec. 1, 6, 9, 15 and 22, 2005; and Jan. 3, 2006.)
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