Court Finds CMKX Transfer Agent Not Substantial Participant in Fraud
Securities Lawyer 101 Blog
On September 10, 2013, the Ninth Circuit Court of Appeals rejected the Security and Exchange Commission’s argument that a stock transfer agent and its principal are necessarily liable “by virtue of their position” when unregistered stock is illegally sold into the market.
The original case involved CMKM Diamonds (CMKX), perhaps the biggest penny stock scam of the last decade. In 2003 and 2004, CEO Urban Casavant, with the help of his undeclared partner John Edwards, raised the company’s authorized shares to 800 billion, and issued about 775 billion shares, of which 622 billion were unregistered. (In late 2004, 75 billion were cancelled, leaving the outstanding at 703 billion.) The SEC suspended CMKX in early 2005, and revoked registration later in the year. In April 2008, the agency sued the company and 13 other individuals and entities for securities fraud and more. The Department of Justice subsequently brought a parallel criminal action. Neither the civil suit nor the criminal prosecution has yet been fully resolved, though some defendants have settled or pled guilty.
Helen Bagley was the owner of 1st Global Stock Transfer, CMKX’s transfer agency. During 2003 and 2004, Bagley relied upon opinion letters written by her co-defendant, attorney Brian Dvorak. She later said she was concerned about the amount of stock made free trading thanks to those opinions, but explained that she was only doing her job.
She was, however, uneasy, and in June 2004 asked that a second opinion be provided for each issuance. CMKX hired Roger Glenn of Edwards & Angell to do that. The SEC and the DOJ have not charged Glenn.
Eventually, the SEC brought a motion for summary judgment against Dvorak, Bagley, and 1st Global. In its complaint, the agency had alleged, among other things, that Dvorak and Bagley had violated Section 5 of the Securities Act of 1933. Section 5 provides that it is unlawful for any person to offer or sell an unregistered security. The SEC held further that without their participation in the scheme, there would have been no sales of unregistered stock.
A motion to dismiss must deal only in “undisputed facts.” The Ninth Circuit determined that the undisputed facts do not show that Bagley and 1st Global were “substantial participants,” without whose collaboration the scheme could not have gone forward, under the law. The Court held that “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…”
The panel remanded the case to the lower court for trial.
For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, by email at [email protected] or visit www.securitieslawyer101.com. This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute, legal and compliance advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.
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