Bungled Calissio Resources Dividend Sparks FINRA Halt and Clearing Firm Lawsuit

For penny stock enthusiasts looking for a little late-summer entertainment, the issues surrounding an extremely large special dividend distributed by Calissio Resources Group, Inc. (CRGP) have proved to be of unusual interest.  On June 16, 2015, the company announced that its board had approved a “quarterly cash and stock dividend.”  It went on to explain that the cash dividend would have a value of approximately $1.3 million, or $0.011 a share, and would be accompanied by a “special stock dividend of 3%” (of what?).  The record date would be June 30, and the pay date would be 17 August.  Not much is clear about the proposed transactions, except that CRGP’s management may have failed to understand how dividends work.  Or, in the view of at least one clearing firm, it may have understood all too well.  On June 16, CRGP closed at $0.021, giving it a market cap of $2.7 million, based on its claimed 129 million shares outstanding.

On June 30, the record date, the stock closed at $0.009, giving it a market cap of $1.2 million.  Either way, the proposed cash dividend would have been a special dividend, as it would be worth more than 25 percent of the value of the company’s stock.  No matter what date the company had in mind—the declaration date of June 16 or the record date of June 30—the cash dividend would be a special, not a regular, dividend.  Special dividends are governed by different rules.  The most important difference for the purposes of this discussion is that for regular dividends, the ex-dividend date—the date on which the stock begins to trade without the dividend attached—is set for two days before the record date.  For special dividends, the ex date is deferred until one business day after the pay date.  Therefore, anyone holding CRGP stock through 18 August would qualify to receive the cash dividend.

It is not clear whether Calissio grasped that.  It may have believed the cash dividend, like the not-so-special stock dividend, would be paid only to investors holding CRGP three days before the record date of June 30.  Cash dividends are rarely distributed by OTC issuers, for the simple reason that the issuers rarely have the money even to consider a small one.  Usually, though, buyers come into the stock shortly after declaration, attracted by the prospect of “free” money.  That did not happen with CRGP, however; the stock continued to sink through July, and up to the ex date of 19 August.  The decline is all the more puzzling given the company’s announcement that it was buying back up to $1.5 million of its common shares on the open market.

One explanation might be that the company was issuing more stock than it was buying back.  That could not be confirmed because its transfer agent, Signature Stock Transfer, was and is under instructions from CRGP not to divulge the number of shares outstanding.  As the ex-date drew closer, many observers expected the dividend to be cancelled, but that did not happen.    It was paid to retail shareholders, who were naturally overjoyed.  Encouraged by the prospect of future quarterly distributions, many of them put all or some of the cash they’d received back into the company.  Volume, on the rise since late July, reached 400 million shares on August 25.  But problems were on the way, as questions were raised about the dividend, the company, its management, and its business.

On August 26, the Financial Industry Regulatory Authority (“FINRA”) halted trading in the stock 20 minutes before the close.  The halt was a U3, which may be invoked “if FINRA determines that an extraordinary event has occurred or is ongoing that has had a material effect on the market for the OTC equity security… or has the potential to cause major disruption to the marketplace or significant uncertainty in the settlement or clearance process.”  On the same day, COR Clearing added to the confusion by suing Calissio, its CEO Adam Carter, and Signature Stock Transfer.  Shareholders were stunned.  FINRA U3 halts are very rare for domestic issuers.  A clearing firm suing an issuer is even more unheard of; COR’s action may be the first of its kind.  Two weeks later, many questions remain unanswered.

Calissio Resources Group

Calissio is a Pink Current Information company, not a Securities and Exchange Commission (“SEC”) registrant, though in its early iterations it was one.  Its financial statements are now unaudited, and it is not obliged to disclose any information it doesn’t wish to disclose.  It was originally incorporated in Nevada in 2000 as eXmailit.com; in 2003 it became Cirond Corporation as the result of a reverse merger transaction.  In the spring of 2006, another reverse merger was effected, and Frank Wilde became CEO.  In August, Wilde filed a definitive proxy statement in which he announced several company initiatives.  One was to change the corporation’s name to Amarium Technologies, Inc.  Whatever Wilde’s plans for Amarium may have been, they were abruptly abandoned less than a month later.  On September 7, 2006, the company made its penultimate SEC filing, an 8-K announcing that KPMG, its accountants, had resigned.  It then went completely dark.

As explained below, the Cirond shell was taken over in a custodianship proceeding.  Recent cases reflect that custodianship shells have been used in multiple FBI stings including those involving Amogear Inc. and Cityside Tickets. Despite the fact that Nevada state court judges have expressed outrage at the illegal use of custodianship proceedings to create reverse merger inventory, shells manufactured in this manner continue to plague the penny stock markets. Calissio is no different. In one case, a Nevada judge was so offended by a custodianship scheme that he ordered the transcript of the hearing be delivered to federal authorities. The transcript of that matter can be read here. Pages 109-115, provide a nice summary of the scheme.

On August 13, 2008, reverse merger facilitator Brian Glass filed for custodianship of Amarium in state court in Clark County, Nevada.  The action was initially denied, because Glass had failed to show he’d attempted service on the company.  He tried again at the end of September, that time with success.  By April 2009, he had control of the shell, and appointed himself sole officer and director.  His next move would have been to inform the company’s transfer agent that he was in charge.  On May 21, Glass submitted the company’s last SEC filing, a Form 15-12G that terminated Amarium’s registration and relieved it of all reporting obligations.  Eventually Glass transferred control of the public shell, but it is not clear when, or to whom.  It was not until mid-2013 that Amarium began posting disclosure statements and financial reports at the OTC Markets website.  By that time, the company had decided to “transition” from the software business to the mining business, explaining that it had acquired a 250 hectare copper mining concession called the Jovita property in the Mexican state of Michoacan.  In its initial disclosure statement, published on July 22, 2013, Amarium identified Adam Carter as its president, secretary, and director.  Carter was said to be an Australian with experience in industrial equipment sales, leasing, and supply.  The company’s treasurer was Alberto Navarro, a mining contractor specializing as a project planner and logistics coordinator.  Neither owned any stock in Amarium, and they say they own no CRGP securities to this day.  No information has ever been offered about their education or previous employment; not even their ages are known.  Neither has any web presence unrelated to Calissio.

In July 2013, the company said that the Jovita mine was already in production, and that a Copper Stream Sale Agreement had been executed with an entity called Anglo-Asia Resource Partners for $8.75 million.  Anglo-Asia is described as a “private Hong Kong partnership,” but, as with Carter and Navarro, no further information about it can be found.  Then and in its most recent disclosures, the company gives coordinates for the purported Jovita mine, but recent satellite photos show no open pit mine, or any other kind of mine, at that location.  How much mining activity is even possible is open to question:  Michoacan is a battlefield in Mexico’s drug wars, with the government, the Knights Templar cartel, and militant farmers fighting for control.

Sometime in 2013, the company acquired another property in Michoacan, called the San Pedro Copper Mine.  It never issued a press release about the acquisition, but announced an initiative to upgrade the flotation mill that came with the concession in December of that year.  On July 24, 2015, it disclosed that it had sold the San Pedro mine to Milagros Del Cobre Mineria S.A. de C.V. for $14.6 million in stock and cash.  Less that a week later, it announced receipt of $7.3 million.  Carter said the money would be used for operations at the Jovita property.  Milagros Del Cobre Mineria is another ghost company; no reference to it outside of CRGP filings and press releases may be found.  The same is true for the San Pedro mine.

In the annual report for fiscal 2011—which was, however, filed in 2013—the company discusses two financing agreements not mentioned in the disclosure statement filed at the same time.  The first is a June 30, 2010 agreement with Global Infinitum Market SA de CV for a line of credit in the amount of $600,000; its ostensible purpose was to “secure funding for mining operations.”  It isn’t clear what that means; was the line of credit to pay for mining operations, or to secure financing?  In the accompanying balance sheet , reference is made to the “GIM Note.”  As of June 30, 2015, the GIM note was still on the books, in the amount of $562,400.  Though it wasn’t mentioned back in 2013, evidently the GIM note is convertible to common stock, though the company doesn’t specify in what circumstances.  In 2012 and 2014, stock was issued to pay down the debt.  Another note was issued on June 30, 2010, according to the 2011 annual report.  It went to Industrias Calissio SA for a total of 450 million shares to be issued at a cost basis of $0.01.  It was to “provide the Company with a deposit on a mineral resource property with a value of $4,500,000 minimum in situ value.” If those two notes were really from 2010, why did the company sign an agreement to purchase its first mining property, the Jovita mine, on May 22, 2013?  What “operations” could GIM’s line of credit conceivably have been financing in 2010?

It isn’t difficult to see that there are serious problems with CRGP’s financial statements.  Its most recent balance sheet doesn’t balance; its cash flow statement doesn’t add up.  Its story about its supposedly profitable Jovita and San Pedro mines doesn’t add up, either.  In December 2014, Amarium changed its name to Calissio Resources Group, because it wanted to “reflect the relationship with our local partner & active shareholder, Industrias Calissio SA.”  In its quarterly financial report for the period ended June 30, 2015, it claimed Industrias Calissio as its only greater-than-5% shareholder, with 90 percent ownership.  The entity was said to be run by one Colosio Sembrano, but those are, unfortunately, two last names.

COR Clearing

COR filed a lawsuit against Calissio, Carter, and Signature Stock Transfer on August 26, 2015, the day FINRA halted trading in CRGP stock.  Probably it filed before FINRA made its move, but it’s impossible to tell.  It seems possible that it, as a FINRA member, had brought its problem to the regulator’s attention earlier, but it cannot be said that FINRA’s action was an endorsement of COR’s complaint.  It is likely that FINRA at the very least agreed that there was a problem with clearance.  That problem had to do with stock cleared by COR.  The stock in question was sold by two of COR’s clients, Nobilis Consulting LLC and Beaufort Capital Partners.  In its complaint, COR says that between July 29 and August 19, Nobilis obtained more than 327 million shares of CRGP stock “through a conversion of debt to equity,” and sold them.  What debt did Nobilis own?  No reference is made to any Nobilis note in CRGP’s financial or disclosure statements.  It its explanation of the background of the case, however, COR mentions the old Industrias Calissio note, implying that Nobilis had purchased some or all of it.  No date is given for that presumed purchase.  COR cleared the Nobilis sales, and on August 24, the Depository Trust and Clearing Corporation (“DTCC”), which presided over the dividend distribution, debited a large sum—variously described as “approximately $3 million,” “$3.3 million,” and “over $4 million”–from COR’s account with them to cover the dividend it claimed needed to be paid.  Earlier the same day, COR wrote to DTCC, explaining that because the shares in question had not yet been issued at June 30, the record date, they did not qualify for the dividend.  Evidently DTCC did not agree, and went ahead with the debit at the close of business.

Nobilis’s introducing broker, JH Darbie & Co., had threatened to close Nobilis’s account with them.  The next day, August 25, Adam Carter of CRGP emailed Michael Yarmish of Darbie and George Buonocore of Nobilis saying that Buonocore had asked him  to “reach out,” and explaining that “there has been a huge glitch/error on how the dividend was supposed to be paid out.  We are currently in conversations with DTCC and will be resolving this issue over the next couple of days.”  He added that “this was a problem created by FINRA and not your client Nobilis Consulting LLC.”  He also wrote to Carlo Salas, CEO of COR, saying the same thing.  Salas replied that it was important to discuss the matter immediately, and asked for a phone number and a good time to call.  COR does not report any further discussions with Carter or DTCC.  The next day it filed its lawsuit in Federal court in Omaha, Nebraska, where the firm is located.

What had really happened?  Certainly Carter had no reason to blame FINRA; the regulator understands dividends, and knew that the one proposed by CRGP was a special dividend whose ex date would fall after, not before, the record date.  DTCC also understood that.  It was Calissio that chose to set a pay date more than six weeks after the record date, and Calissio that did not publicly disclose its issuance of hundreds of millions of shares of stock between the record date and the ex date.  At least 10 days before the ex date, CRGP had filed a corporate action request with FINRA, and notice of the dividend appeared on the Daily List on August 18.  The event type was called a “special dividend cash”.  It must be wondered when Carter learned of it, and whether he understood what it meant, which was that Calissio, not COR, would owe not $1.3 million in dividend payments, but millions more.  Perhaps it is no coincidence that between July 21 and August 25 it raised its authorized capital three times, from 300 million shares to 3.475 billion shares.

In the complaint, COR argues further that it was Calissio itself, or unnamed affiliates of Calissio, that had purchased most of the stock sold by Nobilis.  It objects that “under the guise of what they claim to be a mere mistake, Defendants have defrauded COR Clearing and its customers by surreptitiously issuing hundreds of millions of shares of Calissio stock after declaring a dividend on all common shares prior to the issuance, then repurchasing hundreds of millions of these new shares… and relying on DTCC’s dividend payment system to fail to distinguish between shares entitled to dividends and those not so entitled.”

COR understood who would normally be entitled to receive the dividend:  “shareholders… that owned the shares as of August 19, 2015 (the ‘ex-dividend date’).”  While that statement is technically incorrect—eligible shareholders were those still holding through August 18; they were free to sell on the ex date if they wished—probably the error is due to the haste with which the complaint was prepared.  However, the issue is clouded by COR’s later insistence that it had “no reason to believe any dividend was owed to Calissio for these shares, because these shares were issued after the June 30, 2015 record date and were thus ineligible for dividends…”  Do they mean is that the stock should have been issued by Signature, the transfer agent and another defendant, with due bills attached, or that stock issued between the record date and the ex date is never eligible for dividends?  Normally, companies don’t issue new stock in these circumstances, so the question is not one many market participants have had to grapple with.  In any case, though, Calissio should ultimately have been responsible for any dividend payments that needed to be made.  COR points out that Adam Carter admitted the stock in question did not qualify for dividend payments, and yet failed to make COR whole.  It concludes that “Calissio’s retention of this money only further confirms that Calissio’s admission of liability is nothing more than a tactic to stall legal action by COR Clearing in furtherance of the fraud being perpetrated by Defendants.”

So far, no solution to COR’s problem has been announced.  Service of process has been executed on Calissio, through its resident agent, and on Signature, but not on Adam Carter.  Calissio must answer or otherwise reply by September 18; Signature by September 19.

FINRA and E*TRADE

Unlike SEC suspensions, U3 halts brought by FINRA can be renewed every 10 days for as long as the regulator sees fit.  The last stock to which a U3 was applied, Riviera Tool Company (RIVT), is still not trading five months after the halt.  But Riviera is a completely dead company that had one big day thanks to a wildly incorrect rumor that it had been acquired by Tesla.  CRGP, on the other hand, claims to be in business, and had been trading daily.  FINRA lifted the halt after the initial ten days had expired.  It offered no explanation.  Some observers concluded that the halt had been brought in the first place because of COR’s lawsuit.  While the two were certainly related, FINRA did not act in support of the clearing firm.  It probably moved because it feared COR might not be alone in its predicament.  We still don’t know if it is.  The enormous raise in Calissio’s authorized capital between late July and the end of August is troubling, and prompts questions about how much new stock may have been issued during that time.

When CRGP reopened for trading, it was on the Grey Market.  When any stock goes without public quotation for more than four trading sessions, the company loses compliance with SEC Rule 15c2-11.  That means it will trade on the Greys until and unless it can persuade a market maker to file a Form 211 with FINRA.  Since any market maker willing to do that accepts liability for any inaccurate information contained in the 211—information that is largely supplied by the company—most are hesitant to step up to the plate for issuers that have been the subject of regulatory actions like trading suspensions or halts.  Until the issues surrounding Calissio’s dividend are fully resolved, no 211 is likely to be filed, and if one is, FINRA will have many questions to ask.

In the meanwhile, E*TRADE entered the picture with an action of its own.  On September 2, it informed clients that their dividend payments from Calissio had been put on hold.  That was not a problem for those who hadn’t touched the cash, but for those who’d used the money to purchase more CRGP, or withdrawn it to pay bills or have fun, it was a problem.  Some were left with negative account balances and potential margin calls.  The broker explained that it was only a precautionary measure, in case the dividend should ultimately be rescinded, and that its margin department had been instructed not to enforce margin calls, but clients were nonetheless furious.  The resumption of trading did not change E*TRADE’s mind.  No other brokerage has followed suit.  It’s still not clear who’s responsible for this chaos.  While the situation is not FINRA’s fault, as Adam Carter alleged, FINRA bears some of the blame.  It did, after all, process Calissio’s corporate action request.  Did it not wonder why a small junior mining company had decided to pay cash and stock dividends simultaneously, and launch an expensive stock repurchase program all at the same time?  And didn’t it wonder how Calissio would pay for all that?  If it had, it would have turned to the company’s financial statements, and found them full of inaccuracies and omissions.

A Precedent and Plans for the Future

While there’s no precedent for the problems Calissio’s cash dividend has caused, the story of the company itself rings bells with observers who follow penny stocks.  In late 2012 and early 2013, a Mexican junior miner called Southridge Enterprises (SRGE) enjoyed a meteoric rise and fall.  As with CRGP, its two chief executives, Michael Davies and Derald Johnston, had no backgrounds, and could not be traced beyond their supposed activities in connection with Southridge.  The company claimed extravagant valuations for its properties.  It paid one cash dividend, much smaller than Calissio’s, and promised a second, which in the end it failed to fund.  On the day after Christmas, it announced a joint venture with Kinross Gold.  Though Boxing Day is a holiday in Canada, where Kinross has its headquarters, company officials caught wind of the relative press release and issued a statement denying the truth of its contents.  The SEC suspended trading in SRGE two days later.

Southridge then said it planned to leave the United States to trade on a foreign exchange, probably the Mexican Bolsa.  It was never officially heard from again.  But before it entirely faded away, a bizarre “news story” was fed to the local Mexican press:  Davies and Johnston had been murdered by a drug cartel, their bodies found floating in the Rio Santa Rosa.  Reporters later admitted they didn’t bother to check whether the storywas true.  And it was not, as U.S. news teams sent to investigate discovered.  Southridge had tried to kill off its own nonexistent management.  What does all that have to do with Calissio?  For two years, CRGP has been pumped on financial message boards by the same individual who’d earlier been SRGE’s chief compensated cheerleader.  He began talking up CRGP only a month after he wrote his last message about SRGE.  And he never promoted any other stocks.

On September 10, Calissio, like Southridge before it, announced that it planned to pick up its toys and go home.  In a press release, it said its shareholders had voted in favor of a “previously signed agreement and plan of merger” dated August 31, which proposed a merger with Milagros Del Cobre Mineria S.A. de C.V., the company to which it had sold the San Pedro mine.  Upon completion of the merger, which was to take place “immediately,” Calissio would become a private company whose shares would no longer be listed on the OTC.  Adam Carter expressed resentment about “previous errors” he claims were “committed by third party institutions,” adding:  “Due to the stock price and delisting to the Grey Market, the board of directors saw no alternative but to execute this course of action.”  He ended his message with a solicitation clearly in violation of the securities laws, saying, “I encourage investors interested in receiving an investment proposal to contact us immediately.”  He may think he can remove Calissio from the OTC simply by telling the world that’s the plan.  Perhaps he doesn’t yet realize that in order to consummate the proposed merger, he’ll have to submit a corporate action request to FINRA.  If he goes through with it, FINRA is likely to have many more questions than it did when faced with the requests associated with the dividend distribution.

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.

Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney
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