Calissio Resources – A Special Dividend by Any Other Name
More than two years ago, we published the first in a series of articles about problems surrounding the declaration and payment of a special dividend by penny stock issuer, Calissio Resources Group, Inc. (CRGP). We followed up with a second and third article as legal actions brought by COR Clearing, LLC against a growing number of parties were filed. By the summer of 2016, the Calissio case had become difficult to follow, since access to nearly all the court pleadings was restricted to participants in the case; the judge had agreed to the restrictions in part because those filings contained sensitive trading records naming owners of CRGP stock.
The story began on June 16, 2015, when Calissio, a purported mining company that claimed to own properties in Mexico, declared two stock dividends. One was to be a small stock dividend; the other a large cash dividend that would pay $0.011 a share, or a total of about $1.3 million. The record and pay dates for both were the same, June 30 and August 17, respectively. As we explained in our earlier articles, although the company described the cash dividend as a regular quarterly distribution, at all times between the declaration date and the ex dividend date it qualified as a special dividend: one more than 25 percent of the value of CRGP’s stock.
Special dividends differ from regular dividends in one significant way: the ex-dividend date is set after, not before, the record date. The record date is fixed by the issuer. Only shares outstanding as of that time will qualify for the dividend payment. The ex date is the first day on which the stock will trade without the dividend, and is set for one day after the pay date. The pay date, like the record date, is set by the company. The ex date is set by the Financial Industry Regulatory Authority (“FINRA”); in this case it was two days, not one, after the pay date of August 17. Anyone who owns eligible stock as of the day before the ex date will receive the dividend payment. If a shareholder of record—one who owns the stock in question as of the record date—sells between the record and ex dates, the buyer of his shares will receive the payment. The new owner’s claim to that payment will be noted in the form of a “due bill” attached to the shares he purchased from the shareholder of record. To explain simply, the record date establishes what stock will be eligible for the dividend, and the ex date establishes which shareholders will receive dividend payments. The latter will be only those whose stock was issued and outstanding as of the record date.
For reasons that have never been explained, Calissio set a pay date for both dividends nearly two months distant from the record date. That is very unusual where special dividends are concerned, but it’s possible the company’s CEO, Adam Carter, was unaware the cash dividend qualified as special. Carter was said to be an Australian with no public company experience; subsequent events cast doubt on whether anyone of that name was ever involved with CRGP. When a company declares a large cash dividend, the event usually sparks interest that results in a rise in price between the record and pay dates. That did not happen with Calissio: while volume rose considerably in July and August 2015, stock price dropped from $0.0094 on the day after the record date to $0.0019 on the ex dividend date, August 19.
That happened for good reason. During the period in question, CRGP had issued hundreds of millions of new shares to holders of the company’s convertible debt, and those shares were immediately sold into the market. Since the stock was issued after the record date, it should not have been eligible for the cash dividend. But the dividend was paid on it nonetheless, with serious consequences for COR Clearing and Alpine Securities Corporation, which had cleared most of the new stock for sale.
COR’s clients, through introducing broker J.H. Darbie, were Nobilis Consulting LLC and Beaufort Capital Partners. Each had bought $100,000 worth of a convertible note supposedly issued in 2010. Alpine’s client was Edward Bronson’s Macallan Partners, which had also purchased part of the note. When the ex date for the dividend hit, initially all went well. But the Depository Trust & Clearing Corporation (DTCC), which handled the distribution, quickly realized it had a significant shortfall, thanks to the hundreds of millions of shares issued to and sold by Nobilis, Beaufort, and Macallan. As a result, DTCC notified COR that it would be debiting about $4 million from its account on August 24. Court documents reflect that it took $940,500 from Alpine’s account.
Both COR and Alpine complained to DTCC. DTCC said its hands were tied, and Alpine was “advised that it [DTCC] would only take instructions concerning an adjustment… from CRGP or someone acting on its behalf.” On August 25, Adam Carter emailed Carlos Salas, CEO of COR, saying he realized “there has been a huge glitch/error on how the dividend was supposed to be paid out.” He added that it was all FINRA’s fault. Salas replied that it was important to discuss the matter immediately, and asked for a number to call. The mysterious “Carter” apparently never got back to him. Apparently feeling there was no time to waste, COR filed suit against Calissio, Carter, and Signature Stock Transfer, CRGP’s transfer agent, in federal court in Omaha, Nebraska, the next day. On the same day, FINRA, evidently aware there were potential problems with clearing and settlement, imposed a U3 halt. The regulator lifted the halt after ten trading days, but by then the damage had been done: CRGP had lost compliance with SEC Rule 15c2-11, and so reopened on the Grey Market, where it still trades today. During the halt, E*TRADE had slapped a hold on Calissio stock in its clients’ accounts. Since some of them had already spent their dividend money—ironically, more than a few used the cash to buy more CRGP, believing the company intended to pay another generous quarterly dividend—there were concerns that large margin calls would be due should any adjustment be made to the cash dividend.
Early Stages of the COR Litigation
COR quickly served a summons on Calissio’s resident agent in Nevada, but the company failed to respond. On September 25, 2015, the court clerk entered default as to Calissio. “Adam Carter” disappeared; he last communicated with COR in a snarky email wishing Salas “Good luck with the lawsuit,” and broke off contact with Signature Stock Transfer.
Carlos Salas could not expect satisfaction from Calissio, but probably he never had. COR’s original complaint lays out his working theory. He believed Calissio, and/or unnamed “affiliates” of Calissio, had intentionally taken advantage of the Nobilis and Beaufort conversions and sales. On June 1, shortly before the announcement of the two dividends, CRGP issued a press release claiming it planned to repurchase “up to $1.5 million of the Company’s outstanding common shares.” Salas was convinced that as the Nobilis and Beaufort sales depressed the stock price, Calissio and its presumed associates snapped up those shares at bargain basement prices. The lower the stock price, the better: the dividend would pay a flat $0.11 per share. Of course, that stock should not have been eligible for the cash dividend. COR alleged that Carter, Calissio, and Signature knew the shares were not dividend-eligible, but “intended to defraud the sellers, the clearing system, and indeed the marketplace by failing to provide this information to DTCC or the sellers of those shares.”
On August 24, the day DTCC debited “about $4 million” from COR’s account, CRGP issued a new press release about the buyback, proudly announcing it had repurchased 158,865,114 shares of commons for a total consideration of $588,448. The average price per share would have been $0.0037. The average price for the last 68 million shares bought was $0.0028.
DTCC had already informed both COR and Alpine that any “post-payable adjustment” to the dividend distribution would have to be requested by Calissio or by an agent of Calissio. At DTCC’s suggestion, COR filed a motion for an order appointing a limited purpose receiver for Calissio on an emergency basis. The plan was to have a “friendly” receiver appointed to ask DTCC to reverse the dividend payment. DTCC did not object; it supplied a list of 67 clearing firms that had dealt in CRGP stock during the interim period, which was the time between the record and ex dates for the dividend. COR planned to notify all of them of its intentions, inviting them to reply to the court within a week if they wished. The matter was extremely urgent: DTCC can make post-payable adjustments to dividends only within the 90 day period following the pay date. COR filed its motion on October 5, so the matter would have to be decided by November 13.
Only a few of the clearing firms chose to enter the fray. Among those that did was Alpine. It told its own tale of woe in considerable detail. Like COR, it argued that Calissio had intentionally committed fraud. The judge seemed more concerned about the harm that might be done to ordinary shareholders should the dividend payment be reversed. He concluded that “COR Clearing has failed to sufficiently establish its extreme burden to satisfy the extreme remedy it seeks.”
A Change of Plan
The transcript of the hearing on the motion to appoint a receiver wasn’t released until March 2016. When it appeared, it suggested why the judge might have been reluctant to give COR what it wanted. He asked Salas whether he’d made any claim against J.H. Darbie, Nobilis and Beaufort’s introducing broker. Salas replied that he had: Darbie had given COR $500,000, and also signed a subordinated note in the amount of $1.2 million. In addition, COR had frozen the Beaufort and Nobilis accounts; Salas did not comment on their value.
COR needed a new plan. Clearly it had no intention of giving up. In December 2015, a month after its motion to appoint a receiver was defeated, it issued three subpoenas. Two of them were served on the clearing arms of E*TRADE and Fidelity; the third on online message board Investor’s Hub (IHub). IHub responded quickly, and ultimately COR’s motion to compel the website to turn over personal information about its members was denied. As IHub pointed out, COR argued in the motion to compel that the anonymous posters in question should be identified because some or all of them “actively perpetrated the fraud,” but had alleged no such thing in its original complaint, which had not been amended. On the contrary, there it stated that Calissio, Carter, and Signature committed their own fraud in secret, “notifying no one outside their inner circle of conspirators.”
The two clearing firms were slower to respond to their own subpoenas. COR was not satisfied by their eventual submissions. Not much can be said about those pleadings, as they contained sensitive information about trading activity and about the brokerages’ clients, and so their contents were for the most part sealed by the court. In August 2016, COR filed an amended complaint that added National Financial Services, LLC, TD Ameritrade Clearing, Inc., and E-Trade Clearing, LLC as defendants.
A few months earlier, in late April, the presiding judge had signed a default judgment against Calissio Resources Group, which had made no appearance in the case. Given Calissio’s failure to respond, the judge was obliged to confirm COR’s allegations, and found that:
“Calissio orchestrated the fraudulent scheme by purposely causing the issuance of dividend ineligible shares during a due bill period without any notice to the marketplace, hiding from DTCC the fact that such shares were not dividend eligible, thereby causing DTCC to erroneously collect dividends on all outstanding Calissio shares, and then failing to correct DTCC’s errant due bill collection and covering up the fraud by communicating to COR Clearing, Darbie, and Nobilis that it was all the result of a “glitch” in the system and representing that it was working with DTCC to correct the error.”
While the judgment to some extent strengthened COR’s arguments about Calissio’s perfidy, it did nothing to make the clearing firm financially whole; obviously Calissio and its CEO were long gone. But the brokerages’ clearing firms had plenty of money, and would not default if sued, an so became COR’s new targets. Adding them as defendants obliged COR to make some clumsy alterations to its original complaint. For example, the original complaint read, “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 outstanding prior to the issuance…”; in the amended complaint the word “surreptitiously” was removed. Not only had Calissio “retained some or all of the $4 million from COR Clearing to which it has admitted it is not entitled,” but the “Brokerage Defendants are also in possession of the proceeds of the fraud, including some or all of the $4 million improperly credited to purchasers.”
COR explains that on May 10, 2016, its counsel had sent a letter to brokerages that had received fraudulent Calissio due bills, notifying them that COR had claims for unjust enrichment against them, and demanding they remit the funds to COR. Rather surprisingly, “certain banks” complied, but others, “including the Brokerage Defendants, refused to cooperate.” And so the Brokerage Defendants became defendants in the lawsuit. Not coincidentally, those firms are popular online brokers that had the greatest number of clients who wrongly received the CRGP cash dividend. COR insists that because those firms knew that the penny markets are “rife with fraud,” they should have hesitated to pay the dividend, despite the fact that DTCC had credited them with funds to cover payment. COR does not comment on its own willingness to clear hundreds of million of shares obtained through conversion of notes of questionable origin.
The clearing firm claims it was wrong for the Brokerage Defendants to retain the funds they received from DTCC. They “knew or should have known” the due bills were fraudulent, and ought to have returned the money to COR, rather than distribute them to their clients. COR calls this “unjust enrichment,” though the Brokerage Defendants had done no more that pay the dividend to customers. To remedy this unfair outcome, COR asks the Court to impose a constructive trust against the Brokerage Defendants to recover the cash. A constructive trust is not actually a trust, but an equitable remedy that cans be ordered in cases of unjust enrichment. The unjust enrichment may not arise from fraud; it may also be the result of a simple mistake. In this case, the Brokerage Defendants received funds from DTCC to pay a dividend on some stock that was eligible for the Calissio cash dividend, and on some stock that was not. That was a mistake COR believes should be remedied “equitably,” by making COR whole, regardless of who is ultimately at fault. COR amended its complaint once more, in January 2017, to add an allegation of conversion against the Brokerage Defendants.
Summary Judgment
Naturally the Brokerage Defendants protested that they were merely middlemen who in no way profited from any transaction connected to the Calissio dividend. As the case progressed, access to nearly all the filings and reams of exhibits submitted to the court was restricted to the the parties to the case. Signature Stock Transfer had filed a brief answer to COR’s initial complaint early on, largely reserving affirmative defenses; access to its subsequent pleadings was restricted. As the winter of 2017 moved into spring, the case ground on. In early July, Signature filed a motion for summary judgment against COR. In mid-August, the Brokerage Defendants filed their own joint motion for summary judgment, and COR joined in the fun with a motion for partial summary judgment. As was by then customary, access to those documents was restricted.
The judge—the Honorable Joseph Bataillon, who’d replaced retiring Senior Judge Lyle Strom—decided to deal with all three motions together. He heard oral argument on October 17 and 23, 2017, and handed down a memorandum and order on November 6.
He begins by explaining how the dividend payment process works, giving attention to the ways in which it differs for regular and special dividends. He then recaps the events that led to COR’s resort to litigation in August 2015. In order for a motion for summary judgment to prevail, the moving party must successfully argue that there are no facts at issue, and so the case need not go to trial, but should end immediately. Bataillon begins his discussion of the Calissio case by noting that “[t]he facts are not in serious dispute.” He does, however, shed light on a number of facts not previously known to observers of the case, thanks to the restrictions placed on dozens of filings over the past year and more. Carlos Salas had testified that COR had a duty to conduct a “heightened review” of the Nobilis and Beaufort transactions under FINRA Notice to Members 09-05. After having completed its review, COR deposited at least 340 million new shares of CRGP with DTCC. Relying on a restricted access filing, the judge asserts “[e]vidence shows that the supporting paperwork submitted to COR by its correspondent broker Darbie was factually inaccurate,” and that “[r]esponses to COR’s heightened risk security questionnaire show a possible Rule 144 violation and indicia that Calissio was a shell corporation given its lack of assets and business activity.” That is: if Calissio, which was not an SEC registrant, was a shell company, the Nobilis and Beaufort stock sales would be violations of Rule 144.
It has been clear since we first examined the Calissio case that the cash dividend should only have been paid on stock that was issued and outstanding as of the record date, June 30, 2015. The shares sold by Nobilis, Beaufort, and Macallan were issued after that date, and so were not dividend-eligible. Yet the dividend was paid on them. Whose fault was that? COR claimed Calissio itself should have informed DTCC of the new issuances, and then in later pleadings asserted that the Brokerage Defendants should quickly have realized something was wrong, and stopped payment to, or withdrawn payment from, their customers. But it was DTCC that actually distributed the funds. Why wasn’t the error DTCC’s responsibility, and why did COR not sue the depository?
The answer is much simpler than expected. Relying once again on restricted-access fillings, Bataillon explains:
“The evidence establishes that Calissio instructed its transfer agent, SST, to issue the new shares with the same CUSIP number that was used for pre-record date shares. The parties agree that shares of stock that are issued after the announced record date for a dividend do not qualify for the dividend. The evidence also shows that the issuer generally requests a CUSIP, although a transfer agent can request one if instructed to or authorized by the issuer.
The parties agree that DTCC’s automated interim accounting system treated the post-record date shares the same as pre-record date shares and attached due bills to all shares on deposit at DTCC. Because all Calissio shares on deposit with DTCC during the period June 1 to August 21, 2015 had the same CUSIP, DTCC considered them as fungible within DTCC’s system.”
If “Adam Carter” of Calissio instructed Signature Stock Transfer to issue the new stock with the pre-record date CUSIP, knowing a new CUSIP should be obtained, that would support COR’s contention that a fraudulent scheme had been planned from the start. When an issuer requests a dividend, its transfer agent provides a Transfer Agent Verification Form to FINRA which FINRA relies upon to process the dividend. Among other things, the form requires that the transfer agent provide certain information, including the number of shares outstanding. Between the time that Signature Stock transfer provided the Transfer Agent Verification Form to FINRA and the ex date, it issued 340 million new shares of CRGP to Nobilis, Beaufort, and Macallan, making the Transfer Agent Verification Form it provided to FINRA grossly inaccurate. Signature would have been the one participant in Callissio’s special dividend process with all information necessary to detect and prevent the egregious error that occurred. It had knowledge of the record date, ex date and of the issuances to Nobilis, Beaufort, and Macallan. DTCC’s automated system was unable to detect the problem, and so DTCC paid a total of $4,685,330.03 in credits that were allocated by DTCC for payment of the dividend. Calissio had originally announced that the cost of the dividend would be approximately $1.3 million.
Judge Bataillon observes, as had Judge Strom before him, that introducing broker J.H. Darbie, a non-party to the case, had already agreed to pay COR $1.7 million, and that COR has an arbitration award against Nobilis. Ironically, the claim in the FINRA arbitration case was filed by Nobilis on September 14, 2015, shortly after COR froze the Nobilis account. About a year later, the arbitration panel denied the Nobilis claim in its entirely, and awarded $2,236,000 plus 9% annual interest to COR. An additional arbitration is pending with Beaufort.
The judge begins his discussion of the three motions before him by stating once again that “the dispute between the parties involves questions of law. The salient facts are not in any real dispute. The claims between the parties to the lawsuit can be resolved as a matter of law and summary judgment is proper.” Bataillon starts with COR’s motion, first denying its conversion claim against the Brokerage Defendants partly because the funds sent by DTCC were never the property of the brokerages, and, more importantly, because COR did not allege or demonstrate any collusion between Calissio and the brokers. Evidently the conversion claim was the only element of COR’s second amended complaint that was included in the clearing firm’s partial motion for summary judgment.
Moving on to the Brokerage Defendants’ joint motion, the judge finds that the Brokerage Defendants are protected from liability on the conversion claim by the relevant provisions of the Uniform Commercial Code (U.C.C.), which characterizes them as “securities intermediaries.” Far from imputing any liability at all to the brokerages, he points out that:
“There is evidence to support the conclusion that COR’s own actions created the conditions that the DTCC interim accounting system utilized in processing the Calissio dividend due bills and resulted in the debit to COR on those due bills. The broker defendants did not have knowledge of the supporting facts contained in the documents submitted to COR by Darbie. COR was the only clearing firm member of DTCC that had knowledge of the facts connected to the debt-to-equity conversion by Nobilis and Beaufort that resulted in the issuance of the new shares.
Evidence suggests COR knew the details of the dividend announced by Calissio and was the only clearing firm aware of the data that on its face appears inaccurate or false on the paperwork it received and approved—including misrepresentations as to number of shares held, acquisition dates, holding periods, ability to acquire more shares, beneficial rights, etc.—and was the only clearing firm privy to the suspect selling activity of Nobilis and Beaufort. In any event, COR was in a better position to protect itself, and the market, than the defendant brokers were.”
Dryly noting that “the equities do not favor COR,” Bataillon suggests that “COR’s remedies lie with Calissio, Carter, Darbie, Nobilis, and Beaufort,” adding that whether COR will be able to collect from any or all of them is not a matter before his court.
Signature Stock Transfer had also moved for summary judgment on COR’s claims of fraud, unjust enrichment, and the imposition of a declaratory judgment. Signature had argued it merely processed paperwork for Calissio, and issued the stock in question on the basis of legal opinions on which it had relied. It further claimed it did not receive any of Calissio’s presumed ill-gotten gains, and asserts that COR knew as much or more about the history of the Nobilis and Beaufort issuances than it did. Bataillon agreed, finding that “[t]he evidence suggests that SST may have been at most negligent in connection with the transaction, but there is no evidence of intent to defraud.”
And so the Brokerage Defendants’ and Signature Stock Transfer’s motions for summary judgment were granted, and COR’s motion for partial summary judgment was denied, and the case was finally over.
Or was it? COR is nothing if not determined. On November 21, it filed a Notice of Appeal to the Eighth Circuit Court. Stay tuned…
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 the website at 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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