CMKM Shareholders Sue SEC Commissioners

by Janice Shell
Canada Stockwatch
February 17, 2010

The CMKM Diamonds saga, a source of wonderment for penny stock enthusiasts for more than seven years, has recently taken a new twist with the filing of an extraordinary class-action lawsuit. The suit claims the CMKM promotion was a sting run by the U.S. Securities and Exchange Commission and the Department of Justice, with the cooperation of the Department of Homeland Security, designed to trap naked short sellers who were evading taxes and helping finance terrorists. The alleged profits were huge and are now held in a large "frozen trust" whose beneficiaries are, of course, the CMKM shareholders.

The source of this legal oddity is A. Clifton Hodges, of Hodges and Associates of Pasadena, Calif., who on Jan. 8, 2010, filed the class-action lawsuit on behalf of seven shareholders of CMKM Diamonds.

The defendants are former Securities and Exchange Chairman Christopher Cox, current SEC Chairman Mary L. Schapiro, current SEC Commissioners Troy A. Paredes, Luis A. Aguilar, Elisse B. Walter and Kathleen L. Casey, and former SEC Commissioners Cynthia A. Glassman, Roel C. Campos and Annette L. Nazareth. The complaint does not name the Securities and Exchange Commission itself as a defendant.

The oddball history of CMKM Diamonds

The company, known to most in the penny stock world by its last symbol CMKX -- its aficionados now call themselves Xers -- emerged more than seven years ago from a reverse merger negotiated with Cyber Mark International, a fully-reporting shell controlled by an "Ian McIntyre." The merger was completed at the end of December 2002. The new company was called Casavant Mining Kimberlite International, in honour of its fine Canadian promoter Urban Casavant, and initially traded on the U.S. OTC-Bulletin Board under the symbol CMKI. On Mar. 9, 2004, the company became CMKM Diamonds Inc.

During the spring and summer of 2004 the promoter from Saskatchewan, Mr. Casavant, then CEO, issued a paper mountain of stock, probably close to a world record. By September of that year, the shares outstanding had ballooned to nearly 780 billion. (In December 2004, around 75 billion shares were retired, reducing the outstanding to 703 billion, where it stands today.) On one day, CMKM traded 39.6 billion shares, presumably more than all the volume on all the exchanges of the world combined. The trading volume regularly triggered -- at 2,147,483,647 shares -- a 32-bit signed integer glitch in all quote services except Stockwatch, which programmed around the problem.

In October of 2004, the SEC temporarily suspended trading in a CMKM "sister" company, U.S. Canadian Minerals Inc., and opened an investigation into U.S. Canadian and CMKM Diamonds. The following March, the agency suspended CMKM, and announced it was bringing an action to revoke the securities registration of the company. A revocation hearing was held before an SEC Administrative Judge in May 2005, and registration was duly revoked in July. The company appealed the revocation, and then dropped the appeal two months later. A finality notice was issued at the end of October, and the stock ceased trading on November 1, 2005.

On Apr. 7, 2008, the SEC filed a civil lawsuit against CMKM, Mr. Casavant, John Edwards (none other than the "Ian McIntyre" of the Cyber Mark reverse merger), and 11 other defendants, charging them with illegal issuance of unregistered stock, civil fraud and other offenses. To date this suit, which is still active with regard to some of the defendants, has yielded substantial default judgments against Mr. Casavant and Mr. Edwards; the sums ordered have yet to be collected.

On Sept. 9, 2009, the U.S. Department of Justice unsealed indictments handed up by a Nevada grand jury against Mr. Casavant, Mr. Edwards, and four others. Mr. Edwards was subsequently arrested in London, and is being held in custody there awaiting the completion of extradition proceedings. Mr. Casavant is still free, presumably living in his native Saskatchewan. A warrant for his arrest is outstanding in the United States.

The Task Force and the "new" CMKM Diamonds

In late 2005, following the revocation of the registration of CMKM stock, Mr. Casavant, then still in control of what had become a private company, hired an attorney, Donald Stoecklein of Los Angeles, and appointed a so-called "Task Force" to see to the distribution of 50 million shares of stock in Entourage Mining Ltd. and any other assets CMKM might possess (it was later determined that there were none) to CMKM shareholders. The members of this task force were Mr. Stoecklein, Bill Frizzell, a shareholder and Texas lawyer, and the late Robert A. Maheu, Mr. Stoecklein's business partner. Mr. Maheu, then in his late 80s, was a well-known figure in Las Vegas; he had once been Howard Hughes's chief assistant, and as such claimed to have helped make the city the gambling mecca it is today.

Meanwhile, Kevin West, a Texan and associate of Mr. Frizzell's, had agreed to work with Mr. Casavant as CMKM's nominal CEO. Concurrently, Mr. Frizzell conducted a "cert pull", encouraging CMKM shareholders to request their certificates from the company's transfer agent. The purpose of this exercise was to prove a "naked short" position that was at one time estimated by Mr. Frizzell to be as large as two trillion shares. ("Naked" short selling occurs when stock is shorted by a trader who simply sells non-existent shares into the market without borrowing an equivalent number from a legitimate shareholder.) Though prosecuted with vigour, the cert pull ultimately failed to discover any naked short at all.

On March 29, 2007, Mr. Casavant suddenly stepped down as chairman of the board and sole director of CMKM, turning the company over to Mr. West, the Texan. The company's incorporation moved to Texas from Nevada and Mr. West appointed Mr. Frizzell as its lawyer. The company's assets at that time consisted of the Entourage stock and $558 (all figures are in U.S. dollars).

Mr. Frizzell, like the SEC, has brought civil actions against those he believes to be responsible for shareholders' losses. Again like the SEC, he has secured default judgments against Mr. Casavant and Mr. Edwards, and continues to pursue other targets.

The latest lawsuit

This new action was filed last month independent of any regulatory or law enforcement agency or CMKM Diamonds. Mr. Hodges' clients are aggrieved shareholders, as is Mr. Hodges himself. The object of the action is to secure a remarkably large sum of money allegedly "owed" CMKM shareholders, and a staggering amount in damages as well. The complaint's key claim is that "at some date prior to June 1, 2004 the Securities and Exchange Commission in concert with the Department of Justice of the United States, together combined with Robert A. Maheu and others to utilize CMKM Diamonds, Inc. for the purpose of trapping a number of widely disbursed entities and persons who were believed to be engaged in naked short selling of CMKM Diamonds Inc. stock and cellar boxing the company. The Securities and Exchange Commission and the Department of Justice, with assistance from the Department of Homeland Security, believed and developed evidence that said short sellers were utilizing their activities to illegally launder moneys, wrongfully export moneys, avoid payment of taxes, and to support foreign terrorist operations."

The document goes on to offer the broad outline of a sting operation that included "the sale of some of [the company's] Saskatchewan, Canada mineral claims to three Chinese domiciled corporations with the advice and consent, inter alia, of the Securities and Exchange Commission. Proceeds from the consummation of such sales were placed into a frozen trust for disbursal at a later time."

In addition, "during the period from March, 2004 through August, 2006, on behalf of CMKM Diamonds, Inc. Robert A. Maheu, with assistance from others, negotiated a settlement with the illegitimate brokers, dealers, market makers, hedge funds, and other persons and entities that had engaged in naked short selling of CMKM Diamonds Inc. stock and cellar boxing the company. In exchange for a U.S. Government promise of no prosecution for such sales, the wrongdoers each promised to pay negotiated amounts to a frozen trust for disbursal at a later time."

The defendants

The complaint asserts that "demand for release of said moneys has been repeatedly presented to the Securities and Exchange Commission without result. Agents and employees of the Securities and Exchange Commission and the Department of Justice have represented repeatedly that the release of moneys for distribution was imminent, and/or would occur within several weeks, and/or would occur within less than a month. Each of said representations have been made knowing them to be false, and at the specific direction of the named Defendants. These actions of withholding distribution of said moneys, without compensation and without due process of law, amount to a taking of the property of the individual Plaintiffs and of all similarly situated."

The suit, which seeks relief in the form of a declaratory judgment, asserts that the defendants "acted and failed to act with the intent to deny the Constitutional rights of Plaintiffs or with intentional or callous disregard or deliberate indifference to those rights."

The plaintiffs' monetary demand is for $3.87 trillion.

Yet to come

The complaint is not accompanied by any exhibits; evidence for the claims contained therein will presumably be provided in subsequent court filings. An SEC official has apparently indicated to Hodges that the defendants are retaining representation who will confer with Hodges on the matter of service.

Once served, the SEC Commissioners will be required to answer or otherwise respond to the complaint. Those currently employed by the government will have 60 days in which to do this; those who have left their public posts will have 21 days.

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