March 24, 2008
CMKM Diamonds makes the Big Time in NYT article
by Lee M. Webb
October 4, 2006
CMKM Diamonds Inc., Saskatchewan native Urban Casavant's revoked pink sheet woofer, has made the big time, if that can be measured by an unflattering article in The New York Times and an equally biting follow-up blog entry by chief financial correspondent Floyd Norris.
The hook for Mr. Norris's Sept. 29 New York Times column was a National Association of Securities Dealers (NASD) enforcement action against Nevada-based NevWest Securities Corp. and its two senior officers, president Sergey Rumyantsev and vice-president Antony M. Santos.
As previously reported by Stockwatch, the NASD complaint alleges that the respondents violated anti-money laundering rules, failed to file suspicious activity reports with the U.S. Treasury Department's Financial Crimes Enforcement Network and basically looked the other way as a client with 32 accounts dumped a staggering 259 billion shares of CMKM for proceeds of $53-million. (All amounts are in U.S. dollars.)
The respondents have not yet filed a response to the complaint and no findings have been made regarding the allegations.
The NevWest client, identified only by the initials "JE" in the complaint is actually John Edwards, who is not a party to the NASD action.
As part of his column headlined "Selling Shares by the Billions to Racing Fans," Mr. Norris sketched some of the background of the wild CMKM sub-penny promotion.
"Was this stock being traded by crooks?" Mr. Norris asks in his opening. "Should the brokers have noticed?
"How about the regulators, who now charge that the brokers missed 'red flags' but may have missed a few themselves."
According to Mr. Norris, who does not identify Mr. Edwards in his column, the NevWest client unloaded the vast majority of his 259 billion CMKM shares "before the company had bothered to let investors know so many shares existed."
In fact, while not mentioned by Mr. Norris, Mr. Casavant did what he could to keep investors in the dark about the massive dilution, including gagging the company's transfer agent.
Moreover, while he was peeling off hundreds of billions of shares that ended up in the hands of family, friends and business associates as well as his own, Mr. Casavant had his investor relations lackey Melvin O'Neil spread the word to the company's cult-like following that, far from diluting the company, he was retiring shares.
Much to the dismay and even continued disbelief among some of the CMKM fanatics, by the time the printing press was turned off there were an incredible 703.5 billion shares issued and outstanding.
Touching on CMKM's purported business, Mr. Norris goes on to say that CMKM claimed to be in the diamond business in Canada.
In fact, CMKM did scoop up some moose pasture in Saskatchewan and, along with a couple of Canadian joint venture partners, did manage to poke a few holes into the previously discovered and abandoned Smeaton kimberlite. That provided some promotional mileage.
CMKM's limited exploration also included drilling a hole at the Smeaton town dump, which at least provided a few laughs in the absence of any toutable results.
According to Mr. Norris, while the company could not come up with the money to work its claims, "it did spend $4 million to promote itself at 'funny car' races by sponsoring the CMKXtreme car, which had a drawing of a diamond and a miner on its side."
Given that CMKM has not filed any financial statements, the $4-million may be a best guess based on the letter of an auditor who was fired after reporting that he had uncovered possible criminal activities at the company.
Among other things, ousted auditor Brad Beckstead disclosed to CMKM and subsequently the SEC a possibly illegal transfer of $4-million to CMKXtreme Inc., a company controlled by Mr. Casavant.
In any event, CMKM at one time sponsored two funny cars, including one with a caricature of what appeared to be a construction worker wielding a jackhammer on some substance from which fully cut diamonds bounced into the air. CMKM also sponsored a speed truck and a motorcycle as part of its racy promotion.
As noted by Mr. Norris, the U.S. Securities and Exchange Commission (SEC) finally pulled the plug on CMKM. However, the revocation did not become final until Oct. 28, 2005, more than seven months after the regulator filed its administration proceeding against Mr. Casavant's dog of dogs and long after hundreds of billions of shares had been dumped on gullible investors.
After sketching the NASD complaint against NevWest and its two officers, Mr. Norris offers some final thoughts.
"What does all this prove?" Mr. Norris asks nearing the end of his column. "It may indicate that the Patriot Act gives regulators an unexpected tool to force brokers to tell the government when they see funny business. It may also reflect the fact that regulators do not even look at many filings.
"And it shows that this can go on and on. CMKM has reached a deal to sell what assets it has to Entourage Mining, a penny stock company based in Vancouver, British Columbia, which will pay with shares that will be distributed to CMKM holders."
Indeed, in a peculiar deal announced last year as CMKM dropped its appeal of the SEC ruling, paving the way for the regulator to finalize the revocation order last October, Entourage issued 45 million shares to the pink sheet promotion for some Saskatchewan claims under the control of Mr. Casavant's business associate Emerson Koch.
Entourage, which changes hands for less than 30 cents per share in light trading on the OTC Bulletin Board, has seen the majority of the claims acquired in the deal with CMKM expire, many of them before the 45 million shares were even issued.
"Looks like a hot stock to me," Mr. Norris remarks at the end of his column.
It remains to be seen whether the 45 million shares of that "hot stock" are eventually distributed to CMKM's shareholders.
In a rare SEC filing on Oct. 24, 2005, CMKM disclosed that it was in default on all of its mineral property agreements, did not have the money to continue operations and would be winding up its affairs.
As part of the winding up, the company announced that the 45 million Entourage shares would be distributed to CMKM shareholders.
To effect the liquidating distribution, CMKM struck a "task force" consisting of the company's former trophy co-chairman, 87-year-old Robert Maheu, corporate counsel Donald Stoecklein and Texas lawyer Bill Frizzell.
As previously reported by Stockwatch, Mr. Frizzell, a CMKM shareholder, represented about 5,000 other shareholders who anted up $25 each for his services during the administrative proceeding against the company.
Mr. Frizzell was among the company's cult-like followers convinced that the massively diluted pink sheet woofer's woes could be largely attributed to naked short selling.
The vaunted CMKM task force insisted that shareholders take physical delivery of their shares and fax copies to Mr. Frizzell's office in order to qualify for the Entourage distribution.
While the certificate pull was ostensibly instituted as part of the "orderly and verifiable pro rata liquidating distribution" of Entourage shares, the cockamamie scheme was underpinned by the belief that it would disclose a huge short position in CMKM.
Indeed, the task force, effectively spearheaded by Mr. Frizzell, proclaimed on its website that it had "credible information" indicating that there was a potential short position of two trillion shares.
As previously reported by Stockwatch, a review of CMKM's trading data debunks the incredible claim of a potential short position of two trillion shares.
From the time Mr. Casavant took control of CMKM in November of 2002 until the SEC yanked the company's stock registration in October of 2005, approximately 1.77 trillion CMKM shares changed hands.
It should be clear to most people that it is impossible to have a short position of two trillion shares when only 1.77 trillion shares have traded.
Interestingly, the impossible notion of a possible naked short position of two trillion shares was also debunked by information regarding delivery failures that was provided to Mr. Frizzell by the SEC.
Mr. Frizzell obtained the data for delivery failures in CMKM for April of 2005. Setting aside the observation that not all delivery failures represent naked short sales, the information provided to Mr. Frizzell shows that the failures in CMKM were insignificant and transient.
Indeed, the delivery failures topped out at approximately 186 million shares on April 22, 2005, a trifling amount for a company with 703.5 billion shares outstanding. Moreover, even that insignificant number of fails was settled a few days later. At the end of the month the delivery failures amounted to only approximately 3.1 million shares worth a picayune $300.
In any event, the vaunted task force perpetuated the fantasy about a massive naked short position, to the evident delight of many of CMKM's loyal followers.
Alas, the "cert pull" further debunked the notion of a massive naked short position and, as the scheme was winding down, Mr. Frizzell removed the claim about a potential short position of two trillion shares from the task force website.
The cert pull kicked off in November of 2005 and officially ended on May 15 of this year. According to the task force website, 39,648 CMKM shareholders faxed copies of their share certificates.
While that it is certainly a remarkable achievement, those certificates represented only approximately 633.3 billion shares, according to the task force's tally. That is approximately 70 billion shares less than CMKM's 703.5 billion issued and outstanding shares.
The ballyhooed task force officially dissolved on June 6, but the liquidating distribution of Entourage shares still has not taken place.
Reportedly, the task force recommended that CMKM proceed with an interpleader action in a U.S. District Court. In effect, CMKM would hand the 45 million Entourage shares over to the court and let a judge decide who has a legitimate claim to them and how they should be divided up.
So far, CMKM has not taken up the task force's recommendation and the liquidating distribution remains in limbo.
Meanwhile, some of CMKM's shrinking band of cult-like followers still believe that there is a massive naked short position in the revoked pink sheet dog of dogs.
Apparently some of the CMKM fanatics decided to set Mr. Norris straight on the matter.
Mr. Norris responded with what was essentially another article on his New York Times blog.
Evidently a quick study, by the time Mr. Norris posted his blog article on the evening of Sept. 29, he had identified Mr. Edwards as the NevWest client who dumped 259 billion CMKM shares for proceeds of $53-million.
"According to the NASD, many of the shares sold by J.E. had been registered in the name of the stock transfer agent used by the company, a rather unusual procedure," Mr. Norris wrote.
In fact, the NASD alleges that from August of 2004 and continuing into 2005, Mr. Edwards began depositing CMKM certificates in the name of NevWest's clearing firm, not the company's stock transfer agent.
As it happens, during that period, NevWest used Computer Clearing Services Inc. as its clearing agent.
A review of information from the master shareholders list as of Dec. 31, 2004, reveals that approximately 165 billion shares were issued in the name of Computer Clearing Services.
Interestingly, Computer Clearing Services routed almost all of its non-directed trades through subsidiaries of Knight Trading Group Inc., now known as Knight Capital Group.
During CMKM's racy promotion as billions of shares regularly traded on a daily basis, many of the company's cultish followers were stridently claiming that Knight was one of the firms shorting the stock. Of course, there was no evidence to back up the shorting claims.
Some of CMKM's loyal fans took the purported shorting issue up with Mr. Norris, who was clearly surprised at the choice of concerns.
In his blog article, Mr. Norris notes that Mr. Casavant invoked his Fifth Amendment right not to incriminate himself and refused to testify at the SEC administrative hearing in May of 2005.
He also notes that Mr. Maheu, then the company's touted co-chairman, knew nothing about CMKM's financial condition and had never even visited the company's office.
"So who are shareholders mad at?" Mr. Norris asks. "The management? The man who sold more than a third of the shares outstanding without ever filing a form saying he owned more than 5 percent, and who may have been an insider?
"The S.E.C. for letting this go on for a couple of years before revoking the company's registration, or for having not yet brought any charges against J.E. for selling them shares that may well be worthless?
"No, not any of them.
"A few shareholders who contacted me today were furious about my column because it failed to identify the real villains, as they saw it -- the naked short sellers who they say sold the shares without borrowing them."
Rounding out his blog entry, Mr. Norris reproduced a bit of correspondence from one of the CMKM "get shorty" fanatics.
"What possibly could be the reason you wrote about a worthless little pennystock CMKM Diamonds..and placed it on the first page of the NY Times business section," the writer wanted to know.
"Could it possibly be that the company has just about implicated every major brokerage firms in the country in the systematic rape of the American people due to the insidious practice of NAKED SHORT SELLING...COUNTERFEITING," the fantasizing correspondent continued.
"Your boss's (sic) on Wall Street will have to do some heavy spin on this one Floyd," the writer added.
Mr. Norris's blog response clearly did not satisfy some of the company's faithful followers.
"I will guilt this SOB into action" an Internet poster identified as Jim Farn declared, pasting a copy of another message to Mr. Norris.
"You might be interested to know that Harvey Pitt would be disappointed that you have chosen to focus your efforts on 259 billion shares and John Edwards," Mr. Farn wrote.
It is not clear why the posited disappointment of Mr. Pitt, who was essentially forced out as SEC chairman in November of 2002 after only a 15-month stint, might be of any interest at all to Mr. Norris.
"IMO this is a naked short selling sting led by Mr. Bob Maheu," Mr. Farn continued. "You focussed on some questionable aspects of this story. I respectfully ask you to do some digging with regards to Maheu and 'forced communication'. You might find some similarity with Hughes planes and Casavants cars.
"You are grossly underestimating what you are discussing.
"As a Times subscriber and avid fan, I expect more and I simply do not understand your simplistic analysis and angle."
Ah, yes welcome to the wild and woolly world of CMKM and its remaining gullible cult-like followers, Mr. Norris.
Meanwhile, CMKM has a new "interim" chief executive officer, Kevin West, who was appointed on Sept. 19. Mr. West, who has been a CMKM shareholder for a long time, worked on the certificate pull scheme initiated by the vaunted CMKM task force.
Mr. West also served as vice-president of The Owners Group Inc., a budding stock touting service that grew out of Mr. Frizzell's representation of CMKM shareholders during the SEC administrative proceeding against the company.
CMKM's new interim chief executive officer has been an ardent crusader against naked short selling, as he understands it.
Among other things, Mr. West circulated a letter written to U.S. President George Bush, SEC chairman William Donaldson and others in which he natters about collusion between the Depository Trust and Clearing Corp. and the SEC regarding short selling and suggests that journalists are paid to deceive people "into believing that there is no corruption."
"There are literally tens of thousands of average Americans who are now aware of the SEC's complicity in the sordid tale of abusive and illegal naked shorting," Mr. West wrote. "The DTCC 'earns' hundreds of millions of dollars annually by facilitating this violation of the small investor, and moreover we know the SEC gets a 'commission' on every violation."
Mr. West, who did a fair amount of Internet touting of CMKM, also once served up a "conservative" valuation of the company, pegging it at a modest $64-billion and suggesting that it could realistically be worth many times that amount.
CMKM's new leader also offered a rather interesting assessment of Mr. Casavant in a message to so-called bashers as the promotion was stumbling in October of 2004.
"No matter what you believe, Urban Casavant is a Godly man and God is using him to re-distribute the wealth on this earth," Mr. West wrote. "If you are one that try (sic) to mess with this plan, may God have mercy on your soul."
Since his appointment as interim chief executive officer, Mr. West has asked CMKM shareholders to help out with prayers.
The silly saga continues.
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