Sec. v. CMKM Diamonds, Inc.

• Citation: 729 F.3d 1248
• Decision Date: 10 September 2013
• Docket Number: Nos. 11–17021,11–17025.,s. 11–17021
• Parties: SECURITIES and EXCHANGE COMMISSION, Plaintiff–Appellee, v. CMKM DIAMONDS, INC., Defendant, and 1st Global Stock Transfer LLC; Helen Bagley; Brian Dvorak, Defendants–Appellants.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

729 F.3d 1248

SECURITIES and EXCHANGE COMMISSION, Plaintiff–Appellee,

v. CMKM DIAMONDS, INC., Defendant,and1st Global Stock Transfer LLC; Helen Bagley; Brian Dvorak, Defendants–Appellants.

Nos. 11–17021, 11–17025.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted April 15, 2013.

Filed Sept. 10, 2013.

Mark S. Dzarnoski (argued), Gordon & Silver Ltd., Las Vegas, NV, for Defendants–Appellants 1st Global Stock Transfer LLC and Helen Bagley.

John Wesley Hall, Jr. (argued), Law Offices of John Wesley Hall, Jr., Little Rock, AR, for Defendant–Appellant Brian Dvorak.

Allan Armistead Capute (argued), Securities and Exchange Commission, Washington, D.C., for Plaintiff–Appellee.

Appeals from the United States District Court for the District of Nevada, Larry R. Hicks, District Judge, Presiding. D.C. No. 2:08–cv–00437–LRH–RJJ.

Before: SUSAN P. GRABER and MORGAN CHRISTEN, Circuit Judges, and JOHN R. TUNHEIM,^* District Judge.

OPINION

TUNHEIM, District Judge:

These consolidated appeals arise out of a civil enforcement action brought by the Securities and Exchange Commission (“SEC”) against numerous defendants allegedly involved in a scheme to sell unregistered securities of CMKM Diamonds, Inc. (“CMKM”). The district court granted summary judgment in favor of the SEC, ruling that 1st Global Stock Transfer, LLC (“Global”), Helen Bagley, and Brian Dvorak (collectively, “Defendants”) participated in an unregistered distribution of securities in violation of Section 5 of the Securities Act of 1933 (“Securities Act”), 15 U.S.C. § 77e. The district court ordered Defendants to disgorge proceeds from the illegal sales, plus prejudgment interest. Prior to the district court's ruling on summary judgment, Dvorak brought a motion to stay the civil proceedings until the conclusion of his criminal proceedings involving the same conduct, which a magistrate judge denied.

Global and Bagley appeal the district court's entry of summary judgment and the disgorgement order; Dvorak appeals the magistrate judge's order denying his motion to stay and the district court's disgorgement order. We conclude that the district court erred in granting summary judgment against Global and Bagley because a material issue of fact remains regarding whether Global and Bagley were necessary participants and substantial factors in the distribution of CMKM's stock sufficient to impose liability under Section 5. We therefore reverse the judgment of the district court as to Global and Bagley and remand for further proceedings. We affirm the magistrate judge's denial of Dvorak's motion to stay the proceedings and the district court's disgorgement order as to Dvorak.

I. BACKGROUND

A. The Scheme

CMKM is a publicly held Nevada corporation. During the relevant time period, CMKM's common stock was not registered with the SEC under the Securities Act, 15 U.S.C. § 77a et seq. CMKM's stock was registered, however, under Section 12(g) of the Securities Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. § 78 l (g), and was traded on the Pink Sheets, now known as OTC Pink, an electronic quotation and trading marketplace for both registered and unregistered securities.

Between January 2003 and March 2005, at least eleven individuals and three entities allegedly participated in a scheme to issue billions of shares of unrestricted CMKM stock and then sell the stock to the public without filing a registration statement. CMKM, holding itself out as a gold and diamond mining company, increased its number of shares to 800 billion. Urban Casavant and John Edwards, respectively CMKM's CEO and director of “post-merger matters,” then began issuing and selling shares of unrestricted stock. CMKM in fact had no legitimate operations. The company issued false press releases, operated a promotional racing team that traveled around the country, and provided investors with fake maps and videos of mineral operations in North and South America. The proceeds of the stock sales were used primarily to finance the personal lifestyles of Casavant and Edwards. As a result of the scheme, approximately 40,000 investors lost at least $64.2 million.

In an attempt to appear to comply with securities regulations, Edwards received false opinion letters supporting the issuance of unrestricted CMKM stock from Defendant Dvorak. Based upon these letters, CMKM's transfer agent, Defendant Global and its owner Bagley, issued unrestricted shares of CMKM stock. Using these certificates, Edwards sold 260 billion shares of stock through Daryl Anderson, Kathleen Tomasso, and Anthony Tomasso. Anderson was Edwards' registered representative at NevWest Securities Corporation (“NevWest”) and sold over 200 billion shares. Edwards also issued 77.3 billion shares of stock to companies owned by the Tomassos, which in turn sold the shares to the public.

B. Dvorak's Role

Dvorak acted as CMKM's attorney during the course of the scheme. Casavant told Dvorak that numerous investors had already paid for shares of stock in CMKM when the company was in its initial stages, but stock certificates had never been issued to those investors. Casavant also told Dvorak that new certificates needed to be issued to certain investors whose shares were the subject of an earlier 100–for–one stock split. Casavant then began issuing those certificates. After receiving the newly issued CMKM stock certificates, Dvorak would write an opinion letter stating that the stocks referred to in the certificates should be issued without a restrictive legend.¹

Dvorak's opinion letters indicated that the stocks issued by CMKM met the safe harbor of Rule 144(k), and therefore were exempt from registration under the Securities Act. See15 U.S.C. § 77d(a)(1); 17 C.F.R. § 230.144(k). ² Dvorak's letters concluded that the stocks satisfied the two-year holding period of Rule 144(k) because, perhaps implausibly, the investors had paid for the stock or performed services for CMKM more than two years prior to issuance of the stock certificates or because a 100–for–one stock split had occurred more than two years earlier. Therefore Dvorak's letters concluded that the shares should be issued without a restrictive legend.

During the course of the scheme, Dvorak drafted 450 opinion letters regarding at least 233.7 billion shares of stock, issued to 258 individuals, that CMKM claimed could have been issued more than two years earlier. Dvorak received $318,843 from other participants in the scheme, including approximately $350 per opinion letter.

C. Global and Bagley's Role

Defendant Global is a Nevada corporation owned and operated by Bagley. In October 2001, Global registered with the SEC as a transfer agent ³ pursuant to 15 U.S.C. § 78q–1(c) and in 2002 began serving as CMKM's transfer agent. During the course of the scheme, CMKM approved several increases in its number of authorized shares, until the number of authorized shares approached 800 billion. Global and Bagley were notified of these authorizations, and between 2002 and 2004 Global issued up to 622 billion shares of unrestricted CMKM stock based on attorney opinion letters.

During most of 2003 and the first half of 2004, Bagley relied upon opinion letters written by Dvorak. Bagley testified that, relying on Dvorak's letters she understood that the stock was to be issued without a restrictive legend because payment for the stock had been made, or the stock split had occurred, at least two years earlier. Bagley also testified that she may have wondered whether all of the shares claimed by CMKM should actually have been issued two years earlier, that it seemed strange to her that CMKM had so many shares, and that nothing CMKM did as a company “made sense” to her. Bagley further testified that Global is “only the transfer agency. That's all we do. If we get proper paperwork, we do what needs to be done.”

In June 2004, Bagley requested that Dvorak's opinions be confirmed by Edwards & Angell LLP (“Angell”), another law firm representing CMKM, because she was not comfortable with Dvorak's letters.⁴ In their opinion letters, the Angell attorneys stated that “we have relied upon opinions ... of Dvorak & Associates, Ltd. for each of the Shareholders to the effect that the already-issued shares as to which the Shares are being issued as dividends were issued more than two years ago and that the issuance of the Shares as dividends has been duly authorized.” The Angell opinion letter also stated that “[w]e have examined such certificates, certified copies of organizational and governance documents, certificates of good standing, certifications of factual matters, company resolutions and other records, pertinent documents and instruments, and have investigated such other matters of law and fact, as we have deemed necessary for the purpose of rendering the opinions set forth herein.” Finally, the Angell opinion letter concluded that “the Shares may be issued to the Shareholders ... and that the certificates evidencing the Shares need bear no restrictive legend.” An Angell attorney testified that he felt it was reasonable to rely upon the opinions expressed by Dvorak in writing Angell's opinion letters. The attorney testified that he believed Dvorak's opinion letters to be valid, and had no reason to believe the issuance of shares in reliance on the Dvorak opinion letters was wrongful.

D. Procedural History

On April 7, 2008, the SEC filed a complaint against Dvorak, Global, Bagley, and eleven other defendants in the United States District Court for the District of Nevada. The complaint alleged violations of Section 5 of the Securities Act, 15 U.S.C. § 77e(a), which creates liability for the distribution of unregistered securities.

On March 25, 2009, an indictment was issued in the United States District Court for the District of Nevada based on the same set of facts that gave rise to the civil proceedings. The indictment named Dvorak, as well as five other defendants who are not parties to this appeal.

On ...