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Post by Franko10 ™ on Oct 31, 2006 14:08:41 GMT -5
A tangled tale of stock deceit
By FLOYD NORRIS
Columnist
Read more columns by the Star's business staff
Was this stock being traded by crooks? Should the brokers have noticed? How about the regulators, who now charge the brokers missed “red flags,” but missed a few themselves.
The story of a tiny Nevada company, which claimed to be in the diamond mining business but spent the little money it had sponsoring a race car, sheds light on small stocks that fly below the radar for years.
It is a story that involves a former FBI agent who was promised a lot of money for doing very little but says he did not get the cash, and an auditing firm that was fired 11 days after it was hired.
The company, CMKM Diamonds, never traded for as much as 2 cents a share. But that did not stop one trader from taking in $53 million. He sold more than 259 billion shares from 2003 to 2005, the vast majority before the company had bothered to let investors know so many shares existed.
All that from stock in a company that, when it last filed a balance sheet with the Securities and Exchange Commission, in 2002, reported total assets of $344.
After that, the company said it went into the diamond business, acquiring some mineral claims in Canada. Some of those claims were later given away because the company could not come up with the money needed to work on them, but it did spend $4 million to promote itself by sponsoring the CMKXtreme car.
The SEC later concluded the company had lied when it claimed it did not have to file reports with the SEC, and revoked its registration. The company said that it made an honest mistake when it filed a form claiming the exemption, and that the SEC should have noticed the form was in error.
While it was not filing financial statements, it was seeking publicity, both through the race car and press releases. One of them reported the hiring of Robert Maheu, a former FBI agent who it said had “served as an adviser to many great men and companies,” including Howard Hughes and the CIA.
Maheu became co-chairman of the board and chairman of the audit committee, at a salary of $40,000 a month. But his testimony before the SEC convinced an administrative law judge that he did not know how many employees the company had, or what they did. He was not familiar with the company’s assets or liabilities.
Nor had he ever visited the company’s offices. But that is no surprise. One address it gave to the SEC was actually the home of a hot-rod shop.
When I reached Maheu, he said his lawyer had told him not to comment, but added the company had not paid him what he was owed.
Perhaps the highlight of this story was the audit firm that left quickly, after warning the company’s board of possible criminal activities. The company’s lawyer said that the auditor could not know any such thing, given that company records could not be found.
Last week, NASD, the regulatory agency for the over-the-counter and Nasdaq markets, filed a disciplinary complaint against NevWest Securities, the brokerage that handled the trades for the man who sold more than 30 percent of the shares in the company.
The NASD claimed NevWest should have filed reports of “suspicious activity” with the Treasury Department, as required by the Patriot Act. That section is supposed to deal with money laundering, but it requires brokers to report evidence of violation of any federal law.
Sergey Rumyantsev, NevWest’s president, told me his firm did nothing wrong.
What does all this prove? 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 look at many filings.
And it shows that this can go on and on.
--------------------------------------------------------------------------------
Floyd Norris writes for The New York Times.
By FLOYD NORRIS
Columnist
Read more columns by the Star's business staff
Was this stock being traded by crooks? Should the brokers have noticed? How about the regulators, who now charge the brokers missed “red flags,” but missed a few themselves.
The story of a tiny Nevada company, which claimed to be in the diamond mining business but spent the little money it had sponsoring a race car, sheds light on small stocks that fly below the radar for years.
It is a story that involves a former FBI agent who was promised a lot of money for doing very little but says he did not get the cash, and an auditing firm that was fired 11 days after it was hired.
The company, CMKM Diamonds, never traded for as much as 2 cents a share. But that did not stop one trader from taking in $53 million. He sold more than 259 billion shares from 2003 to 2005, the vast majority before the company had bothered to let investors know so many shares existed.
All that from stock in a company that, when it last filed a balance sheet with the Securities and Exchange Commission, in 2002, reported total assets of $344.
After that, the company said it went into the diamond business, acquiring some mineral claims in Canada. Some of those claims were later given away because the company could not come up with the money needed to work on them, but it did spend $4 million to promote itself by sponsoring the CMKXtreme car.
The SEC later concluded the company had lied when it claimed it did not have to file reports with the SEC, and revoked its registration. The company said that it made an honest mistake when it filed a form claiming the exemption, and that the SEC should have noticed the form was in error.
While it was not filing financial statements, it was seeking publicity, both through the race car and press releases. One of them reported the hiring of Robert Maheu, a former FBI agent who it said had “served as an adviser to many great men and companies,” including Howard Hughes and the CIA.
Maheu became co-chairman of the board and chairman of the audit committee, at a salary of $40,000 a month. But his testimony before the SEC convinced an administrative law judge that he did not know how many employees the company had, or what they did. He was not familiar with the company’s assets or liabilities.
Nor had he ever visited the company’s offices. But that is no surprise. One address it gave to the SEC was actually the home of a hot-rod shop.
When I reached Maheu, he said his lawyer had told him not to comment, but added the company had not paid him what he was owed.
Perhaps the highlight of this story was the audit firm that left quickly, after warning the company’s board of possible criminal activities. The company’s lawyer said that the auditor could not know any such thing, given that company records could not be found.
Last week, NASD, the regulatory agency for the over-the-counter and Nasdaq markets, filed a disciplinary complaint against NevWest Securities, the brokerage that handled the trades for the man who sold more than 30 percent of the shares in the company.
The NASD claimed NevWest should have filed reports of “suspicious activity” with the Treasury Department, as required by the Patriot Act. That section is supposed to deal with money laundering, but it requires brokers to report evidence of violation of any federal law.
Sergey Rumyantsev, NevWest’s president, told me his firm did nothing wrong.
What does all this prove? 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 look at many filings.
And it shows that this can go on and on.
--------------------------------------------------------------------------------
Floyd Norris writes for The New York Times.
