Securities and Exchange Commission v. CMKM Diamonds, Inc. et al
Filing
181
ORDER Granting 161 Motion for Summary Judgment. Clerk of Court shall enter Judgment accordingly. Plaintiff shall have 10 days from entry of this order to file an appropriate permanent injunction and order of disgorgement. Signed by Judge Larry R. Hicks on 7/25/2011. (Copies have been distributed pursuant to the NEF - SLR)
1
2
3
4
5
6
UNITED STATES DISTRICT COURT
7
DISTRICT OF NEVADA
8
***
)
)
)
)
)
)
)
)
)
)
)
)
)
9
10
SECURITIES AND EXCHANGE
COMMISSION,
11
Plaintiff,
12
v.
13
CMKM DIAMONDS, INC., et al.,
14
Defendants.
2:08-cv-0437-LRH-RJJ
ORDER
15
16
Before the court is plaintiff Securities and Exchange Commission’s (“SEC”) motion for
17
summary judgment against remaining defendants Global Stock Transfer, LLC (“Global Stock”);
18
Helen Bagley (“Bagley”); Sergey Rumyantsev (“Rumyantsev”); and Brian Dvorak (“Dvorak”).
19
Doc. #161.1
20
I.
Facts and Background
21
This action involves the sale of unregistered securities. Defendant CMKM Diamonds, Inc.
22
(“CMKM”), a Nevada corporation, concocted and carried out a complex scheme to illegally issue
23
and sell billions of shares of its stock in several unregistered distributions between December 2002,
24
and September 2004.
25
26
1
Refers to the court’s docket number.
1
On April 7, 2008, the SEC initiated the present civil action against defendants for violation
2
of the Securities Act of 1933 (“the Securities Act”), 15 U.S.C. § 77(e). Doc. #1. Thereafter, the
3
SEC filed the present motion for summary judgment against defendants Dvorak, Rumyantsev,
4
Global Stock, and Bagley.2 Doc. #161.
5
II.
Legal Standard
6
A. Summary Judgment
7
Summary judgment is appropriate only when “the pleadings, depositions, answers to
8
interrogatories, and admissions on file, together with the affidavits, if any, show that there is no
9
genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of
10
law.” Fed. R. Civ. P. 56(c). In assessing a motion for summary judgment, the evidence, together
11
with all inferences that can reasonably be drawn therefrom, must be read in the light most favorable
12
to the party opposing the motion. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574,
13
587 (1986); County of Tuolumne v. Sonora Cmty. Hosp., 236 F.3d 1148, 1154 (9th Cir. 2001).
14
The moving party bears the burden of informing the court of the basis for its motion, along
15
with evidence showing the absence of any genuine issue of material fact. Celotex Corp. v. Catrett,
16
477 U.S. 317, 323 (1986). On those issues for which it bears the burden of proof, the moving party
17
must make a showing that is “sufficient for the court to hold that no reasonable trier of fact could
18
find other than for the moving party.” Calderone v. United States, 799 F.2d 254, 259 (6th Cir.
19
1986); see also Idema v. Dreamworks, Inc., 162 F. Supp. 2d 1129, 1141 (C.D. Cal. 2001).
20
To successfully rebut a motion for summary judgment, the non-moving party must point to
21
facts supported by the record which demonstrate a genuine issue of material fact. Reese v. Jefferson
22
Sch. Dist. No. 14J, 208 F.3d 736 (9th Cir. 2000). A “material fact” is a fact “that might affect the
23
outcome of the suit under the governing law.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248
24
25
26
2
Judgment has already been entered against all other defendants in this action either through stipulated
consent decrees or default judgments.
2
1
(1986). Where reasonable minds could differ on the material facts at issue, summary judgment is
2
not appropriate. See v. Durang, 711 F.2d 141, 143 (9th Cir. 1983). A dispute regarding a material
3
fact is considered genuine “if the evidence is such that a reasonable jury could return a verdict for
4
the nonmoving party.” Liberty Lobby, 477 U.S. at 248. The mere existence of a scintilla of
5
evidence in support of the plaintiff’s position will be insufficient to establish a genuine dispute;
6
there must be evidence on which the jury could reasonably find for the plaintiff. See id. at 252.
7
B. Section 5 of the Securities Act
8
Sections 5(a) and (c) of the Securities Act make it unlawful to offer or sell a security in
9
interstate commerce if a registration statement3 has not been filed as to that security, unless the
10
transaction qualifies as exempt from registration. 15 U.S.C. §§ 77c(a) and (c); SEC v. Platforms
11
Wireless Int’l Corp., 617 F.3d 1072, 1085 (9th Cir. 2010). The definition of a security under the act
12
includes a company’s stock. 15 U.S.C. § 77b(a)(1).
13
To establish a violation of Section 5 of the Securities Act, the SEC must establish that:
14
(1) there was not a registration statement in effect as to the underlying securities; (2) the defendants
15
directly or indirectly sold or offered to sell the securities; and (3) the sale or offer was made through
16
interstate commerce or the mails. SEC v. Phan, 500 F.3d 895, 902 (9th Cir. 2007) (citing Berckeley
17
Inv. Group, Ltd. v. Colkitt, 455 F.3d 195, 212 (3d. Cir. 2006). “Once the SEC introduces evidence
18
that a defendant has violated the registration provisions, the defendant then has the burden of proof
19
in showing entitlement to an exemption.” Platforms Wireless Int’l Corp., 617 F.3d at 1086.
20
Despite the term “sell,” liability under Section 5 is not confined to the person who passes
21
title of the security; a participant in the distribution of unregistered securities may also be liable
22
under Section 5. SEC v. Murphy, 626 F.2d 633, 649 (9th Cir. 1980). For a defendant to be liable for
23
24
25
26
3
A registration statement is a filing with the SEC which allows stocks to be freely traded. If a
registration statement is not filed on a stock, a restrictive legend is placed upon the stock certificate stating,
among other things, that the stock is not registered and that ownership cannot be sold or transferred absent
registration or the existence of a valid exemption from registration.
3
1
“indirectly” offering to sell securities in violation of Section 5, their role in the transaction must be
2
a significant one. Phan, 500 F.3d at 906. A significant role includes a defendant who was both a
3
“necessary participant” and a “substantial factor” in the transaction. Id. (citing Murhpy, 626 F.2d at
4
648, 652); SEC v. Rogers, 790 F.2d 1450, 1456 (9th Cir. 1986).
A defendant is a necessary participant if “but for” his participation in the distribution of
5
6
unregistered securities, there would not have not been any sale. Murphy, 626 F.2d at 650-51.
7
Further, a defendant is a substantial factor in the distribution of unregistered securities if his overall
8
conduct and participation is not “de minimis.” Rogers, 790 F.2d at 1456 (citing Murphy, 626 F.2d
9
at 650-52).
10
11
III.
Discussion
In its motion for summary judgment, the SEC argues that the remaining defendants were
12
both necessary participants and a substantial factor in the unregistered distribution of CMKM
13
stock, and therefore, are liable for violating Sections 5(a) and (c) of the Securities Act.4 Doc. #161.
14
The court shall address the SEC’s arguments as to each remaining defendant below.
15
A. Brian Dvorak
16
Defendant Dovrak, an attorney retained by defendant CMKM, wrote approximately 440
17
opinion letters to stock transfer agents justifying the issuance of unrestricted CMKM stock by
18
falsely claiming that the stocks were subject to a statutory exemption.
19
The court has reviewed the documents and pleadings on file in this matter and finds that
20
Dvorak was both a necessary participant and a substantial factor in the sale of unrestricted CMKM
21
stock in violation of Section 5 of the Securities Act. First, but for Dvorak’s participation with
22
CMKM, there would not have been a sale of unregistered securities. His letters enabled the removal
23
24
25
26
4
It is undisputed that there was not a registration statement in effect as to CMKM’s stock certificates
and that a sale of CMKM stock was made through interstate commerce and the mails. Therefore, the only
before the court is whether defendants “directly or indirectly sold or offered to sell” CMKM stock. See Phan,
500 F.3d at 902.
4
1
of the restrictive legends which allowed them to be sold by defendant broker NevWest Securities,
2
Inc. (“NevWest”). Second, the writing of opinion letters justifying the removal of the restrictive
3
legends is not a de minimis act: Dvorak’s participation was a crucial and integral role in the overall
4
scheme to sell unregistered securities. See e.g., Geiger v. SEC, 363 F.3d 481, 487 (D.C. Cir. 2004)
5
(holding that an attorney who writes unfounded opinion letters about registration exemptions which
6
allow for the sale of unregistered securities is both a necessary participant and a substantial factor
7
in any unlawful sale). Therefore, the court finds that the SEC is entitled to summary judgment
8
against defendant Dvorak.
9
B. Global Stock and Helen Bagley
10
Defendant Global Stock is a Nevada corporation that operated as a transfer agent for
11
CMKM’s stock transactions. Defendant Bagley is the principal of Global Stock and was the
12
individual who removed the restrictive legends from CMKM’s stock certificates for at least 270
13
billion shares of CMKM stock.
14
The court has reviewed the documents and pleadings on file in this matter and finds that
15
Global Stock and Bagley were both necessary participants and substantial factors in the sale of
16
unrestricted CMKM stock in violation Section 5 of the Securities Act. First, but for their
17
participation in removing the restrictive legends, there would not have been a sale of unregistered
18
securities because the CMKM stock would still have the restrictive legend on each certificate.
19
Second, defendants participation was not de minimis. Global Stock and Bagley issued billions of
20
shares of CMKM stock without the restrictive legend and then transferred those unrestricted
21
certificates to defendant NevWest for the purpose of sale to the general public.
22
In their opposition, Global Stock and Bagley argue that there is a disputed issue of material
23
fact as to whether they had known or had a reason to know that an illegal distribution of the stock
24
would occur, thereby precluding summary judgment. However, Section 5 of the Securities Act is a
25
strict liability statute. See e.g., SEC v. Ramoil Mgmt., Ltd., 2007 U.S. Dist. LEXIS 79581, *27-30
26
5
1
(S.D. N.Y. 2007); SEC v. Levine, 2010 U.S. Dist. LEXIS 77937, *3 (D. Nev. 2010) (“The plain
2
language of the statute has no scienter requirement.”) (citing SEC v. Alpha Telecom, Inc., 187 F.
3
Supp. 2d 1250, 1258 (D. Or. 2002) (“There is no scienter requirement under Section 5.”)). As such,
4
the SEC is not required to establish scienter on the part of a defendant in connection with the sale
5
of unregistered securities. Phan, 500 F.3d at 906.
6
Additionally, Global Stock and Bagley argue that they relied on the representations of
7
counsel, namely defendant Dvorak, in removing the restrictive legends from the CMKM stock, and
8
therefore, they cannot be liable for any violation of the Securities Act. To establish the defense for
9
good faith reliance on the advice of counsel, a defendant must show that they: “(1) made a
10
complete disclosure to counsel; (2) requested counsel’s advice as to the legality of the contemplated
11
action; (3) received advice that it was legal; and (4) relied in good faith on that advice.” SEC v.
12
Savoy Industries, Inc., 665 F.2d 1310, 1314 n.28 (D.C. Cir. 1981). Further, the defendant has the
13
burden of establishing each element of a reliance on counsel defense. SEC v. Goldfield Mines Co.
14
of Nevada, 758 F.2d 459, 467 (9th Cir. 1985).
Here, the court finds that defendants Global Stock and Bagley have failed to meet their
15
16
burden establishing a good faith reliance on the advice of counsel. Although defendants claim that
17
they did not remove a single restrictive legend from CMKM stock without receiving a supporting
18
opinion letter from counsel, the evidence before the court establishes that defendants believed that
19
Dvorak’s opinion letters were not supported by the law and requested CMKM to find another
20
attorney to the write opinion letters supporting removal of the restrictive legends. Further, after
21
requesting a different attorney, defendants continued to remove restrictive legends from CMKM
22
stock based on Dvorak’s unsupported opinion letters. Therefore, the court finds that the SEC is
23
entitled to summary judgment against defendants Global Stock and Bagley.
24
///
25
///
26
6
1
C. Sergey Rumyantsev
2
Defendant Rumyantsev was the CEO and head trader at defendant NevWest, the company
3
that caused the billions of unregistered shares to be sold to the public. While CEO, Rumyantsev
4
allowed NevWest to acquire and distribute the newly issued unregistered CMKM stock certificates.
5
Further, Rumyantsev allowed an individual associated with CMKM to open more than thirty (30)
6
different brokerage accounts with NewWest in more than thirty (30) different names, while using
7
the same social security number for most accounts, for the sole purpose of trading the unrestricted
8
shares of CMKM stock.
9
The court has reviewed the documents and pleadings on file in this matter and finds that
10
Dvorak was both a necessary participant and a substantial factor in the sale of unrestricted CMKM
11
stock in violation of Section 5 of the Securities Act. First, but for Rumyantsev’s involvement in
12
allowing the thirty (30) brokerage accounts to be opened by a single individual under different
13
names, the unrestricted shares of CMKM stock would not have be offered and sold to the public.
14
Second, the uncontroverted evidence shows that Rumyantsev’s actions, or failure to act, far from
15
being unwitting or de minimis, intimately involved him in the sale of unregistered CMKM stock in
16
violation of Section 5 of the Securities Act. As CEO of NevWest, and the individual responsible
17
for company compliance with SEC regulations, he allowed a single individual to open thirty
18
brokerage accounts in different names solely for the purpose of selling the unrestricted shares of
19
CMKM stock.
20
In opposition, Rumyantsev argues that he was not an active participant in the sale of the
21
unregistered CMKM stock and did not personally open any brokerage accounts or make any active
22
trades of CMKM stock, and thus, he was not indirectly involved in the sale of the unregistered
23
securities. However, it is not determinative of Rumyantsev’s liability whether he personally
24
accepted delivery of the securities, or personally offered them for sale. Rather, the issue is whether
25
he was both a necessary participant and a substantial factor in the overall scheme. Phan, 500 F.3d
26
7
1
at 906. Based on the record before the court, the court finds that Rumyantsev was both a necessary
2
participant and a substantial factor in the sale of unregistered securities in violation of Section 5 of
3
the Securities Act. Therefore, the court finds that the SEC is entitled to summary judgment as to
4
defendant Rumyantsev.
5
6
7
8
9
10
IT IS THEREFORE ORDERED that plaintiff’s motion for summary judgment (Doc. #161)
is GRANTED. The clerk of court shall enter judgment accordingly.
IT IS FURTHER ORDERED that plaintiff Securities and Exchange Commission shall have
ten (10) days from entry of this order to file an appropriate permanent injunction and order of
disgorgement against defendants and submit the same for signature.
11
IT IS SO ORDERED.
12
DATED this 25th day of July, 2011.
13
__________________________________
LARRY R. HICKS
UNITED STATES DISTRICT JUDGE
14
15
16
17
18
19
20
21
22
23
24
25
26
8
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?