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April 2, 2010 (FinancialWire) (By Mark Faulk) -- Editor’s note: This is the second of a series of excerpts from “The Naked Truth: Investing in the Stock Play of a Lifetime”, by Mark Faulk. Part Two was published by FinancialWire(tm) on March 17, 2010 (at http://www.financialwire.net/2010/03/17/the-naked-truth-a-blueprint-for-corruption-part-two/). Faulk’s Book, released in 2008, it is a cautionary true story about a financial system rife with corruption, and predicted last year’s market meltdown. The subject of the book, CMKM Diamonds, Inc. (CMKX), eventually triggered a massive investigation involving the FBI, DOJ, IRS, and SEC, and led to numerous major lawsuits and multiple federal criminal indictments.
Recall when Bear Stearns began to fall apart at the seams in March of 2008, triggering the SEC’s first emergency weekend meeting in over 30 years. Over the next few months, all of America, in fact, the entire world, watched in trepidation as our financial markets unraveled like a slow motion train wreck, one that the vast majority of Americans had been oblivious to until it was too late. Over the next few months, the train wreck began to pick up speed, prompting SEC chairman Christopher Cox to invoke a one-month ban on July 15, 2008 against naked short selling in 19 battered financial stocks, including Goldman Sachs (NYSE: GS), Morgan Stanley (NYSE: MS), Citigroup (NYSE: C), Lehman Brothers (OTC: LEHMQ.PK), Credit Suisse (NYSE: CS), Merrill Lynch (DOA, as in dead on arrival), Bank of America (NYSE: BAC), J.P. Morgan Chase (NYSE: JPM), Fannie Mae (NYSE: FNM), and Freddie Mac (NYSE: FRE). The emergency rule, designed to eliminate the illegal downward manipulation of those companies’ stock prices, stated that no one could short sell stock in those companies unless they had “borrowed or arranged to borrow the security” and that they settle the trade on the required settlement date. Of course, as usual, even that rule imposed absolutely no penalties for anyone who violated the rule.
Faulk was warning us of the hazards lying ahead, long before that unraveling began. Although FinancialWire(tm) will publish additional excerpts from “The Naked Truth” in the future, right now we’re compelled to jump forward and present the book’s epilogue. It seems, simply, that offering a “big picture” summarization is a good idea at this point in time:
Epilogue: The Naked Truth
“The primary mission of the U.S. Securities and Exchange Commission (SEC) is to protect investors and maintain the integrity of the securities market.” -- SEC Mission Statement, 2003, sec.gov
“In 2005, Chairman Cox requested that the mission statement be changed to better reflect the current goals of the SEC.” -- SEC Senior Counsel Chris Wilson
“The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.” -- SEC Mission Statement, December 23, 2005, sec.gov
Unfortunately, the story of CMKM Diamonds, like most stories in real life, doesn’t end up as a package held together by a ribbon tied neatly in a bow. For many Americans, there is no pot of gold (or, in this case, wheelbarrow full of diamonds) at the end of the investing rainbow. As of November 30, 2007, not a single indictment has been issued against those who robbed over 50,000 shareholders…correction; make that “50,000 people”…of their hard earned money, and more importantly, their belief in the American Dream. Tens of thousands of lives have been changed, for better or worse. As Proboards70 moderator Kranker put it, “Shareholders quit their jobs, ran up their credit cards, got divorced, and even died while all the rumors were circulated that we would be rich tomorrow at 9:27am, everyday... No amount of money in the world can bring back what they lost along the way.”
Are the thousands of companies that dot the landscape of the penny stock market legitimate enterprises trying to realize their own version of the American Dream? Or are they part of the scam, set up from the start to bleed shareholders dry? What about the thousands that have already been destroyed? Were they victims of a system gone wrong or predators using that same system to line their own pockets at the expense of investors hoping to better their own lives? In the end, it will turn out that it was a little of both extremes, and everything in between. Unfortunately, regardless of who the criminals are, the victims are always the shareholders.
As of this writing, the corruption not only still exists, it has in fact escalated. Despite considerable progress made by advocates of stock market reform, our financial system is dangerously close to reaching the point of no return. What began as a limited giveaway to a few well-connected ultra-wealthy friends of Wall Street and Washington has turned into a worldwide money grab.
If one organized group of criminals can wreak this much havoc in our financial markets for decades, just imagine how bad the corruption must be system wide. How many John Edwards and Urban Casavants are out there, aided and abetted by their own cartel of hardened criminals bent on destroying our entire system? And why were they allowed to steal hundreds of millions of dollars from shareholders in company after company without repercussions for decades?
Ultimately, the responsibility rests with the SEC, who has designed a system of checks and balances that accomplish neither goal, and with a Congress who has turned a blind eye to the pleas of their own constituents. The regulations that should protect the millions of shareholders who have invested their money and lives into the American Dream instead have been abandoned in favor of big money and greed. Our financial markets are controlled by criminals and driven by heartless greed, and the SEC has given away the keys to the vault. The system that is now in place in our stock market not only allows corruption, it is actually set up to facilitate the countless robberies that take place on a daily basis.
While breakdowns in the federal system and at the SEC were largely responsible for the CMKX scam, there are other factors that facilitate corruption of this magnitude as well. A 2005 U.S. Department of the Treasury report cited Nevada as one of three states that invites fraud through lax corporate regulations. The report stated:
“Legal jurisdictions, whether states within the United States or entities elsewhere, that offer strict secrecy laws, lax regulatory and supervisory regimes, and corporate registries that safeguard anonymity are obvious targets for money launderers. A handful of U.S. states offer company registrations with cloaking features – such as minimal information requirements and limited oversight – that rival those offered by offshore financial centers.”
The report went on to describe shell companies, such as the ones the John Edwards, Urban Casavant and others involved with CMKX used to launder money stolen from shareholders, as entities that “have no physical appearance other than a mailing address, employ no one, and produce nothing.”
A corporate planning company publishes a list called “16 Reasons to Incorporate in Nevada” touting the state as the most “corporate friendly and pro-business” state in the country. Beginning with “Nevada Protects the Corporate Veil,” which refers to corporate officers being held personally liable for company debts, the list includes:
<> Nevada Protects the Corporate Veil. Nevada appears like an iron fortress to your creditors. In fact, the corporate veil has only been pierced two times in Nevada in the last 24 years!! In comparison, in one out of two cases, the corporate veil ispierced in California.
<> Nevada Protects the Board of Directors and Officers. In 1987, the Nevada Legislature passed a revolutionary law that permits corporations to place provisions in their Articles of Incorporation that would eliminate the personal liability of officers and directors to the stockholders of Nevada Corporations.
<> Nevada does NOT Exchange Information with the IRS. Nevada is only one of two states that do not turn over corporate information to the IRS.
<> Nevada Offers the Best Protection of Board of Directors from Shareholders’ Lawsuits. In order to find the Board of Directors liable, the shareholders must prove gross negligence on behalf of the Board of Directors. The test to prove gross negligence in Nevada is to pierce the corporate veil. No other state has such a high test.
<> In Nevada, One Person Can Hold ALL the Corporate Offices. One person can hold the offices of President, Secretary, Treasurer, and be the sole Director in Nevada. Many states require at least three (3) officers and/or directors.
<> Nevada does NOT Require Stockholders, Directors, and Officers to be US Citizens or Live or Hold Meetings in Nevada. Directors need not be Stockholders and Officers and Directors of a Nevada corporation can be protected from personal liability for lawful acts of the corporation.
In 2005 alone, Nevada added over 40,000 new limited liability companies to its roles and collected hundreds of millions of dollars in incorporation fees. The same year, they led the nation in white collar crime committed utilizing the internet. Current Nevada Secretary of State Ross Miller recently began to make changes to the secretary of state’s website. Under predecessor Dean Heller (now a Nevada congressman), the website enticed prospective public companies by asking "Why incorporate in Nevada?" Then, the website answered its own question: “Minimal reporting and disclosure requirements. Stockholders are not public record.”
Stock market reform activist Bud Burrell, who has followed the CMKX story for years, commented on the efforts of the CMKX shareholders to find help at the federal and state level:
“These shareholders initiated tens of thousands of written and oral complaint communications to every single State and Federal entity, agency and many others, to include the Department of Justice, the Attorney General of Nevada, every level of the SEC, the DTCC, the NASD, their Congressmen, The House’s Committee on Financial Services, their Senators, The Senate Banking Committee, and many, many more. They begged for help and they got one form of answer: “We don’t have the resources.” In every single incidence, not one of these organizations or their related officials discharged their sworn duties to protect individual investors.”
The fleecing of over 50,000 CMKX shareholders should never have happened. Let me repeat that, because this is the real story here:
THE FLEECING OF OVER 50,000 CMKX SHAREHOLDERS SHOULD NEVER HAVE HAPPENED:
Just as they bear the brunt of the responsibility in the failure of our financial system, inaction by the SEC and our elected representatives in Congress is directly responsible for the suffering those 50,000 shareholders endured. Where were they over 15 years ago, when these same criminals were robbing shareholders in other scams? Where were they over four years ago when advocates began sounding the alarm about a system horribly out of control? And where were they when those same desperate shareholders were crying out for justice, only to have their cries fall upon deaf ears?
The ongoing joint investigation by the DOJ, FBI, and IRS into CMKX has dragged on for years, much to the dismay and frustration of the shareholders of the company. A phone call to Charyn Aldred of the IRS on November 5, 2007, confirmed that Brian Pugh was heading up the investigation into CMKX for the Department of Justice. While Pugh didn’t return calls and the DOJ spokesperson who did couldn’t comment on the CMKX investigation, she did discuss fraud investigations in general:
“There’s such a shortage of agents at the FBI and the IRS to work such big fraud cases because they’ve been reassigned to terrorism and many other things. They’re very strapped for resources and so are we. Las Vegas has grown so much over the last twenty years and our offices haven’t grown much at all. The top priorities of the Department of Justice and this administration are fighting terrorism, violent crime, and crimes against children, so the fraud cases are not at the top of the list. Even if they were, they still take a long time to investigate and bring to the point of issuing charges. Sometimes they’re never charged; just because we have an investigation doesn’t mean we’re going to have enough evidence to charge anybody. That doesn’t mean that people haven’t done anything wrong or that are criminal, it just means that we don’t have enough evidence to prove it beyond a reasonable doubt. Every case is different obviously, but in my experience, especially with investment fraud and securities fraud cases, they take many, many years.”
Bill Frizzell said that while he couldn’t comment on specifics either, CMKM Diamonds is willingly cooperating with all federal regulators and enforcement agencies. Frizzell and West have repeatedly expressed their desire to see all the perpetrators in the CMKX tragedy brought to justice, and I have repeatedly passed their names and contact information to the various enforcement agencies. Leslie Hakala of the SEC has continued to gather evidence as well, so there is hope that eventually fraud and criminal charges will be brought against John Edwards, Urban Casavant, and their cohorts.
If the only thing that this book accomplishes is to serve as a wake-up call to the problem of financial fraud then it will have been worth it. My hope is that it will act as a catalyst and put pressure on the federal agencies who have been investigating this scandal to finally make it a top priority. I hope that the outcry is loud enough and persistent enough to grease the wheels of justice. While it might not be possible for regulators to return what was stolen from 50,000 shareholders, at least let there be some retribution against those who did the crime.
On December 23, 2005, the Securities and Exchange Commission, after first eliminating the word “honesty” from their Mission Statement in their 2003 Annual Report, changed the Mission Statement again, without notice. Originally listed on their website as “The primary mission of the U.S. Securities and Exchange Commission (SEC) is to protect investors and maintain the integrity of the securities market,” it was rewritten by SEC Commissioner Chris Cox to read:
“The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.”
And so, in two short years, both honesty and integrity were forever eliminated as the stated mission of the governing body of the United States stock market.
In January of 2000, there were 13,300 companies listed on the Over the Counter Exchanges. As of October, 2006, there were 2,700 left standing…and the number keeps falling. Every day that passes that we don’t address the problems facing our financial markets, the potential fallout becomes worse. Even now we face serious consequences, and unchecked, our country, and by extension the entire world, is facing a potential economic meltdown.
Stock counterfeiting, either in the form of naked short selling or fails to deliver, is a very real and damaging problem, but as this story illustrates, it is only a small part of a much larger issue. The central issue here is that our entire system is in danger of reducing the American Dream into nothing more than an illusion dangled like the promise of diamonds in front of middle class America. As long as the game is rigged in favor of the ultra-wealthy and the ultra-connected, then that dream will forever be just out of reach of the vast majority of our citizens. Unless we overcome the culture of greed that permeates our political policies and our financial institutions, government “for the people, by the people” will soon become, like integrity and honesty in the SEC’s Mission Statement, nothing more than a footnote in the history books.
Mark Faulk, author of “The Naked Truth: Investing in the Stock Play of a Lifetime”, (http://www.thenakedtruthbook.com/) and editor of The Faulking Truth (http://www.faulkingtruth.com/ has written over 150 articles on the topic of financial reform and naked short selling since 2004, and has logged hundreds of hours in radio and television interviews. For over five years, he and a small group of dedicated activists have been educating America about the imminent danger of allowing rampant fraud to continue. In his very first article on The Faulking Truth website on March 19, 2004, he coined the phrase “financial terrorism”, which has come to epitomize the culture of greed that dominates Wall Street. His articles have been reprinted or excerpted in numerous major publications, including The Huffington Post and Financial Wire, and financial journals such as the prestigious Capco Journal of Financial Transformation. In the fall of 2009, he will complete work on a major documentary about financial fraud, due to be released in December, 2009.
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Disclosure: No positions.