Argued and Submitted April 15, 2013 -San Francisco, California
Appeals from the United States District Court for the District of Nevada Larry R. Hicks, D.C. No. 2:08-cv-00437-LRH-RJJ District Judge, Presiding
Mark S. Dzarnoski (argued), Gordon & Silver Ltd., Las Vegas, Nevada, 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, Arkansas, for Defendant-Appellant Brian Dvorak.
Allan Armistead Capute (argued), Securities and Exchange Commission, Washington, D.C., for Plaintiff-Appellee.
Before: Susan P. Graber and Morgan Christen, Circuit Judges, and John R. Tunheim, [*] District Judge.
The panel affirmed in part, and reversed in part, the district court's orders in a civil enforcement action brought by the Securities and Exchange Commission against numerous defendants allegedly involved in a scheme to sell unregistered securities of CMKM Diamonds, Inc. in violation of Section 5 of the Securities Act of 1933.
The panel reversed the district court's grant of summary judgment against CMKM's transfer agent, 1st Global Stock Transfer, LLC and its owner Helen Bagley, because there was a material issue of fact 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 of the Securities Act of 1933. The panel affirmed the magistrate judge's denial of the motion of Brian Dvorak, CMKM's attorney at the time of scheme, to stay the proceedings, and the district court's disgorgement order (ordering defendants to disgorge proceeds from the illegal securities' sales, plus prejudgment interest) as to Dvorak.
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.
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. § 78l(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.
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. See 15 U.S.C. § 77d(a)(1); 17 C.F.R. § 230.144(k). 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 ...