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Univ. of Toledo College of Law

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Monday, April 7, 2008

SEC Files Complaint Alleging Penny Stock Fraud

The SEC filed a civil injunctive action against fourteen defendants involved in the alleged illegal issuance and sale of unregistered stock of CMKM Diamonds, Inc., purportedly a diamond and gold mining company located in Las Vegas. CMKM allegedly fraudulently issued hundreds of billions of shares of purportedly unrestricted stock to John Edwards and his nominees, as well as to the nominees of Urban Casavant, the company's chief executive officer. The Commission alleges that as Casavant generated demand for CMKM stock through fraudulent promotion of the company, Edwards, Casavant, and their nominees sold their shares into the public markets for at least $64.2 million in profit.  The complaint, filed in U.S. District Court for the District of Nevada, alleges that, from January 2003 to May 2005, CMKM improperly issued up to 622 billion shares of purportedly unrestricted stock. According to the complaint, these issuances were based in large part on both written authorizations and attorney opinion letters prepared by Brian Dvorak, CMKM's lawyer, which were often facially inadequate, suspect, and inconsistent. Allegedly, based on these faulty documents, CMKM's transfer agent, 1st Global Stock Transfer LLC, and its owner, Helen Bagley, issued stacks of stock certificates without restrictive legends. Edwards, his nominees, Kathleen Tomasso and Anthony Tomasso, and Casavant's nominees, James Kinney and Ginger Gutierrez, then allegedly deposited the certificates with various broker-dealers and sold the shares into the market. NevWest Securities Corporation and its employees, Anthony Santos, Sergei Rumyantsev, and Daryl Anderson, are alleged to have sold more than 259 billion shares of CMKM stock for Edwards, despite numerous red flags indicating a massive unregistered distribution. Meanwhile, Casavant allegedly generated investor interest in CMKM by using false press releases, Internet chat boards, and "funny car" race events across the country. The complaint alleges that this promotion was extremely successful, and about 40,000 investors purchased CMKM stock during the period of the fraud without knowing that Casavant ran the company from his house in Las Vegas, and that CMKM's primary activity was to issue and promote its own stock.

The Commission charged defendants with violating Section 5 of the Securities Act of 1933 and seeks a permanent injunction against all defendants. The Commission also seeks an accounting, disgorgement with prejudgment interest, and civil penalties.

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