Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 1 of 103

UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT _____________________________________________________ No. 11-17021 SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, v. CMKM DIAMONDS, INC., Defendant, and 1st GLOBAL STOCK TRANSFER, LLC, and HELEN BAGLEY, Defendants-Appellants. ________________________________________________________ No. 11-17025 SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, v. CMKM DIAMONDS, INC., et al., Defendants, and Defendant-Appellant. __________________________________________________________ On Appeal from the United States District Court for the District of Nevada ________________________________________________________________ BRIEF OF THE SECURITIES AND EXCHANGE COMMISSION, APPELLEE ________________________________________________________________ MARK D. CAHN General Counsel MICHAEL A. CONLEY Deputy General Counsel JACOB H. STILLMAN Solicitor ALLAN A. CAPUTE Special Counsel to the Solicitor Securities and Exchange Commission 100 F Street, N.E. Washington, D.C. 20549-9040 (202) 551-5122 (Capute) caputea@sec.gov BRIAN DVORAK,

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 2 of 103

TABLE OF CONTENTS Page TABLE OF AUTHORITIES.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v PRELIMINARY STATEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 STATEMENT OF JURISDICTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 COUNTERSTATEMENT OF THE ISSUES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 COUNTERSTATEMENT OF THE CASE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 A. The Regulatory Scheme . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 1. 2. 3. 4. B. Section 5 of the Securities Act. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 The Section 4(1) exemption from registration. . . . . . . . . . . . . . . . . . . 7 Commission Rule 144(k) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Transfer agents, restrictive legends, and attorney opinion letters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Facts.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 1. 2. 3. Overview of the scheme to sell unregistered securities. . . . . . . . . . . 14 Dvorak wrote about 450 opinion letters falsely stating that the CMKM shares were exempt from registration. . . . . . . . . . . 16 Global and Bagley issued CMKM stock certificates without restrictive legends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

C.

Proceedings Below .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

-ii-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 3 of 103

TABLE OF CONTENTS (Continued) Page STANDARD OF REVIEW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 SUMMARY OF THE ARGUMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 ARGUMENT.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 I. A PERSON MAY BE LIABLE UNDER SECTION 5, EVEN THOUGH HE DID NOT DISTRIBUTE THE SECURITIES TO THE PUBLIC DIRECTLY, IF HE WAS A NECESSARY PARTICIPANT AND SUBSTANTIAL FACTOR IN THE DISTRIBUTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 RESPONSE TO DVORAKS BRIEF: THE DISTRICT COURT PROPERLY GRANTED THE COMMISSIONS MOTION FOR SUMMARY JUDGMENT AGAINST DVORAK AND ACTED WITHIN ITS DISCRETION IN DENYING DVORAKS MOTION TO STAY THIS ACTION PENDING COMPLETION OF THE PARALLEL CRIMINAL CASE. . . . . . . . . . . . . . . . . . . . . 31 A. The undisputed evidence shows that there is no genuine dispute that Dvorak violated Section 5. .. . . . . . . . . . . . . . . 31 1. Dvorak failed to oppose summary judgment and therefore cannot contest summary judgment on appeal. .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 In any event, the undisputed facts overwhelmingly demonstrate that Dvorak is liable for violating Section 5 because Dvorak was a necessary participant and a substantial factor in the illegal distribution. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Dvorak failed to demonstrate that the Commissions approximation of the disgorgement amount was not reasonable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

II.

2.

3.

-iii-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 4 of 103

TABLE OF CONTENTS (Continued) Page 4. B. Dvorak has not met the requirements for relief under Fed. R. Civ. P. 56(f). . . . . . . . . . . . . . . . . . . . . . . . . . . 37

The district court acted within its discretion in denying Dvoraks motion for a stay because the burden on his Fifth Amendment rights imposed by this action is negligible. . . . . . 38 There is no evidence that the Commission brought this action in bad faith or that its attorneys otherwise acted improperly. .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

C.

III.

RESPONSE TO GLOBAL AND BAGLEYS BRIEF: THERE IS NO GENUINE FACTUAL DISPUTE THAT GLOBAL AND BAGLEY ARE LIABLE FOR VIOLATING SECTION 5. .. . . . . . . . . . . . . . . . . . . . . . . . . . 48 A. The undisputed facts show Global and Bagley were necessary participants and a substantial factor in the distribution of unregistered CMKM stock. . . . . . . . . . . . . . . . . . . . . 48 Even if culpability were a requirement for a Section 5 violation, the undisputed facts show that Global and Bagley knew or must have known that they were participating in an illegal distribution of unregistered securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Global and Bagleys assertion that they reasonably relied on attorney opinion letters from a second attorney, other than Dvorak, does not raise a genuine factual dispute. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 State law did not require Global and Bagley to remove the restrictive legends on CMKM stock because, under state law, a transfer agent may refuse to complete a wrongful transfer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

B.

C.

D.

-iv-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 5 of 103

TABLE OF CONTENTS (Continued) Page E. There are no genuine factual disputes concerning the Commissions approximation of $302,500 in disgorgement, and the district court properly awarded disgorgement in that amount. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

CONCLUSION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 CERTIFICATE OF RELATED CASES PURSUANT TO CIRCUIT RULE 28-2.6 CERTIFICATE OF COMPLIANCE CERTIFICATE OF SERVICE

-v-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 6 of 103

TABLE OF AUTHORITIES Cases Page

Alnoor Jiwan, 2004 SEC LEXIS 1898 (Aug. 26, 2004) .. . . . . . . . . . . . . . . . . . . 57 American Sec. Transfer, Inc. v. Pantheon Indus. Inc., 871 F. Supp. 400 (D. Colo. 1994).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986). . . . . . . . . . . . . . . . 24, 25, 31 Bank of America, NT & SA v. Pengwin, 175 F.3d 1109 (9th Cir. 1999). . . . . . . . . 38 Bender v. Memory Metals, Inc., 514 A.2d 1109 (Del. Ch. 1986).. . . . . . . . . . . . . 60 Berckeley Inv. Group, Ltd. v. Colkitt, 455 F.3d 195 (3d Cir. 2006). . . . . . . . . . . . . 7 Brae Transp., Inc. v. Coopers & Lybrand, 790 F.2d 1439 (9th Cir. 1986). . . . . . . 38 CFTC v. A.S. Templeton Group, Inc., 297 F. Supp. 2d 531 (E.D.N.Y. 2003). . . 43 California v. Campbell, 138 F.3d 772 (9th Cir. 1998).. . . . . . . . . . . . . . . . . . . . . . 37 Campbell v. Liberty Transfer Co., 61 UCC Rep. Serv. 563, 2006 WL 3751529 (E.D.N.Y. 2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . 60, 61 Catizone v. Memry Corp., 897 F. Supp. 732 (S.D.N.Y. 1995). . . . . . . . . . . . . . . . 61 Celotex Corp. v. Catrett, 477 U.S. 317 (1986). . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Charter Oak Bank & Trust Co. v. Registrar & Transfer Co., 358 A.2d 505 (N.J. Super. 1976). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 CIBE Mellon Trust Bank, 2005 SEC LEXIS 501 (Mar. 2, 2005).. . . . . . . . . . . . . 57

-vi-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 7 of 103

TABLE OF AUTHORITIES (Continued) Page Comite de Jornaleros le Redondo Beach v. City of Redondo Beach, 657 F.3d 936 (9th Cir. 2011), cert. denied, 80 U.S.L.W. 3404 (U.S. Sept. 16, 2011) (No. 11-760).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Commonwealth Util. Corp. v. Goltens Trading Engg PTE LTD., 313 F.3d 541 (9th Cir. 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 DeWitt v. American Stock Transfer Co., 433 F. Supp. 994, modified on other grounds, 440 F. Supp. 1084 (S.D.N.Y. 1977) . . . . . 61, 62 FSLIC v. Molinaro, 889 F.2d 899 (9th Cir. 1989). . . . . . . . . . . . . . . . . . . 25, 38, 39 passim Fiataruolo v. United States, 8 F.3d 930 (2d Cir. 1993). . . . . . . . . . . . . . . . . . . . . 66 Flying Diamond Corp. v. Pennaluna & Co., Inc., 586 F.2d 707 (9th Cir. 1978). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 Geiger v. SEC, 363 F.3d 481 (D.C. Cir. 2004). . . . . . . . . . . . . . . . . . . . . . . 8, 30, 31 passim Gilligan, Will & Co. v. SEC, 267 F.2d 461 (2d Cir. 1959). . . . . . . . . . . . . . . . . . . . 8 Iko v. California State Board of Equalization, 651 F.3d 1049 (9th Cir. 2011) . . . 24 J & G Investments, LLC v. Fineline Properties, Inc., 2007 WL 928642 (N.D. Ohio 2007).. . . . . . . . . . . . . . . . . . . . . . . . . . . 51, 57 Kanton v. United States Plastics, Inc., 248 F.Supp 353 (D. N.J. 1965) . . . . . . . . 61 Keating v. Office of Thrift Supervision, 45 F.3d 322 (9th Cir. 1995). . . . . 38, 39, 41 Kenler v. Canal Natl Bank, 489 F.2d 482 (1st Cir. 1973). . . . . . . . . . . . . 33, 34, 61

-vii-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 8 of 103

TABLE OF AUTHORITIES (Continued) Page Liberles v. County of Cook, 709 F.2d 1122 (7th Cir. 1983) . . . . . . . . . . . . . . . . . . 32 Mackinder v. Schawk, Inc., 2005 WL 1832385 (S.D.N.Y. 2005). . . . . . . . . . . . . 61 In re Marriage of Devick, 735 N.E.2d 153 (Ill. App. 2000).. . . . . . . . . . . . . . . . . 60 Melville v. Wantschek, 403 F. Supp. 439 (E.D.N.Y. 1975). . . . . . . . . . . . . . . 61, 63 Microfinancial, Inc. v. Premier Holidays Internl, Inc., 385 F.3d 72 (1st Cir. 2004) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Pinter v. Dahl, 486 U.S. 622 (1988). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Rochez Brothers, Inc. v. Rhoades, 527 F.2d 880 (3d Cir. 1975) . . . . . . . . . . . . . . 51 Samuels v. Holland American Line-USA Inc., 656 F.3d 948 (9th Cir. 2011). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24, 25 SEC v. Aaron, 605 F.2d 612 (2d Cir. 1979), vacated on other grounds, 446 U.S. 680 (1980). . . . . . . . . . . . . . . . . . . . . . 6 SEC v. Calvo, 378 F.3d 1211 (11th Cir. 2004). . . . . . . . . . . . . . . . . . . . . . 30, 49, 52 SEC v. Chinese Consol. Benev. Assn, 120 F.2d 738 (2d Cir. 1941). . . . . . . . . . . . 7 SEC v. Dresser Industries, Inc., 628 F.2d 1368 (D.C. Cir. 1980). . . . . . . 38, 39, 40 SEC v. First City Financial Corp., 890 F.2d 1215 (D.C. Cir. 1989). . . . . . . . . . . 36 SEC v. First Jersey Sec. Ind., 101 F.3d 1450 (2d Cir. 1996). . . . . . . . . . . . . . 36, 65 SEC v. First Pacific Bancorp, 142 F.3d 1186 (9th Cir. 1998).. . . . . . . . . . . . 36, 65

-viii-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 9 of 103

TABLE OF AUTHORITIES (Continued) Page SEC v. Fisher, Fed. Sec. L. Rep. 94,794, 2008 WL 3006149 (E.D. Mich. Aug. 1, 2008) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33, 53 SEC v. Friendly Power Co. LLC, 49 F. Supp.2d 1363 (S.D. Fla. 1999). . . . . . . . 52 SEC v. Goldfield Deep Mines Co. of Nevada, 758 F.2d 459 (9th Cir. 1985). . . . . 59 SEC v. Holschuh, 694 F.2d 130 (7th Cir. 1982).. . . . . . . . . . . . . . . . . . . . . . . . . 6, 30 SEC v. Hughes Capital Corp., 917 F. Supp. 1080 (D.N.J. 1996), aff'd, 124 F.3d 449 (3d Cir. 1997). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 SEC v. JT Wallenbrock & Assoc., 440 F.3d 1109 (9th Cir. 2006). . . . . . . . . . . . . . 36 SEC v. Kern, 425 F.3d 143 (2d Cir. 2005). . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 10 SEC v. M & A West, Inc., 538 F.3d 1043 (9th Cir. 2008). . . . . . . . . . . . . . . . . . . . 10 SEC v. Management Dynamics, Inc., 515 F.2d 801 (2d Cir. 1975). . . . . . . . . . . . 49 SEC v. Manor Nursing Ctrs., Inc., 458 F.2d 1082 (2d Cir. 1972). . . . . . . . . . . . . . 6 SEC v. Murphy, 626 F.2d 633 (9th Cir. 1980). . . . . . . . . . . . . . . . . . . . . . . . . . 29, 30 SEC v. Netelkos, 592 F. Supp. 906 (S.D.N.Y. 1984). . . . . . . . . . . . . . . . . . . . . . . 57 SEC v. Phan, 500 F.3d 897 (9th Cir. 2007). . . . . . . . . . . . . . . . . . . . . . . . . . . 6, 7, 29 passim SEC v. Platforms Wireless Intl, Corp., 617 F.3d 1072 (9th Cir. 2010). . . . . . 6, 7, 8 passim SEC v. Ralston Purina Co., 346 U.S. 119 (1953). . . . . . . . . . . . . . . . . . . . . . 5, 6, 29

-ix-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 10 of 103

TABLE OF AUTHORITIES (Continued) Page SEC v. Rogers, 790 F.2d 1450 (9th Cir. 1986), overruled on other grounds, Pinter v. Dahl, 486 U.S. 622 (1988). . . . . . . . . . . . . . . . . . . . 30, 31 SEC v. Universal Major Indus. Corp., 546 F.2d 1044 (2d Cir. 1976). . . . . . . . . . . 6 Shearson Lehman Hutton Holding Inc. v. Coates Sales, Inc., 697 F. Supp. 639 (S.D.N.Y. 1988). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 Swenson v. Engelstad, 626 F.2d 421(5th Cir. 1980). . . . . . . . . . . . . . . . . . . . . . . . 52 Tatum v. City and County of San Francisco, 441 F.3d 1090 (9th Cir. 2006). . 37, 42 Travis Inv. Co. v. Harwyn Publg Corp., 288 F. Supp. 519 (S.D.N.Y. 1968). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61, 62 USA Petroleum Co. v. Atlantic Richfield Co., 13 F.3d 1276 (9th Cir. 1994). . . . . 32 United States v. Kordel, 397 U.S. 1 (1970).. . . . . . . . . . . . . . . . . . . . . . . . 39, 44, 45 United States v. Lalley, 317 F.3d 875 (8th Cir. 2003). . . . . . . . . . . . . . . . . . . . . . . 66 United States v. Private Sanitation Ind. Assn, 811 F. Supp. 807 (E.D.N.Y. 1992). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 United States v. Stringer, 535 F.3d 929 (9th Cir. 2008). . . . . . . . . . . . . . . 44, 45-46 United States v. Teyibo, 877 F. Supp. 846 (S.D.N.Y. 1995). . . . . . . . . . . . . . . . . 46 Wassel v. Eglowsky, 399 F. Supp. 1330 (D. Md. 1975). . . . . . . . . . . . . . . . . . 53, 56 Wonsover v. SEC, 205 F.3d 408 (D.C. Cir. 2000) . . . . . . . . . . . . . . . . . . . . . . . . . 34 Zacharias v. SEC, 569 F.3d 458 (D.C. Cir. 2009). . . . . . . . . . . . . . . . . . . . . . . 8, 30

-x-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 11 of 103

TABLE OF AUTHORITIES (Continued) Statutes and Rules Securities Act of 1933, 15 U.S.C. 77a, et seq. Section 2(a)(11), 15 U.S.C. 77b(a)(11). . . . . . . . . . . . . . . . . . . . . . . 8, 10, 12 Section 4(1), 15 U.S.C. 77d(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3, 7, 8 passim Section 4(2), 15 U.S.C. 77d(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Section 5, 15 U.S.C. 77e. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2, 3, 6 passim Section 5(a), 15 U.S.C. 77e(a). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Section 5(c), 15 U.S.C. 77e(c). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Section 7(a), 15 U.S.C. 77g(a). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Section 12, 15 U.S.C. 77l. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Section 20(b), 15 U.S.C. 77t(b). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Schedule A, 15 U.S.C. 77aa. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Securities Exchange Act of 1934, 15 U.S.C. 78a, et seq. Section 3(a)(18), 15 U.S.C. 78c(a)(18).. . . . . . . . . . . . . . . . . . . . . . . . . 50, 51 Section 3(a)(49), 15 U.S.C. 78c(a)(49).. . . . . . . . . . . . . . . . . . . . . . . . . 50, 51 Section 17A(a)(1), 15 U.S.C. 78 q-1(c). . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Section 17A(c), 15 U.S.C. 78 q-1(c).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Section 21(h)(9)(B), 15 U.S.C. 78u(h)(9)(B). . . . . . . . . . . . . . . . . . . . . . . . 44 28 U.S.C. 636(b)(1)(A). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Rules under the Securities Act of 1933, 17 C.F.R. 230.100, et seq. Rule 144(a)(3)(i), 17 C.F.R. 230.144(a)(3)(i). . . . . . . . . . . . . . . . . . . . . . . . 9 Rule 144(b), 17 C.F.R. 230.144(b). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Rule 144(d)(1), 17 C.F.R. 230.144(d)(1). . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Rule 144(d)(3), 17 C.F.R. 230.144(d)(3). . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Regulation D, Rule 502(d)(3), 17 C.F.R. 230.502(d)(3). . . . . . . . . . . . . . 12 Page

-xi-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 12 of 103

TABLE OF AUTHORITIES (Continued) Page Rule 144(k), 17 C.F.R. 230.144(k). . . . . . . . . . . . . . . . . . . . . . . . . . . 9, 10, 13 passim Rule 144(k), 17 C.F.R. 230.144(k) (Preliminary Note). . . . . . . . . . . . . . . . 10 Rules under the Securities Exchange Act of 1934, 17 C.F.R. 240.0-1, et seq. Rule 17Ad-1(d)(i), 17 C.F.R. 240.17Ad-1(d)(I).. . . . . . . . . . . . . . . . . . . . . Rule 17Ad-1(i), 17 C.F.R. 240.17Ad-1(i) . . . . . . . . . . . . . . . . . . . . . . . . . . Rule 17Ad-5, 17 C.F.R. 240.17Ad-5. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rules 17A-9a(a)(1) to (8) .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rule 17Ad-9(b), 17 C.F.R. 240.17Ad-9(b). . . . . . . . . . . . . . . . . . . . . . . . Rule 17Ad-10(a)(1), 17 C.F.R. 240.17Ad-10(a)(1). . . . . . . . . . . . . . . . . . . Rule 17A-10(f), 17 C.F.R. 240.17A-10(f) .. . . . . . . . . . . . . . . . . . . . . . . Rule 17Ad-2(a), 17 C.F.R. 240.17Ad-2(a). . . . . . . . . . . . . . . . . . . . . . . . . . Uniform Commercial Code UCC8-401. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13, 60 UCC 8-401(1)(e). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 UCC 8-407. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13, 60 UCC 8-503, cmt.3. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 Nevada Revised Statutes Nev. Rev. Stat. Section 104.8401. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Nev. Rev. Stat. Section 104.8401, cmt. 1. . . . . . . . . . . . . . . . . . . . . . . . . . . Nev. Rev. Stat. Section 104-8401(1)(g). . . . . . . . . . . . . . . . . . . . . . . . . . . . Nev. Rev. Stat. Section 104.8407 (2011). . . . . . . . . . . . . . . . . . . . . . . . . . . Federal Rules of Civil Procedure Fed. R. Civ. P. 56(f), now 56(d). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Fed. R. Civ. P. 72(a). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 60 60 60 60 60 62 62 62 62 62 62 60

-xii-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 13 of 103

TABLE OF AUTHORITIES (Continued) Page Fed. R. Crim. P. 6(e). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Miscellaneous Robert A. Barron, Some Comments on the Removal of Restrictive Legends, 34, No. 4 Securities Regulation Law Journal 4 (2006) . . . . . . . . 13 4 James D. Cox & Thomas Lee Hazen, Treatise on the Law of Corporations 28:7 (3d ed. 2011). . . . . . . . . . . . . . . . . . . . . . . . . . 13-14, 61 Defrees, Fiske, Voland, Alberts & Hoffman, SEC Staff Interpretive Letter, 1972 WL 8182 (April 12, 1972). . . . . . . . . . . . . . . . . . 53 Distribution by Broker-Dealers of Unregistered Securities, Securities Act Release 4445, 1962 WL 69442 (Feb. 2, 1962). . . . . . . . . . . 34 William Meade Fletcher, 12 Fletcher Cyclopedia of the Law of Corporations 5527, available at Westlaw FLETCHERCYC 5527 (Thomsen Reuters 2011).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 Guidelines, Securities Transfer Association, 1.23 & 13-A (January 2011).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 28 Egon Guttman, Modern Stock Transfers 7:8 (4th ed. 2011).. . . . . . . . 12, 51, 62 1 Thomas Lee Hazen, Law of Securities Regulation 2.2[1] (6th ed. 2012) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6, 30, 49 passim H.R. Rep. No. 88-1418 (1964). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50-51 Robert J. Haft & Michele H. Hudson, Due Diligence 6:26, available at Westlaw DUEDILSEC (Thomson Reuters 2012). . . . . . . . . . 66

-xiii-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 14 of 103

TABLE OF AUTHORITIES (Continued) Page Louis Loss, Joel Seligman & Troy Paredes, Securities Regulation (Wolters Kluwer 2011). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12, 13, 33 passim Notice of Adoption of Rule 144, Securities Act Release No. 5223, 1972 WL 121583 (Jan. 11, 1972) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11, 12 OTC Markets Group Inc. (formerly known as Pink OTC Markets Inc., available at http://www.sec..gov/answers/pink.htm. . . . . . . . . . . . . . . . . . 14 Andrew Downey Orrick, Registration Problems Under the Federal Securities ActResales Following Rule 133 and Exchange Transactions, 10 Hastings L. J. 1 (1958). . . . . . . . . . . . . . . . . . 34 Milton Pollack, Parallel Civil and Criminal Proceedings, 129 F.R.D. 201 (1989). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41, 43 Profile, Direct Registration Processing Guidelines, Securities Transfer Association 43 (Oct. 2004) .. . . . . . . . . . . . . . . . . . . . . 13 S. Rep. No. 100-105 (1987). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Use of Legends, Securities Act Release No. 5121, 1971 WL 120470 (Feb. 1, 1971).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

-xiv-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 15 of 103

UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT ________________________________________________________ No. 11-17021 SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, v. CMKM DIAMONDS, INC., Defendant, and 1st GLOBAL STOCK TRANSFER, LLC, and HELEN BAGLEY, Defendants-Appellants. ________________________________________________________ No. 11-17025 SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, v. CMKM DIAMONDS, INC, et al., Defendants, and BRIAN DVORAK, Defendant-Appellant. __________________________________________________________ On Appeal from the United States District Court for the District of Nevada ________________________________________________________________ BRIEF OF THE SECURITIES AND EXCHANGE COMMISSION, APPELLEE ________________________________________________________________

PRELIMINARY STATEMENT These appeals arise from a civil law enforcement action brought by the Securities and Exchange Commission (Commission or SEC) against fourteen

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 16 of 103

defendants for operating an extensive scheme to sell unregistered securities of CMKM Diamonds, Inc. (CMKM) in the market. Prior to the sales, some of the defendants, who are not parties to these appeals, caused the price of the companys stock to increase artificially by disseminating false information about the company. In all, tens of thousands of investors lost over $64 million. The district court has issued judgments as to all of the defendants, finding them liable under provisions of the federal securities laws. The two appeals here concern the final three defendants against whom the district court entered judgment: 1st Global Stock Transfer, LLC (Global), Helen Bagley, and Brian Dvorak. The Commission alleged that Global, Bagley, and Dvorak enabled the sale of billions of unregistered shares of CMKM securities in violation of the registration requirements of Section 5 of the Securities Act of 1933, 15 U.S.C. 77e. SA 3A.1/ Specifically, Dvorak, as attorney for CMKM, wrote opinion letters stating that the stock transactions would be exempt from the registration requirements even though he had no evidence that the named holders of the stock, who purportedly purchased from CMKM, had ever paid for the stock, a requirement to satisfy Rule 144(k), the claimed safe harbor that would have SA__ refers to the Statutory Addendum to this brief. App.___ refers to the Appendix submitted by 1st Global and Bagley, and Exc.___ refers to the record excerpts submitted by Dvorak.
-3-

1/

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 17 of 103

allowed reliance on Section 4(1), 15 U.S.C. 77d(1), an exemption from registration. Bagley, the owner of CMKMs transfer agent, Global, caused the billions of shares of CMKM stock to be issued without restrictive legends, thereby allowing the shares to be sold to the public without the required registration. Global and Bagley did so in the face of obvious red flags indicating an ongoing illegal unregistered distribution. The district court granted summary judgment in favor of the Commission, holding Dvorak, Global, and Bagley liable for participating in an unregistered securities distribution in violation of Section 5. Each was permanently enjoined from violating Section 5 and ordered to pay disgorgement of illegal profits with pre-judgment interest. The court also barred Bagley and Dvorak from participating in penny stock offerings. Dvorak, who did not file an opposition to summary judgment, argues that the district court abused its discretion in denying his motion to stay this civil action pending the outcome of a parallel criminal action, United States v. Edwards, et al., Case No. 09-cr-00132 (D. Nev.). He contends that his Fifth Amendment right against self-incrimination was impaired when this civil action was allowed to continue at the same time as the criminal proceeding, even though he had already submitted to having his investigatory testimony and deposition
-4-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 18 of 103

taken. Dvorak also argues, contrary to the evidence, that he was unwittingly used by others. Global and Bagley contend that the district court erred in granting summary judgment against them because, as CMKMs transfer agent, Global was dutybound by state law to follow the instructions of CMKM and its lawyer, regardless of the presence of obvious red flags indicating that an illegal distribution of securities was in progress. As we show in this brief, the appellants arguments are without merit. STATEMENT OF JURISDICTION The Commission agrees with the jurisdictional statements of the appellants. COUNTERSTATEMENT OF THE ISSUES 1. Whether the district court acted within its discretion in denying Dvoraks motion for a stay of this civil action pending the outcome of a parallel criminal prosecution where, as the district court found, the burden on his Fifth Amendment rights was negligible because Dvorak had already given investigatory testimony and his deposition. 2. Whether the district court correctly granted summary judgment against Dvorak where the undisputed facts demonstrate he wrote opinion letters falsely stating that CMKM stock transactions would be exempt from registration, when he
-5-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 19 of 103

had no evidence of the existence of a critical prerequisite for the claimed exemption. 3. Whether the district court correctly granted summary judgment against Global and Bagley where they issued hundreds of billions of shares of CMKM stock without restrictive legends in the face of red flags indicating that they were facilitating an illegal distribution. COUNTERSTATEMENT OF THE CASE A. The Regulatory Scheme 1. Section 5 of the Securities Act

The registration provisions of the Securities Act contemplate that the offer and sale of securities to the public must be accompanied by the full and fair disclosure afforded by registration with the Commission and delivery of a statutory prospectus containing information necessary to enable prospective purchasers to make an informed investment decision. SEC v. Ralston Purina Co., 346 U.S. 119, 124 (1953). Under the requirements of Sections 5(a) & (c) of the Securities Act, a security cannot be offered before a registration statement is filed with the Commission, and a sale cannot be made until the registration statement has become effective. Registration entails disclosure of detailed information bearing on the value of the securities, including the issuers financial condition,
-6-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 20 of 103

investment risks, the identity and background of management, and the price and amount of securities offered. See Section 7(a) and Schedule A, 15 U.S.C. 77g and 77aa; SEC v. Manor Nursing Ctrs., Inc., 458 F.2d 1082, 1098 (2d Cir. 1972); see also SEC v. Platforms Wireless Intl, Corp., 617 F.3d 1072, 1085 (9th Cir. 2010). The registration statement is central to the Acts comprehensive scheme for protecting public investors. SEC v. Aaron, 605 F.2d 612, 618 (2d Cir.1979), vacated on other grounds, 446 U.S. 680 (1980). To establish a prima facie violation of Section 5, the Commission must show that the defendant directly or indirectly participated in the offer or sale of securities in unregistered transactions and that the mails or interstate means were used. See Platforms Wireless, 617 F.3d at 1086; SEC v. Phan, 500 F.3d 897, 908 (9th Cir. 2007). The Commission need not prove scienter, i.e., an intent to deceive. See SEC v. Universal Major Indus. Corp., 546 F.2d 1044, 1047 (2d Cir. 1976); 1 Thomas Lee Hazen, Law of Securities Regulation 2.2[1] (6th ed. 2012) (Hazen hereinafter); see also SEC v. Holschuh, 694 F.2d 130, 137 n. 10 (7th Cir. 1982). Once a prima facie case is established, the burden then shifts to the defendant to prove that the offer and sale transactions were exempt from the registration requirements. Ralston Purina, 346 U.S. at 126; Platforms Wireless, 617 F.3d at 1086.
-7-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 21 of 103

2.

The Section 4(1) exemption from registration

Section 5, by its terms, is all embracing; it prohibits the offer or sale of unregistered securities. See Phan, 500 F.3d at 902. Through exemptive provisions, however, Congress distinguished between (1) non-exempt distributions of securities to the public by the issuer of the securities or by persons in a control relationship with the issuer, which violate Section 5, and (2) exempt trading transactions in the market between investors. See SEC v. Chinese Consol. Benev. Assn, 120 F.2d 738, 741 (2d Cir. 1941). In drawing this distinction between distributions and trading, Congress required registration not only where securities are sold to the public by the issuer, but also where an intermediary, or underwriter, has bought the security from the issuer or control person with a view to public resale, or where an intermediary sells for the issuer or control person. See Platforms Wireless, 617 F.3d at 108687. Berkeley Inv. Group, Ltd. v. Colkitt, 455 F.3d 195, 214 (3d Cir. 2006). In order to require registration for public distributions of securities by the issuer, its control persons and intermediaries, and at the same time exempt trading transactions, Section 4(1) exempts from the registration provisions transactions by persons other than the issuer, an underwriter, or dealer, and Section 4(2) exempts transactions by an issuer not involving any public offering, Section 4(2), 15 U.S.C.
-8-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 22 of 103

77d(1) & (2). SA 1. These provisions exempt transactions, not persons. Thus, for example, if a person involved in a transaction is an underwriter, none of the persons involved may claim exemption for the transaction under Section 4(1). See SEC v. Kern, 425 F.3d 143, 152 (2d Cir. 2005); Zacharias v. SEC, 569 F.3d 458, 463 (D.C. Cir. 2009). Underwriter, as defined in Section 2(a)(11), is the statutory device by which Congress subjected control persons and intermediaries transactions to registration. It broadly defines underwriter to mean: any person who has purchased from an issuer [or from a control person] with a view to, or offers or sells for an issuer [or control person] in connection with, the distribution of any security, or participates or has a direct or indirect participation in any such undertaking, or participates or has a participation in the direct or indirect underwriting of any such undertaking * * *. 15 U.S.C. 77b(a)(11), SA 1A; see Platforms Wireless, 617 F.3d at 1086-87. A distribution, as that term is used in Section 2(a)(11), is a public offering of securities. Gilligan, Will & Co. v. SEC, 267 F.2d 461, 466 (2d Cir. 1959). It refers to the entire process in a public offering through which a block of securities is dispersed and ultimately comes to rest in the hands of the investing public. Geiger v. SEC, 363 F.3d 481, 487 (D.C. Cir. 2004).

-9-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 23 of 103

3.

Commission Rule 144(k)

In this case, an attorney wrote opinion letters falsely stating that the Rule 144(k) safe harbor (17 C.F.R. 230.144(k)) was available for certain securities transactions, and that the securities could therefore be offered and sold publicly without registration in reliance on Section 4(1). SA 1A; Platforms Wireless, 617 F.3d at 1086. During the relevant period in this case, Commission Rule 144(k) provided a means for ensuring availability of the Section 4(1) exemption. The Commission adopted Rule 144 to provide greater certainty for persons who acquire restricted securities from the issuer, or from a control person (referred to as an affiliate of the issuer in the Rule), and later seek to resell those securities in public transactions without registration.2/ Such persons, in the absence of a safe harbor provision like Rule 144(k), may be seen as acquiring securities with a view to distribution and thus be considered underwriters when they seek to resell. While Rule 144(k) was in effect, a person satisfying all the conditions of that provision was deemed not to be engaged in a distribution of securities and therefore not an underwriter of securities within the meaning of Section 2(a)(11).
2/

Restricted securities include securities acquired directly or indirectly from the issuer, or from an affiliate of the issuer, in a transaction or chain of transactions not involving any public offering. Rule 144(a)(3)(i). 17 C.F.R. 230.144(a)(3)(i).
-10-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 24 of 103

See 17 C.F.R. 230.144(k) (Preliminary Note). Rule 144(k) was designed to be a means of satisfying the Section 4(1) exemption. See Platforms Wireless, 617 F.3d at 1086-87. For a sale of restricted securities to satisfy Rule 144(k), a seller had to meet two conditions. Kern, 425 F.3d at 148-49. First, the person selling the restricted securities could not have been an affiliate of the issuer at the time of the resale, or during the preceding three months. Second, at least two years must have elapsed since the later of the date the securities were acquired from the issuer or an affiliate of the issuer. If a seller asserting a Rule 144(k) safe harbor failed to meet either of these requirements, he was not entitled to claim the safe harbor in Rule 144(k). Conversely, if both conditions of Rule 144(k) were met, a seller who acquired stock from an affiliate or issuer would not be deemed an underwriter and could sell his stock in reliance on Section 4(1). See 17 C.F.R. 230.144(k); SEC v. M & A West, Inc., 538 F.3d 1043, 1051 (9th Cir. 2008).3/ For purposes of these appeals, the relevant requirement was that the twoyear holding period did not begin to run until the securities were acquired. Under Rule 144(d)(1), the holding period for securities acquired by purchase shall not

3/

The conditions that non-affiliates are required to meet for the sale of their securities under Rule 144 are now found in Rule 144(b).
-11-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 25 of 103

begin until the full purchase price or other consideration is paid or given by the person acquiring the securities from the issuer or from an affiliate of the issuer. Rule 144(d)(1), 17 C.F.R. 230.144(d)(1); see also American Sec. Transfer, Inc. v. Pantheon Indus. Inc., 871 F. Supp. 400, 405 (D. Colo. 1994). Securities acquired from the issuer pursuant to a stock split, reverse stock split, recapitalization, or dividend are deemed to have been acquired at the same time as the underlying securities. Rule 144(d)(3), 17 C.F.R. 230.144(d)(3). The holding period is designed to assure that the registration provisions of the Act are not circumvented by persons acting, directly or indirectly, as conduits for an issuer in connection with the resale of securities. Notice of Adoption of Rule 144, Securities Act Release No. 5223, 1972 WL 121583 at *6 (Jan. 11, 1972) (Adopting Release). 4. Transfer agents, restrictive legends, and attorney opinion letters

Companies that have publicly traded securities use transfer agents to keep track of the individuals and entities that own the companys securities. One of the primary functions of transfer agents is to record, or register, stock in the name of the new owner when stock is transferred to the purchaser of stock.4/

4/

The term register, as used in this sense, means record ownership of a security and is not to be confused with registration of securities under the federal securities laws.
-12-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 26 of 103

Shares sold by the issuer or by control persons outside of a registered public offering typically include a restrictive legend placed on the face of the certificate, which states that the security has not been registered under the Securities Act and may be offered and sold only if registered pursuant to the Act or if an exemption from registration is available. Use of Legends, Securities Act Release No. 5121, 1971 WL 120470, at *2 (Feb. 1, 1971). The use of restrictive legends has been recognized by the Commission as important to compliance with Section 5. When it adopted Rule 144, the Commission emphasized that restrictive legends serve a useful policing function, and the use of such devices is strongly suggested by the Commission. 1972 Adopting Release for Rule 144, 1972 WL 121583, at *11-12; see also Use of Legends, supra, 1971 WL 120470, at *2; 3 Loss, 396, 414.5/ When the requirements for the Rule 144(k) safe harbor had been met, the holder could legally resell the securities to the public in reliance on Section 4(1). At the time of the resale, or shortly thereafter, the transfer agent registered the stock in the name of the purchaser and removed the restrictive legend by issuing a

5/

The use of restrictive legends is a long-established industry practice. See Use of Legends, supra, 1971 WL 120470, at *1. The Commission has identified the use of such legends as one means of ensuring that purchasers in private placements do not act as underwriters within the meaning of Section 2(a)(11). See Regulation D, Rule 502(d)(3), 17 C.F.R. 230.502(d)(3).
-13-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 27 of 103

certificate to the new owner without the restrictive legend. See 28 Egon Guttman, Modern Stock Transfers (Guttman hereinafter) 7:8 (4th ed. 2011). A securities holder might also wish to have a restrictive legend removed in advance of a sale in order to make the stock more salable and to prevent delay once the stock was sold. Robert A. Barron, Some Comments on the Removal of Restrictive Legends, 34, No. 4 Securities Regulation Law Journal 4 (2006) (Barron hereinafter). In order to have a restrictive legend removed, it is common business practice to obtain an opinion letter from the issuers counsel advising the transfer agent that the requirements for an exemption from registration have been met. See Guidelines, Securities Transfer Association, 1.23 & 13-A (January 2011); see also, Barron, at 4; cf. Profile, Direct Registration Processing Guidelines, Securities Transfer Association 43 (Oct. 2004) (opinion letter required for electronic transfer of restricted securities). The issuers counsel must be satisfied that the stock may be sold in compliance with Rule 144(k), or another available exemption, before authorizing the issuers stock transfer agent to remove the restrictive legend. See Barron, supra; accord 3 Loss, 1 and n.8. Uniform Commercial Code (UCC) Section 8-401 lists several conditions that must be present before an issuer registers a transfer, including the removal of a restrictive legend. Section 8-407extends right and duties similar to those of the
-14-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 28 of 103

issuer to transfer agents. Under Section 8-401, a transfer agent has the right to refuse to register a wrongful transfer. See UCC 8-401(1)(e), SA 17; see also 4 James D. Cox & Thomas Lee Hazen, Treatise on the Law of Corporations 28:7 (3d Ed. 2011). As explained, infra p. 60-61, a wrongful transfer includes a sale that violates Section 5. B. Facts 1. Overview of the scheme to sell unregistered securities

CMKM was a publicly held Nevada corporation. Its common stock was quoted in the Pink Sheets.6/ App.62, 1; App.130, 11. From January 2003 through May 2005, the defendantseleven individuals and three entities participated in a scheme to issue billions of shares of CMKM stock and then sell the stock to the public without registration. The sales were made at prices that
6/

The term Pink Sheets refers to an electronic quotation system (now called OTC Link) operated by OTC Markets Group Inc., a privately owned company, that displays quotations from broker-dealers for many over-thecounter (OTC) securities. Pink comes from the color of the paper on which the quotes were historically printed. OTC Markets Group Inc. does not require companies whose securities are quoted upon its system to meet any listing requirements. The quoted companies tend to be closely held, extremely small and/or thinly traded. Many of these companies do not file periodic reports or audited financial statements with the SEC, making them potentially among the most risky investments. OTC Markets Group Inc. (formerly known as Pink OTC Markets Inc.), available at http: //www. sec. gov/ answers/ pink. htm.
-15-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 29 of 103

were fraudulently inflated by some of the defendants who are not parties to these appeals7/ conduct that is commonly referred to as a pump and dump scheme. At the center of the scheme were John Edwards, the mastermind of the effort, and Urban Casavant, the Chairman and CEO of CMKM. While CMKMs stock was trading at between $0.0001 and $0.001, Edwards, Casavant, and their nominees sold billions of shares into the public markets. As a result of the alleged misconduct, approximately 40,000 investors lost at least $64.2 million. Edwards initiated the scheme by arranging for a merger between a public company controlled by him, CMKM, and several private Canadian companies controlled by Casavant. In exchange for $2 million and 2.8 billion shares of CMKM common stock, CMKM acquired worthless mineral claims in Canada owned by Casavants companies. Casavant then became CEO and chairman of CMKM, while Edwards served as the director of post-merger matters. From November 2002 through August 2004, Edwards and Casavant caused CMKMwhich purported to be in the diamond mining businessto increase the number of its authorized shares from 500 million to 10.5 billion and eventually to 800 billion. CMKM, however,

7/

The factual background concerning the overall scheme to sell the securities was taken from SEC v. CMKM Diamonds, Inc., 635 F. Supp. 2d 1185, 118889 (D. Nev. 2009). The appellants do not dispute that there was a large scale offering of securities in violation of Section 5.
-16-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 30 of 103

had no legitimate operations. Its only activities were illegally issuing and falsely promoting its own stock. To carry out the scheme, it was essential for Edwards and Casavant to have huge numbers of ostensibly unrestricted CMKM shares to sell in the market. Since the stock was selling for only $0.0001 at one point, billions, as opposed to millions, of shares of CMKM stock would need to be sold if any substantial profit was to be realized. But stock issued outside of a registered public offering could not be sold to the public by Edwards and Casavant without violating the registration provisions of the Securities Act. Thus, Edwards and Casavant had to find a way to obtain great quantities of stock to sell to the public while making it appear that the stock qualified for an exemption from registration. This is where Dvorak, Global, and Bagley played crucial roles in the scheme. 2. Dvorak wrote about 450 opinion letters falsely stating that the CMKM shares were exempt from registration.

During the relevant period, Dvorak acted as CMKMs attorney. At Casavants instructions, Dvorak, who operated a website with the address www.144opinionletters.com, prepared opinion letters supporting the issuance of CMKM shares without restrictive legends to purported shareholders who were actually nominees of Edwards. App.63, 4-5; App.67-69, 20-23, 29; App.7677; 61-67, 71; App.212 at 95-96. Pursuant to Casavants instructions, Dvorak
-17-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 31 of 103

received CMKM stock certificates from Global that generally had been newly issued. App.219 at 155-57. Dvorak then wrote opinion letters telling Global that the stock certificates could be reissued without legends. App.219 at 155-57. The opinion letters stated that the restrictive legend was no longer required because the stock was exempt from registration under Rule 144(k). According to the opinion letters, Rule 144(k) was applicable because the shares actually had been purchased at least two years earlier, thereby satisfying the holding period of the rule. The letters stated, without explanation, that the shares had not been issued by CMKM at the time of purchase. According to the opinion letters, the shares should have been issued two years earlier to the purported purchasers because Casavant claimed they invested in CMKM at that time, performed services for CMKM at that time, or were entitled to the shares by way of a 100-for-1 stock split. App.217-20 at 149-61. In August and September 2004 alone, Dvorak received instructions regarding 233.7 billion shares of stock that were to be issued without restrictive legends to 258 individuals. Casavant claimed that each of these individuals should have received the stock two or more years earlier. App.66, 14; App.103-04 at 33-34; App.123 at 9. In all, on over 400 occasions, CMKM purportedly failed to

-18-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 32 of 103

issue stock that should have been issued two years earlier. App.67, 19; App.231 at 141. It seemed odd to Dvorak that the company had failed to issue stock on so many occasions. App.231 at 141. Dvorak requested, in writing, back up documentation from CMKM to verify that the stock had in fact been paid for, two years earlier, by the persons and entities to whom the stock was purportedly owed. Dvorak requested subscription agreements, canceled checks, and receipts evidencing payment for the shares. App.67, 20; App.213 at 115-16. But Dvorak did not receive anything to verify payment for the stock. App.213 at 116-17. Indeed, Casavant told Dvorak that he did not have records indicating what CMKM had done with regard to issuing shares. App.67, 25; App.219 at 157. Dvorak testified that he was most dubious about the opinion letters supporting the exemption of shares issued pursuant to the 100-for-1 stock split that had purportedly taken place at an earlier time. Dvorak testified: I screamed and yelled about this isnt going to happen without back[up] and got back up. App.69, 29; App.231 at 141-42. But Dvorak received no verification that the stock split had taken place other than board minutes. Dvorak testified that he helped create at least some of the board minutes (not necessarily those related to

-19-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 33 of 103

the stock split) at the same time that he was writing the opinion letters. App.231 at 141-42. Dvorak knew that CMKM had no assets, that CMKM was operating out of Casavants home, and that Casavant had a [s]erious gambling problem, and Dvorak referred to Casavant as a drunk. App.68-70, 26, 27, 32, 33, 34, 35; App.220 at 159; App.221 at 308-09; App.223 at 359; 252 at 175. Nevertheless, Dvorak set aside his concerns about whether the stock split had actually ever been purchased, or whether the stock had occurred, and wrote over four hundred opinion letters without obtaining the supporting documentation he requested. App.68, 25; App.213 at 115-17; App.219 at 157. Dvorak explained that conversations with people led him to believe Casavant was solid because Casavant had property. He had money. He had signing power at the Venetian [hotel in Las Vegas] all the time. He had rooms * * * . App.68, 24; App.213 at 117. Approximately 90% of Dvoraks income for 2004 came from his work related to CMKM, which was his only client. App.228 at 34-35. During the relevant period, Dvorak received $318,843 from the other defendants in this action for his participation in the scheme. App.257, 349. This amount included

-20-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 34 of 103

$157,500 for writing at least 450 opinion letters at $350 per letter. App.80, 88; App.214; App.215 at 135. 3. Global and Bagley issued CMKM stock certificates without restrictive legends.

Global began serving as CMKMs transfer agent in 2002. App.63, 6; App.99, 20; App.130 13.8/ As transfer agent for CMKM, it was notified on several occasions that CMKM had authorized huge increases in the number of its shares until the number of shares authorized reached approximately 800 billion shares. App.72, 42; App.102, 35, App.132, 21. As CMKMs transfer agent, over a period of twenty months Global caused the issuance of up to 622 billion shares of purportedly unrestricted CMKM stock based on attorney opinion letters. App.71, 37; App.96, 5, App.105 at 41; App.129, 5; App.133, 26. In 2004, when the number of issued shares was 499 billion, Bagley caused Global to issue an additional 279 billion purportedly unrestricted shares of CMKM shares, bringing the total number of outstanding shares to 778 billion. App.73, 46, 47; App.102 36; App.132, 22; App.242-43 at 216-218. Global and Bagley issued these additional shares based on Dvoraks opinion letters. Id. Bagley testified that she understood from the opinion letters
8/

Global registered with the Commission under Exchange Act Section 17A(c), 15 U.S.C. 78 q-1(c), as a transfer agent in October 2001. App.3, 6; App.99, 20; App.130, 13.
-21-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 35 of 103

that these sharesamounting to 35% of total outstanding CMKM stockshould have been issued two years earlier, thereby meeting the holding period of Rule 144(k). App.243 at 217-18. Bagley had her doubts that all these shares should really have been issued two years earlier. Id. And Bagley thought it strange that the company had issued so many shares. App.74, 50; App.245 at 228-29. Indeed, she testified that nothing the company did made any sense to her. App.73, 46, 47; App.242 at 216-218. Bagley relied on Dvoraks opinion letters despite the fact that she appears to have had so little confidence in Dvoraks integrity that she eventually asked that opinion letters from Dvorak be confirmed by another attorney to be hired by CMKM. App.74, 49; App.240 at 123-24. But the opinions of the second attorney expressly relied on Dvoraks opinion letters, including the opinion that the shares met the requirements of Rule 144(k). App.492-93. Therefore, by relying on the second attorneys opinion, Global and Bagley necessarily relied on Dvoraks letters. Bagley testified that over 50% of Globals income came from CMKM in 2005. App.81, 90, 91; App.237 at 31; App.239 at 31; App.239 at 59-60. Based on a financial accounting undertaken by the Commission, Global and Bagley

-22-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 36 of 103

received a total of $302,500 from other defendants in this action because of their participation in the unregistered offerings. App.259, 20. Much of this money came from two brokers who sold CMKM stock for Edwards. App.259, 20; App.391, 393-410. C. Proceedings Below After entry of judgments against other defendants, the Commission moved for summary judgment against Dvorak, Global, and Bagley in December 2010.9/ Dvorak did not file an opposition to the Commissions motion for summary judgment. Instead, he sought a stay of this civil action pending the outcome of a parallel criminal case. Global and Bagley opposed summary judgment, primarily on the ground that a transfer agent is duty-bound to follow the instructions of the issuer and to rely on opinion letters of the issuers counsel. On April 7, 2011, the district court issued an order denying Dvoraks motion for a stay. The court determined that the incursion upon Dvoraks Fifth Amendment rights [is] negligible because Dvorak has already sat for a deposition * * * and nothing prevented him from giving information that did not tend to incriminate him. Exc.3.
9/

The Commission also successfully moved for summary judgment against Sergey Rumyantsev, who was the CEO of the broker-dealer through which much of the CMKM stock was sold. Rumyantsev did not appeal.
-23-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 37 of 103

In a second order, dated July 25, 2011, the district court granted summary judgment against Dvorak, Global, and Bagley. As to Dvorak, the court found that he was both a necessary participant and substantial factor in the sale of unregistered CMKM stock in violation of Section 5 because he wrote hundreds of opinion letters justifying the issuance of CMKM stock by falsely stating that the stocks were subject to a statutory exemption. App.592-93. The district court also granted summary judgment against Global and Bagley, finding that but for their participation in removing the restrictive legends, there would not have been a sale of unregistered securities because the CMKM stock would still have a restrictive legend on each certificate. App.593. As to their contention that they acted reasonably, the court concluded that this argument failed to raise a dispute of material fact because, according to the court, Section 5 is a strict liability provision. Id. In responding to the defense of good-faith reliance on counsel and counsels opinion letters, the court stated that the evidence before the court established that the defendants believed that Dvoraks opinion letters were not supported by the law and requested CMKM to find another to write opinion letters supporting the removal of the restrictive legends. And after requesting a different attorney, defendants continued to remove

-24-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 38 of 103

restrictive legends from CMKM stock based on Dvoraks unsupported opinion letters. App.594. STANDARD OF REVIEW This Court reviews the district courts grant of summary judgment de novo. E.g., Comite de Jornaleros le Redondo Beach v. City of Redondo Beach, 657 F.3d 936, 942 (9th Cir. 2011), cert. denied, 80 U.S.L.W. 3404 (U.S. Sept. 16, 2011) (No. 11-760); Samuels v. Holland American Line-USA Inc., 656 F.3d 948, 951 (9th Cir. 2011). [S]ummary judgment is proper if the pleadings, depositions, answers to interrogatories and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law. Iko v. California State Board of Equalization, 651 F.3d 1049, 1052 (9th Cir. 2011) (quoting Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986)). In making this determination, conflicts are resolved by viewing all the facts and reasonable inferences in the light most favorable to the non-moving party. Id. But a factual dispute must be genuine. A non-moving party can defeat summary judgment only by producing evidence such that a reasonable jury could return a verdict in his or her favor. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). The central issue is whether the evidence presents a sufficient disagreement to require submission to a jury or

-25-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 39 of 103

whether it is so one-sided that one party must prevail as a matter of law. Samuels v. Holland American Line-USA, Inc., 656 F.3d at 952 (quoting Anderson, 477 U.S. at 251-52). This Court reviews a denial of a stay of a civil proceeding, pending the outcome of a parallel criminal proceeding, for an abuse of discretion. FSLIC v. Molinaro, 889 F.2d 899, 902 (9th Cir. 1989). SUMMARY OF THE ARGUMENT A person may be held liable under Section 5, even though he or she did not distribute the securities to the public directly, if that person was a necessary participant and substantial factor in the illegal distribution. 1. The district court properly granted summary judgment against Dvorak

because the evidence shows that there is no genuine dispute that Dvorak violated Section 5. Indeed, Dvorak failed to oppose summary judgment and should not be allowed to contest summary judgment on appeal. Moreover, Dvorak was not, as he claims, fooled by other defendants. The undisputed facts show that Dvorak wrote opinion letters knowing that he had no evidence that the purported holders of the stock had ever paid for it. Without proof of payment, the stock could not satisfy the Rule 144(k) safe harbor because the two-year holding period required by the rule does not begin until payment is

-26-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 40 of 103

made. Nevertheless, after failing to get supporting documentation of payment, Dvorak put aside his concerns and wrote hundreds of opinion letters falsely stating that the Rule 144(k) safe harbor was applicable. Dvoraks was a necessary participant in the illegal distribution of CMKM stock because, but for his baseless opinion letters, the stock could not have been sold to the public. Dvorak was a substantial factor in the distribution because his opinion letters were crucial to the distribution. Nor did the district court act beyond its discretion in denying Dvoraks motion for a stay pending the outcome of a parallel criminal proceeding. While Dvorak contends that the continuation of this action threatens his Fifth Amendment rights, the district court correctly concluded that the burden on Dvoraks rights was negligible, since Dvorak had already provided the Commission with investigatory testimony and, after meeting with representatives of the Department of Justice, Dvorak provided deposition testimony. 2. The district court was also correct to grant the Commission summary

judgment against Global and Bagley. The undisputed facts show that Global and Bagley were necessary participants and a substantial factor in the illegal distribution of CMKM stock because they caused the issuance of hundreds of billions of unlegended shares of CMKM stock.

-27-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 41 of 103

This court and other courts have regularly concluded, like the district court concluded here, that neither negligence nor scienter is an element of a Section 5 violation. Global and Bagley nonetheless contend that transfer agents may be found liable under Section 5 only if they know or have reason to know they are participating in an illegal distribution. Even if, as Global and Bagley claim, there were a culpability requirement, the undisputed facts show that Global and Bagley knew or had reason to knowindeed, that they must have knownthat they were participating in an illegal distribution. Global and Bagley must have realized that CMKM had increased its number of authorized shares to 800 billion in preparation for a large public sale. Global and Bagley must have known that it was simply implausible for 258 people each to have waited over two years to claim, at about the same time, stock that was owed to them. Global and Bagley could not have believed 450 opinion letters that advised that on over 400 occasions stock was purchased and held for two years or longer, but not issued. Nor could they have believed that a company had failed to issue 279 billionor 35%of its outstanding shares of stock. It is simply too much of a coincidence for 35% of an issuers outstanding shares to suddenly appear and happen to meet the requirements for the Rule 144(k) safe harbor. Under these circumstances, any reasonable transfer agent

-28-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 42 of 103

would have known that the opinion letters were part of a blatant attempt to illegally evade the registration requirements. And, indeed, Bagley even conceded that she may have suspected an illegal offering was taking place. Globals and Bagleys argument that they were required by state law to transfer the CMKM stock is meritless. The UCC, as enacted in Nevada, provides that a transfer agent is not required to effectuate a transfer unless it is in fact rightful, and cases have consistently held that transfers in violation of the federal securities laws are wrongful.

-29-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 43 of 103

ARGUMENT I. A PERSON MAY BE LIABLE UNDER SECTION 5, EVEN THOUGH HE DID NOT DISTRIBUTE THE SECURITIES TO THE PUBLIC DIRECTLY, IF HE WAS A NECESSARY PARTICIPANT AND SUBSTANTIAL FACTOR IN THE DISTRIBUTION. As discussed above, Sections 5(a) and (c) make it unlawful to directly or indirectly offer or sell a security through the mails or interstate commerce if the security has not been registered, unless the transaction qualifies for an exemption from registration. See SEC v. Platforms Wireless, 617 F.3d at 1085; SEC v. Phan, 500 F.3d at 902. The district court noted that it is undisputed that no registration statement was filed as to the CMKM stock and that the companys stock was sold through interstate commerce and the mails. App.592 n.4. And appellants do not argue that an exemption was applicable, even though it is their burden to show that an exemption was applicable. Ralston Purina, 346 U.S. at 126; Platforms Wireless, 617 F.3d at 1086 (citing SEC v. Murphy, 626 F.2d 633, 641 (9th Cir. 1980)). The issue before the district court was whether Dvorak, Global, and Bagley indirectly sold or offered to sell CMKM stock , within the meaning of Section 5, because the appellants did not directly distribute shares to the public. App.592 n.4. It has been held repeatedly, however, that for the purposes of 5 the [defendants] do not have to be involved in the final step of the distribution to
-30-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 44 of 103

have participated in it. Zacharias v. SEC, 569 F.3d 458, 465 (D.C. Cir. 2009) (quoting Geiger v. SEC, 363 F.3d 481, 487 (D.C. Cir. 2004)); accord Phan, 500 F.3d at 906; SEC v. Calvo, 378 F.3d 1211, 1215 (11th Cir. 2004) (per curiam); SEC v. Holschuh, 694 F.2d 130, 140 (7th Cir. 1982); see also 1 Hazen, 2.2[1][A] and n.3. Indeed, [t]o hold that proof of direct contact is necessary would ignore and render meaningless the language of Section 5, which prohibits any person from directly or indirectly engaging in the offer or sale of unregistered securities, and would encourage violators to attempt to avoid liability by participating in all except the final steps of a planned offering. SEC v. Holschuh, 694 F.2d at 140 (emphasis in original). In light of the statutory intent to make persons liable who did not offer or sell the securities directly but nonetheless played a role in an illegal distribution, this Court has long held that a party who acts in furtherance of the distribution will be held liable for violating Section 5 if the party was a necessary participant and a substantial factor in an unregistered offer or sale. See SEC v. Murphy, 626 F.2d at 651-52; see also SEC v. Rogers, 790 F.2d 1450, 1456 (9th Cir. 1986), overruled on other grounds, Pinter v. Dahl, 486 U.S. 622 (1988).10/ The first
10/

Globals and Bagleys brief notes that in Pinter v. Dahl, 486 U.S. at 648-50 & n.25, the Supreme Court questioned the applicability of the necessary participant and substantial factor test in private actions brought under Section 12 of the Securities Act, 15 U.S.C. 77l. In Phan, 500 F.3d at 906,
-31-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 45 of 103

prong of this standard requires a defendants participation to be a but for cause of the unlawful sale, and the second requires the participation to be more than de minimis. SEC v. Rogers, 790 F.2d at 1456. II. RESPONSE TO DVORAKS BRIEF: THE DISTRICT COURT PROPERLY GRANTED THE COMMISSIONS MOTION FOR SUMMARY JUDGMENT AGAINST DVORAK AND ACTED WITHIN ITS DISCRETION IN DENYING DVORAKS MOTION TO STAY THIS ACTION PENDING COMPLETION OF THE PARALLEL CRIMINAL CASE. A. The undisputed evidence shows that there is no genuine dispute that Dvorak violated Section 5.

Dvorak did not file an opposition to the Commissions motion for summary judgment but asked instead for a stay of this action pending the completion of a criminal case. But in his motion seeking a stay and in his brief on appeal, Dvorak contends that he was unwittingly being used by Casavant, Edwards, and others (Br.32), thus suggesting that summary judgment should not have been granted. However, the undisputed evidence is so overwhelming that no reasonable trier of fact could return a verdict in his favor. See Anderson, 477 U.S. at 249. Accordingly, while his failure to file an opposition to summary judgment

n.13, however, this Court explicitly held that Pinter does not affect claims brought by the Commission under Section 5. See also Geiger, 363 F.3d at 488 (stating [w]e do not believe Pinter is on point as to the scope of Section 5 liability).
-32-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 46 of 103

precludes him from challenging summary judgment, it is, in any event, clear that summary judgment was properly granted. 1. Dvorak failed to oppose summary judgment and therefore cannot contest summary judgment on appeal.

Because Dvorak chose not to file an opposition to summary judgment, he cannot contest summary judgment now. It is a well-settled rule that a party opposing a summary judgment motion must inform the trial judge of the reasons, legal or factual, why summary judgment should not be entered. If it does not do so, and loses the motion, it cannot raise such reasons on appeal. Liberles v. County of Cook, 709 F.2d 1122, 1126 (7th Cir. 1983) (quoted in USA Petroleum Co. v. Atlantic Richfield Co., 13 F.3d 1276, 1284 (9th Cir. 1994)). Accordingly, the Court should not entertain Dvoraks protestations that he did not violate Section 5. 2. In any event, the undisputed facts overwhelmingly demonstrate that Dvorak is liable for violating Section 5 because Dvorak was a necessary participant and a substantial factor in the illegal distribution.

The district court properly granted summary judgment against Dvorak because the undisputed facts show that Dvorak was both a necessary participant and a substantial factor in the illegal sale of CMKM stock. Dvorak wrote some 450 opinion letters stating that CMKM stock certificates could be

-33-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 47 of 103

issued (or reissued) without restrictive legends pursuant to Rule 144(k), despite the fact that he had no evidence that the purported holders of the shares had ever paid for the shares. App.66-68, 15, 20, 22, 23, 24, 25. And without any evidence of payment, Dvorak had no evidence that the two-year holding period required to satisfy the Rule 144(k) safe harbor had even started to run. The district court was correct to hold that, but for Dvoraks authorization of the issuance of hundreds of billions of shares of unlegended stock, there would have been no shares of CMKM stock to publicly sell. And Dvoraks preparation of opinion letters authorizing the issuance of unlegended CMKM stock was not a de minimus act. Courts have recognized that the provision of opinion letters justifying the removal of restrictive legends is crucial in allowing illegitimate securities to be dispersed to the public. SEC v. Fisher, Fed. Sec. L. Rep. 94,794, 2008 WL 3006149 (E.D. Mich. Aug. 1, 2008) (citing Geiger, 363 F.3d at 487). An attorney responsible for writing opinion letters is expected to be fully aware of the requirements that must be met in order to safely transfer restricted stock and to appropriately investigate the particular circumstances of the stockholder to avoid participating in an illegal distribution. Kenler v. Canal Natl Bank, 489 F.2d 482, 487 (1st Cir. 1973); accord 1 Loss, at 1. The indications of illegal distribution are well-known. They include the sale of a large block of the

-34-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 48 of 103

thinly traded securities of a little-known company under circumstances that raise a question as to whether or not the ostensible sellers may be mere conduits from the issuer or control person. See Wonsover v. SEC, 205 F.3d 408, 415 (D.C. Cir. 2000) (citing Distribution by Broker-Dealers of Unregistered Securities, Securities Act Release 4445, 1962 WL 69442 (Feb. 2, 1962)); see also Geiger, 363 F.3d at 485. Other indicia are securities that are speculative in character and the precarious financial condition of the issuer. Andrew Downey Orrick, Registration Problems Under the Federal Securities ActResales Following Rule 133 and Exchange Transactions, 10 Hastings L. J. 1, 8 (1958) (discussed in 1 Loss, at n.9 at page 9). As shown in the facts, supra 14 -21, all the signs of an unlawful distribution are present here. Dvorak was therefore required to proceed cautiously and to undertake a thorough investigation. See, e.g., Kenler, 489 F.2d at 487-88; cf. Wonsover, 205 F.3d at 415 (citing Distribution by Broker-Dealers, Securities Act Release 4445, 1962 WL 69442). But Dvorak failed to perform the required inquiry, which would have revealed that Edwards and Casavant were undertaking an illegal offering. Far from unwittingly being used by Casavant and Edwards, the undisputed facts show that Dvorak must have known that he was enabling an illegal distribution to take place. Dvorak admitted that he had his suspicions. He

-35-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 49 of 103

testified that he thought it odd that, on over 400 occasions, CMKM had simply failed to issue stock to purchasers. App.67, 19; App.231 at 141. These and other indicia of an unlawful distribution led him to make repeated requests for documentation that the shares had been paid for, but those requests went unanswered (App.68-69, 23, 24, 25, 26, 29). Dvorak received no evidence that the shareholders who purportedly bought from CMKM actually ever paid for the stock, much less owned it for the two-year holding period necessary for Rule 144(k) to be applicable. Dvorak nonetheless continued to write the opinion letters directing that the restrictive legends be removed even after Casavant told Dvorak that he had no records as to what CMKM had done with respect to issuing stock. App.68, 25; App.219 at 157; App.592-93. Dvorak must have realized that it was simply too much of a coincidence for 258 persons (App.66, 14) to suddenly appear who had owned the shares for two years, but had failed to request that the shares be issued to them. 3. Dvorak failed to demonstrate that the Commissions approximation of the disgorgement amount was not reasonable.

The district court granted judgment against Dvorak for over $400,000 in disgorgement and prejudgment interest. App.604. Dvorak argues on appeal that [t]he triable issue in this case is the amount of money received by Dvorak which represents ill-gotten gains subject to disgorgement. Specifically, Dvorak
-36-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 50 of 103

contends that while there is no factual dispute that [he] received $157,500 for writing the letters, he did not receive over $400,000. Br. 21-22. Even if Dvorak had preserved this issue for appeal, he has failed to raise a genuine factual issue. This Court has recognized that [t]he amount of disgorgement should include all gains flowing from the illegal activity. SEC v. Platforms Wireless, 617 F.3d at 1096 (quoting SEC v. JT Wallenbrock & Assoc., 440 F.3d 1109, 1114 (9th Cir. 2006)). The Commission needs to put forward only a reasonable approximation of profits causally connected to the violation. SEC v. First Pacific Bancorp, 142 F.3d 1186, 1192, n.6 (9th Cir. 1998) (quoting SEC v. First Jersey Sec. Ind., 101 F.3d 1450, 1475 (2d Cir. 1996)); see also Platforms Wireless, 617 F.3d at 1096 (quoting First Pacific Bancorp). Once the SEC establishes a reasonable approximation of defendants actual profits, * * * the burden shifts to the defendants to demonstrate that the disgorgement figure was not a reasonable approximation. 617 F.3d at 1096 (quoting SEC v. First City Financial Corp., 890 F.2d 1215, 1232 (D.C. Cir. 1989)). With its motion for summary judgment, the Commission attached the affidavit of a staff accountant, Nina Y. Yamamoto, and detailed supporting documentation. Based on her analysis of Dvoraks bank records and the bank records of the other defendants to this action, Yamamoto determined that Dvorak

-37-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 51 of 103

received $318,843 from the other defendants. App.255-57, 5-15. When $90,795 in prejudgment interest was added by the court, the total came to $409,638. Dvorak argues that $200,000 of this amount came from his lawyers trust account for an unrelated purpose. Br. 23. But Dvorak does not deny that the money in this trust account came, in turn, from other defendants. Nor does Dvorak even indicate the unrelated purpose for the payment of this money. Thus, Dvorak has failed to demonstrate that the Commissions approximation was not reasonable. 4. Dvorak has not met the requirements for relief under Fed. R. Civ. P. 56(f).

At the end of his discussion of summary judgment, Dvorak quotes Fed. R. Civ. P. 56(f), now 56(d), thereby implying that the district court should have granted him a stay to allow him time for discovery before responding to the Commissions motion for summary judgment. But [a] party requesting a continuance pursuant to Rule 56(f) must identify by affidavit the specific facts that further discovery would reveal, and explain why those facts would preclude summary judgment. Tatum v. City and County of San Francisco, 441 F.3d 1090, 1100 (9th Cir. 2006), see also California v. Campbell, 138 F.3d 772, 779 (9th Cir. 1998). Here again Dvorak fails to explain why he received a large amount of
-38-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 52 of 103

money from other defendants. Nor does Dvorak explain what evidence he hopes to obtain to vindicate himself by showing he was unwittingly duped by Casavant and Edwards. Br. 32. In fact, in the four years during which the Commission filed its complaint and obtained judgments against the various other defendants in this action, Dvorak failed to undertake any discovery. Dvorak therefore cannot complain that the district court abused its discretion in declining to give him more time. See Bank of America, NT & SA v. Pengwin, 175 F.3d 1109, 1118 (9th Cir. 1999); Brae Transp., Inc. v. Coopers & Lybrand, 790 F.2d 1439, 1443 (9th Cir. 1986). B. The district court acted within its discretion in denying Dvoraks motion for a stay because the burden on his Fifth Amendment rights imposed by this action is negligible.

The district court denied Dvoraks motion to stay this action pending the outcome of the parallel criminal case, holding that the incursion upon Dvoraks Fifth Amendment Right [is] negligible. Exc.3. As the district court pointed out, there is no constitutional requirement to stay a civil case while a parallel criminal case is pending. Id. at 2 (citing Keating v. Office of Thrift Supervision, 45 F.3d 322, 324 (9th Cir. 1995)); see FSLIC v. Molinaro, 889 F.2d 899, 902 (9th Cir. 1989); SEC v. Dresser Industries, Inc., 628 F.2d 1368, 1375 (D.C. Cir. 1980). Indeed, [i]t would stultify enforcement of federal law to require a [government]

-39-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 53 of 103

agency * * * invariably to choose either to forgo recommendation of a criminal prosecution once it seeks civil relief, or to defer civil proceedings pending the ultimate outcome of a criminal trial. SEC v. Dresser Industries, 628 F.2d at 1375 (quoting Kordel, 397 U.S. at 11). Nevertheless, a court may decide in its discretion to stay civil proceedings when the interests of justice seem to require such action. Kordel, 397 U.S. at 12 n.27. A determination whether to grant or to deny a stay is to be made in the light of the particular circumstances of the case and the competing interests involved in the case. Dresser, 628 F.2d at 1375. In making this determination, this Court first considers the extent to which the defendants fifth amendment rights are implicated. Keating v. OTS, 45 F.3d at 324 (quoting FSLIC v. Molinaro, 889 F.2d at 902). In the absence of substantial prejudice to the rights of the parties involved, [simultaneous] parallel [civil and criminal] proceedings are unobjectionable under our jurisprudence. Dresser, 628 F.2d at 1374. Dvorak argues that his Fifth Amendment rights are implicated because there is substantial overlap between this case and the criminal action and because the witnesses he would purportedly call in the civil action are likely to invoke the Fifth Amendment and refuse to testify. Br. 31-32.

-40-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 54 of 103

It has been said that the strongest case for deferring civil proceedings * * * is where a party is under indictment for a serious offense * * * involving the same matter. Dresser, 628 F.2d at 1375-76. However, in this case, Dvoraks Fifth Amendments rights are hardly implicated at all because he has already surrendered or waived them. Well before he was indicted, Dvorak twice gave investigatory testimony to the Commission. App.227 at 1; App.233 at 237-38. Later, after he had already spoken to the United States Attorneys Office concerning the criminal investigation, he appeared for his deposition while his indictment was still under seal. App.231 at 143. On all these occasions, Dvorak, who is himself a licensed attorney, was represented by counsel. App.208-09 at 1-2. Yet Dvorak never asserted his Fifth Amendment rights. Consequently, the Commissions evidence against Dvorak consists solely of his own admissions. See App.63, 4-5, 14-36; see also App.66-67, 14-36; App. 128-36. This case is much the same as Molinaro, where a defendant responded to an agencys motion for summary judgment by requesting a continuance. 889 F.2d at 901. As for his fifth amendment privilege assertions, this Court noted, Molinaro had already given a partial deposition to FSLIC attorneys which provided the basis of support for FSLICs summary judgment motion. Id. at 903. Under these circumstances, this Court held that any burden on Molinaros fifth

-41-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 55 of 103

amendment privilege was negligible. Id. A party who chooses to testify in a civil case in spite of the risk that a prosecutor later might seek to use his statements against him in a criminal prosecution involving the same subject matter is hard put to complain about the subsequent denial of a stay. Microfinancial, Inc. v. Premier Holidays Intnl, Inc., 385 F.3d 72, 78-79 (1st Cir. 2004) (citing Milton Pollack, Parallel Civil and Criminal Proceedings, 129 F.R.D. 201, 205-06 (1989)). When all is said and done, a stay cannot preserve what a defendant has already surrendered. Microfinancial, Inc., 385 F.3d at 79. Even assuming that Dvoraks Fifth Amendment privilege was implicated, the factors used to determine whether a stay should be granted, Keating, 45 F.3d at 325; Molinaro, 889 F.2d at 903, demonstrate that the district courts ruling was within its discretion: First, the Commission would be prejudiced by postponement of this action pending the outcome of the criminal case. Almost a year has passed since the district court denied Dvoraks request for a stay, and the criminal trial, which is expected to take three to four months, has yet to begin. As Dvorak notes in his brief, the criminal case has been continued until January 2013. Edwards, who has been arrested, is fighting extradition from England, and Casavant has yet to be arrested by Canadian authorities. Br. 27, n.2. At this point, there is no certainty

-42-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 56 of 103

regarding when the criminal case will move forward, much less conclude. Meanwhile, the summary judgment against Global and Bagley will be decided and Dvorak could become the lone outstanding defendant of the original fourteen. Or the case might proceed to trial without Dvorak. A stay would harm the interests of the Commission in obtaining a judgment and collecting over $400,000 in disgorgement that could be used for the benefit of Dvoraks victims. Second, as discussed above, the burden on Dvoraks Fifth Amendment rights is negligible. Furthermore, as the district court noted, Dvorak had the same amount of time to respond to the Commissions motion for summary judgment as did Global and Bagley, and he has enough time to defend both the civil and criminal actions. Exc.5. But Dvorak argues on appeal that [w]ith 200 boxes of discovery waiting to be scanned and delivered to defense counsel in the criminal case, there may be more Dvorak will be able to present to defeat summary judgment. Br. 36. Here again, however, Dvorak gives no indication to what evidence he hopes to find and how it will create a genuine factual dispute. Such vague assertions do not warrant consideration when determining whether to grant a stay. See Tatum v. City and County of San Francisco, 441 F.3d at 1100. Furthermore, Dvorak was invited to review this material at the Commissions office, but did not do so. Exc. 64 n.4.

-43-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 57 of 103

Neither should the Court consider Dvoraks speculation concerning how helpful certain purported witnesses will be at trial, if they will be helpful at all. Third, addressing the courts convenience, the district court correctly pointed out that a stay will not necessarily increase efficiency because, while the two cases overlap, they will not require the Court to perform duplicative or unnecessary work. Doc. No. 180 at 6. The district court further stated its interest in moving cases along. Id. As one court noted, the convenience of the courts is best served when motions to stay proceedings are discouraged. CFTC v. A.S. Templeton Group, Inc., 297 F. Supp. 2d 531, 535 (E.D.N.Y. 2003) (quoting United States v. Private Sanitation Ind. Assn, 811 F. Supp. 807, 808 (E.D.N.Y. 1992)). Fourth, the greatest interest of non-parties to this action is the interest of the victims in being made whole, if possible. Contrary to what Dvorak argues, $400,000 in disgorgement is not a small sum. Finally, the public has an interest in the maintenance of and preservation of the integrity of the securities markets. Pollack, Parallel Civil and Criminal Proceedings, 129 F.R.D. at 205. As Judge Pollack stressed, [t]hese interests can be substantially prejudiced by stays imposing significant delays upon the civil proceeding. Id.

-44-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 58 of 103

C.

There is no evidence that the Commission brought this action in bad faith or that its attorneys otherwise acted improperly.

Throughout his brief without stating what relief he is seeking Dvorak alleges or insinuates that the Commissions attorneys have acted improperly. But Dvorak offers no evidence in support of his suggestions that this civil action was initiated to improperly gain evidence for the later filed criminal action (Br. 31, 32, 34), or that the Commissions attorneys sandbagged him by taking his deposition at a time after the Commissions attorneys allegedly knew he had been charged in a sealed indictment (Br. 14, 15, 25, 26, 31, 34). The district court correctly found that there is no evidence of improper conduct. Exc.3. We note at the outset that there is nothing improper about criminal authorities using evidence acquired by the SEC in a civil law enforcement investigation. In fact, the [f]ederal securities laws authorize the SEC to transmit evidence it has gathered to the [United States Attorneys Offices] to facilitate a criminal investigation by the [United States Attorneys Offices]. United States v. Stringer, 535 F.3d 929, 933 (9th Cir. 2008); see Securities Act Section 20(b) and Exchange Act Section 21(h)(9)(B), 15 U.S.C. 77t(b), 78u(h)(9)(B). A defendant may complain about such use only where it would violate his constitutional rights or depart from the proper administration of criminal justice. Kordel, 397 U.S. at 12-13. In Kordel, the Supreme Court set forth the
-45-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 59 of 103

circumstances that may cause a violation of a defendants right to due process in this regard. These circumstances include cases in which: the government pursued a civil action solely to obtain evidence for a criminal prosecution; the government failed to advise the defendant during the civil proceeding that it was contemplating criminal prosecution; the defendant was without counsel; the defendant reasonably feared pretrial publicity or other unfair injury; or other special circumstances suggested that the criminal prosecution is unconstitutional or improper. 397 U.S. at 12-13. As to the relevant factors, there is nothing to suggest that the Commission initiated this action solely to provide the Justice Department with evidence for a criminal prosecution. Dvorak first gave investigatory testimony to the Commission in January 2006. The Commissions action was subsequently filed in April 2008, well before to the filing of an indictment against Dvorak and Bagley in May 2009. Docket No. 12 & 13, United States v. Edwards, et al., No. 2:09-cr132 (D. Nev.). Responding to similar allegations of collusion, this Court has held that it was significant that the SEC began its investigation first because [t]his tends to negate any likelihood that the government began the civil investigation in bad faith * * * in order to obtain evidence for a criminal prosecution. United

-46-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 60 of 103

States v. Stringer, 535 F.3d at 938-40; see also United States v. Teyibo, 877 F. Supp. 846, 856 (S.D.N.Y. 1995). In addition, at the outset of Dvoraks investigatory testimony, the Commissions attorneys advised Dvorak that, while the Commission was conducting an investigation of violations of the federal securities law, the facts developed in this investigation might constitute violations of other provisions of other federal or state, civil or criminal laws. App.227 at 4 (emphasis added). The defendants to this action were also supplied with Commission Form 1662, entitled Supplemental Information for Persons Requested to Supply Information Voluntarily or Directed to Supply Information Pursuant to a Commission Subpoena. App.236 at 6-7. That form states that the [i]nformation you give may be used against you in any federal, state, local or foreign administrative, civil or criminal proceeding brought by the Commission or any other agency. Id. (emphasis added). The form further emphasizes that [y]ou may refuse, in accordance with the right guaranteed to you by the Fifth Amendment to the Constitution of the United States, to give any information that may tend to incriminate you or subject you to fine, penalty or forfeiture. Id.; see also Stringer, 535 F.3d at 940-41 (discussing Form 1662 in light of similar

-47-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 61 of 103

allegations). But Dvorak, with his counsel present, proceeded to testify anyway. App.209 at 2; App.227 at 2. In fact, Dvorak actually knew a criminal investigation was underway before his deposition was taken by the Commission in July 2009. Before his deposition, Dvorak had already met with prosecutors at the United States Attorneys Office as part of the criminal inquiry. App.231 at 143; see also App.232 at 173; App.503 at 116. There is also no evidence that the Commission sandbagged Dvorak by taking his testimony after learning that he had been indicted. The Commissions attorneys took Dvoraks deposition in July 2009. The indictment of Dvorak and Bagley was not disclosed until Dvorak and Bagley were arrested in September 2009.11/ There is no evidence that the staff of the Department of Justice violated the secrecy of the grand jury and Fed. R. Crim. P. 6(e) by telling the Commissions attorneys of the indictment prior to the time of the arrests. There is also no evidence that the Commissions attorneys in any way affirmatively misled Dvorak.

11/

See Docket No. 29 & 49, United States v. Edwards, et al., No. 2:09-cr-132 (D. Nev.). The indictment was unsealed on August 4, 2009 for the limited purpose of having Edwards arrested in the United Kingdom. Its contents were not otherwise disclosed. Id. Docket No. 27.
-48-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 62 of 103

Under these circumstances, Dvoraks allegations of misconduct should be disregarded.12/ III. RESPONSE TO GLOBALS AND BAGLEYS BRIEF: THERE IS NO GENUINE FACTUAL DISPUTE THAT GLOBAL AND BAGLEY ARE LIABLE FOR VIOLATING SECTION 5. A. The undisputed facts show that Global and Bagley were necessary participants and a substantial factor in the distribution of unregistered CMKM stock.

The district court correctly found Global and Bagley liable under Section 5 because the undisputed evidence shows that they were necessary participants and a substantial factor in the illegal distribution of CMKM stock. Global was CMKMs transfer agent, the entity responsible for causing the issuance and transfer of CMKM securities. The undisputed evidence shows that, in this distribution, Global and Bagley caused hundreds of billions of shares of CMKM stock to be issued without restrictive legends. App.71, 37. Global and Bagley were necessary participants in the illegal offering because, as the district court noted (App.593 at 5), it was the removal of the restrictive legends that allowed

12/

Dvorak also contends that the magistrate had no jurisdiction to decide on his own the motion for stay. Br. 37. But under 28 U.S.C. 636(b)(1)(A), nondispositive motions may be assigned to a magistrate for a ruling without a report of findings and recommendation to the district judge. Dvorak did not take advantage of his opportunity to appeal within two weeks of the Magistrates order, as provided by Fed. R. Civ. P. 72(a).
-49-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 63 of 103

CMKM stock to be publicly sold. Indeed, restrictive legends are the single most effective device for preventing the resale of restricted shares. SEC v. Management Dynamics, Inc., 515 F.2d 801, 810 (2d Cir. 1975). But for the actions of Global and Bagley, the distribution could not have taken place because the stock would not have been salable had the restrictive legends remained. Under the substantial factor test, there is nothing de minimus about removing the restrictive legends from hundreds of billions of shares on more than 400 different occasions over a period of 19 months, thereby enabling a massive illegal offering of unregistered securities. App. 71, 39. The actions of Global and Bagley a substantial factor in the distribution of CMKM shares, just as are than: the procuring of an opinion letter, see, e.g., Geiger, 363 F.3d at 486-87; providing a conduit for an illegal distribution, see, e.g., Zacharias, 569 F.3d at 466; or negotiating contracts under which securities were received as compensation, opening brokerage accounts, and signing transfer authorizations, see, e.g., SEC v. Calvo, 378 F.3d at 1215. Accord 1 Hazen, 2.2[1][A] (summarizing Geiger, Zacharias, & Calvo). The actions taken by Global and Bagley far surpass the threshold for being a substantial factortheir participation was central to the distribution.

-50-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 64 of 103

Global and Bagley attempt to minimize their participation by contending that the removal of restrictive legends is merely ministerial. But under the federal securities laws, the function of transfer agents in removing restrictive legends are not ministerial. Congress found that [t]he prompt and accurate clearance and settlement of securities transactions, including the transfer of record ownership, are necessary for the protection of investors. Exchange Act Section 17A(a)(1), 15 U.S.C. 78q-1. And the removal of the restriction is integral to the transfer of the securities. Indeed, Section 3(a)(49) of the Exchange Act excludes from the definition of associated person of a transfer agent any employee whose functions are solely clerical or ministerial, 15 U.S.C. 78c(a)(49), showing that Congress recognized that the principal functions of a transfer agent are not ministerial. And the House Report accompanying the 1964 Amendments to the Exchange Act, which added Section 3(a)(18), 15 U.S.C. 78(a)(18), defining persons associated with a broker-dealer, stated that the term ministerial, as used in that definition, means persons acting in obedience to authority without the exercise of judgment, including employees who perform the duties of doormen, elevator operators, clerks, and stenographers. H.R. Rep. No. 88-1418, at 1947-48

-51-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 65 of 103

(1964).13/ Needless to say, Global and Bagley, who admit to asking for a second opinion letter, had the discretion to exercise judgment. In support of their ministerial argument, Global and Bagley cite Rochez Brothers, Inc. v. Rhoades, 527 F.2d 880, 888 (3d Cir. 1975) and J & G Investments, LLC v. Fineline Properties, Inc., 2007 WL 928642 (N.D. Ohio 2007), arguing that [c]ourts uniformly have found that the actions of a transfer agent in complying with directives of its client are ministerial and clerical in nature. But Rhoades, a case brought under the antifraud provisions, did not address the removal of restrictive legends, and in, J&G Investments, an unpublished decision in another fraud case, the court refused to dismiss the plaintiffs claims against a transfer agent. Moreover, the leading authority on transfer agents, Professor Egon Guttman, has concluded: [A] transfer agent registering a transfer is not performing a mere ministerial act. * * * . Guttman 10:8 at 1; see also 7:8 at 2. And as discussed above, Congress agrees that a transfer agent is not a mere ministerial functionary.

13/

Section 3(a)(18) later served as the basis for the Section 3(a)(49) definition of persons associated with a transfer agent. S. Rep. No. 100-105, 19 (Sept. 9, 1987).
-52-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 66 of 103

Global and Dvorak suggest that the size of the fee they collected, $15 per certificate, was indicative of the insignificant role Global played in the stock transfers. Br. 18, n.3. But Global and Bagley actually received much more, indicating that they were being paid for performing work that was substantial. Indeed, it appears that Global and Bagley were actually paid approximately $672 per certificate$302,500 divided by 450 certificates. App.66, 15; App.81, 92; App.259 at 20; App.391.14/ B. Even if there were a culpability requirement for a Section 5 violation, the undisputed facts show that Global and Bagley knew or must have known that they were participating in an illegal distribution of unregistered securities.

This Court and other courts have regularly concluded, like the district court here, that neither negligence nor scienter is an element of a Section 5 violation. See, e.g., SEC v. Phan, 500 F.3d 895, 906 (9th Cir. 2007); SEC v. Calvo, 378 F.3d

14/

In their brief, Global and Bagley contend that there is absolutely no evidentiary support for the district courts statement that Global transferred unrestricted CMKM stock certificates to a broker for sale to the public. Br. 34. But the undisputed facts show that Global and Bagley generally gave the unlegended stock certificates to Edwards, who then delivered them to a broker to be sold through accounts controlled by Edwards. App.75-76, 57, 58, 63, 64. The broker would then call Global and Bagley to verify that the CMKM certificates were validly issued, App.75, 52, and Global and Bagley would vouch for the certificates. App.75, 53. Thus, Global and Bagley delivered the certificates to the broker by giving them to Edwards for sale into the public market.
-53-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 67 of 103

1211, 1219 (11th Cir. 2004); Swenson v. Engelstad, 626 F.2d 421, 424 (5th Cir. 1980); SEC v. Friendly Power Co. LLC, 49 F. Supp.2d 1363, 1367 (S.D. Fla. 1999); SEC v. Fisher, Fed. Sec. L. Rep. 94,794, 2008 WL 3006149 (E.D. Mich. Aug. 1, 2008); Hazen 2.2[1][A] . Global and Bagley nonetheless argue for a negligence standard for Section 5 liability in the case of transfer agents. They contend that a transfer agent may be held liable for violating Section 5 only if it knows or has reason to know that the stock transfer would involve an illegal distribution.15/ Br. 14, 19, 24. Global and Bagley argue that they are not liable under that standard because they always received opinion letters before issuing unlegended stock. Br. 12, 31-32. Even if, as Global and Bagley argue, proof of culpability were required in the case of transfer agents, the undisputed facts known to Global and Bagley show not only that they had reason to know but indeed that they must have knownwithout any need for investigationthat an illegal distribution would occur and that the factual basis set forth in the opinion letters was not correct: How could the transfer agent for CMKM stock not have realized that CMKM had
15/

This knows or has reason to know standard of transfer agent liability was adopted by the court in Wassel v. Eglowsky, 399 F. Supp. 1330, 1367 (D. Md. 1975), which drew that formulation from a 1972 SEC staff interpretive letter. See Defrees, Fiske, Voland, Alberts & Hoffman, SEC Staff Interpretive Letter, 1972 WL 8182 (April 12, 1972), App.582-83. But views of the staff do not necessarily represent the views of the Commission.
-54-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 68 of 103

increased its number of authorized shares to 800 billion in preparation for a large public sale? How could Global and Bagley have believed that 258 people each waited over two years to claim, at about the same time, stock that was owed to them?16/ How could they have reasonably relied on approximately 450 opinion letters that advised that, on over 400 occasions, stock was purchased and held for two years or longer, but not issued?17/ How could a transfer agent have believed that a company had failed to issue 279 billionor 35%of its outstanding shares of stock?18/ It is simply too much of a coincidence for 35% of an issuers outstanding shares to suddenly appear and happen to meet the requirements for the Rule 144(k) safe harbor. Under these circumstances, any reasonable transfer agent must have known that the opinion letters were incorrect and were part of a blatant attempt to illegally evade the registration requirements. Bagleys own testimony shows that she knew that she and Global were participating in an illegal distribution of unregistered securities. When confronted with the foregoing facts during her testimony, Bagley admitted that she thought an illegal offering may have been taking place. When asked whether she ever
16/ 17/ 18/

App.66, 14. App.66-67, 14, 15, 19; App.219 at 155. App.72, 43.
-55-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 69 of 103

doubted that the shares discussed in the opinion letters were really intended to have been issued two years earlier, Bagley admitted that I may have.19/ Bagley also conceded that she thought it strange that CMKM had so many shares.20/ The number of shares and the transactions she facilitated were so out of the ordinary that she testified that nothing this company did made any sense to me.21/ Even people who had much less information about CMKM than Global and Bagley possessed were suspicious about CMKM stock. An article published by StockPatrol.com ridiculed CMKMs activities based on information found on the internet. App.532-36. The article, published in June 2004, is entitled CMKM Diamonds, Inc. (Pink Sheet: CMKX)A Familiar Drill and implies that CMKM is orchestrating a pump-and-dump scheme. The article begins by stating that the trading volume of CMKM shares has been deafening, and a bit odd. App.532. Emphasizing the companys decision to stop filing periodic reports with the SEC, the article examines the stocks inexplicably high trading volume, the high numbers of possible outstanding shares, the great number of shares said to have been acquired earlier by affiliates of Casavant, and the inconsistent public
19/ 20/ 21/

App.243 at 217-18. App.245 at 229. App.73 at 46; App.243 at 217

-56-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 70 of 103

statements concerning the companys stock. The article points out that there is no sign this company is, or will soon become, a revenue producing business. App.533. So much about the company and its stock is inexplicable that the writer concludes that investors may just be searching for diamonds in the dark. App.532. If someone could collect enough information on the internet to mockingly publish suspicions about CMKM, then certainly Global and Bagleywho, as transfer agent, undisputedly had more pertinent evidence than the writer of the articlemust have known they were participating in an illegal distribution. Global and Bagley argue that questions of culpability are usually reserved for the fact-finder. Br. 24. But summary judgment is proper where the facts are undisputed and only one conclusion may reasonably be drawn from them. Flying Diamond Corp. v. Pennaluna & Co., Inc., 586 F.2d 707, 713 (9th Cir. 1978); see also Commonwealth Util. Corp. v. Goltens Trading Engg PTE LTD., 313 F.3d 541, 546 (9th Cir. 2002) (quoting Flying Diamond). This is such a case.22/
22/

Global and Bagley quote (Br. 11) Wassel v. Eglowsky, where the court states: that [n]o case has been cited to or located by this Court in which a transfer agent, in the absence of other circumstances, has been liable for violation of the federal securities laws for actions undertaken in the course of performing the duties commonly performed by transfer agents. 399 F.Supp. at 1367 (footnote omitted). But more recent cases make clear that transfer agents may be found liable for violations of the federal securities laws for actions committed in their capacities as transfer agents. See, e.g.,
-57-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 71 of 103

C.

Global and Bagleys assertion that they reasonably relied on attorney opinion letters from a second attorney, other than Dvorak, does not raise a genuine factual dispute.

Global and Bagley argue that they acted reasonably because Bagley, who testified that she did not trust Dvorak, asked CMKM to retain a second attorney and, after that attorney was retained, she did not issue unlegended shares of CMKM stock without an opinion letter from the second attorney. Br. 31-32 & 35. This argument is meritless, however, because the opinion letters of the second attorney, D. Roger Glenn of Edwards & Angell, explicitly rely on Dvoraks opinion letters in support of the central determinationthat the requirements of Rule 144(k) have been met. Specifically, Edwards & Angell relied on Dvorak for the conclusion that the CMKM shares were actually acquired at least two years earlier. In a letter dated July 27, 2004, for example, Edwards & Angell stated: SEC v. Netelkos, 592 F. Supp. 906, 917-18 (S.D.N.Y. 1984) (affirming preliminary injunction against a transfer agent under Section 5 because, separate from any fraud violations he may have committed, he was a necessary participant and substantial factor in the Section 5 violation); J & G Investments, LLC, 2007 WL 928642 (declining to dismiss complaint alleging, among other things, violations of the anti-fraud provisions of the federal securities laws by a transfer agent for actions involving transfer agents duties); CIBC Mellon Trust Bank, 2005 SEC LEXIS 501 (Mar. 2 2005) (order imposing sanction against a transfer agent for causing the issuance of unlegended stock in the presence of red flags indicating an illegal distribution was ongoing); Alnoor Jiwan, 2004 SEC LEXIS 1898 (Aug. 26, 2004) (same).
-58-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 72 of 103

In connection with the opinions expressed herein, we have relied upon opinions dated July 20, 2004 of Dvorak & Associates, Ltd. for each of the shareholders to the effect that the already-issued shares as to which the Shares are being issued as dividends were issued more than two years ago and that the issuance of the shares as dividends has been duly authorized.23/ App.492 at 3 (emphasis added). Thus, it is apparent on the face of the opinion letter that Edwards & Angell simply relied on Dvoraks opinion concerning the satisfaction of the Rule 144(k) two-year holding period. Given what Bagley concedes to have known about CMKM, the Edwards & Angell letter provided no basis for a good-faith belief that the CMKM shares could be issued without a restrictive legend. Global and Bagley nevertheless take strong exception to the district courts finding that after requesting a different attorney, defendants continued to remove restrictive legends from CMKM stock based on Dvoraks unsupported opinion letters. Br. 35 (quoting App.594 at 6). Global and Bagley admit that they continued to receive both the Dvorak and the Edwards & Angell opinion letters before removing the restrictive legends. App.565, 21. Both letters were required because one relies on the other. In substance, to rely on Edwards & Angell letters is inherently to rely on Dvorak letters. This is what the Commission argued in the district court (App.579 at 11), and it is the derivative nature of the Edwards &
23/

The other opinion letters authored by Edwards & Angell were substantially similar in form and content to the July 27, 2004 letter. App.565, 22.
-59-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 73 of 103

Angell letters that the district court presumably had in mind when it stated that Global and Bagley continued to rely on Dvoraks letters. At bottom, Global and Bagley have failed to identify any genuine dispute about whether they relied on the letters in good faith. See SEC v. Goldfield Deep Mines Co. of Nevada, 758 F.2d 459, 467 (9th Cir. 1985). D. State law did not require Global and Bagley to remove the restrictive legends on CMKM stock because, under state law, a transfer agent may refuse to complete a wrongful transfer.

Arguing that state law required them to issue CMKM stock without restrictive legends, Global and Bagley contend that the Commissions position presents issues of high industry significance because it creates significantly higher standards of conduct upon transfer agents than have heretofore been recognized under the law. Br. 7, 21. At the outset, we note that a transfer agents duty not to violate Section 5 is a question of federal law and is not governed by state law. Furthermore, it has not been the lawfederal or statethat a transfer agent is required to complete an unlawful transaction. The Commissions position is not only consistent with federal precedent, as described above, but is also consistent with state law.24/
24/

Global and Bagley also erroneously contend that their refusal to transfer the securities would expose them to liability under Commission Rule 17Ad2(a), 17 C.F.R. 240.17Ad-2(a), which requires that routine transfers be completed in three days. Br. 20. But under Rule 17Ad-1(d)(i), 17 C.F.R.
-60-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 74 of 103

Under UCC Section 8-407, as adopted in Nevada, the responsibilities of an issuer and its transfer agent are coextensive. See Nev. Rev Stat. Ann. (NRS) 104.8407 (2011), SA 18. See also Campbell v. Liberty Transfer Co., 61 UCC Rep. Serv. 563, 2006 WL 3751529, at 16 (E.D.N.Y. 2006) (holding a transfer agent stands in the shoes of the issuer). UCC Section 8-401, NRS Section 104.8401, provides that an issuer, and therefore its transfer agent, who is presented a request to register transfer, has a duty to register a transfer of securities if seven listed preconditions are met.25/ NRS 104.8401, SA 17. But [i]f any of the preconditions do not exist, there is no duty to register transfer. Section 104.8401, cmt. 1. The last of the preconditions listed in Section 104.8401 is that [t]he transfer is in fact rightful. Section 104.8401(1)(g). Where reasonable grounds exist to believe that a proposed transfer might be a wrongful transfer under the Securities Act, a transfer agent is justified in refusing to make the requested transfer. Charter Oak Bank & Trust Co. v. Registrar & Transfer Co., 358 A.2d

240.17Ad-1(d)(i), the three-day turn-around requirement is not applicable to transactions that require an opinion of counsel before the transfer may be effected.
25/

The removal of restrictive legends constitutes a request to register transfer. See In re Marriage of Devick, 735 N.E.2d 153, 159 (Ill. App. 2000); Bender v. Memory Metals, Inc., 514 A.2d 1109, 1115 (Del. Ch. 1986).
-61-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 75 of 103

505, 509 (N.J. Super. 1976). Indeed, it is well established that a stock transfer in violation of the federal securities laws is wrongful and that the transfer agent may refuse to complete it. See Kenler, 489 F.2d at 488; Campbell, 2006 WL 3751529, at *15; Catizone v. Memory Corp., 897 F. Supp. 732, 736-37 (S.D.N.Y. 1995); Melville v. Wantschek, 403 F. Supp. 439, 445-447 (E.D.N.Y. 1975); Travis Inv. Co. v. Harwyn Publg Corp., 288 F. Supp. 519, 526-27 (S.D.N.Y. 1968).26/ A comment to the UCC states that [r]ather than imposing duties to investigate, a general policy of the UCCs securities transfer system has been to eliminate legal rules that might induce participants to conduct investigations into the rightfulness of transfers. UCC Section 8-503, cmt.3 (commenting on both parts 4 and 5 of Article 8). But this policy is of no help to Global and Bagley. A transfer agent acquires the most cogent information in the ordinary course of its

26/

See also Mackinder v. Schawk, Inc., 2005 WL 1832385, at *15-16 (S.D.N.Y. 2005); Shearson Lehman Hutton Holding Inc. v. Coates Sales, Inc., 697 F. Supp. 639, 640 (S.D.N.Y. 1988); DeWitt v. American Stock Transfer Co., 433 F. Supp. 994, 1000-01, modified on other grounds, 440 F. Supp. 1084 (S.D.N.Y. 1977); 1 Loss, at 15 n.25; Cox & Hazen, Law of Corporations, 28:7; cf. William Meade Fletcher, 12 Fletcher Cyclopedia of the Law of Corporations 5527, available at Westlaw FLETCHER-CYC 5527 (Thomsen Reuters 2011); but see Kanton v. United States Plastics, Inc., 248 F. Supp 353, 358-59 (D.N.J. 1965) (holding that Section 5 has nothing to do with stock transfers while failing to recognize that Congress intended to reach the entire distribution process).
-62-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 76 of 103

business.27/ If the agent believes that an unlawful distribution is taking place, the agent may then request more information from the issuer and/or shareholder to be satisfied that the transaction is in fact rightful. But until that time, the transfer agent should not complete the transfer. See DeWitt, 433 F. Supp. at 1000; Travis, 288 F. Supp. at 526. The transfer agent will not incur liability for breach of its obligations to the issuer under the circumstances here if the agent refuses to transfer after being instructed to do so by the issuer. This point may become acute in areas where the agent could be exposed to personal liability, such as under the Securities Act of 1933. Guttman 10:7; see also Travis Inv. Co., 288 F. Supp. at 526 (company justified in not transferring while awaiting assurances that transfer would not violate securities law). If there is a conflict between the instructions of the issuer and the agents judgment reached in good faith and upon the advice of its own counsel, the agent may properly follow its own judgment without breach of
27/

Transfer agents are apprised of all issuances and transfers in the issuers stock. See e.g., 17 C.F.R. 240.17Ad-9(b) & 10(a)(1) (requiring maintenance of master securityholder file); 17 C.F.R. 240.17A-9a(a)(1) to (8) & 10(f) (requiring maintenance of stockholder ledger on which the certificate detailsare recited); 17 C.F.R. 17Ad-1(i) (listing documents reviewed by transfer agents in cases of non-routine transfers, including opinion letters); 17 C.F.R. 240.17Ad-5 (requiring transfer agents to be prepared to respond to inquires regarding the status of a transfer or the validity of securities and instructions from the issuer). See generally Guttman,3:14-22.
-63-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 77 of 103

responsibility to the issuer or loss of its right to indemnification from the issuer. Guttman 10:7 (citing, among other cases, Melville v. Wantschek, 403 F. Supp. 439 (E.D.N.Y. 1975)). E. There are no genuine factual disputes concerning the Commissions approximation of $302,500 in disgorgement, and the district court properly awarded disgorgement in that amount.

The Commissions accountant, Yamamoto, concluded that Global and Bagley received $302,500 from the other defendants in this action, and the district court awarded the Commission disgorgement in that amount. Global and Bagley contend that there are genuine issues of fact that exist concerning the Yamamoto declaration. Specifically, they contend: (1) that the money they received from the other defendants was for legitimate stock transfer services rendered to CMKM; (2) that Yamamoto failed to trace the funds they received to the sale of CMKM stock, and; (3) that there is nothing to show that there is a relationship between the entities in whose names the bank accounts were opened and the other defendants in this action. Br. 36-37. The amount of disgorgement should include all the gains flowing from the illegal activity. Platforms Wireless, 617 F.3d at 1096. In her declaration, Yamamoto reviewed bank accounts over which the various defendants in this action had signature authority, Bagleys bank account, and the bank accounts of

-64-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 78 of 103

Global. Yamamoto concluded from her review that Global and Bagley received $302,500 from other defendants, primarily two brokers who sold CMKM securities to the public for Edwards. App.257-59, 391, 393-410. Having established a reasonable approximation of defendants actual profits for their participation in the illegal offering, the burden shifted from the Commission to the defendants to demonstrate that the disgorgement figure was not a reasonable approximation. Platforms Wireless, 617 F.3d at 1096. But Global and Bagley failed to do so. Bagley states in her affidavit that the only money she received from the defendants was fees related to the stock transfer services provided to CMKM. Br. 33. But Global and Bagley also contend that they charged only $15 per certificate. Br. 18, 13 n.4. This means that Global and Bagley would have been paid $6,750 for issuing 450 unlegended stock certificates. Even if they issued other certificates first, before issuing the unlegended ones later upon the receipt of an opinion letter, Global and Bagley would only have received twice that amount, or $13,500. As it is, Global and Bagley provided no explanation why they were in fact paid $302,500 by the other defendants in this action. The district court was not required to trace every dollar of the offering proceeds fraudulently retained by [the defendants], SEC v. First Pacific

-65-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 79 of 103

Bancorp., 142 F.3d 1186, 1192 n.6 (9th Cir. 1998) (citing SEC v. Hughes Capital Corp., 917 F. Supp. 1080, 1085 (D.N.J. 1996), aff'd, 124 F.3d 449 (3d Cir. 1997)), because the disgorgement amount had to be only a reasonable approximation of profits causally connected to the violation. Id. (quoting SEC v. First Jersey Sec., Inc., 101 F.3d 1450, 1475 (2d Cir. 1996)). In addition, the Commission is under no obligation to trace these funds back to the sale of CMKM stock. The issue here is not the amount of Edwards or Casavants ill-gotten gains from the sale of the stock, but Global and Bagleys ill-gotten gains from their participation in the illegal distribution. Surely, if the other defendants paid them $302,500 for some legitimate purpose, Global and Bagley would have had no problem providing evidence to that effect. But Global and Bagley offered no evidence, or even an explanation, that could lead a reasonable trier of fact to believe that the money paid to them was for legitimate fees. Global and Bagley merely note that some of the names of the bank accounts from which the money came are KRKA, LLC; T&T Equity, LLC; 71st Holding, LLC; Part-time Management, Inc; and Diamond Quality, Inc., and argue that there is no analysis done of the relationship of these entities to the defendants who are signatories. Br. 36. It is sufficient, however, that the Yamamoto

-66-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 80 of 103

declaration, and Exhibits 12 and 13 to the declaration, show that only defendants to this action had signature authority, and therefore control, over these accounts. App.257-59, 391. See, e.g., Robert J. Haft & Michele H. Hudson, Due Diligence 6:26, available at Westlaw DUEDILSEC (Thomson Reuters 2012); cf. United States v. Lalley, 317 F.3d 875, 877 (8th Cir. 2003); Fiataruolo v. United States, 8 F.3d 930, 934 (2d Cir. 1993).

-67-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 81 of 103

CONCLUSION For the foregoing reasons, the district courts denial of a stay and the courts grant of summary judgment in favor of the Commission should be affirmed. Respectfully submitted, MARK D. CAHN General Counsel MICHAEL A. CONLEY Deputy General Counsel JACOB H. STILLMAN Solicitor /s/ Allan A. Capute ALLAN A. CAPUTE Special Counsel to the Solicitor March 2012 Securities and Exchange Commission 100 F Street, N.E. Washington, D.C. 20549-9040 (202) 551-5122 (Capute) caputea@sec.gov

-68-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 82 of 103

CERTIFICATE OF RELATED CASES PURSUANT TO CIRCUIT RULE 28-2.6 These are consolidated appeals arising from the same district court action, No. 2:08-cv-00437. Brian Dvorak appeals from an order denying his motion for a stay of proceedings, entered on April 7, 201l (docket entry No. 180). Both Dvorak and 1st Global and Helen Bagley appeal from the district courts order granting summary judgment against them, entered on July 25, 2011 (Docket No. 181), and final judgment against them, entered August 1, 2011 (Docket No. 185). On August 26, 2011, this Court affirmed an order of the district court (Docket No.152) that also arises from this same district court action. See SEC v. Gewerter, 656 F.3d 829 (9th Cir. 2011) (No. 10-16384).

/s/ Allan A. Capute Allan A. Capute Special Counsel to the Solicitor Securities and Exchange Commission 100 F Street, N.E. Washington, D.C. 20549-9040 (202) 551-5122 caputea@sec.gov.

-69-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 83 of 103

CERTIFICATE OF COMPLIANCE PURSUANT TO F.R.A.P. 32(a)(7)(C) AND LOCAL RULE 32-1 AND THE ORDER OF THIS COURT DATED FEBRUARY 13, 2012 Pursuant to F.R.A.P. 32(a)(7)(C), Ninth Cicuit Rule 32-1, and this Courts order of February 13, 2012, granting the Commission an enlargement of the word limit to 15,400 words, the BRIEF OF THE SECURITIES AND EXCHANGE COMMISSION, APPELLEE, is proportionally spaced, has a typeface of 14 point, and contains 15,200 words, excluding parts of the Brief exempted by F.R.A.P. 32(a)(B)(iii). /s/ Allan A. Capute Allan A. Capute Special Counsel to the Solicitor Securities and Exchange Commission 100 F Street, N.E. Washington, D.C. 20549-9040 (202) 551-5122 caputea@sec.gov.

-70-

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 84 of 103

STATUTORY ADDENDUM

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 85 of 103

Section 2(a)(11) of the Securities Act 15 U.S.C. 77b(a)(11) (a) Definitions When used in this subchapter, unless the context otherwise requires * * *

(11) The term underwriter means any person who has purchased from an issuer with a view to, or offers or sells for an issuer in connection with, the distribution of any security, or participates or has a direct or indirect participation in any such undertaking, or participates or has a participation in the direct or indirect underwriting of any such undertaking; but such term shall not include a person whose interest is limited to a commission from an underwriter or dealer not in excess of the usual and customary distributors' or sellers' commission. As used in this paragraph the term issuer shall include, in addition to an issuer, any person directly or indirectly controlling or controlled by the issuer, or any person under direct or indirect common control with the issuer. Section 4 of the Securities Act 15 U.S.C. 77d The provisions of section 77e of this title shall not apply to-(1) transactions by any person other than an issuer, underwriter, or dealer. (2) transactions by an issuer not involving any public offering. (3) transactions by a dealer (including an underwriter no longer acting as an underwriter in respect of the security involved in such transaction), except (A) transactions taking place prior to the expiration of forty days after the first date upon which the security was bona fide offered to the public by the issuer or by or through an underwriter, (B) transactions in a security as to which a registration statement has been filed taking place prior to the expiration of forty days after the
SA1

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 86 of 103

effective date of such registration statement or prior to the expiration of forty days after the first date upon which the security was bona fide offered to the public by the issuer or by or through an underwriter after such effective date, whichever is later (excluding in the computation of such forty days any time during which a stop order issued under section 77h of this title is in effect as to the security), or such shorter period as the Commission may specify by rules and regulations or order, and (C) transactions as to securities constituting the whole or a part of an unsold allotment to or subscription by such dealer as a participant in the distribution of such securities by the issuer or by or through an underwriter. With respect to transactions referred to in clause (B), if securities of the issuer have not previously been sold pursuant to an earlier effective registration statement the applicable period, instead of forty days, shall be ninety days, or such shorter period as the Commission may specify by rules and regulations or order. (4) brokers' transactions executed upon customers' orders on any exchange or in the over-the-counter market but not the solicitation of such orders. (5) transactions involving offers or sales by an issuer solely to one or more accredited investors, if the aggregate offering price of an issue of securities offered in reliance on this paragraph does not exceed the amount allowed under section 77c(b) of this title, if there is no advertising or public solicitation in connection with the transaction by the issuer or anyone acting on the issuer's behalf, and if the issuer files such notice with the Commission as the Commission shall prescribe. (6) Redesignated (5)

SA2

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 87 of 103

Section 5 of the Securities Act 15 U.S.C. 77e (a) Sale or delivery after sale of unregistered securities Unless a registration statement is in effect as to a security, it shall be unlawful for any person, directly or indirectly (1) to make use of any means or instruments of transportation or communication in interstate commerce or of the mails to sell such security through the use or medium of any prospectus or otherwise; or (2) to carry or cause to be carried through the mails or in interstate commerce, by any means or instruments of transportation, any such security for the purpose of sale or for delivery after sale. (b) Necessity of prospectus meeting requirements of section 77j of this title It shall be unlawful for any person, directly or indirectly (1) to make use of any means or instruments of transportation or communication in interstate commerce or of the mails to carry or transmit any prospectus relating to any security with respect to which a registration statement has been filed under this subchapter, unless such prospectus meets the requirements of section 77j of this title; or (2) to carry or cause to be carried through the mails or in interstate commerce any such security for the purpose of sale or for delivery after sale, unless accompanied or preceded by a prospectus that meets the requirements of subsection (a) of section 77j of this title. (c) It shall be unlawful for any person, directly or indirectly, to make use of any means or instruments of transportation or communication in interstate commerce or of the mails to offer to sell or offer to buy through the use or medium of any prospectus or otherwise any security, unless a registration statement has been filed as to such security, or while the registration statement is the subject of a refusal order or stop order or (prior to the effective date of the registration statement) any public proceeding or examination under section 77h of this title.

SA3

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 88 of 103

Rule 144(k) under the Securities Act 17 C.F.R. 230.144(k) Current through April 1, 2005; 70 FR 16919 230.144 Persons deemed not to be engaged in a distribution and therefore not underwriters. Preliminary Note: Rule 144 is designed to implement the fundamental purposes of the Act, as expressed in its preamble, To provide full and fair disclosure of the character of the securities sold in interstate commerce and through the mails, and to prevent fraud in the sale thereof * * * The rule is designed to prohibit the creation of public markets in securities of issuers concerning which adequate current information is not available to the public. At the same time, where adequate current information concerning the issuer is available to the public, the rule permits the public sale in ordinary trading transactions of limited amounts of securities owned by persons controlling, controlled by or under common control with the issuer and by persons who have acquired restricted securities of the issuer. Certain basic principles are essential to an understanding of the requirement of registration in the Act: 1. If any person utilizes the jurisdictional means to sell any nonexempt security to any other person, the security must be registered unless a statutory exemption can be found for the transaction. 2. In addition to the exemptions found in Section 3, four exemptions applicable to transactions in securities are contained in section 4. Three of these section 4 exemptions are clearly not available to anyone acting as an underwriter of securities. (The fourth, found in section 4(4), is available only to those who act as brokers under certain limited circumstances.) An understanding of the term underwriter is therefore important to anyone who wishes to determine whether or not an exemption from registration is available for his sale of securities.

SA4

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 89 of 103

The term underwriter is broadly defined in section 2(11) of the Act to mean any person who has purchased from an issuer with a view to, or offers or sells for an issuer in connection with, the distribution of any security, or participates, or has a direct or indirect participation in any such undertaking, or participates or has a participation in the direct or indirect underwriting of any such undertaking. The interpretation of this definition has traditionally focused on the words with a view to in the phrase purchased from an issuer with a view to * * * distribution. Thus, an investment banking firm which arranges with an issuer for the public sale of its securities is clearly an underwriter under that section. Individual investors who are not professionals in the securities business may also be underwriters within the meaning of that term as used in the Act if they act as links in a chain of transactions through which securities move from an issuer to the public. Since it is difficult to ascertain the mental state of the purchaser at the time of his acquisition, subsequent acts and circumstances have been considered to determine whether such person took with a view to distribution at the time of his acquisition. Emphasis has been placed on factors such as the length of time the person has held the securities and whether there has been an unforeseeable change in circumstances of the holder. Experience has shown, however, that reliance upon such factors as the above has not assured adequate protection of investors through the maintenance of informed trading markets and has led to uncertainty in the application of the registration provisions of the Act. It should be noted that the statutory language of section 2(11) is in the disjunctive. Thus, it is insufficient to conclude that a person is not an underwriter solely because he did not purchase securities from an issuer with a view to their distribution. It must also be established that the person is not offering or selling for an issuer in connection with the distribution of the securities, does not participate or have a direct or indirect participation in any such undertaking, and does not participate or have a participation in the direct or indirect underwriting of such an undertaking. In determining when a person is deemed not to be engaged in a distribution several factors must be considered. First, the purpose and underlying policy of the Act to protect investors requires that there be adequate current information concerning the issuer, whether the resales of securities by persons result in a distribution or are effected in trading

SA5

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 90 of 103

transactions. Accordingly, the availability of the rule is conditioned on the existence of adequate current public information. Secondly, a holding period prior to resale is essential, among other reasons, to assure that those persons who buy under a claim of a section 4(2) exemption have assumed the economic risks of investment, and therefore are not acting as conduits for sale to the public of unregistered securities, directly or indirectly, on behalf of an issuer. It should be noted that there is nothing in section 2(11) which places a time limit on a person's status as an underwriter. The public has the same need for protection afforded by registration whether the securities are distributed shortly after their purchase or after a considerable length of time. A third factor, which must be considered in determining what is deemed not to constitute a distribution, is the impact of the particular transaction or transactions on the trading markets. Section 4(1) was intended to exempt only routine trading transactions between individual investors with respect to securities already issued and not to exempt distributions by issuers or acts of other individuals who engage in steps necessary to such distributions. Therefore, a person reselling securities under section 4(1) of the Act must sell the securities in such limited quantities and in such a manner as not to disrupt the trading markets. The larger the amount of securities involved, the more likely it is that such resales may involve methods of offering and amounts of compensation usually associated with a distribution rather than routine trading transactions. Thus, solicitation of buy orders or the payment of extra compensation are not permitted by the rule. In summary, if the sale in question is made in accordance with all of the provisions of the section as set forth below, any person who sells restricted securities shall be deemed not to be engaged in a distribution of such securities and therefore not an underwriter thereof. The rule also provides that any person who sells restricted or other securities on behalf of a person in a control relationship with the issuer shall be deemed not to be engaged in a distribution of such securities and therefore not to be an underwriter thereof, if the sale is made in accordance with all the conditions of the section. (a) Definitions. The following definitions shall apply for the purposes of this section.

SA6

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 91 of 103

(1) An affiliate of an issuer is a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such issuer. (2) The term person when used with reference to a person for whose account securities are to be sold in reliance upon this section includes, in addition to such person, all of the following persons: (i) Any relative or spouse of such person, or any relative of such spouse, any one of whom has the same home as such person; (ii) Any trust or estate in which such person or any of the persons specified in paragraph (a)(2)(i) of this section collectively own 10 percent or more of the total beneficial interest or of which any of such persons serve as trustee, executor or in any similar capacity; and (iii) Any corporation or other organization (other than the issuer) in which such person or any of the persons specified in paragraph (a)(2)(i) of this section are the beneficial owners collectively of 10 percent or more of any class of equity securities or 10 percent or more of the equity interest. (3) The term restricted securities means: (i) Securities acquired directly or indirectly from the issuer, or from an affiliate of the issuer, in a transaction or chain of transactions not involving any public offering; (ii) Securities acquired from the issuer that are subject to the resale limitations of 230.502(d) under Regulation D or 230.701(c); (iii) Securities acquired in a transaction or chain of transactions meeting the requirements of 230.144A; (iv) Securities acquired from the issuer in a transaction subject to the conditions of Regulation CE ( 230.1001);

SA7

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 92 of 103

(v) Equity securities of domestic issuers acquired in a transaction or chain of transactions subject to the conditions of 230.901 or 230.903 under Regulation S ( 230.901 through 230.905, and Preliminary Notes); (vi) Securities acquired in a transaction made under 230.801 to the same extent and proportion that the securities held by the security holder of the class with respect to which the rights offering was made were as of the record date for the rights offering restricted securities within the meaning of this paragraph (a)(3); and (vii) Securities acquired in a transaction made under 230.802 to the same extent and proportion that the securities that were tendered or exchanged in the exchange offer or business combination were restricted securities within the meaning of this paragraph (a)(3). (b) Conditions to be met. Any affiliate or other person who sells restricted securities of an issuer for his own account, or any person who sells restricted or any other securities for the account of an affiliate of the issuer of such securities, shall be deemed not to be engaged in a distribution of such securities and therefore not to be an underwriter thereof within the meaning of section 2(11) of the Act if all of the conditions of this section are met. (c) Current public information. There shall be available adequate current public information with respect to the issuer of the securities. Such information shall be deemed to be available only if either of the following conditions is met: (1) Filing of reports. The issuer has securities registered pursuant to section 12 of the Securities Exchange Act of 1934, has been subject to the reporting requirements of section 13 of that Act for a period of at least 90 days immediately preceding the sale of the securities and has filed all the reports required to be filed thereunder during the 12 months preceding such sale (or for such shorter period that the issuer was required to file such reports), other than Form 8-K reports ( 249.308 of this chapter); or has securities registered pursuant to the Securities Act of 1933, has been subject to the reporting requirements of section 15(d) of the Securities Exchange Act of 1934 for a period of at least 90 days immediately preceding the sale of the securities and has filed all the reports required to be filed thereunder during the 12 months preceding such sale (or for such shorter period that the issuer was required to file such reports), other than Form 8-K reports (
SA8

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 93 of 103

249.308 of this chapter). The person for whose account the securities are to be sold shall be entitled to rely upon a statement in whichever is the most recent report, quarterly or annual, required to be filed and filed by the issuer that such issuer has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the issuer was required to file such reports), other than Form 8-K reports ( 249.308 of this chapter), and has been subject to such filing requirements for the past 90 days, unless he knows or has reason to believe that the issuer has not complied with such requirements. Such person shall also be entitled to rely upon a written statement from the issuer that it has complied with such reporting requirements unless he knows or has reasons to believe that the issuer has not complied with such requirements. (2) Other public information. If the issuer is not subject to section 13 or 15(d) of the Securities Exchange Act of 1934, there is publicly available the information concerning the issuer specified in paragraphs (a)(5)(i) to (xiv), inclusive, and paragraph (a)(5)(xvi) of Rule 15c2-11 ( 240.15c2-11 of this chapter) under that Act or, if the issuer is an insurance company, the information specified in section 12(g)(2)(G)(i) of that Act. (d) Holding period for restricted securities. If the securities sold are restricted securities, the following provisions apply: (1) General rule. A minimum of one year must elapse between the later of the date of the acquisition of the securities from the issuer or from an affiliate of the issuer, and any resale of such securities in reliance on this section for the account of either the acquiror or any subsequent holder of those securities. If the acquiror takes the securities by purchase, the one-year period shall not begin until the full purchase price or other consideration is paid or given by the person acquiring the securities from the issuer or from an affiliate of the issuer. (2) Promissory notes, other obligations or installment contracts. Giving the issuer or affiliate of the issuer from whom the securities were purchased a promissory note or other obligation to pay the purchase price, or entering into an installment purchase contract with such seller, shall not be deemed full payment of the purchase price unless the promissory note, obligation or contract: (i) Provides for full recourse against the purchaser of the securities;
SA9

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 94 of 103

(ii) Is secured by collateral, other than the securities purchased, having a fair market value at least equal to the purchase price of the securities purchased; and (iii) Shall have been discharged by payment in full prior to the sale of the securities. (3) Determination of holding period. The following provisions shall apply for the purpose of determining the period securities have been held: (i) Stock dividends, splits and recapitalizations. Securities acquired from the issuer as a dividend or pursuant to a stock split, reverse split or recapitalization shall be deemed to have been acquired at the same time as the securities on which the dividend or, if more than one, the initial dividend was paid, the securities involved in the split or reverse split, or the securities surrendered in connection with the recapitalization; (ii) Conversions. If the securities sold were acquired from the issuer for a consideration consisting solely of other securities of the same issuer surrendered for conversion, the securities so acquired shall be deemed to have been acquired at the same time as the securities surrendered for conversion; (iii) Contingent issuance of securities. Securities acquired as a contingent payment of the purchase price of an equity interest in a business, or the assets of a business, sold to the issuer or an affiliate of the issuer shall be deemed to have been acquired at the time of such sale if the issuer or affiliate was then committed to issue the securities subject only to conditions other than the payment of further consideration for such securities. An agreement entered into in connection with any such purchase to remain in the employment of, or not to compete with, the issuer or affiliate or the rendering of services pursuant to such agreement shall not be deemed to be the payment of further consideration for such securities. (iv) Pledged securities. Securities which are bona-fide pledged by an affiliate of the issuer when sold by the pledgee, or by a purchaser, after a default in the obligation secured by the pledge, shall be deemed to have been acquired when they were acquired by the pledgor, except that if the securities were pledged without recourse they shall be deemed to have been acquired by the pledgee at the time of the pledge or by the purchaser at the time of purchase.

SA10

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 95 of 103

(v) Gifts of securities. Securities acquired from an affiliate of the issuer by gift shall be deemed to have been acquired by the donee when they were acquired by the donor. (vi) Trusts. Where a trust settlor is an affiliate of the issuer, securities acquired from the settlor by the trust, or acquired from the trust by the beneficiaries thereof, shall be deemed to have been acquired when such securities were acquired by the settlor. (vii) Estates. Where a deceased person was an affiliate of the issuer, securities held by the estate of such person or acquired from such estate by the beneficiaries thereof shall be deemed to have been acquired when they were acquired by the deceased person, except that no holding period is required if the estate is not an affiliate of the issuer or if the securities are sold by a beneficiary of the estate who is not such an affiliate. Note: While there is no holding period or amount limitation for estates and beneficiaries thereof which are not affiliates of the issuer, paragraphs (c), (h) and (i) of the rule apply to securities sold by such persons in reliance upon the rule. (viii) Rule 145(a) transactions. The holding period for securities acquired in a transaction specified in Rule 145(a) shall be deemed to commence on the date the securities were acquired by the purchaser in such transaction. This provision shall not apply, however, to a transaction effected solely for the purpose of forming a holding company. (e) Limitation on amount of securities sold. Except as hereinafter provided, the amount of securities which may be sold in reliance upon this rule shall be determined as follows: (1) Sales by affiliates. If restricted or other securities are sold for the account of an affiliate of the issuer, the amount of securities sold, together with all sales of restricted and other securities of the same class for the account of such person within the preceding three months, shall not exceed the greater of

(i) One percent of the shares or other units of the class outstanding as shown by the most recent report or statement published by the issuer, or

SA11

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 96 of 103

(ii) The average weekly reported volume of trading in such securities on all national securities exchanges and/or reported through the automated quotation system of a registered securities association during the four calendar weeks preceding the filing of notice required by paragraph (h), or if no such notice is required the date of receipt of the order to execute the transaction by the broker or the date of execution of the transaction directly with a market maker, or (iii) The average weekly volume of trading in such securities reported through the consolidated transaction reporting system contemplated by Rule 11Aa3-1 under the Securities Exchange Act of 1934 ( 240.11A3-1) during the four-week period specified in paragraph (e)(1)(ii) of this section. (2) Sales by persons other than affiliates. The amount of restricted securities sold for the account of any person other than an affiliate of the issuer, together with all other sales of restricted securities of the same class for the account of such person within the preceding three months, shall not exceed the amount specified in paragraphs (e)(1)(i), (1)(ii) or (1)(iii) of this section, whichever is applicable, unless the conditions of paragraph (k) of this rule are satisfied. (3) Determination of amount. For the purpose of determining the amount of securities specified in paragraphs (e)(1) and (2) of this section, the following provisions shall apply: (i) Where both convertible securities and securities of the class into which they are convertible are sold, the amount of convertible securities sold shall be deemed to be the amount of securities of the class into which they are convertible for the purpose of determining the aggregate amount of securities of both classes sold; (ii) The amount of securities sold for the account of a pledgee thereof, or for the account of a purchaser of the pledged securities, during any period of three months within one year after a default in the obligation secured by the pledge, and the amount of securities sold during the same three-month period for the account of the pledgor shall not exceed, in the aggregate, the amount specified in paragraph (e) (1) or (2) of this section, whichever is applicable; (iii) The amount of securities sold for the account of a donee thereof during any period of three months within one year after the donation, and the amount of securities sold during the same three-month period for the account of the donor,
SA12

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 97 of 103

shall not exceed, in the aggregate, the amount specified in paragraph (e) (1) or (2) of this section, whichever is applicable; (iv) Where securities were acquired by a trust from the settlor of the trust, the amount of such securities sold for the account of the trust during any period of three months within one year after the acquisition of the securities by the trust, and the amount of securities sold during the same three-month period for the account of the settlor, shall not exceed, in the aggregate, the amount specified in paragraph (e) (1) or (2) of this section, whichever is applicable; (v) The amount of securities sold for the account of the estate of a deceased person, or for the account of a beneficiary of such estate, during any period of 3 months and the amount of securities sold during the same period for the account of the deceased person prior to his death shall not exceed, in the aggregate, the amount specified in paragraph (e)(1) or (2) of this section, whichever is applicable: Provided, That no limitation on amount shall apply if the estate or beneficiary thereof is not an affiliate of the issuer; (vi) When two or more affiliates or other persons agree to act in concert for the purpose of selling securities of an issuer, all securities of the same class sold for the account of all such persons during any period of 3 months shall be aggregated for the purpose of determining the limitation on the amount of securities sold; (vii) The following sales of securities need not be included in determining the amount of securities sold in reliance upon this section: securities sold pursuant to an effective registration statement under the Act; securities sold pursuant to an exemption provided by Regulation A ( 230.251 through 230.263) under the Act; securities sold in a transaction exempt pursuant to Section 4 of the Act (15 U.S.C. 77d) and not involving any public offering; and securities sold offshore pursuant to Regulation S ( 230.901 through 230.905, and Preliminary Notes) under the Act. (f) Manner of sale. The securities shall be sold in brokers' transactions within the meaning of section 4(4) of the Act or in transactions directly with a market maker, as that term is defined in section 3(a)(38) of the Securities Exchange Act of 1934, and the person selling the securities shall not (1) solicit or arrange for the solicitation of orders to buy the securities in anticipation of or in connection with such transaction, or (2) make any payment in connection with the offer or sale of
SA13

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 98 of 103

the securities to any person other than the broker who executes an order to sell the securities. The requirements of this paragraph, however, shall not apply to securities sold for the account of the estate of a deceased person or for the account of a beneficiary of such estate provided the estate or beneficiary thereof is not an affiliate of the issuer; nor shall they apply to securities sold for the account of any person other than an affiliate of the issuer provided the conditions of paragraph (k) of this rule are satisfied. (g) Brokers' transactions. The term brokers' transactions in section 4(4) of the Act shall for the purposes of this rule be deemed to include transactions by a broker in which such broker: (1) Does not more than execute the order or orders to sell the securities as agent for the person for whose account the securities are sold; and receives no more than the usual and customary broker's commission; (2) Neither solicits nor arranges for the solicitation of customers' orders to buy the securities in anticipation of or in connection with the transaction; provided, that the foregoing shall not preclude (i) inquiries by the broker of other brokers or dealers who have indicated an interest in the securities within the preceding 60 days, (ii) inquiries by the broker of his customers who have indicated an unsolicited bona fide interest in the securities within the preceding 10 business days; or (iii) the publication by the broker of bid and ask quotations for the security in an inter-dealer quotation system provided that such quotations are incident to the maintenance of a bona fide inter-dealer market for the security for the broker's own account and that the broker has published bona fide bid and ask quotations for the security in an inter-dealer quotation system on each of at least twelve days within the preceding thirty calendar days with no more than four business days in succession without such two-way quotations; Note To Paragraph (g)(2)(ii): The broker should obtain and retain in his files written evidence of indications of bona fide unsolicited interest by his customers in the securities at the time such indications are received. (3) After reasonable inquiry is not aware of circumstances indicating that the person for whose account the securities are sold is an underwriter with respect to the securities or that the transaction is a part of a distribution of securities of the issuer. Without limiting the foregoing, the broker shall be deemed to be aware of

SA14

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 99 of 103

any facts or statements contained in the notice required by paragraph (h) of this section. Notes: (i) The broker, for his own protection, should obtain and retain in his files a copy of the notice required by paragraph (h) of this section. (ii) The reasonable inquiry required by paragraph (g)(3) of this section should include, but not necessarily be limited to, inquiry as to the following matters: (a) The length of time the securities have been held by the person for whose account they are to be sold. If practicable, the inquiry should include physical inspection of the securities; (b) The nature of the transaction in which the securities were acquired by such person; (c) The amount of securities of the same class sold during the past 3 months by all persons whose sales are required to be taken into consideration pursuant to paragraph (e) of this section; (d) Whether such person intends to sell additional securities of the same class through any other means; (e) Whether such person has solicited or made any arrangement for the solicitation of buy orders in connection with the proposed sale of securities; (f) Whether such person has made any payment to any other person in connection with the proposed sale of the securities; and (g) The number of shares or other units of the class outstanding, or the relevant trading volume. (h) Notice of proposed sale. If the amount of securities to be sold in reliance upon the rule during any period of three months exceeds 500 shares or other units or has an aggregate sale price in excess of $10,000, three copies of a notice on Form 144 shall be filed with the Commission at its principal office in Washington, D.C.; and if such securities are admitted to trading on any national securities exchange, one copy of such notice shall also be transmitted to the principal exchange on which
SA15

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 100 of 103

such securities are so admitted. The Form 144 shall be signed by the person for whose account the securities are to be sold and shall be transmitted for filing concurrently with either the placing with a broker of an order to execute a sale of securities in reliance upon this rule or the execution directly with a market maker of such a sale. Neither the filing of such notice nor the failure of the Commission to comment thereon shall be deemed to preclude the Commission from taking any action it deems necessary or appropriate with respect to the sale of the securities referred to in such notice. The requirements of this paragraph, however, shall not apply to securities sold for the account of any person other than an affiliate of the issuer, provided the conditions of paragraph (k) of this rule are satisfied. (i) Bona fide intention to sell. The person filing the notice required by paragraph (h) of this section shall have a bona fide intention to sell the securities referred to therein within a reasonable time after the filing of such notice. (j) Non-exclusive rule. Although this rule provides a means for reselling restricted securities and securities held by affiliates without registration, it is not the exclusive means for reselling such securities in that manner. Therefore, it does not eliminate or otherwise affect the availability of any exemption for resales under the Securities Act that a person or entity may be able to rely upon. (k) Termination of certain restrictions on sales of restricted securities by persons other than affiliates. The requirements of paragraphs (c), (e), (f) and (h) of this section shall not apply to restricted securities sold for the account of a person who is not an affiliate of the issuer at the time of the sale and has not been an affiliate during the preceding three months, provided a period of at least two years has elapsed since the later of the date the securities were acquired from the issuer or from an affiliate of the issuer. The two-year period shall be calculated as described in paragraph (d) of this section.

Nevada Revised Stat. Ann. 104-8401 (codifying UCC 8-401) 1. If a certificated security in registered form is presented to an issuer with a request to register transfer or an instruction is presented to an issuer with a request to register transfer of an uncertificated security, the issuer shall register the transfer, pledge or release as requested if:
SA16

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 101 of 103

(a) Under the terms of the security, the person seeking registration of transfer is eligible to have the security registered in his or her name; (b) The endorsement or instruction is made by the appropriate person or by an agent who has actual authority to act on behalf of the appropriate person; (c) Reasonable assurance is given that the endorsement or instruction is genuine and authorized; (d) Any applicable law relating to the collection of taxes has been complied with; (e) The transfer does not violate any restriction on transfer imposed by the issuer in accordance with NRS 104.8204; (f) A demand that the issuer not register transfer has not become effective under NRS 104.8403, or the issuer has complied with subsection 2 of that section but no legal process or indemnity bond is obtained as provided in subsection 4 of that section; and (g) The transfer is in fact rightful or is to a protected purchaser. 2. If an issuer is under a duty to register a transfer of a security, the issuer is liable to the person presenting a certificated security or an instruction for registration or his or her principal for loss resulting from unreasonable delay in registration or failure or refusal to register the transfer.

SA17

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 102 of 103

Nev. Rev. Stat. Ann. 104-8407 (codifying UCC 8-407) A person acting as authenticating trustee, transfer agent, registrar or other agent for an issuer in the registration of a transfer of its securities, in the issue of new security certificates or uncertificated securities or in the cancellation of surrendered security certificates has the same obligation to the holder or owner of a certificated or uncertificated security with regard to the particular functions performed as the issuer has in regard to those functions.

SA18

Case: 11-17021

03/23/2012

ID: 8115457

DktEntry: 26

Page: 103 of 103

CERTIFICATE OF SERVICE I hereby certify that I electronically filed the BRIEF OF THE SECURITIES AND EXCHANGE COMMISSION with the Clerk of the Court for the United States Court of Appeals for the Ninth Circuit by using the appellate CM/ECF system on March 23, 2012. I further certify that all counsel for the parties in the appeal, as listed below, are registered CM/ECF users and that service will be accomplished by the appellate CM/ECF system.

s/ Allan A. Capute Allan A. Capute Special Counsel to the Solicitor Securities and Exchange Commission 100 F Street, NE Washington, DC 20540-9040 (202) 551-5122 caputea@sec.gov Counsel for 1st Global Stock Transfer and Helen Bagley Mark S. Dzarnoski, Esq. 3960 Howard Hughes Parkway Las Vegas, NV 89109 Counsel for Brian Dvorak John Wesley Hall, Jr., Esq. 1202 Main Street Little Rock, AR 72202