COR Clearing Subpoenas Retail Shareholder Trade Information

 

Penny Stock Lawyer

Last fall, we wrote about a highly unusual cash dividend paid by penny stock Calissio Resources Group, Inc. (CRGP).  The payment process was so badly botched it resulted in a Financial Industry Regulatory Authority (FINRA) U3 trading halt that sent the stock to the Grey Market, and prompted a lawsuit by COR Clearing, LLC, which claimed it had been cheated out of $4 million.  Much has happened since that time, and the drama continues.  While some important points have been clarified, others have not, and no resolution is in sight. This debacle comes as no surprise in light of the fact that CRGO was a former dormant ticker that slithered into the public markets without oversight.

To recap:  On June 16, 2015, Calissio, a purported mining company with properties in Mexico, declared two dividends.  One was to be a small stock dividend; the other a large cash dividend that would pay $0.011 a share, or a total of about $1.3 million.  The record and pay dates for both were the same, June 30 and August 17 respectively.  As we explained in our earlier piece, although the company described the cash dividend as a regular quarterly distribution, at all times between the declaration date and the ex dividend date it qualified as a special dividend:  one worth more than 25 percent of the value of CRGP’s stock.

Special dividends differ from regular dividends in one significant way:  the ex-dividend date is set after, not before, the record date.  The record date is fixed by the issuer.  Only shares outstanding as of that time will qualify for the dividend payment.  The ex date is the first day on which the stock will trade without the dividend, and is set for one day after the pay date.  The pay date, like the record date, is set by the company.  The ex date is set by FINRA; in this case it was two days, not one, after the pay date of August 17.  Anyone who owns eligible stock as of the day before the ex date will receive the dividend payment.  If a shareholder of record—one who owns the stock in question as of the record date—sells between the record and ex dates, the buyer of his shares will receive the payment.  The new owner’s claim to that payment will be noted in the form of a “due bill” attached to the shares he purchased from the shareholder of record.  To explain simply, the record date establishes what stock will be eligible for the dividend, and the ex date establishes which shareholders will receive dividend payments.  The latter will be only those whose stock was issued and outstanding as of the record date.

What set off the uproar that surrounded the payment of the Calissio dividend was the fact that the company issued a very large number of new shares—hundreds of millions—between the record date and the ex date.  Those shares were not eligible for the dividend payment, but were treated as if they were.  Many of them were cleared by COR for their clients Nobilis Consulting LLC and Beaufort Capital Partners, who sold them between July 29 and August 19, the ex date.  The dividend distribution was handled by the Depository Trust & Clearing Corporation (DTCC).  As it proceeded with the payment, DTCC realized it had a significant shortfall.  Part of it was due to the Nobilis and Beaufort sales.  As a result, DTCC notified COR that it would be debiting approximately $4 million from its account on August 24.  COR protested that no dividend payments were due on the stock in question, but to no avail; DTCC went ahead and withdrew the money.

On August 25, COR engaged in an email correspondence with “Adam Carter,” CEO of Calissio.  Carter agreed that the Nobilis and Beaufort stock did not qualify for the dividend, and asked for a few more days in which to try to get things straightened out with DTCC.  However, he rejected a request by Carlos Salas, COR’s CEO, for a conference call.  The next day, COR filed suit against Calissio, Carter, and Signature Stock Transfer, CRGP’s transfer agent, in federal court in Omaha, Nebraska.

On the same day, FINRA imposed its U3 halt.  The halt was lifted after 10 trading days, but the stock had already been delisted to the Grey Market, because the issuer had lost compliance with SEC Rule 15c2-11.  The day of the halt—which hit just 20 minutes before the close—CRGP closed at $0.0036; the day it reopened, it closed at $0.0007 on volume of 102 million shares.  Since then, the stock price has declined to $0.0001, and volume has dried up.  Adding insult to some shareholders’ injury, a few days into the FINRA halt, E*TRADE slapped a hold on CRGP stock in its clients’ accounts.  The hold was not removed until mid-December.

The Amarium Technologies Shell and the GIM Note

The controversy surrounding Calissio’s cash dividend payment arose because of the very large stock issuances made between the record and ex dates.  It appears that in the summer of 2015, COR’s clients Nobilis and Beaufort each purchased $100,000 of debt from Global Infinitum Market S.A. de C.V.  According to COR’s original complaint, Nobilis converted and sold 277 million shares of CRGP between July 29 and August 19.  Beaufort converted and sold 90 million shares.  COR contends that many of those shares ended up back in the hands of Calissio, which at the time was engaged in a stock repurchase program.  Because the Nobilis and Calissio stock was issued after the record date, it did not qualify for the dividend, but, COR says, DTCC’s dividend distribution program failed to recognize that.  As a result, COR’s DTCC account was debited $4 million.

Nobilis and Beaumont were able to sell their newly-converted commons immediately because, they claimed, the debt they purchased was properly aged.  In an opinion written for Beaufort and sent to Signature Stock Transfer, attorney Vic Devlaeminck explained that the GIM note had originally been issued, in the amount of $600,000, on September 30, 2010.  Therefore:  “[t]he original debt owed to GLOBAL had been held by it as the original holder for more than four years prior to its sale to BEAUFORT.  Because no further consideration was necessary on the part of GLOBAL after acquisition, the securities represented by this debt holding are deemed to have been acquired on September 30, 2010.  BEAUFORT, as a non-affiliated purchaser for value from GLOBAL, is allowed, according to Rule 144, to tack onto the holding period of GLOBAL.  Therefore, the debt purchased by BEAUFORT, now converted to common stock of CRGP, has been held for a period in excess of one year as required under Rule 144…”

But was the GIM note really issued on September 30, 2010?  No one seems to have checked to make sure.  While that is indeed the date on the copy of the note in our possession, it’s difficult to see how it could be correct.

In our first article, we discussed at some length how Calissio became a public company.  Since then, we’ve learned more.  Briefly, a shell called Cirond Corporation did a reverse merger in 2006 that resulted in a change of control.  Frank Wilde became the new CEO, and changed the company’s name to Amarium Technologies.  Whatever his plans may have been, they were aborted in September of that year, when Wilde abruptly disappeared.  The Amarium shell went completely dark, and stayed that way until August 2008, when Bryan Glass, a shell vendor, applied in state court in Clark County, Nevada, to become its custodian.  The custodianship action was completed in April 2009, and Glass appointed himself sole officer and director.  On May 21, he submitted the company’s last SEC filing, a Form 15-12G that terminated Amarium’s registration and relieved it of all reporting obligations.

Glass then began to look for a buyer.  He didn’t find one for three years.  A document filed by Glass with the Nevada Secretary of State on July 25, 2012 shows that Adam Carter, who’s supposedly still CRGP’s CEO, took over as Amarium’s sole officer and director at that time.  Who was the buyer?  None other than Global Infinitum Market S.A. de C.V.  The signatory for GIM was one Julio Martin Del Campo.

Our copy of the GIM note is dated June 30, 2010, two years before GIM bought the Amarium shell.  GIM did not lend money to some private entity that later became the public company.  The promissory note itself specifies that:  “AMARIUM TECHNOLOGIES INC., a Nevada corporation (the “Company”), for value received, hereby promises to pay to the order of GLOBAL INFINITUM MARKET SA DE CV (the “Investor” or the “Holder”) the sum of Six Hundred Thousand US Dollars ($600,000)…”  GIM did not own Amarium Technologies in 2010.  Bryan Glass did, and it was a completely dead custodianship shell at the time.

The new public company, still called Amarium, didn’t begin making disclosure at the OTC Markets website until July 2013.  It then filed a purported annual report for fiscal 2011, in which the GIM note is described for the first time.  The ostensible purpose of the loan was to “secure funding for mining operations.”  That’s a bit puzzling, since Amarium didn’t announce its intention to “transition” to the mining business until May 2013, when it issued a press release announcing its acquisition of the so-called Jovita Mine in Michoacan, Mexico.  (No mine is visible at the coordinates offered by the company.)

It is not clear when the GIM note was actually issued, though it certainly appears to have been  fraudulently backdated.  That would make any debt conversions questionable, even if executed years later.

COR Moves to Appoint a Receiver

COR’s summons was served on Calissio’s resident agent in Nevada, but the company filed no response to the action.  On September 25, 2015, the court clerk entered default as to Calissio; on October 12, the resident agent, unable to contact CRGP, resigned.  Since Calissio failed to make a showing, the judge will likely grant COR a default judgment, but that judgment will no doubt prove impossible to collect.  Adam Carter has disappeared.  In early September, he announced in a pair of press releases that CRGP would merge with a Mexican company called Milagros Del Cobre Mineria S.A. de C.V.  Milagros reciprocated by reporting a few days later that the merger was complete.  Whether Milagros del Cobre exists or not—it has no internet presence—no merger has been processed by FINRA.  Carter last communicated with COR in a snide email saying “Good luck with the lawsuit,” and broke off contact with Signature Stock Transfer.

COR needed a new strategy.  On October 5, it filed a motion for an order appointing a limited purpose receiver for Calissio on an expedited basis.  In its brief in support of the motion, COR explained that DTCC will make “post-payable adjustments” to dividend distributions if—but only if—they are requested by an issuer or an agent of an issuer.  COR’s plan was to have a candidate named by them appointed as Calissio’s receiver; the receiver would then ask DTCC to reverse the dividend payment.  DTCC did not object.  COR proposed that it would issue notice of its intentions to all DTCC members that had dealt in CRGP’s stock during the interim period, which was the time between the record and ex dates for the dividend, and that those members, all clearing firms, would have seven days in which to submit a response to the court if they wished to do so.  DTCC had already supplied a list of 67 firms to COR.

Time was of the essence, because DTCC’s rules specify that it can make post-payable adjustments only in the 90 day period following the pay date for a dividend.  The question had to be decided by November 13.  Only four clearing firms made submissions to the court.  Of them, Hilliard Lyons had no objection to the proposed order.  KCG Americas said it would defer to the judge, but asked that, should a receiver be appointed, he conduct a full accounting.  TD Ameritrade Clearing objected that the “motion… seeks what amounts to a final judgment reversing the $4 million charge DTCC made to [COR’s] clearing account at the expense of thousands of innocent investors who purchased the stock which Nobilis and Beaufort dumped on the market.”

The most interesting response was from Alpine Securities Corporation.  Alpine declared that as of the record date of 30 June, it had “not a single CRGP share” in its DTCC account, and therefore none of the new shares it later handled should have had due bills attached to them.  The firm was in fact debited $940,500 by DTCC.  Alpine, like COR, complained to DTCC, and was “advised that it would only take instructions concerning an adjustment… from CRGP or someone acting on its behalf.”

Alpine’s client was Macallan Partners, a company run by well-known dilution funder Edward Bronson.  During the interim period, Macallan deposited 85.5 million shares in Alpine’s DTCC account, and then sold all of them before the ex date.  Despite the fact that those shares did not exist as of the record date, DTCC paid the dividend on them, and then charged Alpine.  Needless to say, Alpine supported COR’s motion for the appointment of a receiver.  Both firms argued that Calissio was a “ghost corporation” that had deliberately committed fraud. To date, it appears that none of the parties have considered the actions of those who put the ghost corporation into the market place for this debacle.

In the end, the judge was not convinced.  Quoting from a precedential case, he noted that “[a] receiver is an extreme remedy that is only justified in extreme situations,” and concluded that “COR Clearing has failed to sufficiently establish its extreme burden to satisfy the extreme remedy it seeks.”

A New Strategy

While Signature Stock Transfer is still a defendant in the lawsuit, even if COR prevails against it, it seems unlikely it would succeed in collecting $4 million.  But as that part of the case moves forward, COR seems to have come up with a new plan.

In December, it sent out at least three subpoenas.  One went to E-Trade Clearing LLC; another to National Financial Services LLC, the clearing arm of Fidelity Investments.  The E-Trade subpoena was served at the beginning of the month.  Its scope is very broad.  It demands documentation of every transaction made in CRGP stock between June 30 and August 19 2015, complete with the names of the individuals or entities that bought or sold, the size of each transaction, and more.  It also demands all documents relating to E-Trade and “any person, individual, introducing firm, broker, dealer, regulatory agency, or entity, including… DTCC and FINRA, concerning” Calissio, stock issued by Calissio, the dividend, any payment in respect of due bills, Signature Stock Transfer, Adam Carter, COR itself, Alpine Securities, “any transfers, payments, debits, or credits related to Calissio, stock issued by Calissio, or any due bills related to Calissio,” and the lawsuit brought by COR.  Also on the list are internal communications, all other communications, especially with DTCC, and all communications with the broker’s customers.

That seems an enormous amount of information to ask of a non-party to the legal action.  The National Financial Services subpoena is virtually identical.  Neither E-Trade Clearing nor NFS took the trouble to respond, or to communicate with COR about the matter in any way.  As a consequence, on December 31 COR filed two motions in the Federal District Court of New Jersey—where the firms are located—to compel appropriate responses.  E-Trade was served on January 6, and must answer by January 27.  The case as to NSF was voluntarily dismissed by COR on January 15.  Probably NSF in some way satisfied COR’s demand, either by agreeing to turn over the information required, or by responding with an objection.

We know of one other entity that received a subpoena:  financial message board Investor’s Hub (IHUB).  It was served on December 12.  Unlike the two clearing firms, IHub chose to respond quickly, filing an objection almost immediately.  The subpoena is similar to the ones sent to E-Trade and NFS, though in a cover letter COR’s counsel says it’s chiefly interested in communications written by “apparent shareholders of Calissio” who may have received improper dividend payments.  COR would like for IHub to identify these people.  In addition, it wants copies of all posts made “relating to Calissio” between January 1, 2015 and the present.

In its objection, IHub points out that “COR Clearing has failed to identify any actionable post in the underlying litigation.  Nor has COR Clearing demonstrated that any of the Posters have any other potentially relevant or discoverable knowledge.”  It further points out that “[i]n 2015 alone, almost one thousand (1,000) Posters have transmitted well in excess of forty thousand (40,000) posts on the Calissio board alone.”  Noting that “similar subpoenas are frequently used to harass, intimidate and/or silence anonymous critics,” IHub characterizes the subpoena as a violation of its privacy policy and other contractual commitments to its members, adding that compliance with it would cause it to violate the Electronic Communications Privacy Act.  It will be up to the judge in Omaha to rule on the objection.

We know about the objection only because IHub sent copies of it and the subpoena to at least one IHub member, because she had submitted a letter to the court protesting COR’s earlier motion to appoint a limited purpose receiver.  Consequently, she was listed on the docket as an “interested party.” She was  one of the few interested parties to offer a mailing address with her protest.

All of this raises a number of questions.  What is COR’s objection?  What’s the new plan?  How many other subpoenas were sent out in December?  It appears that the clearing firm wants to trace every share of stock traded between the record and ex dates for the cash dividend, in order to determine which shareholders were ultimately entitled to that dividend and which were not.  Perhaps a more effective approach would be tracing transactions in the shares issued in the 12 month period prior to the announcement of the dividend. It is less obvious what COR plans to do with that information should it receive it.  In its original complaint, COR contended that Calissio defrauded it by “surreptitiously issuing hundreds of millions of shares of Calissio stock after declaring a dividend on all common shares outstanding prior to the issuance, then repurchasing hundreds of millions of these new shares (both on its own and through its affiliates)…”  That statement suggests Calisso and nefarious affiliates of Calisso colluded to profit illicitly from the dividend distribution, at the expense of COR.  But none of those affiliates has ever been named.  Now the focus seems to have shifted to sorting through transactions involving ordinary shareholders.

If that’s COR’s new direction, and it wants complete data, it will need to subpoena all 67 clearing firms it notified in connection with the motion to appoint a receiver.  The judge will need to rule on any objections and perhaps enforce document production.  Then what?  Would COR sue shareholders who’d received dividends to which they weren’t entitled?  Or would they sue the brokerages for failing to distinguish between dividend-eligible and dividend-ineligible stock?

Chances are the judge will raise some objections of his own to this new strategy.  If the real culprit in this story is Calissio the “ghost corporation,” it would get to keep its ill-gotten dividend gains, while shareholders who knew nothing of due bills and potential problems with DTCC’s dividend distribution system would be penalized.  That would scarcely be an equitable solution. The bigger question that everyone seems to be overlooking involves tracing who controlled Calissio behind the scenes when this scheme was put into place. It certainly wasn’t “Adam Carter,” or the two other untraceable individuals named as directors.  In the company’s OTC Markets disclosure statement for the period ended June 30, 2015, it’s stated unambiguously that they owned no stock at all.   The only greater-than-5% owner named is Industrias Calissio Sur SA, a company with a Mexico City address.  Industrias Calissio’s beneficial owner is said to be “Colosio Sembrano,” a moniker improbably concocted from two surnames.  As of June 30, Industrias Calissio held 90.12% of Calissio’s stock.  There is no way of knowing who really controls Industrias Calissio.

In the financial statements for the same period, CRGP reports that it had 129,460,000 shares of common stock issued and outstanding.  That number changed dramatically over the next two months, which, not by chance, coincided with the interim period for the company’s cash dividend.  According to amendments to Calissio’s corporate charter filed with the Nevada Secretary of State, the company raised its authorized capital three times between late July and late August.  The first raise, filed on July 21, was from 300 million shares to 1 billion shares.  Filed along with the amendment was the consent of Industrias Calissio as majority shareholder.  The size of Industrias Calissio’s holding—102,250,000 shares—had not changed since June 30, though the company’s shares outstanding had risen to 143,460,000.  The signatory for Industrias Calissio was Roberto Gutierrez.

Less than three weeks later, on 11 August, CRGP filed another amendment in Nevada, this time raising the authorized from 1 billion shares to 1.4 billion.  Once again, Roberto Gutierrez of Industrias Calissio gave his consent, noting that as of August 6, his firm owned 140,080,168 shares, which represented 55% of the 254,700,306 shares outstanding.  On August 21, another amendment was sent to Nevada, dramatically hiking the authorized to 3.5 billion.  At this time, a new majority shareholder appeared:  Minerales Consolidados S.A. de C.V.  Its signatory, Nestor Martinez, stated that Minerales Consolidados owned 350 million shares, or 55% of Calissio’s voting stock.  The shares outstanding as of that date were 592,807,222.

What is Minerales Consolidados, and how did it suddenly acquire a majority interest in Calissio?  The first part of that question can be answered:  Minerales Consolidados is the company from which CRGP bought the purported Jovita mine.  The transaction supposedly took place in May 2013.  If Minerales Consolidados received a large amount of Calissio stock at that time, why was it never mentioned in the company’s filings? If it didn’t, how and why did it suddenly acquire 350 million shares?  And who is behind it?

Since then, Calissio’s shares outstanding have risen to 903 million, according to E*TRADE.  We wonder who controls the company now.  It has since been announced that Calissio has merged with Milagros del Cobre, but nothing substantive is known about that transaction.  No determination of who controls CRGP may be made.

In the meanwhile, COR struggles to get its money back, though it seems to be ignoring the obvious. The elephant in the room is DTCC.  Its distribution system appears to have failed to recognize stock issued after the June 30 record date; stock that was not eligible to receive the dividend.  The Nobilis, Beaufort, and Macallan stock was presumably deposited with DTCC’s nominee CEDE & Company upon issuance, so DTCC had the means of knowing it did not exist as of the record date.  COR complained to DTCC as soon as it realized its account would be debited, but to no avail.  Alpine says it requested a hearing on the matter; DTCC refused schedule one.  So why isn’t DTCC a party to COR’s lawsuit?  The simple answer is probably the right one:  DTCC is powerful, and clearing firms must work with it on a regular basis.

For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, by email at [email protected] or visit www.securitieslawyer101.com.   This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute legal advice on any specific matter, nor does this message create an attorney-client relationship.  Please note that the prior results discussed herein do not guarantee similar outcomes.

Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney
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