IHUB Pushes Back to COR Clearing Subpoena in Calissio Case

We last wrote about the complex litigation involving Calissio Resources Group (CRGP) in February. It arose out of a controversy surrounding the company’s payment of a special dividend of $0.011 a share in August 2015. At the time of declaration, Calissio estimated that the dividend would cost about $1.3 million. During the same period, it announced that it would launch a stock buyback program.

We last wrote about the complex litigation involving Calissio Resources Group (CRGP) in February.  It arose out of a controversy surrounding the company’s payment of a special dividend of $0.011 a share in August 2015.  At the time of declaration, Calissio estimated that the dividend would cost about $1.3 million.  During the same period, it announced that it would launch a stock buyback program.

The dividend was declared on 16 June.  The company set a record date of 30 June and a pay date of 17 August.  When FINRA processed the relative corporate action request, it named 19 June as the ex dividend date.  The ex date is the first day on which a stock will trade without a dividend attached.  The dividend will be paid on all stock of the class specified that is issued and outstanding as of the record date.  If a shareholder sells his stock between the record and ex dates—that is, during the interim period—he will be selling his right to the dividend with it.  A due bill will be attached, and the dividend will be paid to the person holding the stock as of the ex date.  To sum up:  the record date establishes what stock is eligible for the dividend; the ex date establishes what shareholders will receive it.

Special dividends, which are worth more than 25 percent of a company’s market cap, are relatively rare.  When they do occur, they usually aren’t problematic.  Normally the company sets the record and pay dates fairly close together, and does not issue any new stock during the interim period.  Calissio didn’t do that.  It set the record and pay dates nearly two months apart, and during that time, it issued hundreds of millions of shares of new stock.  That new stock was sold into the market by Nobilis Consulting LLC, Beaufort Capital Partners, and Macallan Partners, who were holders of convertible debt.  Nobilis and Beaufort sold through COR Clearing; Macallan sold through Alpine Securities Corporation.

COR and Alpine assumed that the stock in question was not eligible for Calissio’s cash dividend, as it had been issued after the record date.  Unfortunately for both firms, no one told the Depository Trust and Clearing Corporation (DTCC) that.  When its dividend distribution department went to work after the ex date, it found it had a large shortfall.  As a consequence, it informed COR and Alpine that it would be debiting their accounts to the tune of $4 million and a little less than $1 million, respectively.  COR emailed DTCC urgently, explaining that a mistake had been made.  Even “Adam Carter,” CRGP’s purported CEO, agreed in an email that a “huge glitch” had occurred.  But DTCC was adamant, and went ahead with the debits.  Alpine requested a hearing on the matter, but the depository refused.

On August 26, 2015, COR filed suit against Calissio, Adam Carter, and Signature Stock Transfer in federal district court in Omaha, Nebraska, alleging that the defendants had conspired to profit illegally by issuing a large amount of stock during the interim period, buying it back in connection with its stock repurchase program, and then collecting dividends on it, at the expense of COR and Alpine.  Calissio was served, but defaulted.  “Adam Carter” could not be located.

COR then tried, apparently at DTCC’s suggestion, to persuade Lyle Strom, the judge in the case, to appoint a limited purpose receiver for CRGP.  The receiver would reverse the dividend payment, and everyone would be made whole.  Except, of course, for retail shareholders, many of whom had spent the money they were paid, or used it to buy more CRGP in anticipation of a second dividend.  The judge was not impressed by COR’s arguments, or by a brief submitted by Alpine, which was not a party to the case.  He ruled against COR’s motion, saying the remedy sought by the clearing firm was too extreme.

The transcript of the hearing on the motion wasn’t released until March.  When it appeared, it offered some hints to what might have influenced the judge’s decision.  At one point, Judge Strom asked Carlos Salas, COR’s CEO, some pointed questions about J.H. Darbie, the firm that had acted as introducing broker for Nobilis and Beaufort:

Q. Have you made any claim against — you, when I say you, COR — has COR made any claims against Darbie as a result of this conversion of debt to equity or the subsequent sale of the shares that were issued as a result?  

A. Yes, in the following sense: We approached Darbie with this. They understood their liability to our firm for indemnification against errors or any losses caused by their activity or customers’ activity. And so Darbie paid to our firm a half million dollars in exchange for which I permitted — or the firm permitted the remaining unsecured debit balance to be owed to us by Darbie in the form of an unsecured — excuse me — yeah, an unsecured but a subordinated note.

Q. Okay. So there was an agreement between Darbie and COR whereby Darbie paid COR $500,000, first of all, correct? 

A. Correct.

Q. And then there’s a subordinated note from Darbie to COR in the amount of how much?

A. 1.2 million — or thereabouts, about 1.2 million. 

Q. And so collectively that’s roughly $1.7 million; is that right? 

A. Correct.

Until then, Salas had insisted the appointment of a receiver and the consequent reversal of the dividend payment was the only remedy available to it.  Yet it had already obtained $500,000 in cash, and a note in the amount of $1.2 million, from Darbie.  Salas added that he’d also frozen the Beaufort and Nobilis accounts, but did not indicate their value.  Clearly, COR had the means of recovering a good part of its lost funds.

The judge’s ruling on the motion to appoint a receiver was a defeat for COR, but the clearing firm wasn’t finished.  Still determined to get its money back, it once again changed strategy.  In mid-December, it served three subpoenas.  Two of them were received by the clearing arms of two of the largest discount brokers, E*TRADE and Fidelity, demanding production of a great deal of documentation, including information about trading activity in CRGP by the brokers’ clients.  Both were initially ignored by their recipients.  A third subpoena went to online message board site Investor’s Hub (IHub).  IHub, unlike the two clearing firms, chose to respond quickly.  It objected that the subpoena was overly broad, requiring the production of tens of thousands of posts “relating to Calissio,” and personal information about dozens of the site’s members.  IHub objected 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.”  Noting that “similar subpoenas are frequently used to harass, intimidate and/or silence anonymous critics,” IHub asserted that the subpoena was 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.

On December 31, COR filed motions to compel production against E*TRADE’s clearing arm E-Trade Clearing and Fidelity’s clearing arm National Financial Services (NFS) in the New Jersey Federal District Court.  The action was dismissed as to NFS a few days later.  E-Trade objected, COR responded, and E-Trade dug in its heels.  The New Jersey judge has yet to rule.

In the meanwhile, COR attempted to negotiate with IHub, shortening its list of user accounts to 54 aliases.  IHub declined to comply, once again on the ground that such production would still violate its privacy policy.  Evidently frustrated, on April 15, 2016, COR filed a motion to compel IHub to produce information about a shorter list of 35 user accounts.

In its motion and accompanying memorandum of law, COR argued that because of fraudulent actions undertaken by Calissio and “Adam Carter,” funds were “unlawfully debited” from COR’s DTCC account, and “unauthorized, unlawful, and void due bills” were paid to CRGP shareholders who purchased the stock sold by Nobilis and Beaufort during the interim period.  Those shareholders, COR contended, included the IHub aliases named in its list.  Those individuals had received “an unjust windfall at COR Clearing’s expense.”  Not only that:  COR also wanted “information regarding the identities of certain posters on InvestorHub.com [sic] message board who appear to have been active promoters of the fraud perpetuated [sic] by Calissio.”  In its original complaint, COR had said that Calissio, Carter, and Signature Stock transfer had “defrauded COR Clearing and its customers 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), and relying on DTCC’s dividend payment system to fail to distinguish between shares entitled to dividends and those not so entitled.”  COR’s allegations had changed significantly.  No longer had the Nobilis and Beaufort stock been repurchased by Calissio; now it, with the dividend attached, had been sold directly to ordinary CRGP shareholders.

In support of its new argument, COR sustained that the individuals on its list had all posted messages suggesting they were the recipients of dividend payments.  A few examples were offered, including one that was actually a joke:  “What?  Mansion?  I have every intention of retiring after todays [sic] windfall.  If you keep replying, I will own Uzbekistan.”  With the possible exception of a single alias, the sinister “promoters” of the stock were merely people who’d exchanged email with Adam Carter at one time or another.

Addressing IHub’s argument that anonymous speech is protected by the First Amendment, COR contended that it was seeking evidence related to its core claims, and which was not available from other sources.  Put more clearly, COR believed the money it had “lost” had ended up in the hands of specific IHub posters, and it wanted to know the identities of those posters.  Answering IHub’s objection that the 67 clearing firms that had handled the transactions in question would be the logical source of such information, COR said that although it had served subpoenas on some of those firms, it was not “economically feasible” to deal with them all.

On May 9, IHub filed an extraordinary brief in opposition to COR’s motion to compel.  It begins with the assertion that the clearing firm “urges this Court to trample on the established First Amendment rights of anonymous speakers based on COR’s urgent entreaties that their identities are critical to COR’s ability to pursue its fraud and unjust enrichment claims.”  Going to the heart of the matter, IHub points out that the anonymous speakers in question were not named as parties to the underlying case, and so exposure of their identities would be irrelevant to the claims COR stated in its complaint.  IHub further notes that “ …the weighty First Amendment concerns threatened by COR’s subpoena should persuade this Court to uphold the strong protections afforded to anonymous speakers in proceedings attempting to force disclosure of their identities.  Indeed, if those identities are revealed, the consequences to such speakers are immediate, permanent and irreversible.  Thus, as to the nonparty speakers, this Court’s decision has the potential to be not only procedurally, but constitutionally, dispositive.

When COR produced its list of 54 posters in February, it referenced only seven examples of posts. IHub objected that “COR offered no explanation or evidence supporting its claim that the discussion on the Calissio Board of widely publicized matters regarding Calissio was somehow actionable, but… simply relied upon its sweeping and unsupportable conclusions that those isolated remarks are clear evidence of fraud and wrongdoing.”  By the time COR submitted its “modified” list of 35 aliases as an exhibit to the motion to compel, a number of the original names had been removed, and new ones had been added.  As IHub said, “the information demanded by COR at any point in time [is] a ‘moving target’”.

IHub then turned to an explanation of the heightened standard for identification of anonymous parties established in the seminal Dendrite case.  A plaintiff must give the speakers notice and allow them to defend their anonymity; must specifically identify the allegedly actionable speech or conduct; must state a claim against each defendant; must produce evidence supporting those claims; and must satisfy the court that the harm to plaintiff outweighs the damage caused to defendant speakers.  But the individuals whose personal information was sought by COR in its motion to compel were not parties to the underlying litigation.  The standard for identification of anonymous nonparties is even higher.  The defendants in the case are not IHub posters, but Calissio, Carter, and Signature.  As IHub put it, “nowhere in the pleadings does COR allege that any Calissio shareholders, much less any Posters who COR insists must be Calissio shareholders, were involved, knowingly or otherwise, in the alleged fraudulent activity, except as ‘victims’ according to the Complaint.”  Even more explicitly, COR stated in the complaint that it “does not assert any claims against Calissio shareholders.”

IHub acknowledges that since COR’s motion to appoint a receiver was denied, the clearing firm has apparently taken a new stance, but points out that it has never amended its complaint to reflect that.  In addition, though COR argued in the motion to compel that the anonymous posters should be unmasked because some or all of them “actively perpetrated the fraud” does not sort well with the claim in the complaint that Calissio, Carter, and Signature committed their own fraud in secret, “notifying no one outside their inner circle of conspirators.”

IHub also reminded COR that it had “alternative sources to trolling message boards,” though COR claimed it did not.  In connection with that, it brings up the clearing firm’s still-active efforts to extract customer information from TD Ameritrade Clearing and E-Trade Clearing.  IHub closed by suggesting that “this Court should reject COR’s attempt to enlist judicial assistance in this attempt to so grossly abridge the Posters’ constitutional rights.”

Charles Stampelos, a Magistrate Judge for the Tallahassee Division of the Northern District of Florida, ruled on the action, finding in IHub’s favor.  On May 11, he issued an order denying COR’s motion to compel.  Convinced by IHub’s argument that the anonymous posters whose identities were sought by COR were not parties to the case, he held:

The First Amendment right implicated here is not inconsequential, nor is the amount of monetary loss allegedly suffered by COR.  Notwithstanding, the disclosure of entities who have made postings on IHub cannot be permitted because those postings are not sufficiently related to the wrongful actions of Defendants Calissio, Adam Carter, and Signature Stock Transfer as alleged in the underlying civil case.  The motion to compel is denied.

Unlike many message board operators, IHub is willing to defend its members.  Most similar sites simply turn over the information requested, or merely notify them that a legal action with which they intend to comply is underway.  More than once, IHub has defended itself and its posters against individuals and entities interested in abridging those posters’ right to anonymous speech, or seeking to silence them altogether.  Members seeking anonymity should appreciate its efforts on their behalf.

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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Boca Raton, Florida 33432
Telephone: (561) 416-8956
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