Monday, April 30, 2007

A Naked Shorting Victim -- Or Massive Fraud?

In Wall Street Versus America and in this blog (see this post) I described the sad tale of CMKM Diamonds, a penny stock nightmare that -- as is the fashion nowadays among bad companies -- was blaming its woes on "naked short selling."

A vocal minority of the company's 60,000 shareholders were so deluded that they demonstrated in New York and Washington and wrote nutty letters to the SEC and media, all lamenting this nonexistent problem.

It seems that CMKM was more of a nightmare than I had dreamed. In fact, it may even be one of the biggest corporate scandals of recent history.

As alleged in a startling lawsuit filed last week by CMKM's new management team, this small diamond company's shareholders may be victims of systematic fraud, with tens of millions of dollars allegedly looted by its former management. Among other things, the suit claims as follows:

During the last several years, CMKM has sold over $200 million in corporate stock to the public, but as of this writing, only $558 remains in the corporate bank accounts. Rather than use the funds raised through equity sales for the benefit of the corporation, [former CEO] Urban Casavant and his cohorts have funneled the money into their own personal bank accounts and trusts for their personal use, all at the expense of the corporation.
Corporate assets were allegedly used to buy real estate, including a $3.5 million Las Vegas home for Cassavant, and to settle the latter's gambling debts. Millions more are missing, the suit says.

A copy of this jaw-dropping suit can be found here.

If these allegations are borne out, CMKM Diamonds is right up there with the massive frauds of the Enron era. $200 million stolen? And mind you, the word "looted" is CMKM's, not mine.

It is also an example of the real damage that can be caused by stock market conspiracy theorists. Management and its allies had done an excellent job of diverting shareholder attention -- or at least the attention of a sizable number of shareholders -- from the real culprits.

As I have pointed out previously, the same "blame the shorts" technique is being employed by Overstock.com, to shift blame from its shortcomings and to intimidate critics.

The question now is not whether investors will learn from CMKM -- memories are short, so that's not happening -- but whether the SEC will do so.

Will the SEC stop caving in to political pressure, particularly from the Utah congressional delegation, and recognize that naked shorting is a smokescreen for bad companies? Will it stop wasting resources on this issue?

© 2007 Gary Weiss. All rights reserved.

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Wall Street Versus America was published by Penguin USA on April 6.
Click here for its Amazon.com listing and here for more information on the book, from my web site, gary-weiss.com.

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