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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) [email protected] BRIAN DVORAK,

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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

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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.

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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.

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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/

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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-

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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-

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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-

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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-

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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-

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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).

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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-

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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-

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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-

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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-

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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-

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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 that6/

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-

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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-

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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-

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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

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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

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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

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$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 letters8/

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-

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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

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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-

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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

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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

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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

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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.

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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

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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.

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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-

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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 first10/

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-

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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-

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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

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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

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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

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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-

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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

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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-

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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]

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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.

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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

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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

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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.

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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.

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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-

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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

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