Securities Attorneys Gone Wild l John Briner

On February 3, 2014, the Securities and Exchange Commission (the “SEC”) announced the filing of stop order proceedings against 20 purported mining companies for providing false information in their registration statements. Of the 20 registration statements, 18 were opined upon by the same attorney, Diane Dalmy, who is the subject of a pending SEC proceeding. Additionally, in June and July of last year, 17 of these 20 issuers subject to the registration
statements had requested SEC allow them to withdraw their registration statements. The other three issuers remained dormant for more than a year.

According to the SEC, enjoined and suspended securities attorney John Briner controls the 20 issuers.Briner was previously the subject of an SEC enforcement action and is not allowed to practicebefore the SEC.

Interestingly, enough more than one year ago, Promotion Stock Secrets published a report in which it noted blazing red flags of fraud in the same 20 registration statements. Promotion Stock Secrets noted that the business plans of the issuers were virtually identical and involving purported mining properties with straw management.

All 20 of the issuers had nominal or no revenues, nominal or no assets and limited cash on hand. They also shared common bad actors, including John Briner. The registration statements opined by Dalmy were filed within close proximity to one another; in several cases, on the same day. Promotion Stock Secrets pointed out 19 of the 20 issuers were formed on May 31, or June 1 of 2012 and; 16 filed registration statements during January 2013. The remaining 4 registrations were filed in November and December of 2012.

More than a year after thePromotion Stock Secrets report, the SEC’s Enforcement Division took action.According to the SEC, all of the companies are controlled by John Briner, a promoter who was the subject of a prior SEC enforcement action and was suspended from practicing as an attorney on behalf of any entity regulated by the SEC.However, each registration statement falsely stated that management consisted of a different individual who controlled and solely governed the company.The named individuals varied by company.

The SEC’s Enforcement Division and the agency’s Division of Corporation Finance attempt to prevent false or materially misleading registration statements from becoming effective.The purpose of a stop order is to prevent the sale of privately held shares to the public under a registration statement that is materially misleading or deficient.If a stop order is issued, no new shares can enter the market pursuant to that registration statement until the company has corrected the deficiencies or misleading information in the prospectus.

“By seeking stop orders, we can proactively protect investors from the harmful consequences of investing in companies with materially misleading and deficient offering documents,” said Andrew M. Calamari, director of the SEC’s New York Regional Office.“These particular registration statements failed to give investors an accurate depiction of who is running the companies.”

The obvious appearance from the Briner/Dalmy registration statements is that they were filed to manufacture shell companies for reverse merger transactions.Over the last eight years, the SEC and theFinancial Industry Regulatory Authority (“FINRA”) have overhauled the rules and regulations applicable to reverse merger transactions. Not only have the SEC and FINRA jumped on the bandwagon to eliminate them, but Depository Trust Company and national securities exchanges have joined in their efforts.Among the SEC’s efforts to stem microcap fraud is a campaign to eliminate dormant shell companies to prevent them from being used in reverse merger transactions. Using a registration statement, shell purveyors are often able to skirt past the rules that apply to offerings by shell companies.An issuer is not able to obtain a trading symbol if it is blank check or shell company.Issuers created to evade the rules that apply to blank check and shell companies are called Footnote 32 and Footnote 172 shells.In 2005, the SEC applied new rules to shell companies and prohibited the use of Form S-8 by shells. The SEC also imposed new reverse merger reporting requirements for Form 8-K.The SEC amended Rule 144 in 2008, to prevent its use by shareholders of shell companies.As such, many promoters use Form S-1 to register shell companies and conceal shell status using bogus business plans and management.A review of the Briner/Dalmy shells certainly appear to contain bogus business plans and management.

SEC Release Nos. 33-8587; 34-52038; International Series Release No. 1293, contains footnote number 32, which states: “We have become aware of a practice in which a promoter of a company and/or affiliates of the promoter appear to place assets or operations within an entity with the intent of causing that entity to fall outside of the definition of “blank check company” in Securities Act Rule 419. The promoter will then seek a business combination transaction for the company, with the assets or operations being returned to the promoter or affiliate upon the completion of that business combination transaction. It is likely that similar schemes will be undertaken with the intention of evading the definition of shell company that we are adopting today. In our view, where promoters (or their affiliates) of a company that would otherwise be a shell company place assets or operations in that company and those assets or operations are returned to the promoter or its affiliates (or an agreement is made to return those assets or operations to the promoter or its affiliates) before, upon completion of, or shortly after a business combination transaction by that company, those assets or operations would be considered “nominal” for purposes of the definition of shell company.”

SEC Release No. 33-8869, contains footnote number 172, which states: “Rule 144(i) does not prohibit the resale of securities under Rule 144 that were not initially issued by a reporting or non-reporting shell company or an issuer that has been at any time previously such a company, even when the issuer is a reporting or non-reporting shell company at the time of sale. Contrary to commenters’ concerns, Rule 144(i)(1)(i) is not intended to capture a “startup company,” or, in other words, a company with a limited operating history, in the definition of a reporting or non-reporting shell company, as we believe such a company does not meet the condition of having “no or nominal operations.”

The 20 companies that are the subjects of the stop order proceedings are:

Braxton Resources Inc. Bonanza Resources Corp. Canyon Minerals Inc. CBL Resources Inc. Chum Mining Group Inc. Clearpoint Resources Inc. Coronation Mining Corp. Eclipse Resources Inc. Gaspard Mining Inc. Gold Camp Explorations Inc. Goldstream Mining Inc. Jewel Explorations Inc. Kingman River Resources Inc. La Paz Mining Corp. Lost Hills Mining Inc. PRWC Energy Inc. Seaview Resources Inc. Stone Boat Mining Corp. Tuba City Gold Corp. Yuma Resources Inc.

The SEC’s Division of Enforcement alleges that the companies also falsely stated that they had no material agreements with an undisclosed control person or promoter when in fact they did have such agreements with Briner.The SEC’s Division of Enforcement alleges as well that some of these issuers obstructed the SEC staff and refused to permit examinations of their registration statements.

The SEC instituted the proceedings against the issuers pursuant to Section 8(d) of the Securities Act of 1933 to determine whether the Enforcement Division’s allegations are true, and to afford each issuer an opportunity to present affirmative defenses. The proceedings will determine whether a stop order should be issued suspending the effectiveness of the registration statement or statements.

Its efficacy is demonstrated by what the agency calls operation Shell Expel, which so far has resulted in trading suspensions for more than 1,000 dormant public companies.In addition, the SEC has recently identified gatekeepers – securities lawyers, transfer agents, accountants- and shell purveyors as ripe targets for enforcement actions.

Last year the SEC announced its new task force “Enforcement Initiatives to Combat Financial Reporting and Microcap Fraud and Enhance Risk Analysis”whose targets, among others, would be reverse merger purveyors and securities attorneys involved in reverse merger transactions.

The rules and regulations impacting reverse mergers have changed dramatically in recent years and reverse mergers are often misunderstood and misapplied. This is illustrated by the string of SEC cases involving reverse merger participants and their legal counsel.

Shell company purveyors praise the virtues of reverse merger transactions claiming they are easier and faster than filing a registration statement with the SEC, despite recent rule changes that eliminate many if not all of the benefits once conferred by them. Seeking to persuade clients to use their services, shell peddlers hark back to the glory days of unregulated reverse merger transactions. The reality is that those glory days are over. Anyone familiar with the rules and regulations impacting reverse merger transactions knows they can be toxic for private companies seeking to go public if not done properly.

Creating Inventory for Reverse Mergers l Illegal Custodianship and Receivership Actions

Custodianship and receivership fraud has become an epidemic in the OTC markets particularly with non-reporting issuers. It is by far the most abusive and blatant crime committed by reverse merger scammers.

In these custodianship and receivership actions, fraudsters locate dormant tickers and/or public companies that are inactive in their state of domicile. They then file pleadings with a state court under penalties of perjury, falsely stating, among other things, that the issuer’s board of directors was deadlocked in a vote, and so shareholders, unable to break the deadlock, are appealing to a state court judge to appoint a receiver selected by the shareholders, who are in fact the fraudsters. In reality, there was no deadlock, vote or even a meeting of the board of directors or shareholders.Upon appointment, the receiver presents the fraudulent order to the issuer’s transfer agent and causes it to issue millions, sometimes billions and sometimes evenbillions, of illegally free trading shares.To issue the illegally free trading shares, the fraudsters solicit the assistance of incompetent or corrupt securities attorneys to render flawed opinions in reliance upon Rule 3(a) (10) or Rule 144 of the Securities Act. To conceal their illegal actions from the legitimate shareholders and board of directors, the fraudsters often change the name and domicile of the issuer and conceal material aspects of their transactions from public filings as well as from FINRA.

Once the coast is clear, the fraudsters sell the hijacked entity to unsuspecting small companies in going public transactions. Fortunately, these fraudsters’ days are numbered.In the last year, the Justice Department has chargednumerous defendants for using similar schemes to exploit state court actions.

The Risk to Private Companies in Going Public Transactions

Any private company that purchases a custodianship or receivership shell is at risk of an SEC enforcement action even if they were an unknowing participant in certain securities violations that occurred.Section 5 of the Securities Act does not require scienter. In other words, even if someone is an unknowing participant relying upon a legal opinion to improperly issue free trading shares to himself or others, he can be charged with violating Section 5.In addition to SEC enforcement actions, issuers purchasing custodianship shells risk SEC trading suspensions.In the less than two years, the SEC has suspended approximately 700 dormant public companies to prevent corporate hijackings using fraudulent custodianship and receivership actions.Additionally, issuers may be subject to civil actions by legitimate management and shareholders of the entities hijacked in the custodianship proceedings.As stated above, most reverse mergers fail to properly disclose information material to investors. Additionally, where public vehicles are hijacked and/or taken over in custodianship proceedings, egregious accounting failures are present because the auditors employed fail to contact former management of the entity subject to the proceeding. To do so would reveal the scheme.

Any company considering going public through a reverse merger transaction should consider the decision carefully, and consult a qualified securities attorney before signing the dotted line for a reverse merger.

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 atinfo@securitieslawyer101.com or visit www.securitieslawyer101.com.

This securities law blog post is provided as a general informational service to clients and friends ofHamilton & Associates Law Group and should not be construed as, and does not constitute, legal and compliance advice on any specific matter, nor does this message create an attorney-client relationship. For more information about going public and the rules and regulations affecting the use of Rule 144, Form 8K, FINRA Rule 6490, Rule 506 private placement offerings and memorandums, Regulation A, Rule 504 offerings, SEC reporting requirements, SEC registration statements on Form S-1 , IPO’s, OTC Pink Sheet listings,Form 10 OTCBB and OTC Markets disclosure requirements, DTC Chills, Global Locks, reverse mergers, public shells, direct public offerings and direct public offerings please contact Hamilton and Associates at (561) 416-8956 or info@securitieslawyer101.com. 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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