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to third parties. No redaction has been performed by the Office of Inspector General. Recipients of this report should not disseminate or copy it without the Inspector General's approval.

REPORT OF INVESTIGATION
UNITED STATES SECURITIES AND EXCHANGE COMMISSION OFFICE OF INSPECTOR GENERAL Case No. OIG-528 Allegation of Preferential Treatment by the Division of Enforcement During an Investigation Introduction and Summary of Results of Investigation
sent an e-mail to the On October 10,2008, an investor named|(b"7)(C> Securities and Exchange Commission ("SEC" or the "Commission") Office of Inspector General ("OIG") attaching a July 23, 2008 e-mail message he had written to the Honorable Christopher Shays, United States House of Representatives. In his message to Congressman Shays,|(b"7)(C) [alleged that over 50,000 CMKM Diamonds, Inc. ("CMKM") investors had been defrauded by the company, suffering losses of $250 million. See October 10,2008 e-mail from|'b"7"C) to OIG, attached hereto as Ex. 1, at p. 1. <b>(7><c> also questioned why SEC officials had failed to name CMKM's former outside counsel,(b,(7)(C) - who was a former SEC Division of Enforcement ("Enforcement") attorney - as a defendant in the SEC's civil complaint filed in the U.S. District Court for the District of Nevada on April 7, 2008. Id. at pgs. 1-2.
(b)(7)(C) (b)(7)(C)

alleged further that during his tenure as CMKM's attorney, ^signed off on opinion letters that resulted in the fraudulent issuance of over 300 billion shares of CMKM stock, yet was not charged in the SEC's lawsuit against several participants in CMKM's scheme. On November 18, 2008, the OIG opened a preliminary inquiry into whether1"'111 1 may have received preferential treatment from Enforcement as a result of his past employment with the SEC.

Scope of Investigation
In its investigation of the aforementioned complaint, the OIG reviewed nearly 2,000 e-mails and supporting materials including action memoranda, investigative transcripts and opinion letters. In addition, the OIG also conducted on-the-record, under oath interviews of the following Enforcement employees: ^
<b)|7)(C> Qn january

] 5; 2010, excerpted portions

of which are attached hereto as Ex. 2;

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On November 25, 2009, after conducting an initial inquiry of the matter, the OIG converted the preliminary inquiry into an official investigation.

(b)(7)(C)

(2)

(3)

________________________ on January 15, 2010, excerpted portions of which are attached hereto as Ex. 3; January 15, 2010, excerpted portions of which are attached hereto as Ex. 4; and
l'b "7)(C) __________________________________________ on

(4)

3>n February 26, 2010,

excerpted portions of which are attached hereto as Ex. 5.

Relevant Commission Regulations and Rules

The SEC's Enforcement staff is obligated to continuously and diligently investigate instances of securities fraud, as set forth in the Commission's Canon of Ethics in the Code of Federal Regulations. The "Policy" provision of the Canon recognizes that "[i]t is characteristic of the administrative process that the Members of the Commission and their place in public opinion are affected by the advice and conduct of the staff, particularly the professional and executive employees." 17 C.F.R. 200.51. Thus, "[i]t shall be the policy of the Commission to require that employees bear in mind the principles specified in the Canons." Id. The "Preamble" of the Canon sets forth the serious duty placed upon members of the Commission and its staff, as follows: Members of the Securities and Exchange Commission are entrusted by various enactments of the Congress with powers and duties of great social and economic significance to the American people. It is their task to regulate varied aspects of the American economy, within the limits prescribed by Congress, to insure that our private enterprise system serves the welfare of all citizens. Their success in this endeavor is a bulwark against possible abuses and injustice which, if left unchecked, might jeopardize the strength of our economic institutions. 17 C.F.R. 200.53. The Canon provides further that: "In administering the law, members of this Commission should vigorously enforce compliance with the law by all persons affected thereby. . . . In the exercise of their judicial functions, members shall. . . impartially determine the rights of all persons under the law. 17 C.F.R. 200.55 (emphasis added). Finally, the Canon requires the maintenance of independence and the rejection of any impressions of influence: "A member should not, by his conduct, permit the impression to prevail that any person can improperly influence him, or that any person unduly enjoys his favor or that he is affected in any way by the rank, position, prestige, or affluence of any person. " 17 C.F.R. 200.61 (emphasis added).
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Results of the Investigation I. Investigation of Potential Misconduct by CMKM and

Enforcement's

On February 17,2005, the Pacific Regional Office (currently the Los Angeles Regional Office) Enforcement staff opened a Matter Under Inquiry ("MUI") into CMKM. See First SEC Name Relationship Search Index ("NRSI") entry attached hereto as Ex. 6. On March 2,2005, the SEC issued a formal order in the matter, converting the MUI into a formal Enforcement investigation. See Second NRSI entry attached hereto as Ex. 7. On April 7, 2008, Enforcement staff filed a civil complaint in the U.S. District Court for the District of Nevada against CMKM and 13 other defendants. See SEC v. CMKM Diamonds, Inc et al, Civ. Action No. 2:08-cv-00437 (D. Nev. Apr. 7, 2008), attached hereto as Ex. 8. The complaint alleged multiple violations of the federal securities laws including violations of the antifraud provisions of the Securities and Exchange Act of 1934 ("Exchange Act") by CMKM - a purported diamond and gold mining company - and its chief executive officer and sole active director, Urban Casavant. Id. Specifically, the complaint alleged a massive and complex scheme to improperly issue and sell CMKM stock in an unregistered distribution, and to manipulate CMKM's stock price and volume through false and misleading statements from January 2003 through May 2005. Id. A.
(b)(7)(C)

Alleged Misconduct

During the course of its investigation, Enforcement staff examined______________ under

oath on two separate occasions - July 19, 2006 and October 23, 2007.2 In his July 19, 2006 testimony.(b>(7|(C> [stated that he began his legal career working for the SEC's Division of Enforcement in the Washington, DC Home Office after graduating from law school(bK7||C) excerpted portions of which are attached hereto as Ex. 9, at p. 10. According to the SEC's Office of Human Resourceslb < was employed in Enforcement from (b>(7)|C| jjto (b 7 c> ISee February 10-11, 2009 e-mail chain | "" between OHR and<b)(7)(C) w/handwritten note, attached

f>

1(b)(7)(C)

hereto as Ex. 10. Of those 15 months, he worked as a law clerk and a staff attorneyl(b)(7)(C) ] Id. After leaving Enforcement, held several positions at various law firms and a private company before eventually i oining the law firm of where he is (b)(7)(C) currently (b)(7)(C) employed as a partner in the firm's July! 9,2006|(b)(7)(C)

about CMKM and his involvement with the company on the grounds of attorney-client privilege. CMKM eventually waived its attorney-client privilege protection, and Enforcement staff took(b)|7|(C> testimony a second time on October 23,2007 in which he answered all of the SEC's questions.

During his July 19, 2006 testimony,|0|<7)(C) refused to answer a number of Enforcement staffs questions

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While atj1(7)(C) ___________________ stated that he first became acquainted with CMKM in May or June of 2004 at a dinner he attended with the company's former CEO Urban Casavant and others in Las Vegas, Nevada. Id. at p. 16. During dinner,|(b)(7)(C) said he learned from Brian Dvorak, former counsel to CMKM, and Casavant that the company was not filing reports with the SEC as required by the Exchange Act and, furthermore, that the company's transfer agent was suspected of issuing shares without authorization. Id. at pgs. 17, 26. After advising CMKM that it appeared to be in violation of the Exchange Act by not filing the required reports, and advising CMKM that audited financials needed to be prepared before the company could become a "reporting company" under the Exchange Act,(b)(7|(C) testified that he was retained by CMKM as outside counsel. Id. at pgs. 17,26-28, 35. From July through September 2004. at Casavant's request<bl<7>(C, issued 13 opinion letters on behalf of his firrrJ(0)<7,<C) which he faxed to CMKM's transfer agent authorizing the issuance of purportedly unrestricted (b)(7)(C) ________ ppmion CMKM stock to several individuals and entities identified in those letters. See letters dated July through September 2004 attached hereto as Ex. 11. Based upon these letters, hundreds of billions of unrestricted, free-trading shares of CMKM stock were issued. Id. According to|(b"7)(C> [he relied exclusively on company counsel Dvorak's representations that the stock issuances were valid. October 23,2007 |(b)(7)(C) Transcript, excerpted portions of which are attached hereto as Ex. 12, at pgs. 87-88. [(b)(7)(c) |egal representation of CMKM terminated in February 2005. July 19, 2006

B.

Enforcement Staffs Recommendation to the Commission

On March 4, 2008, Enforcement staff sent an action memorandum to the Commission|(b)(5)

(b)(5)

'b"5 TMarch 4, 2008 Action Memorandum titled, In the Matter of CMKM Diamonds. Inc.. attache! hereto as Ex. 13, at pgs. i-iv. Enforcement staff recommended|(b)(

(b)(7)(c)

Tr.atp.37.

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Id. at p. 26. There was no mention of (b,(')|C) jn the action memorandum. After receiving Commission approval to pursue the recommended federal and administrative actions against the prospective defendants, Enforcement staff filed a civil injunctive action in U.S. District Court on April 7, 2008.3 On April 8, 2008, Enforcement staff notified l>(7)(C) [counsel that "based on current information, our intent is not to pursue an

enforcement action againstl(b)(7)(C) ^pril 8, 2008 e-mail from(b"7|(C) |to|(b)(7"C) attached hereto as Ex. 15, at p. 1. See also April 8, 2008 Termination Letter from'""7"0' tolb)(7|(C) attached hereto as Ex. 16.

and ~|

From the evidence presented, including(b|(7)(C> ___________ testimony, it appears that failed to adequately investigate the representations that Dvorak made to the preparation of the opinion letters. Rather, it appearsr*'7"0' |may have (b)(7)(C) effectively "rubber-stamped" Dvorak's original opinion letters that the stock issuances were valid and, in doing so, may have ignored red flags raised by CMKM's conduct -including the fact that CMKM had been violating the Exchange Act by failing to file required reports with the SEC. In spitel(b)(7)(C) conduct in the case and role in the fraudulent issuance of hundreds of billions of shares of unregistered stock, Enforcement staff decided not to bring an action against(b)1 " ' As stated earlier, Enforcement staff did, however, bring an action against Dvorak as well as 13 additional defendants for their roles in CMKM's fraudulent scheme.

II. Against A.

Enforcement Staff's Decision Not to Bring An Action Enforcement Staff Initially Considered Charging

(b)(7)(C) (b)(7)(C)

During its investigation of CMKM, Enforcement staff initially considered bringing an action against]3 pis involvement in CMKM's scheme, and discussed charging him with a variety of federal securities law violations, including violations of: (1) the antifraud provisions of the Securities Act and Exchange Act; (2) Section 5 of the Securities Act prohibiting the sale of unregistered securities; and (3) Rule 102(e) of the SEC's Rules of Practice. In a March 8, 2007 e-mail to members of the investipation team
.c
-t, (b)(7)(C)

in preparation for an upcoming meeting withL (b)(7)(C) (b)(7)(C) eXp]aine(} the basis for a possible action against |(b)(7)(C) [was briefly a staff attorney in Enforcement at the beginning of his career. He was retained as counsel for CMKM Diamonds from June 2004 through February 2005,

Although several of the defendants have settled with the SEC, the case remains in active litigation against the remaining defendants, including Dvorak. On September 21, 2009, the U.S. Attorney's Office for the District of Nevada announced the arrest of five of the SEC's defendants, including Dvorak, on charges of "federal conspiracy and securities fraud crimes for issuing and selling hundreds of billions of shares of unregistered stock . . . . " September 21,2009 U.S. Department of Justice News Release, attached hereto as Ex. 14, at p. 1. According to the U.S. Attorney's Office, the case currently is "being investigated by the FBI and IRS Criminal Investigation." rb**7Mc*_pis not among those under arrest, but is a named defendant in a civil suit filed in Nevada state court by CMKM in 2009.

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and CMKM touted him and his firm to lend legitimacy. (b)(7)(C) Our proposed charges agains Jrelate to opinion letters he drafted and issued between July and September 2004 through which millions and millions of CMKM shares were issued as free-trading to various individuals and (b)(7)(C) had an entities. In a nutshell, we believe insufficient basis on which to issue these letters and thus aided and abetted the CMKM fraud. We issued him an oral Wells notice for violations of Sections 5 and 17(a), Section 10(b)/Rule 10b-5, and Rule 102(e).4

According to the SEC's Enforcement Manual, "Rule 5(c) of the SEC's Rules on Informal and Other

March 8,2007 e-mail from 1 (emphasis added). ')(C) 5 deluding: f ^

to
(b)(7)(C)

(b)(7)(C)

and

, (b)(7)(C) (b)(7)(C)

attached hereto as Ex. 17,

(b)(7)(C)

then listed a series of factors in support of charging was on notice that CMKM might be a fraud;

"slapped" his own opinion letters on top of Dvorak's without ever relying on any documentation other than Dvorak's and "publicly available documents," which at that time were "largely non-existent:"l(b>'7)(C1 "knew that CMKM had no books and record to speak of, no financials;" and(b>(7)(C> knew that the individual ultimately alleged to have masterminded the fraud was a "bad guy." Id. at p. 2.(b)(7)|C) concluded his e-mail as follows:

As alluded above, we were stymied by an aggressive assertion of attorney-client privilege regarding |(b)(7)(C) communications with CMKM, Urban, Dvorak, and the basis for his opinion letters. Thus, there is a lot we don't know and may not know until the privilege issue is resolved through waiver (unlikely) or litigation. That risky, but we feel that there is (b)(7)(C) makes the case against a basis to proceed assuming that the Commission will tolerate that risk. Id. (emphasis added). When asked about the initial decision to consider charging testified: is a tough call, you know, he I mean, I thinkp'5"0' has had some prominence out there in terms of investor complaints, and I think we had to look very hard at him,
(b,,7)(C) (b)(7)(C)

Procedures states that '[ujpon request, the staff, in its discretion, may advise such persons [involved in preliminary or formal investigations] of the general nature of the investigation, including the indicated violations as they pertain to them, and the amount of time that may be available for preparing and submitting a statement prior to the presentation of a staff recommendation to the Commission for the commencement of an administrative or injunction proceeding.'" 17 C.F.R. 202.5(c). Securities and

Exchange Commission Division of Enforcement Enforcement Manual, Office of Chief Counsel, January 13, 2010 at pgs. 27-28.

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and really struggle with his conduct. So he was one of the tough calls that we made and struggled with.

Well, initially, because he was the author of some of the opinion letters that resulted in the issuance of shares, he was naturally someone of interest to us. This case really was so centered around this, you know, share issuing machine, and since he was a crucial link in that because of his opinion letters, we wanted to look at him. So we did look carefully at him. We took testimony of him and, based on the attorney-client privilege issues, and then ultimately we were able to accomplish a waiver, and then went back and took more testimony from him to see if we could get behind some of his decision-making. And, you know, at the end of the day, it was still a close call. I mean, there were reasons to charge him because of some questions we had about the opinion letters and red flags he should have seen, but then we also had faced we had an attorney in the case, Dvorak, whose letters result in the issuance of many more shares. He received money beyond the fees to write those opinion letters. Testimony Tr. at pgs. 20, 21-22.
(b)(7)(C)

Other members of the investigative team likewise acknowledged person that thev initially considered charging. On February 26, 2010,(b|(7|(C) testified:

(b)(7)(C)

w.

But I think |<b>(7)(C> was there at the company for a period of time and wrote some opinion letters for a relatively short period of time which led to the issuance of some stock. So since we considered the company to have committed fraud and issued stock that should not have been issued, he was obviously one of those that we would consider to include in our actions.
(b)(7)(C) (b)(7)(C)

Testimony Tr. at pgs. 17-18. On January 15,2010,(b)(7||C) testified:

Q:

Okay, one of the individuals that you had considered earlier, as possibly bringing an action against, and then deciding against it, was one of those|(b'|7"C) Wasitl'

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A:

Yes.

A:

became associated with - and became counsel to CMKM Diamonds according to some press releases some time in the summer of 2004, and we had various concerns about that his relationship with CMKM Diamonds and some of his activities. We took testimony ~ I took testimony from him twice pursuant to subpoena.

(b)(7)(C)

(b)(7)(C)

Testimony Tr. at pgs. 46-47.

, (b)(7)(C)

one of several We conclude that Enforcement staff once considered potential "crucial link" in 7 defendants in the CMKM action. They considered^ CMKM's fraudulent scheme because of his opinion letters, but also acknowledged that
(b)(7)(C)

an action against|'"""'"' was a "tough call." For the reasons discussed immediately below, Enforcement staff ultimately decided not to charge)(b,|7)(C| in the CMKM fraud.

B.

Enforcement Staff Decides Not to Bring an Action Against

(b)(7)(C)

In late 2007, Enforcement staff was preparing its final recommendation to the Commission in the CMKM investigation. According to staff e-mail and sworn testimony before the OIG, the staff had not yet decided whether to charge two remaining individuals in the investigationj(b)(7)(C) Jand a securities broker named ]m (b)(7)(C) summarized the a November 6, 2007 e-mail to the rest of the investigative team state of the case and the need to make a final charging decision for these two individuals: because his (b)(7)(C) As you know, we did not Wells lawyer asked us to defer given the disclosure consequences. We also did not Wells|(b)(7'(C) author of several problematic 144 opinion letters, (b)(7)(C) (b)(7)(C) for the same reason. [second] recently completed testimony, in which she was able to probe areas over which the company had previously asserted attorney-client privilege. Now that the CMKM memo needs to be back in [the Home Office] by the end of the month because of statute of limitation concerns, I thought we should make some final decisions on how to handle (b"7)(C) and IWouId you have time on Thursday for a short meeting about this? Thanks.

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November 6, 2007 e-mail from(b)(7)(C) t<jmn and <b"7"c> attached 5 hereto as Ex. 18, at p. 2. The rest of the team responded in the affirmative, and the meeting was held to determine what charging decisions would be made with respect to According (b)(7)(C) (b)(7)(C) the final decision was made to charee to[(b)(7)(C) and (b)(7)(C) but not Testimony Tr. at pgs. 51-52. As a result, was
(b)(7)(C)

never issued a Wells notice and no Enforcement action was brought against him. In deciding whether to bring an action against[^17)(C> [the OIG investigation found that Enforcement staff weighed a series of factors before reaching the ultimate decision to forego an action against him. These factors are described below.

1. Risk:

Litigation (b)(7)(C)
(b)(7)(C)

Had a Potentially Strong Defense

was involved in CMKM's Enforcement staff acknowledged fraudulent scheme and that he issued opinion letters resulting in the improper issuance of "millions and millions" of CMKM shares to various individuals and entities. Ex. 17 at p. 1. Moreover, Enforcement staff believed (b)|7||C) had an insufficient basis on which to issue these letters and thus aided and may have had a good "reliance on defense" because of his reliance on Dvorak's opinion letters when issuing his (b)(7)(C) abetted the CMKM fraud." Id. However, Enforcement staff believed also counsel own, as testified: Q: Okay. And did the lawyer present a compelling argument on behalf of his client as to why he should not be charged? What did you think about that? A: Well, I think he presented very interesting arguments, one which was a little frustrating because he kept saying, "My client would like to tell you certain things, but it is shrouded in privilege." So that was the first thing. The second one was interesting because I do not think I have ever really had this situation, where we had a lawyer relying on another lawyer's work in a case. And, actually, that turned out to be the litigation
(b)(7)(C)

As mentioned earlier in this report, the staff issued an oral Wells notice earlier in 2007. However, the staff decided to hold off on issuing a written notice until deciding whether to formally recommend (b)|7 (C) for the charges against him. Thus, we believe that the statement "We also did not Wells 2 same reason" refers to providing'""7" 1 with a written Wells notice, which, upon receipt, would have required disclosure byj(b)(7)(C) knd/or his law firm. When asked about this practice]7^"01 | testified, "[A]t this time we did you know, we had variations on the Wells process. A lot of counsel were asking to have sort of pre-Wells meetings to hash things out before a formal Wells [notice] was given. So I'm not surprised to see this." |(b)'7)(C) [Testimony Tr. at p. 25. |(b)(7)(C) [stated further that the practice was consistent with what he had seen in other investigations in the past, but "[m]ore recently, I think we viewed that as a delay tactic by counsel sometimes. And so in the last year or so at least, we're doing a lot fewer pre-Wells meetings." Id. at p. 26. This document is subject to the provisions of the Privacy Act of 1974, and may require redaction before disclosure to third parties. No redaction has been performed by the Office of Inspector General. Recipients of this report should not disseminate or copy it without the Inspector General's approval.

risk that I was most concerned about, was how would that play out, a lawyer relying on another lawyer? Those were the two things I remember from that meeting. And those were some of the things that were raised when we discussed(D|(7)(C| (B)(')(C) because we were very concerned about
(D)(7)(C) ' "I

Testimony Tr. at pgs. 21-22 (emphasis added)J(b)(7"C) during her testimony:

frnade a similar observation

As I recall, a guiding reason a primary reason why we

10

decided not to recommend charges against<b)(7)(C) was that his attorney his opinion letters regarding the stock invariably said and his testimony had also indicated that he sent opinion letters from [Brian] Dvorak on to Helen Ba[g]ley, the Transfer Agent, but that he felt and there was enough ambiguity in his letters that we thought it would be a significant litigation risk that he was relying on another attorney's work. . . . But the combination of that, the fact that he would potentially have a very legitimate defense in saying, "I relied on [Brian] Dvorak's work," [Brian] Dvorak was a licensed attorney, [Brian] Dvorak had a long history with companies |0>|7|(C) knew, and said he had no reason to doubt Ryan Dvorak's work. And so we thought that was a significant consideration. . . . restimony Tr. at D. 58 (emphasis added). Moreover, in a list of "PROS" and

(b)(7)(C)

"CONS" prepared by in advance of Enforcement staffs meeting, she listed as a "CON" to suing!""'7"6' pMayhave some defenses, including that he relied on Dvorak (another attorney), "f^ J List of "PROS" and "CONS" for|(b)(7)'C) ^nd [(b)(7|(C) attached hereto as Ex. 19.

2.

Internal Resistance When Bringing Cases Against Attorneys

Ajecond factor cited by Enforcement staff in the decision not to bring an action againstiD|(7)(C) was an overall reluctance by staff to bring cases against attorneys because of the internal difficulties often encountered. Specifically!<b)<7)(C) testified: And with |(b)(7)(C) not only did we have these potential defenses of a lawyer relying on another lawyer, we had at that time obviously we think about how are the Divisions going to react to this matter? How is the Commission going to react to this matter? At that time, it

11

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was not terribly easy to sue a lawyer. You had to have a really good case . . . there was also this other issue where our office it was not a case I had, I was not involved in it - but our office had just lost against suing a lawyer who we thought knew or should have known, it was a very low standard; the allegation was that he caused the violation of this broker-dealer, and we got that case was dismissed and it went on appeal after the fact, and the Commission also dismissed it. So everyone is very sensitive to suing lawyers, you have got to have a really good case, and you really have to be thorough about how would this play out in litigation.
(B)(7)(C)

Testimony Tr. at pgs. 23-24.( 11 >( 1

took a similar view in his testimony:

On the other hand, it's very difficult to charge attorneys for many reasons, and at that time, going back to 2007-2008, the Commission in my memory was not very receptive to charging attorneys when they were close calls. And, you know, the typical approach has been that we will charge attorneys if they engage in conduct that is fraudulent, just like any other person that we would charge. But when an attorney or other professional like a compliance officer is acting in their professional capacity and giving advice in good faith, we want to be very careful, we in Enforcement, to not chill those functions. And so we want to be very careful in charging attorneys and compliance officers for providing advice in good faith. So that was kind of and I think the Commission at the time and the general counsel took a very protective view of attorneys, and so that meant that any case where we would recommend a case against an attorney, we would get that highly scrutinized by the Commission and by general counsel, and that's before we even would go into our litigation. So we faced two challenges, first to get a case approved, and then second, to litigate a case with all its litigation risks.

(b)(7)(C)

Testimony Tr. at p. 22.

3.

The Case Against Dvorak Was Stronger

In consideration of Reason #2 above, Enforcement staff determined that it had a stronger case against Dvorak than(b)(7)|C) and the prudent course of action would be to ,( 1 sue only Dvorak. During testimony, presented her view on the relative merits
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of each potential defendant's case, and explained her belief that Dvorak was the one whom the SEC should have sued: But I do remember having you know, we had to make some hard [decisions] and we went round I still remember we went to (B)(7)(C) office, and going round and round about the concern of|(b)(7)(C) |Also overlaying all of this concern about suing the lawyer is, we had very my understanding is our evidence against [Brian] Dvorak was much stronger than|<b><7><c>

So that in context also was, what is our best case? that we had a strong case against Dvorak. We thought __________ . I mean, he was very close, but that(b)(7)<C)
(b)(7)(C)

We

felt

12

we were going to run into potential litigation risks.

So, for example. Dvorak had been at CMKM for much longer than |(b)(7)(C) |had done over 400 opinion letters, there [were] direct ties my understanding from his testimony, from whatfb><told me, was that he knew that [the scheme's mastermind] fabricated documents, and dumped stock into the market, that he suspected that [the same mastermind] was giving money back to Casavant. You know, he was actually [Brian] Dvorak made quite a bit of money, and some of that money came from nominees of Casavant's. So those connections were very strong. And his ties to [certain scheme participants], it fit right into who was scheming in this case. ^Testimony Tr. at pgs. 22-23,24,25. |(b)(7|(C) ]view was shared by who testified that, "... Dvorak, I think had been involved earlier and a lot longer than|(b)(7)((^ and had issued ... 464 opinion letters over a 10-month period. So he - and also he didn't seem to be doing any other actions for the company, any other legal work." ( " ,( ' Testimony Tr. at p. 18(,()( 1 made a similar assessment in testimony: A: And, you know, at the end of the day, it was still a close call. I mean, there were reasons to charge (b)(7)(C) kecause 0f some questions we had about the opinion letters and red flags he should have seen, but then we also had faced we had an

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This document is subject to the provisions of the Privacy Act of 1974, and may require redaction before disclosure to third parties. No redaction has been performed by the Office of Inspector General. Recipients of this report should not disseminate or copy it without the Inspector General's approval.

attorney in the case, Dvorak, whose letters result in the issuance of many more shares. He received money beyond the fees to write those opinion letters. Q: And there was no evidence that|b|(7)(C) received any extra compensation? Yeah, not that I recall. So I think it was just fees that he ordinarily received as a lawyer. He was writing letters on top of letters, I mean, he was basically opining on the opinions of another lawyer, which took him one step from the actual conduct, and we at the time were facing a general counsel's office and a Commission that was having difficulties with charges against lawyers. That was something we had to factor in, you know, we have to think about our client and what our client would be willing to do. So, for all of those reasons, you know, that come to mind now, plus the already kind of over-crowded nature of the case, we felt that (b)(7)(c) couij deciine t0 g0 forward with.

A:

cage-| wag Qne wg

(b)(7)(C)

Testimony Tr. at pgs. 21-22 (emphasis added). Enforcement staffs view of the severity of Dvorak's conduct in furtherance of
(b)(7)(C)

CMKM's fraudulent scheme was also reflected in a July 12, 2009 e-mail from trial counsel, in which t o she stated, "Also, you might find it interesting to read through Dvorak's testimony transcript. I'd forgotten until I re-read it this evening how blatant his misconduct was." July 12, (b)(7)(C) {0 (b)(7)(C) 2009 e-mail from' attached hereto as Ex. 20, at p. 1. C.
(b)(7)(C)

Enforcement Staff Denies

Was Treated Preferentially

(b)(7)(C)

Finally, each member of the investigative team stated under oath prior employment with the SEC had nothing to do with the ultimate decision not to charge him with misconduct in the CMKM investigation. Enforcement staff maintained
(b)(7)(C) (b)(7)(C)

was investigated fairly and in good faith, and received no preferential treatment. Specifically, A: I am quite confident that
(b)(7)(C)

estified:

former employment at the Commission played no role pro or con in his charging decision. And I do not

This document is subject to the provisions of the Privacy Act of 1974, and may require redaction before disclosure to third parties. No redaction has been performed by the Office of Inspector General. Recipients of this report should not disseminate or copy it without the Inspector General's approval.

know if you want my personal opinion on that or not? Q: A: Q: A: Please. And I do not want to speak for anyone else in the office Please. but my personal opinion is that it would be wrong

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either to penalize |(b)(7>(C) [based on his past employment or to have that be a benefit to him in our decisions, that that is just something that does not play a role, just as there are other aspects of one's background that should not play a role at all, and it was not a factor.
(b)(7)(C)

Testimony Tr. at p. 98

<b>(7)(C)
,

-r.

testified: way once that was known, the fact|<b>(7,<C) Q: was

And did you have a sense that that cut a particular way c here? I did not. I do not think it biased anyone towards well, let me say this I am aware of what has been alleged about him, and the fact that people think we gave him a pass because of that, and 1 think that is absolutely untrue in every respect. There is no way in the world that we, because of his time at this agency, ever looked less severely, strongly, at his conduct. It was just a fact that we knew, and in some respects you could say it argues in favor of charges, because he is somebody that should know better ____
(b)(7)(C)

A:

(b)(7)(C)

Testimony Tr. at pgs. 41-42. Q: A: Q: A:

testified:

So that was not even on your radar at the time? No. That he worked here once. Okay. No.

This document is subject to the provisions of the Privacy Act of 1974, and may require redaction before disclosure to third parties. No redaction has been performed by the Office of Inspector General. Recipients of this report should not disseminate or copy it without the Inspector General's approval.

Q:

Okay, you know, someone might suggest that, well, they are passing on him because he used to work here. Well, I think people have suggested, I mean, literally, I heard that from[_( _______ find I do not know who else that some of the shareholders were ridiculous, that accusation, which is absolutely (b)(7)(C) have never met I cannot even tell you what he looks like . . . This was not an issue. Yeah, in fact, more shame on him if he was a former SEC Enforcement Attorney. But, you know, it is was he an Enforcement Attorney?

A:

making and I

Q: A:

(b)(7)(C)

Testimony Tr. at pgs. 36-37. Finally, when asked whether |(b)(7)(C) Ipast , c employment with the SEC influenced Enforcement staff in any way, p'' " jtestified [N]ot in any way. If that's a suggestion that we were somehow cutting him a break because he was a former SECer, that had no basis in fact or it was never discussed and never considered in that way. We would not hesitate to bring a case against a former SEC person.

(b)(7)(C)

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Testimo ny Tr. at We also reviewed thousands of pages of documents including e-mail communication by and among <b"7)<c>
J(b)(7)(C)

and <b><7"c> regarding the

p. 50. ong^ decision not to charge^"'and did not find any evidencel(P"/>(t;) previous employment with the SEC was a factor in any way in the decision.

Conclusion
As stated earlier in this report, the Commission's Canon of Ethics obligates Enforcement staff to continuously and diligently investigate instances of securities fraud. It is imperative that Enforcement staff vigorously enforce compliance with the law, and that it does so impartially and free from influence by a person's rank, position, prestige or other impermissible factor. This is particularly true where, as here, a subject of the investigation was a former employee of the SEC and, more specifically, a former staff attorney in the Division of Enforcement. The OIG reviewed numerous documents and took the under oath testimony of the members of the investigative team responsible for the CMKM investigation. In no instance did the OIG find any evidence to suggest that

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This document is subject to the provisions of the Privacy Act of 1974, and may require redaction before disclosure to third parties. No redaction has been performed by the Office of Inspector General. Recipients of this report should not disseminate or copy it without the Inspector General's approval.
1(b)(7)(C)

brmer employment with the SEC had any bearing on Enforcement staffs decision not to charge him. On the contrary, the evidence demonstrates that Enforcement staff considered the question of whether to charge seriously, weighing the "pros" and "cons" of bringing an action in an attempt to resolve what fairly may be considered a tough call. In light of the foregoing, the OIG is closing this matter. A copy of this report is being provided to the Deputy Chief of Staff to the Chairman and the Director of Enforcement for informational purposes.

Submitted:

Date :

Concur:

Date:

Approved: Date

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