On June 29, 2012, the Securities and Exchange

On June 29, 2012, the Securities and Exchange Commission filed a civil action in the United States District Court for the Central District of California against Gold Standard Mining Corp. (“Gold Standard”), its Chief Executive Officer/Chief Financial Officer Panteleimon Zachos,  attorney Kenneth G. Eade, auditor E. Randall Gruber and his firm Gruber & Company LLC.

The case itself is not particularly unusual. The SEC alleges that the company materially misrepresented the financial and legal details of an acquisition and that the company filed false financial statements. This is par for the course in penny land. What is much more interesting to me is that the SEC sued the company’s attorney, Kenneth G. Eade, and the company’s auditor, Randall Gruber. SEC lawsuits against penny stock lawyers and auditors, while not unknown, are far less common than they should be. Penny stock fraud would be a lot harder without auditors who are willing to ignore suspicious actions and lawyers who give false opinion letters to allow shares to be registered. Below is the essence of the SEC’s case (emphasis mine):

In its complaint, the Commission alleges that, between May 2009 and April 2011, Gold Standard filed numerous reports about its purported Russian gold mining operations that were materially false and misleading in various respects. According to the complaint, Gold Standard represented that it had acquired a Russian gold mining company known as Ross Zoloto Co., Ltd. (“Ross Zoloto”), but did not inform investors that it had agreed to allow the prior owner of Ross Zoloto to keep profits from existing operations or of issues surrounding Russian government registration or approval of the business combination. The complaint also alleges that Gold Standard filed false or misleading financial statements.

The complaint alleges that Gold Standard and Zachos were responsible for these misstatements, and that  Eade, Gruber and Gruber & Co. substantially assisted Gold Standard in making these false and misleading statements . The complaint further alleges that Gruber & Co., through its sole member Edward Randall Gruber, misrepresented in an audit opinion that it had audited the company’s 2007, 2008 and 2009 consolidated financial statements in accordance with standards of the Public Company Accounting Oversight Board.

See the  full SEC complaint (PDF).

If the name Kenneth Eade sounds familiar, it is because he is a well-known lawyer for penny stock companies who made the mistake of suing a bunch of message board posters (including Janice Shell) and InvestorsHub for libel back in 2011. He lost that case badly. Below is a quote from the  iHub press release about the verdict:

Kenneth Eade sued iHub and 10 John Doe posters in February of this year for allegedly defamatory posts made on the iHub website. iHub raised several meritorious defenses, including that the comments made by the John Doe posters were protected speech under the First Amendment and that immunity was provided by the Communications Decency Act.

In his 12-page ruling, The Honorable John A. Kronstadt granted iHub’s motion to strike Eade’s complaint in its entirety and without leave for him to amend. The court’s ruling effectively dismissed the action against the John Doe posters as well.

Dave Lawrence, spokesperson for iHub commented, “This federal court ruling finding in favor of iHub and awarding legal costs should serve as notice to others who would engage in frivolous litigation, try to plead around CDA immunity or attempt to chill the public’s exercise of freedom of speech.”

Disclaimer: No relationship with any parties named above and no positions in any stocks or funds mentioned. This blog has a  terms of use that is incorporated by reference into this post; you can find all my disclaimers and disclosures there as well.