Case 8:10-cv-01299-AG -JCG Document 5 Filed 08/24/10 Page 7 of 23 Page ID #:177

CORRIGAN Be MORRIS LLP

ATTORNEYS AT LAW

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201 SANTA MONICA BLVD.,
5ANTA MONICA, CALIFORNIA 90401-2212

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TELEFACSIMILE (310) 394-2825

STANLEYC. MORRIS WRITER'S DIRECTDIAL.

SCRl@cormorllp.COIII (310) 394'2828

July 21,2010

VIA ELECTRONIC MAIL AND FACSIMLE

tony@crisnicfund.com
506-2291-4951

Anthony Gentile Crisnic Fund, S. A.

IFG Opportunity Fund, LLC c/o Lexperts Abogados
2070 Business Center Drive ConHotel Office Center Office 5
Suite 160 Sabana Norte
Irvine, CA 92612 San Jose, Costa Rica

Re: Putative Loan Agreement with Kexuan Yao

Dear Mr. Gentile:

I write to you on behalf of my finn's client, Mr. Kexuan Yao, Chairman of

China Armco Metals, Inc. ("China Armco"),

On June 29, 2010, Mr. Yao entered into a putative loan agreement with the
Crisnic Fund (the "Loan Agreement"), which was executed by you on behalf of IFG
Opportunity Fund, LLC ("IFG"). Inconsistently, that Loan Agreement identified each
oflFG, on the one hand, and the Crisnic Fund, S. A. ("Crisnic"), on the other hand,
independently, as the "Fund".

At that time, Mr. Yao believed that he had entered into a legal and legitimate
debtor-creditor agreement, pursuant to which he agreed to transfer 1.3 million shares
of his China Armco stock (approximately 9% of all the issued and outstanding shares
of China Armco valued at over $4 million) to Crisnic as collateral for a loan. Mr.
Yao's 1.3 million China Armco shares were never registered with the United States
Securities and Exchange Commission ("SEC''). Crisnic, in tum, agreed to transfer the
loan proceeds of$2,535,000 to Mr. Yao within five business days of the receipt of the
collateral. Although Mr. Yao transferred his China Armco shares to Crisnic, Crisnic
failed to transfer the loan proceeds to Mr. Yao in plain breach of the Loan
Agreement.

Recent events now have revealed that the Loan Agreement documentation is
no more than a self-serving attempt to manufacture a factually inaccurate record of
the transactions to cover your illegal actions as discussed in more detail below. It
Case 8:10-cv-01299-AG -JCG Document 5 Filed 08/24/10 Page 8 of 23 Page ID #:178
CORRIGAN & MORRIS LLP

Anthony Gentile
July 21,2010
Page 2

appears that Crisnic Fund sold the China Armco shares and planned to use a portion
of the proceeds to fund Mr. Yao's loan through the sale ofMr. Yao's collateral.
Consequently, you have defrauded Mr. Yao and are violating the registration
provisions ofthe federal securities laws by engaging in an illegal underwriting. The
Supreme Court has long instructed that securities law places emphasis on economic
reality and disregards form for substance. See SEC v. W J. Howey Co., 328 U.S. 293,
298-300 (1946); see also, Danner v. Himmelfarb, 858 F.2d 515,518 (9th Cir. 1988).

Mr. Yao's 1.3 million China Armco shares delivered as collateral were not
registered, and are not exempt from registration. Accordingly, to the extent that you
have sold any of such shares, your actions would violate the registration requirements
of such laws. Also, it appears that your actions, to date, violate the anti-fraud
provisions of the federal and state securities laws. See Sections 5(a) and (c) of the
Securities Act of 1933 [15 U.S.c. § 77e(a) & (c)]; Section lOeb) of the Exchange Act
ofl934 [15 U.S.C. § 78j(b)] and Rule 10b-5 [17 C.F.R. § 240.10b-5].

As I am sure you are aware, Mr. Yao' s 1.3 million shares of China Armco
stock are restricted from trading as "control securities". Control securities are those
held by an affiliate of the issuing company. An affiliate is a person, such as Mr. Yao,
in a relationship of control with the issuer. See, SEC Rule 144(a). There can be no
genuine dispute that Mr. Yao, CEO of China Armco, is a control person.
Accordingly, when Crisnic obtained the 1.3 million China Armco shares from Mr.
Yao, it took restricted securities, even ifthey were not restricted in Mr. Yao's hands.

The Ninth Circuit has concluded that Mr. Yao, as an affiliate ofthe issuer,
may not rely on the Section 4(1) [15 U.S.C. 15 U.S.C. § 77d] exemption without the
benefit of Rule 144 [17 C.F.R. § 230.144 safe harbor]. SEC v. M & A West, 538 F.3d
1043, 1053 (9th Cir. 2008).

Under Rule 144, Mr. Yao may transfer exempt from registration a maximum
of 1% (143,555 shares) of the issued and outstanding every 90 days, provided the
other conditions are satisfied. However, there is no tacking of Mr. Yao's holding
period. A party, such as Crisnic, receiving stock from Mr. Yao, must wait a minimum
of six-months before a resale of the 1% would be permitted. This means that Crisnic
would, at the earliest, assuming all other Rule 144 conditions are met, be entitled to
removed the restrictive legend from 143,555 shares of stock six-months after it
received the stock from Mr. Yao under Rule 144(d)(l)(i).

Pledged securities, which are transferred as part of a bona fide pledge by an

affiliate of the issuer, are treated no differently when pledged without recourse, as is
the case here. See, Rule 144(d)(iii).

Crisnic obtained over 9% of all of China Armco's stock from a control person.
You, along with Messrs. Ed Furman and Sunny Joseph Barkats, caused the restrictive