tlsv1 alert unknown ca

[Troyanker, Vlad]

We are building a peer-to-peer system that uses SSL for connection privacy and 
performs authentication outside of SSL. The system creates self-signed 
certificates as needed on every node. Since we use those self-signed 
certficates in the authentication I have to force peer cert validation as the 
only means to forcing SSL to send client cert to the server. So I set the 
following flags on both ends of the connection:  SSL_VERIFY_PEER | 
SSL_VERIFY_FAIL_IF_NO_PEER_CERT | SSL_VERIFY_CLIENT_ONCE

Here is the code which creates the self-signed certificates:

// Generates a self-signed x509 certificate
static X509 * generate_x509(EVP_PKEY * pkey)
{
    X509 * x509 = X509_new();
    if(!x509)
    {
       throw CryptoException("Unable to create X509 structure");
    }
    X509_set_version(x509, 2);
    ASN1_INTEGER_set(X509_get_serialNumber(x509), 1);
    X509_gmtime_adj(X509_get_notBefore(x509), 0);
    X509_gmtime_adj(X509_get_notAfter(x509), 31536000L); // one year

    X509_set_pubkey(x509, pkey);
    X509_NAME * name = X509_get_subject_name(x509);
    X509_NAME_add_entry_by_txt(name, "C",  MBSTRING_ASC, (unsigned char *)"CA", 
       -1, -1, 0);
    X509_NAME_add_entry_by_txt(name, "O",  MBSTRING_ASC, (unsigned char 
*)"Amazon", -1, -1, 0);
    X509_NAME_add_entry_by_txt(name, "CN", MBSTRING_ASC, (unsigned char 
*)"localhost", -1, -1, 0);

    X509_set_issuer_name(x509, name);

    /* Inform openSSL this certificate can be used as CA */
     add_ext(x509, NID_basic_constraints, "critical,CA:TRUE");
     //add_ext(x509, NID_key_usage, "critical,keyCertSign,cRLSign");

    if(!X509_sign(x509, pkey, EVP_sha1()))
    {
       X509_free(x509);
       throw CryptoException("Error signing certificate");
    }
    return x509;
}


PROBLEM: the server fails SSL connection with SSL_accept: tlsv1 alert unknown ca

The funny part I cannot even find where in source code that error (code 
SSL_R_TLSV1_ALERT_UNKNOWN_CA) gets thrown. I am looking through 
openssl-1.0.1e/ssl/s3_srvr.c

What am I missing?

Thank you for your time