The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A Bahamian broker/dealer yesterday said the fact it had been fined less than 20 per cent of the $1.6 million penalty sought by Canadian regulators “spoke volumes” to the strength of its case, as took another shot at the Securities Commission’s “highly questionable” decision to hand over information on its clients.

Warren Davis, principal of Gibraltar Global Securities, said that while it regarded the $300,000 administrative fine imposed against it by the British Columbia Securities Commission (BCSC) as “draconian”, it viewed the final decision by the Canadian regulator’s hearing panel as “balanced”.

Pointing out that the BCSC never made any allegations of fraud or criminal wrongdoing against Gibraltar or its employees, Mr Davis said the broker/dealer stood by the legal opinions it received from two attorneys, which said there was nothing in Bahamian law to support the handing over of information on its clients to the Canadian regulator.

Gibraltar incurred the fine after a May 2012 verdict by the BCSC found it was advising on, and trading in, securities within the latter’s jurisdiction despite not being registered to do so. It also allegedly failed to provide the BCSC with requested information on its clients.

“It is worth highlighting the fact that the extent of the sanctions which the executive director of the BCSC was actually seeking was roughly $1.6 million,” Mr Davis said.

“However, the fact that the actual fine imposed by the Hearing Committee was only roughly 20 per cent of that amount speaks volumes as to what we believe reflected the strength and validity of our legal arguments, as well as the reasonable approach adopted by the Commissioner and the members of his Hearing Committee under the given circumstances.”

Noting that the only information on Gibraltar’s clients received by the BCSC was “handed over by the Securities Commission of the Bahamas” without the broker/dealer’s knowledge, Mr Davis said the case had raised fundamental issues regarding the Bahamas’ sovereignty and legal framework for information exchange.

Indeed, he suggested the Securities Commission’s actions could expose other Bahamas-based financial services providers to similar fines and legal actions, harming the industry’s attractiveness and employment for Bahamians. The Bahamian regulator, though, has always insisted it acted in accordance with the law.

“We say that the unfortunate reality of this legal odyssey in Canada, culminating in the $300,000 fine against Gibraltar, has been as a direct consequence of the release of client-related information to the BCSC, which was obtained by a very questionable, suspect, and what we still consider as a highly inappropriate ‘modus operandi’ of the Securities Commission,” Mr Davis alleged.

“In fact, when one takes into account the expressed position of the BCSC, which in no uncertain terms maintains that ‘the privacy laws of the Bahamas are no basis for Gibraltar’s refusal’ to release the requested information, it suggests that, by virtue of the Securities Commission turning over this information to the BCSC, that the Securities Commission is also of the view that Bahamian privacy laws represent no basis to withhold information from the prying eyes of foreign regulators.

“Thus, the fundamental issue at hand is the respect of the sovereignty of the Bahamas and its legal framework. In short, Gibraltar is essentially being penalised for complying with Bahamian law, which we believe is an untenable position.”

Analysing the wider ramifications, Mr Davis told Tribune Business: “Moreover, we believe that this fine may just be the tip of the iceberg for Bahamian-domiciled financial institutions, as this type of release of information by our regulators, which we contend may be in conflict with long-standing Bahamian law, can clearly expose our financial institutions to significant risk and fines that could affect Bahamian employment as well as the attractiveness of the Bahamas as a robust international financial centre.

“Based on feedback from our attorneys and industry participants, both locally as well as internationally, there has been no precedent case where a regulator has released information in such an unusual manner. We therefore urge other financial participants, as well as the Government, to review the process of information exchange and the powers of the Securities Commission of the Bahamas in this regard.”

Mr Davis said Gibraltar was still assessing with its attorneys whether it should take legal action against the Securities Commission over the episode.

He added that Gibraltar could now proceed with the sale of securities and other assets in its BC accounts, which had been frozen in August 2011. Those accounts contained $2.2 million worth of assets at the time, and the broker/dealer last week estimated they had since dwindled in value to 50 per cent of that sum.

The $300,000 fine includes the $48,250 in registration fees that Gibraltar should have allegedly paid to the BCSC.

The panel also ordered that Gibraltar be “permanently banned from trading or purchasing securities in British Columbia”, apart from selling the assets in its existing accounts - with the sales proceeds still ordered held.

“Gibraltar is also permanently prohibited from becoming or acting as a registrant, investment fund manager or promoter, and from engaging in investor relations activities. In addition, Gibraltar must disseminate on its website that it is permanently prohibited from having clients who are resident in British Columbia,” the BCSC added.

In the sanctions hearing, Gibraltar had argued that it should only be reprimanded, and any administrative fine - while not warranted - should be no more than $50,000.

The BCSC panel did not agree with that, but it refused the regulator’s demand that the Bahamian broker/dealer be forced to hand over the $1.1 million in the frozen accounts, plus $248,908 in alleged trading commission profits.

On the commissions, it ruled: “The executive director says it is reasonable to conclude that the commissions Gibraltar charged its clients is no less than the commissions it paid to Global, and so must represent Gibraltar’s minimum profits from the trades.

“We disagree. Gibraltar is likely to have recovered its trading costs from its clients, but that tells us nothing about any profit it earned from its clients after recovering its costs.”

While Gibraltar’s position was that it was unaware of the need to register itself in British Columbia, the hearing panel described this as “irrelevant”.

“There is no credible jurisdiction anywhere in the world that does not require the registration of securities dealers,” the sanctions ruling said. “Anyone with even a passing familiarity with the business knows that. Gibraltar had to have known that its activities in British Columbia were likely to be subject to registration. Yet it took no credible steps to ensure that it would be in compliance with British Columbia requirements.

“Gibraltar also refused to give the commission staff information it requested about its business activities. It continues to refuse. As noted in our findings, the privacy laws of the Bahamas are no basis for that refusal.

“Gibraltar failed to register and to provide information as required. Its conduct is contrary to the public interest because it violates two of the most fundamental means of regulating dealers to protect the public interest.

“We have therefore imposed an administrative penalty intended to deter Gibraltar from future misconduct, and to demonstrate to other dealers the consequences of participating in our capital markets without complying with the Act and attempting to shield their activities from regulatory scrutiny through reliance on the privacy laws of offshore jurisdictions.”

The Hearing Panel said the $300,000 penalty was appropriate, because it “offsets the cost-recovery component of whatever Gibraltar charged its clients, and therefore it likely more than offsets any profit Gibraltar made on its trades here”.