The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A US judge has rejected the Securities & Exchange Commission’s (SEC) bid to re-plead ‘fraud’ allegations against a Bahamian broker/dealer, branding its claims as “unavailing” and failing to prove there was any cover-up of an alleged $11 million ‘pump and dump ‘scheme.

But, while the US capital markets regulator has for the second time failed to prove its ‘fraud’ claims against Gibraltar Global Securities, and seen the southern New York court throw them out, it was successful on another score.

For the court has given it leave to file claims against Gibraltar “on negligence alone”, an allegation that at this stage requires the SEC to provide a lower standard of proof.

Still, once again Gibraltar and its principal, Warren Davis, can take heart from the fact that the New York court has dismissed the most serious and damaging claims against them - finding that the SEC cannot prove its ‘fraud’ allegation,

Judge George Daniels ruled: “Plaintiff’s revised allegations no longer implicate the Tradeshow and Pacific Blue pump-and-dump scheme, or Gibraltar’s knowledge of or involvement in it, which were the factual allegations at the centre of this court’s pleading sufficiency concerns during oral argument.”

This effectively confirms that the SEC is no longer alleging that the Bahamian broker/dealer knowingly participated in the alleged $11 million scheme to artificially inflate the value of the two companies’ stocks.

The SEC had alleged that Gibraltar had provided false affidavits and share deposit forms to conceal from a US broker “the fact that a client, Ben Kirk, beneficially owned and controlled Pacific Blue and Tradeshow stock.

“Plaintiff’s suggestion that Gibraltar’s mere maintenance of nominee accounts should subject it to liability is unavailing,” Judge Daniels ruled.

“As Gibraltar’s counsel argues, such an interpretation would automatically render companies like Gibraltar strictly liable in securities fraud for any individual client who opened an account in a corporate name.

“Gibraltar’s routine business practice of assisting its clients with maintaining nominee accounts cannot alone sustain an inference of securities fraud,” the judge added.

“Plaintiff must provide this court with additional facts to convert this activity to an intentional misstatement to defraud; it must plead sufficient facts to establish that Gibraltar knew the true relevant information, the means by which Gibraltar knew the true relevant information, and the circumstances surrounding, and purpose behind, Gibraltar’s decision to cover it up. Plaintiff’s proposed factual amendments fail to satisfy these requirements.”

Judge Daniels also rejected the SEC’s contention that because Ben Kirk was listed as an employee of two stock promotion companies, Skymark and Emerging Stock Report (ESR), on his account opening document, the US broker would have known he was an affiliate of the two ‘pumped’ companies and restricted his share sales, had it not been for Gibraltar concealing his beneficial ownership.

The court noted that while Kirk was identified as a principal of Skymark, there was nothing specifically stated on the account opening documents about his relationship with Emerging Stock Report.

“There is no allegation or indication of how Gibraltar was to know of any connection between Skymark/ESR and Tradeshow or Pacific Blue,” Judge Daniels concluded.

“Absent such allegations, the proposed amended complaint does not set forth sufficient facts as to how Gibraltar could have determined that Ben Kirk’s affiliation with Skymark or ESR meant that he was an affiliate of Tradeshow and Pacific Blue, the two companies whose stock he intended to sell.”

The judge continued: “Plaintiff provides no explanation as to why this Skymark/ESR employment listing would support the inference that Gibraltar knew and intentionally concealed Ben Kirk’s beneficial ownership of Tradeshow or Pacific Blue.

“More precisely, the only explanation plaintiff has provided with respect to Gibraltar’s alleged scienter regarding Ben Kirk’s alleged affiliate status is in the factual allegations of its original complaint.”

These allegations, though, had already been found by Judge Daniels to be “insufficient to allege Gibraltar’s knowledge of the larger pump-and-dump scheme, and [SEC] disavows such claims at the outset of its proposed amendments.

“Thus, Plaintiff has failed to allege that Gibraltar had the requisite knowledge or reckless disregard of the fact that it was concealing any “restricted’ status of the Tradeshow and Pacific Blue shares that were the subjects of its affidavits,” Judge Daniels concluded.