The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

An ex-bank manager and former trader yesterday saw their securities fraud convictions quashed by the Court of Appeal, which found that a magistrate’s earlier ruling “fatally fell into error”.

Wayne Bethel and Hiram Cox were also cleared of deceit, and misleading stock purchasers and the wider Bahamian capital markets, over a 2005 scheme involving Commonwealth Bank’s employee stock option (ESOP) plan.

The only conviction upheld by the Court of Appeal was Mr Bethel’s for acting as an unlicensed broker in facilitating the sale of shares held in the ESOP for the BISX-listed institution’s managers.

The verdict is likely to attract interest, and possible consternation, in the Bahamian capital markets, as it identifies weaknesses in statute law and also requires the scheme’s ‘profits’ to be returned to the duo.

Mr Bethel, an ex-Commonwealth Bank branch manager himself, had devised a scheme that would both allow his fellow managers to exercise their stock options and generate profits for himself and Mr Cox.

The scheme, as disclosed by the Court of Appeal judgment, relied on the discrepancy between the $6 price at which the bank’s managers could exercise their ESOP options, and the BISX market price for Commonwealth Bank’s shares.

The stock was then trading between $8.80 and $10.50 per share, meaning the ESOPs option price was a substantial discount. Mr Cox, a then-trader with Colina Financial Advisors (CFAL) and its First Bahamas Capital subsidiary, helped Mr Bethel and the other managers find third-party buyers for the ESOP shares at $8.

Mr Bethel “guaranteed” the $8 per share price to all participating Commonwealth Bank managers, who then used the proceeds from the third-party buyers of their shares to exercise their ESOP options, plus pocket the $2 profit differential.

Mr Bethel, according to the Court of Appeal judgment, kept the different between the actual selling price and $8 ‘guarantee’ as his profit/fees for facilitating the scheme.

Garvin Gaskin, prosecuting the case for the Attorney General’s Office, had argued that Messrs Bethel and Cox made “false representations” to the third party purchasers of the shares that the Commonwealth Bank managers were legally entitled to sell them.

Instead, he alleged that the shares were instead owned by Commonwealth Bank, and this gave rise to the fraudulent and deceitful nature of the scheme.

However, Appeal Justice Neville Adderley, giving the court’s written reasons for overturning most of the earlier ruling, said there was “an honest explanation” for the discrepancies that emerged in share trading logs as a result of the scheme.

These saw Commonwealth Bank managers purportedly selling their shares to third-party buyers prior to exercising their ESOP options.

However, Justice Adderley found that because the buyers received the correct quantity of Commonwealth Bank shares purchased on the trade’s ‘settlement date’, and no party suffered a financial loss, the scheme could not have been fraudulent.

“It lies in the difference between the trade date when the contract to see was made, and the trade settlement date when the shares were transferred to the third party,” Mr Adderley said of the “honest explanation”, adding that Messrs Bethel and Cox were “entitled to the benefits”.

Other notable features of yesterday’s verdict by Justice Adderley were:

• The Securities Industries Act contains no provisions “defining an intention to defraud”, highlighting another weakness/loophole in the legislation.

• Commonwealth Bank was ordered to return to Mr Bethel the $164,000 scheme profits that the earlier ruling, by then deputy chief magistrate Carolita Bethel, had required him to re-pay to the bank. CFAL was also ordered to return $7,805 to Mr Cox.

Recalling Mr Bethel’s testimony at the earlier trial, Justice Adderley said the former bank manager alleged that Mr Cox had informed him the scheme was a “normal” means for helping persons exercise stock options.

“After he was successful in exercising his option without incurring indebtedness and selling his shares to third parties at a profit, he [Mr Bethel] agreed to do the same for other managers who feared that their options would expire because they did not see how they would obtain the funding to exercise their option,” Justice Adderley wrote,

“In his testimony, he explained how the system was carried out. He stressed that he saw it as helping his fellow managers, and denied that he had any intention to act fraudulently, to mislead or to deceive anyone.”

Mr Bethel further alleged that Mr Cox had informed him “there was nothing unusual” about the proposed transaction, adding that he would not have gone ahead if he “knew there would be a problem”.

Justice Adderley said Mr Bethel obtained ‘powers of attorney’ from all managers wishing to participate in the scheme, authorising Mr Cox and CFAL’s First Bahamas Capital to sell the ESOP shares. The ‘powers of attorney’ were left blank in accordance with industry practice.

First Bahamas capital paid the proceeds from the share sales to third-party buyers into a bank account controlled by Mr Bethel, who then directed the funds to the managers so they could exercise their options.

Upon doing so, the managers delivered the share certificates received from Commonwealth Bank to Mr Bethel.

The “discrepancies” referred to by Justice Adderley, for example, saw Stephen Johnson sell his 10,000 option shares in a trade on January 13, 2006, to a third-party buyer, even though the ESOP option was not exercised until three days later.

However, in a decision which the entire Court of Appeal ruling revolved around, Justice Adderley found: “It is clear by the settlement date that the manager was the registered owner in the register of Commonwealth Bank, and First Bahamas Capital could fill in the blanks in the power of attorney to lawfully transfer the shares to the third party on behalf of the buyer.”

In another example, Justice Adderley said the trade date for Lernix Williams’ shares was February 1, 2006, but the settlement date for the transaction with Vaughn Higgs was not until five days later.

Finding that the shares were no longer Commonwealth Bank’s once the ESOP option was exercised, Justice Adderley said the third-party buyers received exactly what they thought they had purchased on the settlement date.

“That representation was not false, nor was it deceitful or misleading, with the method being used by Bethel and Cox,” the Court of Appeal found.

“Further, there was no risk of it not being fulfilled because Commonwealth Bank was irrevocably bound to sell that number of option shares to the manager, upon exercising the option by tendering the option price.”

Justice Adderley ruled that no party had suffered financial loss as a result of the scheme, while there was no proof that the Bahamas International Securities Exchange (BISX) had been defrauded of trading fees or suffered economic damage.

The dismissal of the fraud-related convictions completely exonerates Mr Cox. However, the Court of Appeal found that Mr Bethel “wittingly or unwittingly” had acted as a broker or securities trader without possessing a valid licence.

His sentence of a $50,000 fine or one year in prison for this offence was confirmed.