The Tribune

By NEIL HARTNELL Tribune Business Editor THE SECURITIES Commission uncovered 16 alleged regulatory breaches during an on-site inspection of Caledonia Corporate Management less than one year before its $25 million collapse, Tribune Business can reveal, the regulator deciding to belatedly charge the former broker/dealer and its management to "send a clear message" to the Bahamian financial services sector. The breaches, contained in the Securities Commission's May 30, 2011, formal complaint against Caledonia, its management, directors and staff, range from seemingly minor administrative details to more serious infractions, including the fact that the insolvent broker/dealer had an almost $70,000 capital deficiency. "Caledonia did not meet the capital requirement set out in the Securities Industry Regulations 55 (b)," the Securities Commission said of its inspection report. "As of December 31, 2006, they had a regulatory capital deficiency of $69,932." That came to light as a result of the routine on-site examination of Caledonia, which was carried out by the Securities Commission's Inspections Department between February 26-March 14, 2007. Other Securities Commission findings were that the regulator "has not received the monthly financial and operational reports for Caledonia, as required, since July 2005". Another was: "Caledonia did not have in place periodic or annual training for any employees with respect to anti-money laundering." The rest consisted of persons not being licensed to perform the roles they were fulfilling; and persons executing securities trades without being licensed to do so. For two clients, Eksdale Investments and Rogan Trust, the Securities Commission alleged that there was no evidence of the beneficial owners having been verified, while "cash balances are not being transferred into trust accounts within five trading days as required". The Securities Commission, in its complaint, noted that Caledonia had responded to the findings in a June 6, 2007, letter, although no details were provided. Of more serious concern, though, is why the Securities Commission's inspection failed to pick up the problems emerging in the Caledonia account controlled by George Georgiou, a now-convicted fraudster serving jail time in the US, and his associate, Ron Wyles. Mr Georgiou was found to be using his Caledonia account to run a 'pump and dump' scheme involving several 'penny' or illiquid stocks. He was allowed to trade on margin without adequate collateral, and eventually Caledonia's correspondent Canadian broker, Jitney, 'called in' the margin when it hit $25 million and sold-off assets owned by the Bahamian broker/dealer's other clients to cover the hold created by Mr Georgiou. A written statement by Caledonia's vice-president of investments, Robert Dunkley, which has been obtained by Tribune Business, reveals that by end-February 2007 - in the middle of the Commission's inspection - there was already an almost-$11 million gap between the long and short-selling in the Georgiou account, even though the latter had been told not to go beyond a $3 million cash position. "By the end of February 2007, the debit balance on the longs was $7.5 million, while the credit balance on the shorts was $18.3 million," Mr Dunkley alleges. This raises questions about whether the Securities Commission was looking in the right places during its 2007 Caledonia inspection, and whether it knew what it was looking for. There is also the question of what action, if any, was taken by the Bahamian capital markets regulator as a result of the 16 breaches identified, and whether more robust action by the supervisor then may have prevented Caledonia's ultimate meltdown and the client losses. The Securities Commission also appears to have adopted a 'scatter gun' approach with its complaint against Caledonia, naming almost all its staff as defendants, even though many may not have participated in - or had no knowledge of - the events that led to the broker/dealer's demise. Explaining why it had only decided to take action against Caledonia and its principals more than three years after its early 2008 collapse, the Securities Commission said it wanted to send a signal to the rest of the Bahamian financial services industry. It also hinted that it had passed some findings on to the Attorney General's Office, for possible criminal action, due to the costs involved in pursuing Caledonia's chairman and managing director, respectively, Matthew McNeilly and William Jennings, who are both no longer in the Bahamas. It hinted that the possibly of extraditing the pair of them was on the table. "In view of Caledonia's financial loss and subsequent liquidation, the Commission had to consider whether to pursue the outstanding breaches identified by the Inspections Department in its May 15, 2007, report," the Commission's complaint said. "Both main principals, McNeilly and Jennings, left this jurisdiction shortly after the liquidation became court-supervised and pursuing them may prove costly for the Commission. In addition, Caledonia has no means of paying a fine if one were to be imposed." Yet the regulator added: "Administrative proceedings may result in a conviction of some former employees, and possibly the two principals in absentia, which would lie on their files in the Commission for future considerations. "It would certainly send a clear message to the financial industry, both local and international. Also, any criminal action would necessarily involve the resources of the Office of the Attorney General, so that if extradition proceedings were necessary the two principals could be brought back, and criminal convictions would be a bar to their participation in the industry." Among the charges being laid by the Securities Commission are that $8 million worth of bonds were transferred from one Caledonia client, the Peter G. Rogan Trust and RPP Finance, to the Jitney account to cover the margin limit exceeded by Georgiou. This was allegedly done without the client's consent. The Rogan Trust was the same client that the Commission's inspectors had failed to find beneficial ownership information on. The Rogan Trust is also being pursued by the US Justice Department, in the belief its assets can compensate the settlor's creditors over a bankrupt hospital he ran, which allegedly committed health care fraud. And the Commission is also alleging that some $1.435 million worth of cash was transferred from one client's account to help purchase shares on Georgiou's behalf. These allegations, though, have been denied by Mr Jennings on behalf of Caledonia's management and staff. The Commission, though, is seeking restitution of $8.443 million and $1.435 million, respectively, as a result of the alleged two offences. The Commission hearing has yet to take place.