The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

US regulators have described as “laughable” a Bahamian broker/dealer’s assertion that it had no reason to question an $11.384 million “illegal, unregistered” share offering.

Responding to attempts by Gibraltar Global Securities and its principal, Warren Davis, to have the New York lawsuit against them thrown out, the Securities and Exchange Commission (SEC) labelled as “inappropriate” their argument that they were “bit players at most”.

Suggesting that the Bahamian defendants’ claim was contradicted by the fact they sold 11 million Magnum d’Or shares in over 600 transactions, the SEC alleged that Gibraltar and Mr Davis were “direct participants” in an unregistered share offering.

“To contend that defendants had no reason to question the deposit and sale of 10 million shares of a thinly traded microcap stock is laughable, particularly where they were instructed to send the proceeds back to the issuer [Magnum d’Or],” the SEC alleged.

“Defendants’ contention that they had no reason to assume the shares were acquired directly from the issuer is all the more disingenuous because the shares issued to the Flatt nominees were acquired in an S-8 offering, which applies to shares offered from the issuer to consultants.

“If Gibraltar had done any inquiry, it could have determined that the shares were issued by Magnum d’Or directly to the Flatt Nominees, purportedly for consulting services. The fact that it funnelled the proceeds back to the issuer would have raised obvious red flags.”

The main thrust of the SEC allegations is that between November 2008 and September 2009, Gibraltar and Mr Davis deposited 11 million shares in Magnum d’Or at four US broker/dealers.

The shares, deposited by mail, were allegedly re-titled to show Gibraltar as the beneficial owner, disguising the nominees’ identity.

And the SEC claimed that after receiving the sales proceeds at its Bahamian bank accounts, Gibraltar then re-wired $7.175 million back to the scheme’s controllers.

Accusing Gibraltar and Mr Davis of failing to register the Magnum d’Or offering with the SEC, the regulator alleged: “Despite the fact that defendants directly placed orders in over 600 transactions to sell the 11 million Magnum d’Or shares (through the US brokers) into the public markets, they contend that they ‘added nothing’ to the scheme and were therefore not ‘substantial participants’. Such assertions are totally inappropriate arguments........

“The defendants misused Form S-8 to disguise what was actually an unregistered public distribution that raised capital for the issuer. Gibraltar knew that the re-sales were for raising capital because it funnelled resale proceeds back to Magnum d’Or. No valid registration statement was in effect to register the public distributions through the Gibraltar accounts.”

The SEC added that the fact the proceeds were sent back directly to Magnum d’Or “raises a strong inference” that the Bahamian broker/dealer was selling on the company’s behalf.

“It is highly unusual for a broker to send the proceeds of a sale of securities from a customer account back to the issuer,” the US capital markets regulator alleged.

“This is particularly true with respect to S-8 shares, which are not to be used in a capital raising transaction. Gibraltar and Davis were obligated to make reasonable inquiry as to the origin of the shares that they were asked to sell.”

And the SEC also objected to Gibraltar’s request that the lawsuit be combined with another SEC action against it, which has been filed in the same southern New York district court, on the grounds that it would “confuse a jury with two factually independent schemes to unlawfully sell unregistered securities”.

And the US regulator also suggested that the fact Gibraltar facilitated more than $100 million worth of securities transactions for US customers, earning 2-3 per cent commission, provided a strong “inference” that it was soliciting American clients - breaching its Exchange Act and Securities Act.

The Bahamian broker and Mr Davis were also alleged to have deposited false US withholding tax forms, showing themselves - rather than their clients - as the owners of share deposited with US broker/dealers.

“Detailed factual allegations identify how Gibraltar ran an offshore, unregistered broker/dealer catering to entities and persons seeking to sell shares of low-priced, thinly traded securities into the United States securities markets,” the SEC alleged.

“Gibraltar accepted deposits of low-priced microcap stocks from its US customers, arranged to have the shares re-titled in its name, and then sold the shares on behalf of the US customers, who placed sell orders through Gibraltar’s website.

“The proceeds, less commissions, were then directly deposited into the issuer’s bank accounts, belying any notion that they were issued as compensation, as required by the registration exemption under which they were purportedly issued.”