The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A judge has given a significant boost to a Bahamian broker/dealer and its principal in their ongoing legal battle with US regulators, finding that a key element of the case against them was “weaker than any other” he had seen.

Judge George Daniels, sitting in the southern New York district court, came close to dismissing the Securities & Exchange Commission’s (SEC) allegation that Gibraltar Global Securities and Warren Davis operated as an unlicensed broker by using their website to solicit US clients.

He appeared to agree with the Bahamian duo’s attorney, Nicholas DeFeis of DeFeis, O’Connell & Rose, that the SEC had employed “junk science” in using a ‘website hits analyser’ to suggest that 25 per cent of visitors to Gibraltar’s website were Americans.

Arguing that this proved “absolutely nothing”, Mr DeFeis said the SEC had yet to produce any evidence that a single US investor was induced to do business with the Bahamian broker/dealer via its website.

Judge Daniels, at an August 13, 2013, hearing, seemed to agree. He told the SEC’s attorney, James Kidney: “It is a weaker set of allegations than any other case that I am aware of that gives me a factual scenario in which the SEC says: ‘Look, they [investors] are solicited; it’s obvious they are solicited.

“I mean, every other case I have seen is a stronger set of allegations than this.”

The transcript of the August 13 courtroom hearing was only released last week, but it is likely to give Gibraltar and Mr Davis some comfort that a crucial element to one of two SEC-initiated cases they are currently fighting in the New York courts may be on shaky ground.

The case, though, remains live before Judge Daniels, and he has yet to grant Gibraltar and Mr Davis’s motion to dismiss this particular matter, which was the subject of the August 13 hearing.

In the court hearing, Judge Daniels said the key question was whether the content of Gibraltar’s website could be interpreted as specifically soliciting US clients.

He added that the US capital markets regulator’s case would have been stronger had Gibraltar’s website referred specifically to American clients, rather than “buzzwords” about commission rates being equal to the “mainland” and ‘offshore’.

“Obviously it would be stronger if you can allege that there are certain individuals who were customers and they are customers because they were solicited by them,” Judge Daniels told the SEC, agreeing with Gibraltar’s attorney that the website hits data was “a false argument”.

“That’s an irrelevant statistic,” the judge added. “It doesn’t matter whether or not 1,000 people came to the website. It doesn’t matter if it was one person that came to the website. The question is whether the website is a solicitation….. How does it prove that I have been solicited by the percentage of people who went to the website?”

Mr Kidney, for the SEC, appeared to defer under the judge’s onslaught, saying: “I agree that if we had such people [investors solicited by Gibraltar’s website] we would be in better shape; we would have a stronger case, but I think that right now there is no doubt that we have a sufficiently strong case to withstand a motion to dismiss.”

The SEC, though, appeared on firmer grounds with Judge Daniels when it came to the other main allegations against a now-defunct Gibraltar and Mr Davis.

The US capital markets regulator launched this specific lawsuit against them earlier this year, claiming they had operated “unlawfully” in the US in selling $100 million worth of stocks.

Gibraltar was accused of participating in an alleged “illegal unregistered offering and sale” for Magnum d’Or, a small, thinly-traded company. Some 10 million shares were allegedly sold by Gibraltar on behalf of US customers, netting proceeds of more than $11.384 million.

Some 11 million Magnum d’Or shares were alleged to have been deposited by nominees in accounts with Gibraltar.

The share certificates were then allegedly renamed to show Gibraltar as the beneficial owner, before 10 million were sold via 600 transactions between November 2008 and December 2009.

The sale, executed through four US brokers, the SEC said, should have been registered with it, and Gibraltar allegedly “wired approximately $7.175 million [in proceeds] directly back to Magnum d’Or”.

Finally, the SEC alleged that Mr Davis submitted “false” Internal Revenue Service (IRS) forms to US brokers, in order to conceal the identities of US clients and help them avoid taxes.

This allegedly involved Mr Davis wrongly certifying that Gibraltar beneficially owned the funds and securities in the account, and that the owner was not a US person.

In seeking to have these allegations dismissed, Mr DeFeis said that while Mr Davis was Gibraltar’s principal, the ‘control person liability’ being alleged against his client only applied to fraud cases.

“The bottom line is that we have not found authority for imposing control person liability in claims of this kind,” Mr DeFeis alleged.

This, though, was challenged by the judge, who suggested the definition of personal “culpability” went beyond fraud.

As for the Magnum d’Or case itself, Mr DeFeis tried to argue that his Bahamian clients were “not a substantial participant in this transaction at all”.

Again this was challenged by Judge Daniels, who pointed out that Gibraltar bought and sold the shares involved.

“They are a critical player. They are clearly a critical player. If you have nobody buying and selling the shares for the company that you are trying to hide, then it’s not going to happen,” the judge added.

Mr DeFeis said the crux of the SEC’s case was that Gibraltar was acting as an underwriter, not a broker, because the share proceeds were going back to Magnum d’Or, meaning the offering should have been registered.

Yet he added that the SEC’s Florida action against the perpetrators of the Magnum d’Or situation had admitted that all other parties involved had been taken in by “an elaborate con and deception”.

This, Mr DeFeis submitted, was directly contradictory to its allegations against Gibraltar and Mr Davis, which claim the Bahamian duo should have known what was happening.