The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A Bahamian broker and its principal are arguing that US regulators “cannot make a case for securities fraud” against them over an alleged $11 million ‘pump and dump’ scheme.

Urging the New York southern district court to dismiss the Securities & Exchange Commission (SEC) lawsuit against them, Gibraltar Global Securities and its president, Warren Davis, argued that of all the defendants they were the ones “least involved” and “most removed” from the alleged scheme.

In July 12 court filings in support of their motion to dismiss the SEC action, Gibraltar and Mr Davis said the US capital markets regulator failed to specify “a single misrepresentation” they had made to investors - a key charge in the lawsuit.

“The SEC contends that Gibraltar participated in a scheme to defraud investors by misrepresenting the beneficial ownership of certain shares and facilitating deposits of the same shares, thus violating.... the [US] Exchange Act and.....the Securities Act,” Gibraltar’s defence filing said.

“First, the SEC fails to cite any evidence to suggest Gibraltar made any statements to investors in Tradeshow or Pacific Blue at any time, a

necessary component for a violation.

“Second, the SEC points almost exclusively to the actions of others and pleads no facts upon which one could even infer that Gibraltar should have uncovered the scheme. Accordingly, the SEC cannot make a case for

securities fraud against Gibraltar or Mr Davis, and both these claims should be dismissed.”

The SEC charged Mr Davis and Gibraltar this March with falsifying affidavits and documents in relation to an alleged fraud involving two thinly-traded microcap stocks, Pacific Blue Energy Corporation and Tradeshow Marketing Company.

A group of Canadian stock promoters, John and Benjamin Kirk, Dylan Boyle and James Hinton, are alleged to have “used false and misleading promotions” to artificially pump up the prices of the two stocks, prior to dumping the large blocks of shares they controlled on the market, and profiting at the expense of unwitting investors.

The SEC is claiming that Gibraltar facilitated the scheme through the “false affidavits and misleading statements”, which allowed Benjamin Kirk to “secretly sell” his shares in the two companies. Mr Davis was charged individually because he allegedly “signed misleading representations”.

But, hitting back at the SEC claims, the defence filing said: “Significantly, of all the moving defendants, Gibraltar and Mr Davis – according to the SEC’s own allegations – are the most removed from the creation and perpetration of the alleged scheme, and the least involved in it.

“In fact, the complaint fails to allege that Gibraltar or Mr Davis made even a single misrepresentation to the investing public. The complaint also is devoid of any allegation that Gibraltar or Mr Davis had any involvement in organising the purportedly elaborate scheme.

“Moreover, unlike the other defendants, Gibraltar and Mr Davis are not alleged to have profited from the scheme in any way. In no way can it be said, nor has it even been alleged, that Gibraltar was a substantial participant in the alleged scheme.”

Gibraltar and Mr Davis alleged that the SEC was seemingly trying to hold them “liable for failing to uncover the scheme or for turning a blind eye to it”.

This, they argued, was based on the SEC assuming that because Ben Kirk had accounts with Gibraltar in different corporate names, they “must have known” the nominees were being used to hide a securities fraud.

Suggesting no such inference was warranted, Mr Davis and Gibraltar said the US regulator was alleging they were “complicit because they failed to conduct a reasonable inquiry and concealed the beneficial owner of the shares.

“The SEC fails to allege sufficient participation on the part of Gibraltar or Mr Davis.”

Noting that Gibraltar had been in the process of “ceasing operations” prior to the SEC lawsuit’s filing, the broker/dealer’s defence said its website had been converted to just a ‘log in’ page.

Backing up its defiant assertions, Gibraltar and Mr Davis alleged that the ‘misrepresentation’ charges against them stemmed from three forms they provided to a US broker/dealer, Scottsdale Capital Advisors, affirming that shares in Pacific Blue and Tradeshow were held for the benefit of three Gibraltar corporate account holders - Medford Financial, Mazi and Baltic.

“Nowhere in the complaint does the SEC allege any contact between Gibraltar or Mr Davis and any potential investors in Tradeshow or Pacific Blue which could support securities fraud liability,” the Bahamian defendants’ filings alleged.

“The failure to allege any statement by Gibraltar to the public is fatal to the SEC’s fraud claims. Here, the SEC has not even alleged that the documents in question, or any representations made by Gibraltar, for that matter, were ever shown or repeated to the investing public.

“Gibraltar did not control the content of any representations by correspondents or clients to the investing public, nor is it alleged that they did. Therefore, Gibraltar made no representations that can support liability.”

The Bahamian broker/dealer argued that it “had no duty” to speak to Pacific Blue and Tradeshow investors because its role was only to act as clearing broker.

And it claimed that the SEC had attempted to “paint a suspicious picture” concerning Ben Kirk’s three Gibraltar accounts, with allegations that the nominee ownership concealed his identity and that this should have made the Bahamian broker/dealer suspicious.

“There is nothing in the complaint to suggest that Gibraltar had any reason to believe these entities were anything other than companies owned by Ben Kirk, trading in their own names for their own benefit – activity that is not proscribed by securities law and not inherently suspicious,” Gibraltar and Mr Davis alleged.

“Instead, the complaint summarily concludes that these accounts are ‘nominee accounts’, beneficially owned by Ben Kirk, with no legitimate purpose. The complaint does not make any allegations to support an

inference that Gibraltar knew or should have known this.”

Arguing that there was no evidence to suggest they knew of the ‘pump and dump’ scheme’s existence, Gibraltar and Mr Davis also argued the SEC had failed to prove they acted recklessly.

The Bahamian broker/dealer and its principal said the SEC “fell short” of proving they provided ‘substantial assistance’ to the scheme, its role being to pass documents received from clients on to other brokers.

While the SEC had accused them of failing to conduct a ‘reasonable inquiry’ into the sale of the two stocks, Gibraltar and its principal said it had not identified any ‘red flags’ that should have alerted them.

“In sum, the complaint fails to allege facts sufficient to infer that Gibraltar or Mr Davis knew, or should have known of the scheme, or were reckless in not discovering it,” their defence concluded.

“Remove the conclusory statements from the complaint, and according to the complaint itself, Gibraltar and Mr Davis acted reasonably at all times.

“The SEC should not be permitted to hold them liable for failing to uncover what the SEC alleges was a complex and carefully concealed fraud. Nor did Gibraltar or Mr Davis participate substantially in the fraud or in the sale of unregistered securities.”

However, the effect of this and other legal actions on Gibraltar’s business has been somewhat terminal.

The former Bahamian broker/dealer has been very much in the sights of overseas regulators, not just the SEC, a previous well-publicised encounter with the British Columbia Securities Commission (BCSC) having prompted its wind-up move.

Gibraltar, which at one point had 1,224 client accounts, surrendered its licence to the Securities Commission at the end of last year. Mr Davis said the closure was taking $1.5 million, and 15 jobs, out of the Bahamian economy.

The closure came in response to what was perceived as reputational damage inflicted on Gibraltar by the BCSC, which last year found the company guilty of advising on, and trading in, securities within its jurisdiction despite not being registered to do so.

It also allegedly failed to provide the BCSC with requested information on its clients. Gibraltar was forced to pay a $300,000 administrative fine imposed against it by a BCSC hearing panel, a sum less than 20 per cent of the $1.6 million punishment that the Canadian regulator had sought.

The affair sparked a long-running public row between Gibraltar and the Securities Commission, with the broker/dealer accusing the local regulator of handing over information on its clients to the BCSC despite their being no basis in Bahamian law for it to do so.

Gibraltar based its criticism on two separate legal opinions provided by Bahamian attorneys, who said the BCSC was engaged in nothing more than a so-called ‘fishing expedition’.