The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A Bahamian broker/dealer has accused US regulators of smearing its reputation to “create the illusion” it was knowingly involved in an $11 million fraud, while denying that Bahamian law obliged it to act as “an investigative agency”.

Gibraltar Global Securities and its president, Warren Davis, in legal filings urging the southern district New York court to dismiss Securities & Exchange Commission (SEC) charges against them, said the regulator had attempted to portray its involvement as “nefarious”.

The documents, filed on Friday last week, said the SEC had failed to show there were “any red flags” to show that some its clients were using their Gibraltar accounts to operate an alleged $11 million ‘pump and dump’ financial fraud.

Asserting that neither Gibraltar nor Mr Davis knew that alleged misrepresentations by their clients, and attorneys acting for the companies involved in the scheme, were false, their defence also alleged that the Bahamian broker and its president never profited from it.

And they also argued that they “acted reasonably” under Bahamian law, specifically the Financial Transactions Reporting Act, in their dealings with the scheme.

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.

In its lawsuit, the SEC effectively levied a ‘low blow’ against Gibraltar and Mr Davis, implying that the broker/dealer was ‘bottom feeding’ by catering largely to clients trading in illiquid stocks “during periods of suspicious activity”.

Arguing that this did nothing to strengthen the SEC’s case against them, Mr Davis and Gibraltar fired back: “The complaint makes generalised comments about the nature of Gibraltar’s business in order to create the illusion that Gibraltar’s involvement in the transactions in question was nefarious.

“For example, the complaint states ‘Gibraltar’s business primarily consists of liquidating low-priced, thinly-traded stocks . . . often during periods of suspicious promotion’, and that Gibraltar’s website ‘touts its goals of client secrecy’ but, again, these claims are conclusory.”

And their defence adds: “The SEC does not explain in the complaint how its disreputable characterisations help support the inference that Gibraltar should have known Kirk and his accounts were part of what the SEC claims was an elaborately concealed fraud.

“Moreover, although the complaint makes references to Gibraltar’s involvement beyond the alleged misrepresentations, nowhere does it allege Gibraltar was acting in a manner other than pursuant to its ordinary course of business or had any awareness of the larger alleged scheme.

“Further, the SEC has not pleaded any facts to suggest that Gibraltar did anything improper with respect to their due diligence, nor that any red flags should have put Gibraltar on alert. To the contrary, the complaint seems to point to several factors which indicate Gibraltar may have been misled.”

Gibraltar and Mr Davis argued that the Canadian promoters had all obtained corporate resolutions and certificates on behalf of Pacific Blue and Tradeshow, as required under the Bahamian broker’s due diligence.

Alleging that the SEC had shown nothing to indicate Gibraltar knew these documents to be false, Mr Davis and Gibraltar said these were also backed by opinion letters from US attorneys also charged by the US regulator.

“The complaint makes the alleged scheme out to be a complex web including numerous misrepresentations carefully crafted to prevent its discovery,” the Bahamian defendants alleged.

“The complaint, however, does not allege that Gibraltar knew of these misrepresentations, or if it did, knew them to be anything other than true.”

“The SEC also does not allege any motive on the part of Gibraltar. The complaint is completely silent as to any benefit Gibraltar received from the alleged scheme.

“Gibraltar did not beneficially own any of the shares in question and made no profits from the transactions. The other defendants, however, are alleged to have received profits of at least $11 million.”

Mr Davis and Gibraltar also accused the SEC of trying to “bolster its allegations” by implying that they violated their Financial Transactions Reporting Act obligations through failing to examine the background of Ben Kirk and the accounts he established using corporate nominees.

In response, they said that because they knew Ben Kirk was the beneficial owner, they had complied with Bahamian law’s Know Your Customer (KYC) provisions.

“Given that there is nothing inherently suspicious about an individual owning a number of corporations and respecting their independence in executing financial transactions, and that Kirk allegedly went to great lengths to conceal the scheme and confer on it an air of legitimacy, Gibraltar acted reasonably under Bahamian law,” Mr Davis and his company argued.

“Indeed, the complaint itself alleges that corporate resolutions, public filings and legal opinions vouched for the integrity of the transactions.

“Under the circumstances – and under Bahamian or US law – Gibraltar acted reasonably and cannot be held liable for failing to uncover a carefully designed and concealed fraud.”