The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A Bahamian broker/dealer and its owner have described themselves as “bit players at most” in two alleged multi-million dollar financial frauds, accusing US regulators of attempting to portray them as “unscrupulous”.

In their second defence in as many weeks to separate lawsuits filed against them by the Securities & Exchange Commission (SEC), Gibraltar Global Securities and Warren Davis urged the southern district New York court to “consolidate” the two actions into one if it chose not to dismiss them outright.

Calling on the US court to choose the latter route, Gibraltar and Mr Davis said the SEC was guilty of an “impermissible logical leap” in accusing them of operating illegally as a broker/dealer in the US and facilitating the sale of $100 million in securities.

While the US regulator had charged them with soliciting US clients via Gibraltar’s website, the Bahamian defendants said it could identify no specific American investor who had come to them through this route.

And they alleged that the SEC’s claim that Gibraltar’s website attracted 2,200 hits per day, with 21 per cent of traffic coming from the US, was based on “completely unreliable” data from website analysers.

The SEC, in its latest lawsuit, also charged Mr Davis and Gibraltar with 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.

Yet Mr Davis and his company, which is in the process of winding-up, countered that the SEC was charging them with “guilt by association”.

He and Gibraltar argued that they were not “knowing participants” in the Magnum d’Or scheme, and that the perpetrators had deceived others - including a large US law firm.

Referring to the first SEC lawsuit against them, Mr Davis and Gibraltar said: “In both cases the SEC attempts to portray Gibraltar as an unscrupulous ‘offshore’ broker/dealer that flagrantly flouts SEC registration requirements and helps penny stock scammers perpetrate their ‘pump and dump’ schemes.

“In both cases, however, removing the SEC’s conclusory allegations reveals Gibraltar and Mr Davis to be, at most, bit players that the SEC seeks to hold liable for failing to uncover elaborate and carefully concealed schemes. On this basis alone, both complaints should be dismissed.”

In its first lawsuit, the SEC in March 2013 charged Mr Davis and Gibraltar 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.

But, responding to this ‘double whammy’, Mr Davis and Gibraltar argued: “The SEC inexplicably puts Gibraltar and Mr Davis to the burden of defending two separate actions by two separate offices of the SEC that are both based on the same sort of allegations.

“The only conceivable reason to separate these actions may be tactical.... Regardless, to the extent either action proceeds against Gibraltar or Mr Davis, they object to being put to the burden of litigating the same issues

against two separate offices of the same federal agency, and thus move for this action to be consolidated for all purposes with the related SEC action.”

Taking on the SEC’s latest lawsuit, Gibraltar and Mr Davis noted that they were supposed to have received 2-3 per cent commissions from the $100 million worth of transactions processed for US customers.

Refuting claims that they breached the US Securities Act and the Exchange Act, they countered: “The complaint fails to identify a single specific US investor who actually bought stock through Gibraltar as a result of a solicitation on Gibraltar’s website.

“Nowhere does the SEC allege that Gibraltar’s website specifically stated that it was seeking US investors. Instead, the SEC cites portions of the content of Gibraltar’s website and asserts that such content can only be aimed at US investors.”

Given that almost 80 per cent of traffic to Gibraltar allegedly originated from Canada, Mr Davis and his company said it was more logical to conclude they were targeting Canadian investors.

And they added: “More likely, the SEC hopes that negative connotations associated with the word ‘offshore’ somehow add to the inference that Gibraltar was improperly soliciting US investors. In fact, there is nothing inherently suspicious or improper about ‘offshore’ business activities.

“The complaint next makes one of its many references to Gibraltar’s former website touting the fact that transactions through Gibraltar are not subject to taxes, again somehow implying that this is nefarious.

“As an initial matter, this inference – were it even nefarious – has no bearing on whether the website solicited US customers. Investors in any country are just as interested as US investors in paying as little in taxes as lawfully possible.”

Defending their “touting” of the Bahamas’ beneficial tax environment, Gibraltar and Mr Davis said there was clear evidence to undermine the SEC claim that they were re-registering shares in their name to conceal client identities.

And they accused the US regulator of employing third party websites to bolster its allegations, with Hupso.com and webstatsdomain.com alleging that US traffic accounted for 21 per cent of the 2,200 daily hits to Gibraltar’s website.

“Presumably, we are to infer based on this that 462 Americans per day were illegally solicited by Gibraltar’s website,” the two Bahamian defendants alleged.

“Counsel for Gibraltar ran Gibraltar’s website (www.ggsibahamas.com) through Hupso.com on May 29, 2013, and July 16, 2013, and both times the results stated that it receives exactly 2,212 visitors per day.

“Thus, on any given day, Hupso.com apparently reports the exact same

amount of web traffic – 2,212 visitors or, according to the SEC, ‘over 2,200 visitors’ – despite the fact that Gibraltar is ceasing operations and the website has been changed to a simple login screen. These results simply cannot be accurate, and thus Hupso.com is patently unreliable.”

As for the Magnum d’Or situation, the defence argued: “The complaint lacks any allegation that Gibraltar or Mr Davis was involved in planning or carrying out the MDOR scheme.

“The SEC simply alleges that the Flatt nominees transacted accounts through Gibraltar, and that Gibraltar ‘knew or should have known that the Flatt nominees acquired the shares directly from the issuer, Magnum d’Or’.

“The complaint contains absolutely no explanation as to why or how Gibraltar or Mr Davis could have known this.”

Noting that they received no more than the normal commission for the Magnum d’Or trades, Mr Davis and his company noted that both the US-based transfer agent that issued the share certificates, and a large US law firm, were also deceived by the scheme.

“If a large and highly-regarded law firm representing a corporation is unable to discover that the corporation is a sham, it is totally unreasonable to infer that Gibraltar – which had absolutely nothing to do with planning the alleged scheme – acted unreasonably in failing to uncover it,” Gibraltar and Mr Davis argued.

“The SEC alleges no basis to infer that Gibraltar would have paid special attention to the scheme, particularly given that, according to the SEC itself, Gibraltar’s only financial interest was a standard broker’s commission.

“In fact, the far more logical inference to be drawn from the complaint is that Gibraltar acted reasonably at all times and was itself deceived.”

Gibraltar and Mr Davis argued that they were nothing more than a ‘clearing broker’ for the Magnum d’Or trades, and that the SEC had itself conceded they were often “totally transparent” with US brokers as to client identities.

“In short, Gibraltar added nothing to the scheme,” they added.