The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A Bahamian broker/dealer and its principal have “categorically denied” they were “knowing” participants in an alleged $11 million multinational fraud, after the US Securities and Exchange Commission (SEC) charged them with falsifying affidavits and documents.

Warren Davis said he and his company, Gibraltar Global Securities, were “surprised” to have been included among those indicted on Friday over an alleged ‘pump and dump’ scheme, given that they had assisted both the SEC and Securities Commission of the Bahamas in their investigations.

A copy of the SEC lawsuit, which has been obtained by Tribune Business, reveals that the charges against Mr Davis and Gibraltar relate 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, in its lawsuit filed on Friday, is alleging that Gibraltar facilitated the scheme by “providing false affidavits and misleading statements” that allowed Benjamin Kirk to “secretly sell” his shares in the two companies. Mr Davis was charged individually because he allegedly “signed misleading representations”.

Contacted by Tribune Business, Mr Davis said he was limited in what he could say because he had yet to discuss the matter with his attorney. However, in an e-mailed response to this newspaper’s questions, he denied the claims against him and Gibraltar, and indicated they would fight the SEC’s action.

“For the record I categorically deny that Gibraltar or myself knowingly were involved in any pump and dump scheme,” Mr Davis said. “I never knowingly provided any false affidavits or false or misleading statements; these affidavits were vetted and approved by attorneys.

“Neither Gibraltar Global Securities or myself were ever in complicity with any secret sale of unregistered securities. As a matter of fact, Gibraltar Global Securities assisted both local and international regulators in this matter.

“In light of this, it is surprising to me that these allegations have been brought against Gibraltar Global Securities and myself. I will continue to follow the rule of law and our legal duties and responsibilities.”

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

More seriously, the SEC action also alleges that Gibraltar breached Bahamian law, namely the Financial Transactions Report Act and Proceeds of Crime Act, by failing to verify the identity and purpose of nominee accounts it held for Ben Kirk, one of the scheme’s major participants.

Alleging that the Kirks and Boyle “sold millions” of Tradeshow and Pacific Blue shares through accounts at Gibraltar and a US broker/dealer, the SEC claimed they opened accounts with the Bahamian broker/dealer “in the name of fake nominee entities”.

Noting that Gibraltar liquidated client stocks through accounts at Scottsdale Capital Advisors, a US broker, the SEC alleged: “Gibraltar’s business primarily consists of liquidating low-priced, thinly-traded stocks on behalf of its clients, often during periods of suspicious promotion.”

While Ben Kirk, Boyle and Hinton all held Gibraltar accounts either in their own names or via offshore companies they controlled, the SEC lawsuit disclosed that US attorney Luis Carrillo was also part of the alleged ‘pump and dump’ scheme. He, too, has been charged.

“Gibraltar served a key role in the ‘dump’ portion of the scheme by providing misleading representations in September 2009 and April 2010 that served to conceal the beneficial ownership of millions of Tradeshow and Pacific Blue shares controlled by Ben Kirk,” the SEC alleged.

“Ben Kirk controlled at least three separate nominee accounts at Gibraltar, for no apparent purpose other than to conceal his identity. Gibraltar knew that it was maintaining these nominee accounts beneficially owned by Ben Kirk in addition to his personal account, and that there was no readily apparent legitimate purpose for these accounts.”

The SEC alleged that Gibraltar “misrepresented the beneficial ownership” of the Tradeshow and Pacific Blue shares that Ben Kirk controlled. It claimed that in September 2009, the Bahamian broker/dealer provided Scottsdale with a “false” affidavit stating that Medford Financial was its ‘client’ in depositing one million Tradeshow shares, despite knowing this entity – and the shares – were owned by Ben Kirk.

“Gibraltar provided additional affidavits to Scottsdale in April 2010 for two separate deposits of 1.8 million Pacific Blue shares, misleadingly stating that it held securities for the ‘sole benefit’ of its clients, Mazi and Baltic, when Gibraltar knew that Ben Kirk was the beneficial owner and that Mazi and Baltic were nominee entities,” the SEC alleged.

“Also in April 2010, Gibraltar signed share deposit forms relied upon by Scottsdale’s clearing broker for the deposit and sale of 3.6 million Pacific Blue shares on behalf of Ben Kirk. These forms misleadingly represented that the shares were ‘acquired’ from nominee entities Mazi and Baltic, when Gibraltar knew that its client Ben Kirk was the beneficial owner of the shares.”

The SEC alleged that this “contradicted” the account opening information provided to Gibraltar by Ben Kirk for his nominee entities. It added that Bahamian law “imposed” on Gibraltar a duty to investigate the beneficial ownership and use of Ben Kirk’s accounts, and to verify the identity of its clients, thus ensuring it knew he – and not the nominee entities – owned the shares being traded.

“These representations, which were signed by Warren Davis, president of Gibraltar, were made to conceal the beneficial ownership of the shares in furtherance of the scheme,” the SEC alleged.

“After making these false representations, Gibraltar arranged to sell Pacific Blue and Tradeshow shares on behalf of Ben Kirk’s nominee accounts for proceeds of over $3.8 million through omnibus accounts in Gibraltar’s name at Scottsdale.”

The SEC further alleged that Gibraltar conspired with the scheme’s participants to “illegally sell or offer to sell millions of Tradeshow shares for which no registration statement was in effect” in 2009 and 2010.

“Gibraltar is subject to liability for its illegal distribution of Tradeshow shares on behalf of its client Ben Kirk. Gibraltar’s sales were not considered ‘brokers’ transactions’ under Section 4(a)(4) because the exemption is not available where the broker has failed to make a reasonable inquiry,” the SEC alleged.

“Here, numerous red flags existed, including the sale of blocks of a low-priced, thinly-traded issuer and Ben Kirk’s acts to conceal his beneficial ownership by transferring and selling shares through multiple nominee accounts at Gibraltar.

“In light of the numerous red flags surrounding Ben Kirk’s sales, there was a need for a ‘searching inquiry’ into the Tradeshow stock that it deposited and sold. Gibraltar did not conduct a reasonable inquiry, but instead affirmatively helped Ben Kirk conceal his beneficial ownership of shares from Scottsdale.

“Warren Davis, as president of Gibraltar, signed the misleading documentation, provided to Scottsdale concealing Ben Kirk’s beneficial ownership in furtherance of the deposit and sale of shares.”

The SEC alleged that Ben Kirk and Boyle generated profits of $4.4 million from selling five million shares through their accounts at Gibraltar and Scottsdale. And in June 2012, Ben Kirk wired $1.5 million in Pacific Blue proceeds from nominee accounts at Gibraltar to a bank in Barbados.

Gibraltar has thus been charged with violating the US Securities Act and Exchange Act, and aiding and abetting the scheme’s participants to do so. The SEC wants Gibraltar and Mr Davis to produce an accounting of all revenues they allegedly received as a result of the ‘pump and dump’ scheme, repatriate all funds and assets obtained and hand these over – all the while paying penalty interest on top.

The SEC charges are the latest regulatory headache for Mr Davis and Gibraltar, the broker/dealer’s last encounter with an overseas supervisor having led to the company’s winding down.

Gibraltar is in the process of closing all its 1,224 accounts and returning assets/securities to clients, having surrendered its licence to the Securities Commission at the end of last year. Mr Davis earlier this year 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 British Columbia Securities Commission (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’.

Whether some people will now see the Gibraltar/Securities Commission row in a different light as a result of the SEC charges levied against the broker/dealer and its principal remains to be seen.