The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A Bahamian broker/dealer’s “failed attempt at corporate suicide” has failed to impress a New York judge, who has ordered it to produce potentially thousands of documents sought by US federal regulators by today.

Judge James Francis, in an April 1 ruling, denied the ‘protective order’ sought by Gibraltar Global Securities and its principal, Warren Davis, and gave them two weeks to produce documents stored in the Bahamas.

He also revealed that Gibraltar’s Board decided to place the broker/dealer in voluntary liquidation just one day after US regulators served a notice on the company, alerting it that a US enforcement action was imminent.

This, Judge Francis found, together with the fact that Gibraltar had not apparently moved litigation against its Bahamian regulator forward, suggested it was not acting “in good faith” with respect to the lawsuit against it.

The judge, sitting in the southern New York district court, dismissed Gibraltar and Mr Davis’s fears that production of the documents sought by the Securities & Exchange Commission (SEC) could “expose them to liability in the Bahamas” for breaching client confidentiality and this nation’s laws.

And he also dismissed their argument that the information sought by the SEC was no longer in their possession, given that Gibraltar had attempted to go into voluntary liquidation - a move its Bahamian regulator, the Securities Commission of the Bahamas, is refusing to approve.

“An ineffective voluntary liquidation - in effect, a failed attempt at corporate suicide - does not excuse a party from its discovery obligations,” Judge Francis’s ruling began, giving every indication of how he would later rule.

The documents sought by the SEC relate to a lawsuit it has filed against Mr Davis and Gibraltar, in which it alleges that they participated in an alleged “illegal unregistered [share] 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.

The Bahamian duo were also alleged to have operated as an unlicensed broker by using their website to solicit US clients, facilitating the sale of $100 million worth of securities.

Recalling the background to Gibraltar and Mr Davis’s application for a ‘protective order’ that would have prevented the SEC from moving forward with its disclosure demands, Judge Francis said the Bahamian broker/dealer had admitted storing documents relating to 100,000 transactions, and its 1,200 clients, in this nation.

Although Gibraltar’s Board approved its voluntary liquidation on August 29, 2012, the Securities Commission’s refusal to approve this or accept surrender of its licence has led to the current litigation between those two parties in the Bahamian Supreme Court.

Turning to the implications for the SEC action, Judge Francis ruled that the Bahamian defendants had failed to prove that this nation’s laws prevented the discovery sought by the US regulator.

Noting that section 73 of the Bahamian Securities Industries Act prevented a company going into liquidation without the Securities Commission’s prior approval, he ruled: “The defendants fault the SEC for relying on the plain language of the Securities Industries Act....

“Yet statutory construction generally begins with an analysis of the language of the statute and, if that language is clear, ends there as well. This principle applies to interpretation of foreign as well as domestic law.

“The language of section 73 of the Securities Industries Act could not be more clear. As against the words of the statute, the defendants proffer only the declaration of their Bahamian counsel, Raynard S. Rigby, who states that ‘[t]he Securities Commission, under section 73 of the Securities Industries Act, must approve a registrant’s decision to proceed to a voluntary liquidation’,” the judge added.

“The opinion of an expert as to foreign law does not bind the court, even if it is uncontradicted. Here, Mr Rigby, who is hardly a disinterested expert, provides no legal support for his opinion. His ipse dixit does not warrant disregarding the plain text of the statute.

“Because Gibraltar’s liquidation and attempted surrender of its registration are ineffective, then, it remains in control of the documents sought by the SEC.”

As for Gibraltar and Mr Davis’s assertion that providing the sought-after documents would violate Bahamian law, Judge Francis said the claims were “more nebulous” than previous similar cases.

He added that case law cited by Mr Rigby referred to a bank, not a broker/dealer such as Gibraltar, and that there was nothing to indicate that this matter - decided in the UK - had been adopted in the Bahamas.

“Finally, even if the British common law of bank secrecy applied with full force to Gibraltar, it would not justify withholding documents in this case,” the US judge found.

“In addition to relying on a common law bank secrecy privilege, the defendants contend that ‘section 55 of the Securities Industries Act recognises the right of legal professional privilege in relation to certain documents in the possession of a registrant’.

“Indeed it does, but this is of little assistance to the defendants. Section 55 simply provides that no one shall be required under the Securities Industries Act to divulge attorney-client communications.

“Yet the defendants have not suggested that any of the requested documents reflect such communications. Accordingly, there is no duty of confidentiality that precludes the disclosure of the requested information.”

Judge Francis said neither Bahamian securities laws relating to liquidation, nor client confidentiality requirements, had been shown as conflicting with US discovery laws.

“Here, the information requested is plainly central to the SEC’s claims. It is necessary to identifying Gibraltar’s customers in the US, its potentially illegal transactions, and its communications regarding the nature of Gibraltar’s operations,” Judge Francis said.

“While not highly specific, the SEC’s discovery requests are appropriately limited to documents relating to Gibraltar’s customers in the US. Given the discrete nature of Gibraltar’s business and the relation of the SEC’s claims to that business, the SEC’s discovery demands could not be much more specific.

“Although the information requested is maintained in the Bahamas, it all relates to individuals in the US. Some communications originated with those individuals, and their transaction records were accessible to them in the US through Gibraltar’s website.”

Judge Francis said the Bahamian government had raised no objection to the document production, and added: “There is no apparent hardship to Gibraltar in complying with the SEC’s requests.

“The relevant information is in storage and, since the firm is not currently operating, the task of segregating responsive documents would not drain resources from its day-to-day activities.

“In sum, with the exception of the availability of alternative means of discovery, all of the factors relevant to a comity analysis favour granting the SEC the discovery it requests.”