The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A US judge has recommended slashing the financial sanctions to be imposed against a former Bahamian broker/dealer and its principal by more than $7 million.

Magistrate Judge James Francis, in a ruling delivered on Friday, found that the civil penalties sought by US federal regulators against Gibraltar Global Securities and Warren Davis were “unreasonable”.

The Securities & Exchange Commission (SEC) had previously urged the southern New York federal court to levy a $7.246 million “civil monetary penalty” against both the Bahamian defendants separately.

But Judge Francis said this figure was “inappropriate”, and recommended cutting the civil penalty that each of Gibraltar and Mr Davis must pay by almost 50 per cent - from $7.246 million down to $3.667 million.

“I disagree with the SEC as to the appropriate size of the penalty in this case,” Judge Francis said of the demand for almost $14.5 million in collective civil penalties.

While agreeing that Gibraltar had “generated hundreds of millions of dollars in revenue, while both encouraging and helping customers avoid taxes”, the judge also noted that Mr Davis had never admitted to any wrongdoing.

“The SEC has not cited any case law to suggest that a $7.246 million civil penalty for each defendant is reasonable in this case. In light of the substantial disgorgement and prejudgment interest award I have recommended, the ‘punitive and deterrent purposes of the civil penalty statutes’ can be achieved by penalties below the maximum,” Judge Francis found, substituting in the lower $3.667 million fine per defendant.

The SEC’s $7.246 million figure was equivalent to 50 per cent of the alleged profits that Mr Davis and Gibraltar were alleged to have earned, while both operating as an unregistered broker in the US and facilitating/participating in an unregistered share offering.

While this represents something of a victory for Mr Davis and Gibraltar, as the collective financial sanctions likely to be imposed on them have been reduced by $7.158 million, they are still facing an eight-figure penalty - albeit one that has been reduced from the SEC’s $31.56 million to $24.4 million.

For Judge Francis backed the SEC’s assessment that the two Bahamian defendants should be ordered to pay a $14.5 million fine, representing their alleged “ill-gotten gains”, plus $2.7 million in pre-judgment interest.

The SEC, in its original 2013 lawsuit, alleged that Gibraltar received $3.487 million in trading commissions from US clients while operating as an unregistered broker/dealer.

It based this on the Bahamian company’s 2-3 per cent commission fees, and $116 million in wire transfers sent to US recipients.

And the US capital markets regulator claimed they received a further $10.962 million from facilitating a share offering involving stock in a thinly-traded company, Magnum d’Or, which breached capital markets regulations because it was not registered with the SEC.

“From approximately March 2008 through August 2012, the defendants operated as unregistered broker/dealers, offering their customers - many of whom resided in the United States - a means to engage in securities transactions anonymously and without paying taxes on their profits,” Judge Francis recorded in his Friday sanctions recommendation.

“To enable customers to avoid US taxes, Mr Davis submitted withholding forms to brokers in the US that falsely certified that Gibraltar - a non-US entity exempt from withholding - was the beneficial owner of the income generated from its transactions.”

Judge Francis said Gibraltar would receive shares in low-priced, thinly-traded companies from its US clients. It would then transfer and re-title these shares in its name, depositing them in correspondent accounts at US-based broker/dealers.

Gibraltar took trading instructions from its clients, with the proceeds from share transactions transferred to its own account at the Royal Bank of Canada (RBC) in Nassau. These funds were then wired to the clients, once the Bahamian broker/dealer had deducted its 2-3 per cent commission.

As for the Magnum d’Or scheme, Judge Francis recalled: “Gibraltar retitled the Magnum shares in its own name and deposited them in four accounts it maintained with US brokers.

“Between November 2008 and December 2009, the defendants sold over 10 million shares of Magnum stock through their US brokers, generating total proceeds of $11.385 million.

“ The defendants never filed a registration statement with the SEC in connection with any sale of Magnum stock. Gibraltar eventually wired approximately $7.175 million directly back to Magnum,” he added.

“The indispensable role the defendants played in selling the unregistered Magnum stock, combined with their refusal to participate in discovery, makes it appropriate to hold them jointly and severally liable for the total proceeds generated by their illegal conduct.”

Mr Davis and Gibraltar now have until October 30 to file written objections to the sanctions recommendations with the southern New York court.