The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Appeal Court has overturned a verdict that prevented the Securities Commission “from acting in the public interest”, following its battle with a BISX-listed company over the latter’s compliance with regulatory capital standards.

The ruling, delivered on Wednesday, effectively allows the Securities Commission to maintain the integrity and order of the Bahamian capital markets by upholding its ability to take pre-emptive regulatory action against licensees before giving them an opportunity to respond.

This had been curtailed by a Supreme Court ruling from Senior Justice Stephen Isaacs in June 2014, who found that the Securities Commission had been “heavy handed” and “exceeded its jurisdiction” in the action it took against Alliance Investment Management.

The regulator had been concerned about the failure of the broker/dealer, the main subsidiary of BISX-listed Benchmark (Bahamas), to address concerns over whether it was compliant with regulatory capital/going concern requirements and properly segregating client monies from its own.

The Securities Commission ultimately on April 11, 2013, ordered Alliance Investment Management to “cease taking on any new business” and remedy its non-compliance with the Securities Industries Act 2011 within 15 days.

This prompted the broker/dealer and its president, Julian Brown, to initiate a Supreme Court action four days later to have the regulator’s orders “quashed”.

Alliance prevailed at the Supreme Court, with Senior Justice Isaacs finding that the Securities Commission operated “as a law unto itself” in taking regulatory action without first giving the broker/dealer an opportunity to be heard.

He added that the regulator had incorrectly interpreted two sections of the Securities Industries Act which, when read together, only “negated” the requirement for a hearing on three of 19 counts.

“In other words, it could not be the intention of Parliament to deprive Alliance wholly of its right to a hearing,” Senior Justice Isaacs ruled.

The Securities Commission moved to appeal the verdict on “points of law of general public importance”, with the judge certifying the question of whether it could take action against its licensees prior to a hearing despite objections from Alliance’s attorney, Charles Mackay.

“The appellant [Securities Commission] holds the view that the judgment effectively prevents the appellant from acting in the public interest without a hearing, as authorised by section 133(3) of the Act,” Appeal Justice Jon Isaacs, writing the higher court’s verdict, said.

Acknowledging that the Securities Commission’s role was to maintain “public confidence” in the integrity of the Bahamian securities and capital markets, Appeal Justice Isaacs said it could take regulatory action prior to a hearing provided it complied with certain conditions.

“It must be satisfied that it is necessary and in the public interest to do so,” he added of the Securities Commission. “Parliament expressly stated the order is to have a temporary effect, and is intended to protect the integrity and reputation of our securities industry.

“The power is engaged in circumstances where the appellant, as a prudent regulator charged with oversight of the industry, deems it crucial to intervene quickly and nip in the bud, practices or actions which may be harmful to the country’s financial sector, of which the securities industry is a part.

“As one of the pillars of our economy, it is important that no effort be spared to ensure that those who engage in the business of handling investors’ funds do so with probity and integrity, and are not allowed to tarnish the reputation of our financial industry.”

Appeal Justice Isaacs added that the Supreme Court ruling was “misconceived”, but he noted that Gawaine Ward, the Securities Commission’s, had conceded that the original order issued against Alliance was defective.

“The judge’s finding that the order bears the infirmity he identified has not been quashed or overturned. That portion of his decision remains unimpeached,” Appeal Justice Isaacs said.

His verdict detailed how the dispute between the Securities Commission and Alliance first arose in April-May 2011, when the accounting firm, Pannell Kerr Foster (PKF), conducted an on-site examination of the latter on the regulator’s behalf.

PKF was also Alliance’s external auditor, and the Appeal Court verdict noted: “The results of this examination caused concern to the [Commission] relative to the segregation of accounts and to regulatory capital, and this concern was communicated to the respondent sometime in November 2011.”

Some 17 months’ of correspondence between the two parties resulted, with the Securities Commission alleging that Alliance was in breach of Bahamian law.

“The respondent [Alliance] maintained that there had been compliance because, as the appellant was aware (it had downloaded all of the respondent’s records), the respondent segregated the accounts so that each client had a separate account at its firm,” the Appeal Court said.

“Further, the respondent asserted that this position had been endorsed, approved and checked by the respondent’s external accountants at each annual audit, and the accountants had given no notification to the appellant that the respondent has been found wanting.”

Mr Brown, as Benchmark and Alliance’s president, countered in late 2011 that Alliance’s client accounts were segregated from the broker/dealer’s own. He also argued that the Securities Commission’s regulatory capital calculation was “flawed”, and that there was no deficiency.

The Securities Commission, in late June 2012, asked PKF to assess Alliance’s “viability” to continue operating “as a going concern”.

“PKF submitted a ‘report’ which was not unfavourable, but shortcomings in it failed to allay the appellant’s concerns,” the Appeal Court said of the Commission.

“The appellant thought that ‘insufficient and unreliable documentary evidence’ had been provided.”

This led to a Securities Commission letter of July 30, 2012, in which the regulator said Alliance had failed to provide enough proof that “the assets of its clients had been segregated externally from that of the company’s”.

It also said Alliance had failed to submit plans to address the regulatory capital shortfall, despite being pressed to do so on two occasions.

This led to the Securities Commission’s first “cease taking on any new business” and comply demand on July 30, 2012, which was followed by a demand for the Krys Global accounting firm to undertake a ‘regulatory compliance assessment’ of Alliance.

There followed another eight months of ‘to-ing and fro-ing’, as Mr Brown sought to “forestall” Krys Global’s appointment in favour of his own auditors, PKF.

Alliance then initiated its own legal action, with the Securities Commission responding by seeking a Supreme Court Order that Krys Global be appointed and given “unfettered access to the respondent’s business premises and records for the purpose of determining the respondent’s ability to continue as a going concern”.

The Court of Appeal verdict thus reveals that the Securities Commission’s concerns regarding Alliance’s regulatory compliance, particularly its failure to meet capital requirements, existed before the broker/dealer became embroiled in the $400 million BC Capital Group ‘ponzi’ fraud saga.

Mr Brown and Alliance had always vigorously denied, and defended, allegations that they facilitated the scheme.

But, in a settlement with the SEC that was concluded in October, they agreed to repurchase the company’s entire $5 million preference share capital.

This, potentially, revives the same questions over Alliance (and Benchmark’s) regulatory capital and ‘going concern’ ability.

Benchmark (Bahamas) latest financial statements, for the six months to end-June 2016, show the $5 million preference shares are currently critical to the company’s net worth or solvency.

With them included on its balance sheet, the BISX-listed firm has a net worth or ‘shareholders’ equity’ of $3.157 million.

Take them away, as the SEC settlement now requires by virtue of Alliance buying them back, would plunge Benchmark (Bahamas) into ‘negative net worth’ or insolvency without those preference shares being replaced by Mr Brown or another investor(s).

The SEC settlement effectively demands a recapitalisation of Benchmark and Alliance, its international broker/dealer subsidiary.