Broker's $22m

'road to ruin'

By NEIL HARTNELL

Tribune Business Editor

A senior executive at a Bahamian broker/dealer has admitted that it used assets/funds against client wishes to fund other customers' margin loans for about 18 months before the appearance of the fraudulent 'pump and dump' scheme that caused the company's eventual $22 million collapse.

Court transcripts from the trial of Canadian George Georgiou, who was ultimately convicted of securities fraud, record Bahamian financial services executive, Robert Dunkley, a former investment advisor at Caledonia Corporate Management, disclosing that the broker/dealer had used client assets as collateral/security for the activities of other clients for some two-and-a-half years.

Under cross-examination by Georgiou's attorneys, Mr Dunkley confirmed that all Caledonia clients' money was sitting in one Omnibus account at the company's Canadian correspondent broker, Jitney.

"That enabled Caledonia to use other clients' money for reasons having nothing to do with those clients' wishes, correct?" Georgiou's attorneys asked.

"Correct," Mr Dunkley replied, "which we had operated, and never had problem on that basis for quite a while, probably for about a year-and-half before Mr Georgiou came into this."

Earlier in the trial, under examination by US government attorneys, Mr Dunkley gave details about how all Caledonia client assets came to be sitting in just one account belonging to its Canadian correspondent broker.

The former investment adviser sought to blame Jitney for the situation that led to the creation of the single Omnibus account, which meant that the Canadian broker was able to sell off other client assets on a margin call to cover the $22 million hole created by Georgiou's activities.

Mr Dunkley testified that prior to 2005, all Caledonia clients had their accounts properly segregated at Jitney, but then there was a Canadian regulatory change that required the Bahamian broker/dealer to provide Know Your Customer (KYC) information on all its customers.

"And Caledonia felt that this is something that the clients did not want," Mr Dunkley testified. "And Jitney had turned it around and said: 'OK, we will set up the account for you, but it has to be an Omnibus Account so all of the assets of all of the clients had to be in one account'. And they allowed us to operate that on a margin account basis.

"You know, just about all of our clients were good, honest, decent individuals, operating accounts. We probably had five or six accounts that were on margin. Five years of operating with those people, those accounts, we never had a problem, we never had a margin call.

"And it was venturing out into, taking on an aggressive account, one which was really more in the wholesale or venture capital type business we had no experience in" that got Caledonia into trouble.

Tribune Business revealed last week how Georgiou and his alleged co-conspirators, including supposed Canadian "mobster" Vince deRosa, repeatedly promised Caledonia that they would infuse more cash or stocks into the account to cover the expanding deficit that was occurring as a result of their 'margin' trading and 'short selling' strategies. However, none of these promises ever became reality.

"I lost every penny that I had," Mr Dunkley, who is now trying to open a Nassau pub, said. "When all is said and done, yeah, clients lost; we lost."

Asked what happened to Caledonia and the Omnibus account, he told the US court: "It went into ruin. If clients get..... you know, some made out not too badly, others have lost everything. I mean, that is the doom and gloom of it. And the clients are getting together to really bring a suit against Jitney, because we believe that they should never have allowed Caledonia to have operated that type of account."

Mr Dunkley was challenged on this by Georgiou's attorneys, who argued he was claiming that "Jitney should have saved Caledonia from itself".

The Bahamian executive reiterated that former Caledonia clients were going to take legal action against Jitney over the pooling of their assets into just one account, querying whether this was required by Canadian law or simply done as a way to retain the Bahamian broker/dealer as a client.

"In my mind, in retrospect, looking back on it, they should not have allowed Caledonia to operate an account like that, a margin account that is pooled with clients' - many different clients' - assets," Mr Dunkley testified. "Jitney should not have allowed Caledonia to operate a margin account that is a pooled account with clients' money in it."

Trial

The trial transcript provides a fascinating insight into how Georgiou was able to defraud not just Caledonia but a total of three Bahamian broker/dealers, one of which is a subsidiary of a Bahamas International Securities Exchange (BISX) listed company.

No details were provided of just how much exposure Alliance Investment Management, a subsidiary of Benchmark (Bahamas), faced as a result of Georgiou's activities, although the trial transcript noted the Bahamian broker/dealer was left with a "deficit" and detailed several rows between the convicted fraudster and Julian Brown, Benchmark (Bahamas) president and chief executive.

Under examination by US government attorneys, Georgiou admitted that a brokerage account at Alliance Investment Management ended up in deficit "at a different time and in a different way".

The US government attorneys revealed an e-mail sent by Ron Wyles, the nominee used by Georgiou for many of his brokerage accounts, to Mr Brown in which he asserted he was "the only authorised person entitled to place orders on the Bay Pointe account or give instructions whatsoever".

"He is sending that because there has been a lot of back and forth between Julian Brown and you, and Julian Brown and Ron Wyles, about your giving instructions in the account, isn't that true," the US government attorneys asked.

"There was a dispute that was trying to be resolved," Georgiou admitted. And he also conceded that there was "great conflict" between him and Mr Brown after a fellow conspirator, who turned government informant against him, failed to return a block of shares to Alliance Investment Management after finding he was unable to finance the trade.

The final Bahamian broker/dealer impacted by Georgiou's activities, the trial transcript showed, was Accuvest, which was left holding a $3.75 million deficit.

Published On:Monday, July 05, 2010