The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A Bahamian broker/dealer allegedly “wished to bring about and make succeed” an $11 million stock fraud, US regulators have claimed.

The Securities & Exchange Commission (SEC), in an October 18, 2013, filing in the southern New York district court, argued that its lawsuit provided “ample” evidence to show that the now-defunct Gibraltar Global Securities and its principal, Warren Davis, both knew of and provided “substantial assistance” to a ‘pump and dump scheme’.

The SEC was responding to July 12 court filings by both Gibraltar and Mr Davis, who alleged that the US capital markets regulator “cannot make a case for securities fraud” against them over the scheme.

“The SEC contends that Gibraltar participated in a scheme to defraud investors by misrepresenting the beneficial ownership of certain shares and facilitating deposits of the same shares, thus violating.... the [US] Exchange Act and.....the Securities Act,” Gibraltar’s defence filing at the time said.

“First, the SEC fails to cite any evidence to suggest Gibraltar made any statements to investors in Tradeshow or Pacific Blue at any time, a necessary component for a violation.

“Second, the SEC points almost exclusively to the actions of others and pleads no facts upon which one could even infer that Gibraltar should have uncovered the scheme. Accordingly, the SEC cannot make a case for securities fraud against Gibraltar or Mr Davis, and both these claims should be dismissed.”

Dismissing the defence offered by Gibraltar and Mr Davis in last week’s rebuttal filing, the SEC hit back: “Notwithstanding [Gibraltar’s] assertion that it did not have knowledge or provide substantial assistance to the scheme to support its aiding and abetting claim, the complaint amply alleges both.

“[Gibraltar] knew that its representations regarding beneficial ownership of Ben Kirk’s shares were false because they contradicted the account documentation Gibraltar maintained for Ben Kirk’s nominee accounts.

“[Gibraltar] also knew that Ben Kirk acted to conceal his beneficial ownership by using multiple nominee accounts at [Gibraltar]. Gibraltar provided substantial assistance in support of the scheme by providing misleading representations concealing Ben Kirk’s ownership in order to facilitate the deposit and sale of shares, and also sold shares on Ben Kirk’s behalf through nominee accounts for millions of dollars in proceeds. [Gibraltar] thus actively aided and abetted the scheme as something it wished to bring about and make succeed.”

The SEC charged Mr Davis and Gibraltar this March with falsifying affidavits and documents in relation 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 is claiming that Gibraltar facilitated the scheme through the “false affidavits and misleading statements”, which allowed Benjamin Kirk to “secretly sell” his shares in the two companies. Mr Davis was charged individually because he allegedly “signed misleading representations”.

The SEC’s latest missive comes as Gibraltar and Mr Davis this time launch their own action in the Supreme Court, against the Securities Commission of the Bahamas, in a case whose outcome could have widespread ramifications for the Bahamian regulator’s information sharing and cross-border co-operation powers.

Gibraltar’s action, as detailed by a September 16, 2013, summons filed by their attorney, Raynard Rigby of Baycourt Chambers, has three strands: Challenging why the Securities Commission refuses to accept its voluntary liquidation and surrender of its registration/licence; whether the Bahamian regulator’s information sharing powers under the Securities Industry Act are unconstitutional; and seeking an injunction to prevent the Commission from demanding that the broker/dealer turn over information it sought in three letters written earlier this year.

Gibraltar is seeking a court declaration that the Securities Commission is in breach of section 71 of the Securities Industry Act, and acting “against administrative jurisprudence and the law generally as a regulator” by refusing to accept its voluntary registration surrender.

It also wants the Supreme Court to declare that the Securities Industry Act does not give the Securities Commission the “right to reject a voluntary surrender of registration by a registrant”.

Elsewhere, Gibraltar also wants the Supreme Court to declare Section 28 of the Securities Industry Act “void”, as it prevents the Securities Commission making “reasonable disclosures” to one of its licensees, and require the regulator to provide them with details on a foreign regulator’s information requests.

It is also seeking a declaration that the Act’s sections 42-43 to not empower the Securities Commission to employ its statutory powers to “facilitate or promote request from foreign regulatory authorities”, and that several other sections breach the Bahamian constitution.

Finally, Gibraltar wants the Supreme Court to declare that the powers invoked by the Securities Commission in three letters written to it between March and August this year “are foul of the law and the said Articles of the Constitution”. It is also seeking an injunction to prevent the regulator from demanding the information requested in the letters prior to its action being heard.

It is unclear what the Securities Commission is demanding, but the information being sought may well be in relation to the two SEC lawsuits against Gibraltar and Mr Davis.

The latter two are also seeking a Supreme Court Order that previous information disclosures made by the Securities Commission caused them to “suffer loss and damages, and to suffer loss of reputation”. That refers to their previous dispute over the regulator’s decision to release information on Gibraltar’s clients to the British Columbia Securities Commission which, the Bahamian broker alleged at the time, was engaged in nothing more than a ‘fishing expedition’.

Meanwhile, the SEC’s latest court filing reiterated previous allegations that Ben Kirk sold Tradeshow shares through three nominee accounts at Gibraltar, called Medford, Baltic and Mazi. And he also controlled 7.2 million shares in Pacific Blue via nominee accounts.

“Ben Kirk ultimately sold 3.6 million Baltic and Mazi shares through Gibraltar and sold other shares through Scottsdale,” the SEC alleged. “In sum, Gibraltar sold both Tradeshow and Pacific Blue shares on Ben Kirk’s behalf for total proceeds of at least $3.8 million during the scheme.”

The SEC claimed that the Gibraltar accounts served no purpose other than to “conceal” Ben Kirk’s identity, and further alleged: “Gibraltar provided multiple misleading affidavits and representations to Scottsdale (the US broker through which it dumped stock). Gibraltar falsely represented that shares beneficially owned by Ben Kirk were instead beneficially owned by offshore entities.

“For example, in September 2009, it provided an affidavit stating that nominee entity Medford Financial was its “client” and owner of one million Tradeshow shares. In April 2010 it provided affidavits stating that two deposits of 1.8 million Pacific Blue shares were held for the “sole benefit” of nominee entities Mazi and Baltic.

“In April 2010 it also signed share deposit forms misleadingly stating that the shares were “acquired” from Mazi and Baltic. These misleading documents, which concealed Ben Kirk’s ownership, were signed by Warren Davis as president on behalf of Gibraltar.”

And the SEC further alleged: “Gibraltar knew these representations were false because the account opening documents provided to Gibraltar by Ben Kirk made clear that Ben Kirk was the beneficial owner of the multiple nominee accounts.

“In addition to the fact that Gibraltar made affirmative misrepresentations to Scottsdale, there were numerous red flags that should have alerted Gibraltar to the ‘pump-and-dump’ scheme, including the sale of large 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.

“Gibraltar was particularly positioned to understand the implication of these very signs. Its business model was based on providing a platform for microcap stock promoters to secretly dump shares while concealing their identities.

“Gibraltar also had motive and opportunity. Gibraltar was motivated to conceal Ben Kirk’s activities because that is precisely the service Gibraltar provided. Its business model (as it touted to prospective clients) was to conceal beneficial ownership, Gibraltar took steps to do so, and as a broker executing trades on behalf of its clients, the most reasonable inference is that Gibraltar obtained concrete benefits in the form of commissions and fees for executing the ‘dump’ portion of the scheme.”

The SEC then took on Gibraltar’s defence, arguing that the former Bahamian broker/dealer did “not contest” the alleged statements made to US brokers “or that the statements were false”. It claimed the company’s defence was that its representations were not actionable because they were not made to the investing public.

“But for Gibraltar’s acts of concealment, the shares would not have been purportedly unrestricted and eligible for deposit and sale without registration,” the SEC alleged. “Once Gibraltar made a statement regarding material facts, it was under a duty to do so truthfully.

“With respect to scheme liability, Gibraltar not only made misleading statements, but engaged in manipulative acts by providing a platform for the ‘dump’ portion of the scheme through nominee accounts. Its uses of nominee accounts constituted deceptive acts in furtherance of the scheme.”