By NEIL HARTNELL
Tribune Business Editor
A Bahamian broker/dealer will “act at its peril” should it comply with US federal regulators’ demands to produce thousands of documents relevant to their ongoing New York legal battle.
Raynard Rigby, the Bahamian attorney for Gibraltar Global Securities, alleged in a December 4 affidavit obtained by Tribune Business that there were two key obstacles that prevent the now-defunct broker/dealer complying with the Securities & Exchange Commission’s (SEC) request that it produce documents held in this nation.
The first was that Gibraltar, and its principal, Warren Davis, would be exposed to potential lawsuits from former customers for violating their confidentiality if they complied with the SEC’s demands.
Mr Rigby said the only protection Mr Davis and his broker/dealer had against this would be a Supreme Court Order under the Evidence (Proceedings in Other Jurisdictions) Act.
Such an Order, requiring Gibraltar to produce the requested documents in the New York courts, would also “protect against potential liability” the broker/dealer may have towards its clients.
In effect, Mr Rigby is suggesting that the SEC and New York courts follow the established legal procedures for foreign jurisdictions seeking to obtain information held in the Bahamas.
And he also cites Gibraltar’s liquidation as another reason why the SEC’s demands can be met, arguing that the documents sought were now under the liquidator’s possession – and neither the company nor its principal had any control over them.
Mr Rigby also alleged that the Securities Commission of the Bahamas’ refusal to accept the surrender of Gibraltar’s licence/registration had left the company in “legal limbo”, and was being challenged by the broker/dealer in the Supreme Court as there was no legal basis for this.
“Under the present circumstances, Gibraltar acts at its peril with respect to any Gibraltar documents because of its legal status, and because it could be sued by its former customers/clients if it violates client confidentiality,” Mr Rigby alleged.
His affidavit is intended to support Gibraltar’s motion, filed in the southern New York district court on Friday, for a ‘protective Order’ that would block the SEC’s demands that it produce documents “not within its possession or control”.
The case has important wider ramifications for the Bahamian financial services industry and its clients, as the matter goes to the heart of the seeming ‘extra-territorial’ reach and demands of US law and regulators.
It may yet serve as something of a ‘test case’ for whether US federal regulators will abide by the proper legal channels for obtaining information held in the Bahamas, and if the local courts and regulators can resist the pressure that may be brought to bear.
Setting out the progress of Gibraltar’s battle with its Bahamian regulator, Mr Rigby said the broker/dealer gave the Securities Commission notice of its desire to surrender its licence/registration on January 31, 2013.
“Generally, it is the custom for the Securities Commission to agree to the surrender once it is granted safeguards with respect to the retention of the documents for the required statutory period of seven years,” the Baycourt Chambers attorney said.
“In this instance, the Securities Commission refused to agree to surrender the licence/registration of Gibraltar. The Securities Commission has provided no reason for its refusal.”
Mr Rigby said the issue was part of Gibraltar’s Supreme Court legal action against the Securities Commission, which was “seeking a number of other orders and declarations relating to the actions and conduct” of the regulator in its dealings with the broker/dealer.
He added that Gibraltar’s August 29, 2012, decision to dissolve itself meant the company’s director/management powers had passed to the appointed liquidator.
“The Securities Commission….. must approve a registrant’s decision to proceed to a voluntary liquidation,” Mr Rigby alleged. “Gibraltar has complied with all of the requests from the Securities Commission in respect of the surrender of its licence/registration, and for it to proceed to a voluntary liquidation.
“The appointment of a liquidator, and the unexplained failure of the Securities Commission to approve Gibraltar’s liquidation, leave Gibraltar in legal limbo.”
Mr Rigby, the former Progressive Liberal Party (PLP) chairman, added that Bahamian companies and individuals “need not voluntarily surrender or produce documents to a foreign court unless ordered to do so by the Bahamian Supreme Court acting on the request from the foreign court”.
Effectively urging the SEC and New York court to follow established legal procedure for obtaining the information sought, Mr Rigby said: “Under Bahamian law, Gibraltar owes a duty to its clients/customers that it will not disclose documents relating to a client’s transactions without the consent of the client/customer, or without an Order of the Bahamian court.
“Violating client confidentiality may subject Gibraltar to liability.” And, apart from the Evidence (Proceedings in Other Jurisdictions) Act, Mr Rigby said the Supreme Court would likely have to consider the Financial Transactions Reporting Act and Financial Intelligence Unit Act in reaching a decision on the Gibraltar matter.
Mr Davis’s Bahamian attorney, Sean Moree backed Mr Rigby’s analysis in a November 30, 2014, letter to the former’s US attorneys. The McKinney, Bancroft & Hughes partner confirmed that once a Bahamian company is placed into liquidation, all powers vest in the liquidator.
And, with companies and the individuals who manage them treated separately under Bahamian law, Mr Davis was “in no position to access Gibraltar’s records”. Therefore, Mr Moree said the SEC’s information demands should be submitted to the liquidator.
“The Bahamian legislation clearly enunciates the procedure for the production of documents for foreign proceedings, and this is a fairly common occurrence in our courts,” Mr Moree said.
“In the absence of client approval or a Bahamian court order, a Bahamian company which produces documents ex gratia may be liable to their client.
“Unless the document holder falls within a specified class, there is a common law right to confidentiality in the Bahamas which, if breached, would potentially expose the company to an award in damages.”
The two Bahamian attorneys’ missives are part of Gibraltar’s response to the SEC’s October 17 letter to the New York court, which claimed that the broker and Mr Davis were using “unfounded excuses” that had no basis in Bahamian law to defend the non-production of documents held in this nation.
The US capital markets regulator added that it had “reached an impasse” with the Bahamian defendants on the issue, and was now seeking the southern New York district court’s help to force them to provide the information.
And the SEC also accused Gibraltar and Mr Davis of allegedly acting ‘in bad faith’ by filing their Judicial Review action against the Securities Commission.
Responding to these claims in a December 5, 2014, filing with the New York courts, Mr Davis and Gibraltar shot back: “In correspondence, the [SEC Washington} DC office takes the position that Gibraltar should simply turn over that which it does not possess or control.
“The DC office contends that because the Securities Commission has not accepted the surrender of Gibraltar’s registration, Gibraltar, rather than the liquidator, controls Gibraltar’s files.
“The DC office also argues that it is not obligated to pursue the Gibraltar documents through international channels, and that the confidentiality of Gibraltar client documents under Bahamian law is inapplicable. Finally, the DC office accuses Gibraltar of commencing its action against the Securities Commission in an effort to impede discovery in this action.”
Mr Davis and Gibraltar , rebutting all this, said: “Each of the DC office’s contentions is wrong. Upon appointment of the liquidator, control over Gibraltar vested with the liquidator.
“Moreover, Gibraltar’s action against the Securities Commission was undertaken to rectify the Securities Commission’s inexplicable refusal to accept Gibraltar’s surrender of its registration.
“Indeed, should Gibraltar prevail in its action against the Securities Commission and compel it to accept the surrender of Gibraltar’s registration, the DC office could still seek the Gibraltar documents from Gibraltar’ liquidator.
“In short, Gibraltar is not attempting to thwart discovery by the SEC. It is simply complying with Bahamian law.”
Gibraltar and Mr Davis alleged that they spent “well over one year” seeking to resolve the SEC’s demands “in good faith” and without the need for the courts to intervene.
“To the best of our knowledge, during the 16 months in which the parties have exchanged various iterations of their respective positions, the SEC has not attempted to consult with an expert in Bahamian law or to follow any of the aforementioned [legal] procedures,” they added.
“We understand from Bahamian counsel that had the DC office pursued an international request consistent with Bahamian law when the defendants first raised these issues, some or all of the issues might already have been resolved.
“The DC office argues that it should not make a request for Gibraltar’s documents through international channels because ‘[t]here is no question that discovery under these American procedures is more expedited and more efficient than the procedure that the defendants argue must take place.’
“In effect, the DC office argues that Bahamian law should be disregarded for the sake of expediency. The defendants cannot ignore Bahamian law for the sake of convenience. This is particularly true when the defendants long ago proposed alternative means of seeking the documents that are consistent with Bahamian law.”
The documents sought by the SEC relate to a New York 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.
Mr Davis and Gibraltar have denied, and fought, these allegations for more than a year, and have enjoyed some success - a US judge have described the website soliciting case as among the weakest he has seen.
In response to the SEC’s ‘solicitation’ claim, Mr Davis and Gibraltar said the US regulator had never alleged they sent out the likes of “mailings, phone calls or spam”. And they further argued that the SEC was not being specific on the documents it wanted to obtain.