The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A BISX-listed company’s principal, and its broker/dealer affiliate, are demanding that a federal regulator’s lawsuit against them be dismissed because the US courts have “no jurisdiction”.

Julian Brown, Benchmark (Bahamas) president, and his Alliance Investment Management firm are also arguing that US securities laws “do not have extraterritorial effect”, meaning the action against them cannot ‘state a claim’ and should thus be dismissed.

These arguments are contained in documents filed by Mr Brown’s/Alliance’s attorneys on Friday in the northern Illinois district court; their first response to the Securities & Exchange Commission (SEC) lawsuit against them over their alleged role in a $340 million ‘Ponzi’ fraud.

The Bahamian defendants are arguing that they have no ties to Illinois, and their only ‘connection’ with the US state came at the behest of the $340 million BC Capital Group scheme’s architect, Nikolai Battoo.

Mr Brown/Alliance alleged that they were being “hauled” before the northern Illinois district court “as a result of random, fortuitous and attenuated contacts” initiated by Mr Battoo.

These, they added, were phone and fax contacts between Alliance and the auditors for one of BC Capital Group’s clients, who were based in Illinois.

And Mr Brown/Alliance are also arguing that the SEC lawsuit against them should be dismissed on the grounds that it fails to state a claim, as US securities laws - and their anti-fraud provisions - do not apply outside the US.

Given that the BC Capital scheme involved no purchases or sale of US securities, including those listed on an exchange, the Bahamian defendants are arguing that the claim against them should be dismissed.

Attorneys for Mr Brown and Alliance will now present their arguments for dismissing the SEC lawsuit before the US district court on December 1, 2014.

Alliance, which allegedly acted as custodian for some $217 million of investor funds placed with BC Capital, and Mr Brown were hit with the SEC lawsuit in early August 2014.

Its central claim was that the Bahamian defendants had helped facilitate Battoo’s purported fraud, misrepresenting themselves to investors as independent custodian when, since at least 2009, most of the assets listed on investor account statements were not in their control.

“Brown and Alliance assisted Battoo with his efforts to conceal the misappropriation as well as the crippling losses suffered by investors by sending account statements to investors’ agents that materially overstated the value of assets held for investors,” the Bahamian duo’s own motion, recounting the SEC claims, noted. “Battoo provided the information for Alliance’s account statements.”

The SEC alleged that financial statements sent out on Alliance-headed paper overstated the value of BC Capital assets by some $150 million.

The US federal regulator is also claiming that Mr Brown and Alliance allowed Battoo to misappropriate $45 million investor monies for his own personal use, while injecting another $5 million into Benchmark preference shares to keep the BISX-listed company financially solvent.

The dismissal motion filed by Mr Brown and Alliance does not answer or rebut these allegations directly, instead focusing on ‘legal technicalities’ to try and have the SEC lawsuit thrown out.

They, and their attorneys, are arguing that Alliance does not conduct business in, or solicit clients from, Illinois, and they have no connections/nexus to that state which would give the US court jurisdiction over them.

In an affidavit accompanying the dismissal motion, Mr Brown describes the SEC claim that Alliance account statements were sent to the Illinois-based auditors for Maven Assurance as “inaccurate”.

Pointing out that neither Maven nor its auditors were Alliance clients, Mr Brown said the “two random and attenuated contacts” between the latter two entities were initiated by Battoo.

“At the request of Battoo, the auditors telephoned Alliance’s office in the Bahamas to inquire about BC Capital’s investments,” Mr Brown alleged.

“After Alliance received direction and authorisation from Mr Battoo and BC Capital to provide the auditors with information relating to BC Capital, Alliance then spoke with the auditors.

“Subsequently, Mr Battoo and BC Capital instructed Alliance to forward account statements to the auditors.”

Mr Brown added: “The auditors did not request the statements from Alliance. Rather, Mr Battoo requested Alliance to forward the account statements directly to the auditors instead of Alliance sending the statements to Mr Battoo who, in turn, would send them to the auditors.

“Had Mr Battoo not made his request, Alliance would never have sent the statements to the auditors. It is not Alliance’s policy to send account statements other than to Alliance’s clients.”

Emphasising this happened only once, with the statements sent to Maven’s auditors by fax, not mail, Mr Brown reiterated that no connection to Illinois had been created.

The SEC, though, is alleging that the receipt of the financial statements from Alliance, and other verifications based on the Bahamian broker/dealer’s work, induced Maven investors to place $13 million with BC Capital between 2011 and the scheme’s late 2012 collapse.

Still, Mr Brown/Alliance and their attorneys described the Bahamian duo’s contacts with Illinois as “non-existent”. The financial statement mailing, they added, would not have happened but for Battoo’s insistence.

Tribune Business has previously revealed how Alliance is alleged to have played a key role in facilitating the BC Capital scheme, in which most of the $340 million was placed via the company.

The Bahamian broker/dealer then put the money into 71 different portfolios at its omnibus Royal Bank of Canada and FirstCaribbean International Bank (Bahamas) accounts.

Of the $217.1 million placed with Alliance, previous court reports said Nikolai Battoo, misappropriated approximately $45.7 million (21.1 per cent) for his personal use and paid approximately $18.3 million (8.4 per cent) to parties related to him.