The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A BISX-listed company’s principal, and its main broker/dealer subsidiary, are demanding that a US federal lawsuit against them be dismissed because they “acted in good faith and did not receive ill-gotten profits” from an alleged $400 million financial fraud.

Attorneys for Julian Brown and Alliance Investment Management on Monday listed 19 defences to the Securities & Exchange Commission (SEC) action against their Bahamian clients, with the duo arguing that any “wrongful conduct” was outside their control.

Demanding a jury trial over SEC claims that they facilitated a global ‘Ponzi’ scheme by Nikolai Battoo and his BC Capital Group, Mr Brown and Alliance denied that they “knowingly or recklessly” assisted any fraud.

And they pledged that they “at all material times complied with applicable Bahamian laws, rules and regulations” as a licensee of the Securities Commission of the Bahamas.

Court documents obtained by Tribune Business show that Mr Brown, president and chief executive for BISX-listed Benchmark (Bahamas), and Alliance are essentially relying on the same legal grounds employed in an earlier attempt to have the SEC action thrown out.

That was rejected by a US judge, but the Bahamian duo are continuing to argue that the northern Illinois district court has no jurisdiction over them because they did not deliberately direct their activities into that state.

Mr Brown and Alliance instead argue that Battoo directed them to send BC Capital financial statements to the Illinois-based auditors for an investor in the scheme.

And they continue to maintain the position that the SEC, and US federal securities laws, have no “extraterritorial effect” and therefore cannot touch them in the Bahamas.

The crux of the SEC’s case is that Mr Brown and Alliance allegedly helped to facilitate the international scheme perpetrated by BC Capital and Battoo.

The US regulator is claiming that the Bahamian defendants misled investors by suggesting they were the independent custodian for the BC Capital funds, whereas these monies were all directly in Battoo’s hands.

And it is also alleging that Alliance “helped him hide the massive losses by sending out bogus account statements that fraudulently overstated the value of investor assets by more than $148 million”.

However, Mr Brown and Alliance in their defence demanded that the SEC case either be dismissed or subjected to a jury trial.

“Defendants did not purposefully direct any activities into the United States or the state of Illinois,” attorneys for the Bahamian defendants argued.

“At the direction of Nikolai Battoo, the advisor to a client of Alliance named BC Capital, Alliance received a phone call at its offices in the Bahamas from auditors in Illinois.

“Then, at the direction of Mr Battoo, Alliance sent, via facsimile, account statements to the auditors on one occasion. Had Mr Battoo not directed the account statements be sent, Alliance would never have forwarded the account statements to the auditors.”

Mr Brown and Alliance also argued that because BC Capital did not sell its securities in the US, the federal securities laws and regulations employed by the SEC did not apply or cover them.

Listing several alleged obstacles that should stop the SEC claim proceeding, Mr Brown and Alliance alleged: “Defendants acted in good faith at all material times and did not directly or indirectly induce or cause the acts” complained about.

Denying any “intentional prior wrongful conduct”, the Bahamian duo added: “Defendants did not receive ill-gotten profits, did not act unlawfully, acted in good faith, and investors did not suffer from their alleged conduct.....

“The alleged wrongful conduct was committed by individuals or entities over whom defendants had no control.”

Mr Brown and Alliance also denied any involvement in the selling of the BC Capital scheme - and its securities - to investors, and alleged that the SEC’s demands for an injunction were “unlawfully overbroad”.

“Plaintiff’s [SEC] claims are barred because Alliance, a Bahamian broker/dealer registered with the Securities Commission of the Bahamas, at all material times complied with applicable Bahamian laws, rules and regulations,” the defence concluded.

Alliance and Mr Brown’s protestations of innocence, though, are unlikely to cut much ice with the SEC at this stage.

Their position is also unlikely to be shared by the liquidators for the Bahamian part of BC Capital who, in several reports to the Supreme Court, have made clear they believe Alliance has ‘a case to answer’.

The only obstacle to initiating such litigation in the Bahamian courts, PricewaterhouseCoopers (PwC) accountants Kevin Cambridge and Gowon Bowe have made clear, is either the unwillingness or inability of BC Capital investors to finance such action.

“The illiquidity of the liquidation estate has hampered any follow-up action, investigation and litigation initiatives by the joint official liquidators,” the PwC accountants said.

“To date, the joint official liquidators’ efforts to obtain funding from the Liquidation Committee have proven fruitless.”

They added: “As previously reported, the joint official liquidators maintain their strong opinion that legal action in respect of a number of previously identified courses of action should be pursued against Alliance to compel Alliance to return the company’s $5 million in Alliance’s preference shares (which itself may not be a realisable asset); complete the registration of the company’s marketable securities and surrender the same to the joint official liquidators; and grant the joint official liquidators access to certain Battoo-controlled accounts where the joint official liquidators believe that investor funds may have been diverted.”

The ultimate outcome of the SEC case, and other potential litigation, against Mr Brown and Alliance, is currently unclear, as is the long-term impact for Benchmark (Bahamas) and its 735 Bahamian public shareholders.

An adverse finding, resulting in substantial damages awarded against Alliance, could translate into a serious situation for Benchmark, given that the former its main subsidiary.

Benchmark’s stock is currently trading on BISX at $0.12 per share. There are no ‘Buy’ orders for the stock, with only four active ‘sell’ orders - at a price of either $0.12 or $0.13 per share - currently in play.