The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Federal regulators have effectively accused a BISX-listed company’s principal, and its broker/dealer affiliate, of hypocrisy over their claims that US law “cannot touch” their allegedly “egregious acts” in relation to a $400 million fraud.

The Securities & Exchange Commission (SEC), responding to efforts by Julian Brown, Benchmark (Bahamas) chief executive, and Alliance Investment Management to dismiss its lawsuit against them, alleged that the Bahamian defendants were quite happy to use the US courts and capital markets when it suited them.

Mr Brown and Alliance have argued that the SEC’s action against them should be dismissed because the northern Illinois district court has “no jurisdiction” over them, while US securities laws do not go beyond American borders.

The SEC, not surprisingly, is rejecting such arguments by insisting that US federal law covers the allegedly “egregious acts” committed by the Bahamian broker/dealer in relation to the BC Capital Group ‘Ponzi’ fraud.

“Defendants, who willingly accepted the benefits of doing business with US investors and even today boast publicly about the financial services they provide ‘throughout the United States’ claim the courts and securities laws of the US cannot touch them,” the SEC alleged in court documents filed this week, which have been obtained by Tribune Business.

“They are wrong. The SEC’s complaint is more than sufficient to demonstrate [US law and the courts] can reach defendants’ egregious conduct......

“Defendants’ desire to avoid discussing their contacts with the United States is understandable, and not only because of the allegations in the complaint.”

Demonstrating the alleged hypocrisy, the SEC’s papers include a ‘screen grab’ from Alliance’s website where it promotes itself as offering clients a range of financial services products “throughout the United States, Canada and internationally”.

And the US capital markets regulators argued that Alliance had been quite happy “to invoke the jurisdiction of US courts in the past”, noting that the Bahamian broker/dealer had been embroiled in 2004 litigation in the south Florida district court against Akers Bioscience.

“Alliance removed the lawsuit to federal court, asserted a counterclaim, and litigated the case to a jury verdict,” the SEC said, alleging that both cases confirmed the Bahamian broker/dealer had sufficient contact with the US to bring it within the remit of its laws.

The crux of the SEC’s case is that Mr Brown and Alliance alleged helped to facilitate the international fraud perpetrated by BC Capital and its principal, Nikolai Battoo.

The 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.

“Contrary to defendants’ representations, Alliance did not maintain custody of most of the assets supposedly held for the benefit of investors,” the SEC alleged. “Instead, Brown caused Alliance to transfer the assets to Battoo’s control, thereby facilitating his misappropriation of the money”.

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.

“AIM and Brown’s complicity, for which they were monetarily rewarded, enabled the fraud scheme to flourish in the shadows for years.”

The SEC, which alleged that BC Capital raised $400 million worldwide, including $200 million in the US, said financial statements sent to investors by Alliance “materially overstated the true value of the assets”.

It claimed: “The phony accounts statements were created by Battoo using Alliance letterhead.

“At the request of Battoo’s US-based sales agent, Alliance and Brown sent blank Alliance letterhead to Battoo in Fort Lauderdale, Florida where he constructed the fictitious account statements and sent them back to Alliance.

“Brown then willingly distributed the false account statements with cover letters bearing his signature.”

Among those who allegedly received the statements were the auditors for one pooled investment scheme in Illinois, which the SEC says establishes the nexus linking the Bahamian defendants to that state. It is also alleging that these statements induced the same investors to place a further $13 million with Battoo.

Rebutting Alliance’s arguments that the case be dismissed, the SEC said its case was founded on ‘minimum contacts’ with Illinois - not ‘minimum contacts’ with the US.

And the US federal regulator pointed out that the Bahamian defendants were seeking dismissal of the case on legal technicalities, and had not “rebutted” a single allegation it had made against them in relation to BC Capital.

Noting that Alliance admitted sending the account statements to Illinois auditors, Johnson Lambert, the SEC said this did not “tell the full story” - because such financials were sent by the Bahamian broker to the same auditors on multiple occasions, not just once.

“The additional evidence, including defendants’ own admissions, convincingly demonstrates that defendants sent, under their own signature and on their own letterhead, allegedly fraudulent documents into the United States,” the SEC alleged.

“Their objection to this court exercising personal jurisdiction over them in a lawsuit arising out of such conduct is wholly without merit.”

If further argued that its lawsuit showed the acts complained of occurred in the US, adding: “For example, they sent bogus account statements to US-based investors and auditors, and they sent blank Alliance letterhead to Battoo in Florida, which allowed him to create the fictitious account statements.”

The SEC argued that this, and the impression that Alliance was the custodian holding all BC Capital scheme assets, had a “substantial effect” in the US.