The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A Bahamian broker/dealer’s trading activity resulted in one of the most prestigious US financial firms yesterday being hit with a $20 million fine by federal regulators.

Documents released by the Securities & Exchange Commission (SEC) revealed that Oppenheimer & Co had allowed Gibraltar Global Securities’ clients to evade due US taxes, while it also failed to file suspicious transaction reports (STRs) on activity in the Bahamian broker/dealer’s account.

The SEC’s administrative order is the third time within the last three years that the now-defunct Gibraltar Global Securities has become embroiled in the US capital markets regulator’s enforcement actions.

The Bahamian broker and its president, Warren Davis, have for the past two years been fighting two SEC lawsuits filed against them in the southern New York district courts.

While they were not named as defendants, or subjects, in yesterday’s SEC order, and were not accused of wrongdoing, there can be little doubt that Mr Davis and his firm remain a target of the US federal regulator.

Sean Moree, the McKinney, Bancroft & Hughes partner who represents Mr Davis in the Bahamas, did not respond to a Tribune Business e-mail seeking comment yesterday afternoon.

The Oppenheimer fine is to be split evenly, with $10 million apiece going to the SEC and the Financial Crimes Enforcement Network (FINCEN).

The SEC order, obtained by Tribune Business, alleged that the US institution, which was founded in 1881, knew that Gibraltar was using its correspondent account with it to trade securities on behalf of clients - rather than itself.

The Bahamian broker/dealer, in opening the account, had stated it would only be used for trading in its own name - known as proprietary trading. Alleging deception, the SEC said this resulted Oppenheimer facilitating a strategy to enable Gibraltar’s American clients to avoid due US taxes.

And the US regulator also said Oppenheimer, which had agreed the facts in the SEC order as part of its settlement agreement, failed to file suspicious transaction reports when questionable activity occurred in Gibraltar’s account.

“Gibraltar used its Oppenheimer account almost exclusively to deposit, sell and transfer shares of penny stocks into the United States on behalf of its customers,” the SEC order alleged.

“From July 2008 through June 2009, Gibraltar conducted approximately 1,800 trades in its Oppenheimer account. Almost all of those trades were orders to sell, resulting in proceeds of over $14.68 million from the sale of approximately 7.6 billion shares of over 92 different issuers.

“Gibraltar also used its Oppenheimer account to distribute billions of shares, of over 130 different issuers of thinly traded penny stocks, into US markets by depositing shares and instructing Oppenheimer to transfer those shares to other broker-dealers.”

The SEC order revealed that Oppenheimer rated the Gibraltar account “as a high risk” when it was opened in 2007 because the broker/dealer “was, among other reasons, located in the Bahamas”.

Gibraltar, in opening the account, was alleged to have represented that it was the beneficial owner of all the securities and income in the account.

This, the SEC said, enabled it to hide the fact that Gibraltar had US clients who would be trading through the account, enabling them to avoid US withholding tax and reporting requirements.

The federal regulator said Oppenheimer should have known the information provided by Gibraltar was “false”, because the Bahamian broker/dealer was instructing it to accept deposits, and execute sales, for clients who had US addresses.

“Oppenheimer knew or was reckless in not knowing that Gibraltar was selling shares on behalf of its customers, and that Gibraltar was not the beneficial owner of the securities sold,” the SEC alleged.

“In fact, in or about January 2009, Gibraltar’s president [Mr Davis] informed Oppenheimer personnel that Gibraltar’s customers wanted to liquidate shares of penny stocks.

“Gibraltar’s president told Oppenheimer that even though the securities to be liquidated were deposited into Gibraltar’s account and in Gibraltar’s name, those securities actually belonged to its underlying customers.”

Share certificates and deposit instructions said they were being made for the benefit of Gibraltar clients, and in some cases the Bahamian broker/dealer was merely forwarding their e-mailed instructions to Oppenheimer.

And, in some cases, Gibraltar and Oppenheimer had the same customers, with the former servicing them by transfers between its account and their own personal accounts.

Then, despite concerns raised by Oppenheimer’s own anti-money laundering officer, the US institution failed to report suspicious transactions in the Gibraltar account to FINCEN as required by law.

A surveillance analyst at Oppenheimer concluded that Gibraltar’s activities “raised red flags”, and that the broker’s activities needed to be ‘escalated’.

“From July 2008 through June 2009, Oppenheimer routinely accepted large deposits of penny stocks from Gibraltar either electronically or by accepting physical certificates,” the SEC order alleged.

“These deposits identified certain US persons (individuals and/or entities) on the face of the security certificates or as the beneficial owners of the shares. Thereafter Oppenheimer followed Gibraltar’s instructions to either sell the shares or transfer them to other broker/dealers.

“The transactions were suspicious because, although the deposits were made into Gibraltar’s proprietary account, the securities belonged to Gibraltar’s customers and were in fact titled ‘for the benefit of’ or ‘fbo’ Gibraltar’s customers.

“In addition, Gibraltar deposited large blocks of penny stocks and sold a significant portion of those securities shortly after deposit. Accordingly, these deposits (and subsequent sales) on behalf of Gibraltar’s customers should have raised red flags that Gibraltar was participating in unlawful offerings or sales of securities that may have required registration or exemption from registration.”

The SEC order said Oppenheimer “did virtually nothing” to monitor or inquire into Gibraltar’s block sales of penny stocks, which might have indicated possible market manipulation by the broker’s clients.

“Gibraltar’s deposits, sales and transfers of thinly traded penny stock often coincided with suspicious news stories and dubious promotion,” the SEC alleged.

The US regulator alleged that Oppenheimer had “aided and abetted” Gibraltar’s strategy to circumvent the requirement that it be registered with the SEC to operate in the US. It had also allowed the Bahamian broker to participate in unregistered offerings and securities sales.