The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A BISX-listed firm’s chief executive, and its main broker/dealer subsidiary, yesterday lost their bid to dismiss a US federal regulator’s lawsuit against them over an alleged $400 million fraud.

Judge Thomas Durkin, in a 16-page judgment, found that analysing the Securities & Exchange Commission’s (SEC) allegations “in the most favourable light”, it had proven there was a valid claim against Julian Brown, Benchmark (Bahamas) principal, and the company’s Alliance Investment Management subsidiary.

The Bahamian defendants, as previously revealed by Tribune Business, had argued that the SEC action should be dismissed because the northern Illinois district court lacked jurisdiction over them.

“They argue that their contacts with the United States are to sporadic to support personal jurisdiction,” Judge Durkin said of the arguments advanced by Mr Brown and Alliance.

“They also argue that the SEC has failed to allege a domestic securities transaction, which they argue is a necessary element of a claim under the federal securities laws.”

Judge Durkin found that while Mr Brown and Alliance’s contacts with the US were “insufficient” to give the court ‘general jurisdiction’ over them, the SEC had “made a prima facie case of specific jurisdiction” due to their actions that allegedly facilitated the BC Capital Group fraud.

Yesterday’s verdict means that Mr Brown and Alliance have failed in their first attempt to get the SEC lawsuit dismissed, and will have to continue spending time and money defending themselves against it. It further exposes them to potential reputational damage, even if the allegations are ultimately found to be untrue.

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 its principal, Nikolai 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”.

Judge Durkin, in his ruling, said it was Alliance and Mr Brown’s contacts with the US as a whole - rather than a particular state - that established the court’s jurisdiction over them.

“The defendants incorrectly assumed that their contacts with Illinois were dispositive, and tailored Brown’s affidavit accordingly,” the judge found. “So they have not rebutted many of the complaint’s allegations regarding their contacts with the US.

“Brown does state that AIM does not have an office, and that he does not reside, ‘anywhere in the United States’. While the court accepts these statements as true, the SEC’s jurisdictional arguments are not based upon the defendants’ physical presence in the United States.”

While the SEC failed to meet the standard necessary to establish ‘general jurisdiction’, it did on the ‘specific’ variety.

“The SEC alleges that US investors wired investment funds directly into Alliance Investment Management’s bank account in the Bahamas,” Judge Durkin recalled.

“Alliance Investment Management and Brown led investors to believe that Alliance Investment Management operated as an independent custodian for those investments.

“In fact, according to the complaint, the defendants worked in concert with Battoo to misstate the value of those investments. Alliance Investment Management sent blank letterhead to Battoo in Florida so that he could prepare bogus account statements.

“After Battoo returned the completed statements to Alliance Investment Management, it distributed the false statements to investors in the United States under letters bearing Brown’s signature.”

These account statements were allegedly sent to the Illinois-based auditor for Maven, one of the investment groups that put money into Battoo’s scheme, giving rise to the SEC’s decision to initiate its lawsuit in that state.

“The defendants argue that their contacts with Illinois were random and fortuitous, not purposeful, because they sent statements to Maven’s auditors at Battoo’s request,” Judge Durkin ruled.

“Brown states in his declaration that Battoo’s request was atypical: ‘It is not Alliance Investment Management’s policy to send account statements other than to Alliance Investment Management’s clients.’

“This statement is consistent with the SEC’s allegation that the defendants deliberately sent false account statements to US investors under Alliance Investment Management’s letterhead. According to Brown, it was only the direct contact with Maven’s auditors that was ‘random’ or ‘fortuitous’, not the defendants’ contact with the United States.”

Judge Durkin said Mr Brown had also failed to refute the SEC’s allegations that he had control, and ultimate authority, to approve and release the account statements on the Alliance Investment Management headed paper.

With Maven investors allegedly induced to place a further $13 million into the BC Capital scheme by the false account statements, the judge found: “It was foreseeable, then, that the defendants might be required to defend the accuracy of the account statements in a US court. These contacts are sufficient to support specific personal jurisdiction.”

Judge Durkin also rejected the arguments by Mr Brown and Alliance that the SEC action failed to state a proper claim, as no domestic securities transactions were involved.

He suggested the dispute between the two parties would be better resolved at a later stage in the case, and ruled: “Construing the complaint in the light most favourable to the SEC, it has stated a claim for relief.”