The Tribune

US federal regulators are seeking sanctions and a default judgment against the Bahamian principal of a broker/dealer for failure to comply with a New York court’s order.

The Securities & Exchange Commission’s (SEC) predictable move came as US attorneys for Warren Davis and Gibraltar Global Securities warned that preventing their withdrawal from two securities-related cases would not encourage the Bahamian duo to produce the sought-after documents.

Tribune Business revealed last week how Judge James Francis, in a 10-page ruling, prevented De Feis, O’Connell & Rose from ceasing to represent the Bahamian duo until the demands of US federal regulators were met.

Their withdrawal is blocked until Mr Davis and Gibraltar comply with the New York court’s order to produce potentially tens of thousands of documents stored in the Bahamas.

And Mr Davis, who is Gibraltar’s president and sole shareholder, must also give evidence at depositions before SEC investigators.

Mr Davis and Gibraltar are defendants in two lawsuits brought against them by the SEC, which alleges that they participated/facilitated two unregistered securities offerings and also operated as an unregistered broker/dealer in the US.

Now, after missing the April 15, 2015, deadline to provide documents held in the Bahamas to the SEC, attorneys for the US capital markets regulators are seeking to obtain court-imposed penalties against Mr Davis.

“We are planning to file a motion for Rule 37 sanctions, including default judgment, for the failure of Warren Davis and Gibraltar to comply with the court’s discovery orders,” Kevin O’Rourke, an SEC attorney, told Mr Davis’s attorneys in a May 8 e-mail.

That move relates to just one case against them, in which the SEC is claiming the Bahamian duo participated in an unregistered share offering for two companies, Pacific Blue and Tradeshow, which netted $11 million.

But De Feis, O’Connell & Rose, in a May 13, 2015, letter urged the southern New York district court to review its decision to prevent it ceasing to represent Mr Davis and Gibraltar.

“As a preliminary matter, the Order unfortunately assumes that denying our application to withdraw will have some impact on our client’s willingness to participate in discovery or that this firm, which has effectively been discharged by our foreign client, can compel the client to produce documents and sit for a deposition in this country,” De Feis, O’Connell & Rose argued.

“ There is no support for this position in case law or logic. Davis has emphatically stated that he does not want to defend these cases and has asked us to cease legal work on his behalf.”

The US attorneys added that Mr Davis “will not oppose immediate entry of judgment in favour of the SEC”, including the application being submitted by Mr O’Rourke in one of the two actions.

And they added that keeping them in the case would not secure production of the Gibraltar documents held in the Bahamas.

Admitting that Mr Davis had failed to comply with the New York court’s discovery order, De Feis, O’Connell & Rose added: “Concededly, Davis has not provided discovery previously ordered by the Magistrate Judge or appealed that decision, but this should not hold up progress of the case against him or co-defendant Gibraltar.

“Davis has been counselled as to the risks of failing to produce the requested documents. As to his deposition, Davis had already resolved to assert his Fifth Amendment privilege as to the allegations contained in the complaints – and has been advised about attendant risks.”

The US law firm concluded: “While we do not minimise the effect of Davis’s failure to supply discovery, it should have limited impact in the cases against him and Gibraltar, and certainly should not delay their progress.

“The SEC has various means to obtain the requested materials. Keeping our firm in these cases against Davis’s expressed wishes will not yield these items and as such, the SEC has not demonstrated ‘compelling circumstances’ necessary to deny the application to withdraw.”

In his ruling, Judge Francis said De Feis, O’Connell & Rose’s withdrawal was based on two factors - Mr Davis’s instructions to stop representing him, and the fact he owed his US attorneys a ‘six-figure’ legal fees debt that had been in arrears for more than six months.

However, he backed the SEC’s argument that De Feis, O’Connell & Rose had failed to provide specifics showing how much Mr Davis and Gibraltar owed.

Nor was there any accounting of their Bahamian clients’ assets, or evidence of “future inability to pay” other than a one-page affidavit from Mr Davis which gave no details.

The SEC’s opposition to De Feis, O’Connell & Rose’s withdrawal alleged that it would “complicate discovery” in both lawsuits.

Judge Francis agreed, finding: “To date, Gibraltar and Mr Davis have several unfulfilled discovery obligations. These obligations include those unambiguously set forth in my April 1, 2015 order, which compelled them to produce documents by April 15, 2015.

“Instead of complying with my order - and without any advance notice to the SEC - De Feis, O’Connell & Rose filed the instant motion” to withdraw.

The battle with the SEC has not been totally-one sided. Mr Davis and Gibraltar have been successful in getting the southern New York court to throw out the most serious charge against them - that of knowingly participating in, and facilitating, a securities fraud.

In the second lawsuit, the SEC is alleging Mr Davis and Gibraltar were involved in another “illegal unregistered [share] offering and sale” for Magnum d’Or, a small, thinly-traded company.

Some 10 million shares were allegedly sold by Gibraltar on behalf of US customers, netting proceeds of more than $11.384 million.

The Bahamian duo were also alleged to have operated as an unlicensed broker by using their website to solicit US clients, facilitating the sale of $100 million worth of securities.