The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A BISX-listed company will have to undergo a $5 million ‘recapitalisation’ as a result of the deal struck by its principal and main subsidiary to settle a lawsuit against them by US federal regulators.

The court-approved settlement that Julian Brown, Benchmark (Bahamas) president and chief executive, and Alliance Investment Management, have reached with the Securities & Exchange Commission (SEC) requires them to repurchase the company’s entire $5 million preference share capital.

Those preference shares are currently in the custody of receivers/liquidators for BC Capital Group, which operated a $400 million international ‘Ponzi’ fraud that Mr Brown and Alliance were accused of aiding and abetting.

Benchmark (Bahamas) latest financial statements, for the six months to end-June 2016, show the $5 million preference shares are currently critical to the company’s net worth or solvency.

With them included on its balance sheet, the BISX-listed firm has a net worth or ‘shareholders’ equity’ of $3.157 million.

Take them away, as the SEC settlement now requires by virtue of Alliance buying them back, would plunge Benchmark (Bahamas) into ‘negative net worth’ or insolvency without those preference shares being replaced by Mr Brown or another investor(s).

Mr Brown did not respond to a voice mail message left by Tribune Business on his cell phone yesterday, seeking comment, but the SEC settlement effectively demands a recapitalisation of Benchmark and Alliance, its international broker/dealer subsidiary.

Court documents obtained by Tribune Business from the northern Illinois district court in the US show that the October 7, 2016, settlement between Mr Brown and Alliance, and the SEC, is a typical one for the regulator where the Bahamian duo neither “admit nor deny” the allegations against them.

However, as part of the deal, Alliance has given an “undertaking to repurchase all its preferred stock, as soon as the repurchase of such shares, in whole or part, is lawfully permitted under the laws of the Bahamas, including but not limited to the Companies Act 1992”.

The $5 million preference shares are currently held by the US receiver for BC Capital Group, and the PricewaterhouseCoopers (PwC) Bahamas duo of Kevin Seymour and Kevin Cambridge, who were appointed liquidators for the Bahamian arm of Battoo’s empire. BC Capital originally acquired the preference shares in two deals in 2010 and 2011.

“Alliance shall satisfy its obligation to repurchase the preference shares by paying $5 million to the receiver or joint official liquidators, or to their duly-appointed and authorised successors or assigns,” the settlement agreement adds.

The PwC accountants had long urged BC Capital investors to target recovery of the $5 million preference share investment, but their efforts were thwarted via lack of funding.

Their previous reports urged that “identified courses of action should be pursued against Alliance to compel Alliance to return the company’s $5 million in Alliance’s preference shares”.

No deadline has been imposed upon Mr Brown or Alliance to sell the preference shares, although they have to provide the SEC with proof this has been done within 60 days of doing so.

The proceeds from the repurchase will likely be used to compensate BC Capital’s investors, but of more interest to Benchmark’s several hundred Bahamian retail and institutional investors is how their investment will be recapitalised.

The settlement also makes no mention about obtaining approval for the repurchase from the Securities Commission, Benchmark and Alliance’s principal regulator.

The two sides are currently embroiled in a court battle, after Alliance successfully challenged via Judicial Review the Securities Commission’s bid to impose a 15-day moratorium on its ability to write new business and impose a forensic accounting of its books. The Court of Appeal heard the regulator’s appeal last month.

Still, the $5 million ‘recapitalisation’ comes just as Benchmark (Bahamas) financial position appears to be turning the corner, net profits for the three months to end-June 2016 having jumped to $1.959 million as opposed to just $157,063 the year before.

Other aspects of the SEC settlement require Alliance to pay a $337,832 fine, the funds “representing profits gained” from its work for BC Capital Group plus interest.

Mr Brown also has to pay a personal $50,000 penalty, and both he and Alliance are barred from future violations of US securities laws. They have the ability to pay the fines in instalments.

The settlement, agreed last week as Hurricane Matthew ravaged the Bahamas, brings to an end the more-than two-year legal battle between the SEC and the Bahamian duo.

Mr Brown and his international broker/dealer have always vigorously denied, and defended, allegations that they facilitated the global ‘Ponzi’ scheme by Mr Battoo and his BC Capital Group.

They last year listed 19 defences to the SEC action against them, with the duo arguing that any “wrongful conduct” was outside their control.

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

The US regulator claimed 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 also claimed 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 argued that Battoo directed them to send BC Capital financial statements to the Illinois-based auditors for an investor in the scheme.

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