The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A Bahamian broker/dealer has admitted to using almost $4 million in client monies without permission to fund its own operating costs and business development initiatives, with regulators now moving to finally shut it down.

The Securities Commission, in legal papers obtained by Tribune Business, is alleging that apart from “the improper use of its clients’ funds”, Tillerman Securities has also been unable to meet the minimum $300,000 regulatory capital requirement for two years.

Detailing numerous serious breaches by the Bahamian-owned broker/dealer, the Securities Commission added that Tillerman was also “insolvent”, with assets exceeding liabilities following several years of sustained losses.

Christina Rolle, the Commission’s executive director, in a November 7, 2016, affidavit filed with the Supreme Court, set out an 18-month saga that concluded with Tillerman’s alleged failure to both reimburse its clients and remedy its regulatory capital deficiency.

Alerted in mid-2015 by Tillerman’s external auditors, Baker Tilly Gomez, Ms Rolle said the Securities Commission conducted an 18-day ‘inspection for cause’ of Tillerman’s accounts on September 1, 2015, to determine its operational status and financial soundness.

“During the said inspection, it was discovered that Tillerman had used clients’ funds without clients’ knowledge or consent to, among other things, fund the operations of Tillerman; fund uncollateralised loans to Tillerman’s clients, including an uncollateralised loan to a Tillerman Securities director; invest in a fund which owns real property at Albany; and invest in an online trading platform,” Ms Rolle alleged.

“It was further noted that Tillerman had made at least 20 transactions transferring funds from its clients’ accounts, far in excess of what was required to satisfy any financial obligations the clients may have owed to Tillerman.

“The amount of clients’ assets used was estimated to be in the amount of approximately $3.8 million, which was taken from the clients’ accounts and transferred to Tillerman’s operating account at Royal Bank of Canada, without the clients’ knowledge or consent.”

Documents attached to Ms Rolle’s affidavit reveal that the Tillerman director who received the unsecured loan of client monies was attorney Craig Franklin Milo Butler. The $30,000 loan was repaid in full in November 2015, just months after the Securities Commission’s inspection findings.

Mr Butler was described in Ms Rolle’s affidavit as one of three principals/directors, together with managing director, Hans Christian Saunders, and Anthony Dupuch, who were responsible for Tillerman’s decision-making and daily operations.

“The inspection also revealed that Tillerman was not maintaining its statutorily required regulatory capital pursuant to regulation 42 of the Securities Industry Regulations, which further jeopardised its clients’ assets,” Ms Rolle alleged of the Commission’s findings.

“Tillerman’s regulatory capital deficiency was further aggravated by the use of clients’ assets because to-date there is insufficient capital available with which to reduce the amount owed by Tillerman to its clients.”

After Tillerman failed to resolve its various breaches of the Securities Industry Regulations to the Commission’s satisfaction, the regulator decided on October 31, 2016, to pursue the broker/dealer’s winding-up through the Supreme Court.

Ms Rolle argued that the appointment of a provisional liquidator, under the Supreme Court’s supervision, was the best way to protect the remaining $8 million in client assets still held by Tillerman.

The broker/dealer is currently not operational, its licence and registration having “become ineffective” on September 1, 2016, with the Securities Commission not renewing it or its licence.

“Tillerman is, in the view of the Commission, insolvent having been an operation making a loss for the last few years,” Ms Rolle alleged, adding that the Securities Commission had prevented it from taking on any new business since October 2015.

“Also, Tillerman’s statutory regulatory capital has not been met since 2014 and remains deficient to-date. Unless there is an injection of capital from the shareholders, Tillerman’s continued operations are therefore reliant on the use of its clients’ assets - a position that causes the Commission grave concern, because Tillerman’s clients’ assets have been jeopardised by [their] improper use.”

Ms Rolle alleged that because they used client funds without permission, and the persistent minimum regulatory capital deficiency, the Securities Commission had determined that Tillerman’s principals and directors were “not fit and proper persons” to operate in the securities industry.

Arguing that Tillerman’s continued operation would be “detrimental to the public interest”, Ms Rolle added: “It is a paramount duty of the Commission to protect the welfare of investors and/or clients, as well as to maintain the integrity of the Bahamas’ securities and investment markets.....

“Tillerman is not a fit and proper entity to be registered because of this impermissible business practice of creating involuntary overdrafts in its clients’ accounts for the benefit of its shareholders and/or directors, and there is a need for a thorough inquiry into the affairs of this registrant, which only a liquidator can do.”

Tribune Business previously revealed how Justice Indra Charles had ‘frozen’ Tillerman’s entire business via a Preservation Order, until the Securities Commission’s winding-up petition can be heard by the Supreme Court on January 23, 2017.

Ms Rolle’s affidavit discloses how the alarm over Tillerman’s practices was first raised by its external auditor, James Gomez of the Baker Tilly Gomez accounting firm, in a July 1, 2015, letter to the Securities Commission.

He warned that apart from the regulatory capital deficiency, Tillerman was also breaching section 84 of the Securities Industry Regulations, which prevents “the improper use of clients’ funds or securities” without authorisation.

Mr Gomez said this breach had also been disclosed in Baker Tilly Gomez’s audit report on Tillerman for the prior year’s financials, 2013, raising questions as to why the Securities Commission waited for at least a year to take action.

The 2014 audit report, as well as flagging the regulatory breaches, raised the ‘going concern’ issue for Tillerman following a $708,294 net loss for the year to end-December.

“As of that date, the company’s current liabilities exceeded its current assets by $1.054 million, resulting in an accumulated deficit of $1.858 million and a negative net equity of $716,020,” Baker Tilly Gomez noted.

After its conclusions were supported by the Securities Commission’s own inspection, the regulator imposed a ban on Tillerman taking on any new business, and demanded that it reimburse its clients for the monies taken.

This ultimately resulted in a November 10, 2015, meeting between the Securities Commission and Tillerman’s principals, Messrs Saunders and Dupuch.

“During the said meeting, Messrs Saunders and Dupuch confirmed and admitted that they had used clients’ funds without knowledge or consent of the clients to cover Tillerman’s operating costs,” Ms Rolle alleged.

“Mr Saunders and Mr Dupuch further confirmed that all of the directors of Tillerman had knowledge of the actions taken by Tillerman in using client’s funds without the clients’ knowledge or consent.”

The Securities Commission held another meeting with the Tillerman duo on December 11, 2015, and set February 12, 2016, as the deadline for the Bahamian-owned broker/dealer to reimburse all clients. Once that was completed, it was to wind down its operations and surrender its registration.

Ms Rolle said the regulator also began “settlement talks” with Tillerman over its regulatory breaches, but these ultimately proved unsuccessful, despite a constant dialogue between the two sides.

She alleged that rather than reimburse its clients, Tillerman “continued to propose other solutions”, ranging from the sale of its business to “obtaining retroactive written consents” from certain clients to cover the improper use of their assets.

The Securities Commission then hired another accounting firm, Kikivarakis & Company, to conduct a forensic audit of Tillerman’s business on February 9, 2016.

This found that the client monies improperly used totalled $3.9 million, and that an account in the name of ‘Raleigh Butler and Craig Butler’, which was overdrawn by $65,422, had been regularised through the sale of securities.

Ms Rolle’s affidavit revealed that the Securities Commission also had misgivings over the ‘retroactive client consents’, which were key to the solution being proposed by Tillerman to address the missing client funds.

This involved converting the missing monies into a ‘loan’ to Tillerman by these ‘consenting clients’, with the debt secured by real estate assets owned by the broker/dealer’s principals and shareholders. This would also move the liability off the broker/dealer’s balance sheet (see other article on Page 1B).

The ‘consenting clients’ were to be represented by WFG Services, an entity that would act as their agent. The clients’ interests were to be further secured by the representation of the Higgs & Johnson law firm, and its attorneys, Dr Earl Cash and Portia Nicholson.

Ms Rolle, though, alleged that Tillerman continually failed to satisfy the Securities Commission’s concerns over the client money misuse and regulatory capital shortfalls.

And the broker/dealer, and all those advising it, failed to submit and complete everything necessary to close the ‘retroactive client consent’ transaction, including obtaining Central Bank and Bahamas Investment Authority (BIA).

The Securities Commission also noted that many of the entities involved in the transaction had close links to some of Tillerman’s principals, and those advising them. Ms Rolle, for example, alleged that WFG Services appeared to have been incorporated by Anthony Dupuch.

Mr Dupuch was also a director of Bluewood Management, WFG Services’ registered agent, and of the corporate entities serving as directors for the ‘consenting clients’. Bryan Glinton, the Glinton, Sweeting & O’Brien attorney and partner representing Tillerman, was also a director of one of Bluewood’s corporate directors.

Ms Rolle also alleged that the ‘retroactive consents’ were subject to several conditions that the Securities Commission had to fulfill, particularly it allowing Tillerman to continue to operate and resume normal operations, taking on new clients.

They were also contingent on the regulator advising of the sanctions it intended to impose on the broker/dealer, and it approving new officers and directors for Tillerman.

Ms Rolle said these were all conditions the Securities Commission “would be unable and unwilling to confirm before the client consents and related transactions were absolutely finalised”.

She added that the ‘sanctions’ issue “cannot be pre-determined” as it was subject to the Securities Commission’s disciplinary processes - effectively blocking both the ‘retroactive client consent’ deal and Tillerman’s plans to address its regulatory capital deficiency.

The Securities Commission, seemingly out of patience, and deciding that Tillerman was out of time, on October 24, 2016, gave the broker/dealer seven days to submit a plan for its orderly winding-up. When no response was forthcoming, the regulator moved to the present legal action.

Mr Butler could not be reached for comment over the New Year’s weekend. Roy Sweeting, the Glinton, Sweeting & O’Brien attorney and partner, who is representing Tillerman and its principals, said he would speak to his clients to see if they wished to comment. No response was received, by phone or e-mail, before press time.