By NEIL HARTNELL
Tribune Business Editor
A former Bahamas-based broker/dealer last night accused the Securities Commission of failing to understand a business model that the regulator had branded "akin to a 'ponzi' scheme".
Guy Gentile, principal of SureTrader and MintBroker International, told Tribune Business via e-mail that his firm's operating model had withstood previous Securities Commission audits and been "in good standing" with the regulator prior to late 2019's legal battle over its attempt to suspend the broker/dealer's licence.
The Securities Commission's concerns, never publicly revealed before, have been exposed by legal filings in the New Jersey federal court which reveal that the Bahamian regulator had also become alarmed by Mr Gentile's company allegedly "diverting clients' funds to an unregulated entity" located in Canada.
Friday's filings by the Securities & Exchange Commission (SEC), the US capital markets regulator which is also embroiled in a legal battle with Mr Gentile, also highlight worries that Sure Trader/ Mint Broker - previously known as Swiss America Securities - had set-up overseas subsidiaries to which the Bahamian broker/dealer would pay "referral" fees without these being disclosed to clients.
These details were contained in a September 18, 2019, letter to Mr Gentile by Christina Rolle, the Securities Commission's executive director, outlining the reasons for regulator's decision to suspend his company's licence and continuing registration for a five-day period.
As previously reported by Tribune Business, Mr Gentile and Sure Trader/ Mint Broker were successful in obtaining a Supreme Court injunction to halt the five-day suspension through their attorney, Opposition leader Philip Davis QC. Mr Gentile subsequently closed his Bahamian business, resulting in what he said was the loss of 60-80 jobs, with client accounts transferred to a new broker in St Vincent and the Grenadines.
Referring to a meeting between herself and Mr Gentile on September 12, 2019, Ms Rolle cited two practices by Sure Trader/ Mint Broker that the Securities Commission deemed "wholly unacceptable... and must cease immediately".
She added the name change from Swiss America Securities "remains unapproved by the Commission", and said: "These matters are also a source of grave concern."
Setting out the Bahamian regulator's case, Ms Rolle said: "Swiss America's online 'day trading' facilities do not enable clients to trade directly with the market, or against a market held position, as is the premise for trading facilities generally.
"Instead, Swiss America's clients' orders are placed via an online platform called 'Das Trader' and routed to a purported trading desk/back office of Swiss America in The Bahamas. Clients' orders are not filled in the market, but instead are recorded as orders by Swiss America with no transaction having been entered in the market.
"As such, clients' positions do not exist in the market as would be expected, but rely on Swiss America's ability to cover gains and withdrawals in a manner that is akin to a 'ponzi' scheme. This practice is wholly unacceptable to the Commission and must cease immediately."
A 'ponzi', or pyramid, scheme is one of the oldest - and crudest - forms of financial fraud perpetrated on unsuspecting investors. It lures them in by promising huge financial returns, but really involves paying off earlier investors with monies supplied by new investors attracted to the scheme. It ultimately collapses when not enough new investor money is coming in to make such payments.
Mr Gentile, though, last night vehemently denied the Securities Commission's allegations and said its failure to understand his business model had cost 60 to 80 Bahamians their jobs. "The firm was run by 60 full-time, 100 percent Bahamian staff that are out of work due to the [Commission]," he blasted.
"It has no basic understanding on electronic markets or principal trading. The firm has operated the same way from before its first Securities Commission audit in 2016, and before its forensic audit in 2017 and in every annual audit. It was disclosed how it safeguarded client funds as well as me personally telling" the regulator.
Mr Gentile then alleged that he was the victim of "a personal attack", and called for changes at the Securities Commission. He added: "Karma will fix this... I loved The Bahamas and I'd be happy to bring back all those (60-80) jobs.... Other jurisdictions want the employment and business."
Ms Rolle's letter, though, also disclosed the regulator's unhappiness over Mr Gentile's business establishing an "unregulated" Canadian entity for the purpose of receiving clients' funds. "Swiss America's clients are not aware that they are not sending funds directly to Swiss America, and the Commission has received no satisfactory explanation for this operational structure," she wrote.
"Swiss America's inability to obtain a bank account in its own name is an unsatisfactory explanation for the diverting of clients' funds to an unregulated entity and demonstrates, at the very least, gross deficiencies in Swiss America's operational capacity."
After again calling on Mr Gentile's Bahamian broker/dealer, which was based at the Elizabeth on Bay plaza on Bay Street, to cease and desist, Ms Rolle outlined the regulator's third complaint. "Swiss America has established purported 'subsidiaries' in the UK and elsewhere," she added.
"Swiss America has entered into client referral and other agreements with these entities. In the case of the client referral agreements, Swiss America has either paid - or intends to pay - referral fees to these entities which are purported subsidiaries of Swiss America. The existence of these arrangements has not been disclosed to Swiss America's clients."
Ms Rolle added that the five-day suspension was intended to give Swiss America an opportunity to explain "the reasons for its non-compliance, and why the aforesaid issues should not result in Swiss America's winding-up".
This, though, was short-circuited by Mr Gentile's obtaining of the Supreme Court injunction to overturn the suspension. Tribune Business understands that while all hearings on the Securities Commission's bid to overturn the injunction were completed in December, Justice Ruth Bowe-Darville has yet to rule on the matter.
And, while the Securities Commission has petitioned for the appointment of a liquidator, and for Sure Trader/Mint Broker to be wound-up under Supreme Court supervision, the matter in effect may have been rendered moot by Mr Gentile closing the broker/dealer and transferring all clients - as well as their assets - who wanted to go to a firm in another jurisdiction.
Mr Gentile, in his response to Ms Rolle's later dated the same day, warned that the Securities Commission's actions threatened both client funds and the employment of his Bahamian staff. He offered to switch to agency trading only; place client accounts in a segregated account at Deltec Bank & Trust; change the firm's name back to Swiss America; and end the referral agreement with Mint Global Markets in the UK.
Offering to "clear up some misunderstandings", Mr Gentile wrote: "I would note that the Commission's actions in shutting down Swiss America without notice or opportunity to cure the deficiencies cited in your letter put at risk customer funds, because such customers are precluded from managing their accounts during the suspension.
"Your order, as you may know,has severely impacted the livelihood of our 40 Bahamian employees. I must note that Swiss America has been in good standing with the Commission for the past nine years, employing at one time any where from 40-70 Bahamians, without any serious issues or out-of-the-ordinary customer complaints."
However, Mr Gentile and Swiss America Securities previously agreed to a $120,000 settlement with the Securities Commission in 2018 after failings were identified failings in their customer due diligence processes and record-keeping procedures. Ms Rolle's letter said "deficiencies arising from on-site examinations have not been satisfactorily addressed".
Mr Gentile, meanwhile, said he had become "dehydrated and very overwhelmed and tired, becoming frustrated" by the Securities Commission's inability to understand the broker/dealer's business model when their September 12 meeting went into its third hour.
"I was at a loss because I was told our meeting was about the audits, and that was what I was prepared to discuss, but your seemingly rapid questions were not about the audits," he wrote.
"My frustration was because I was not able to express sufficiently that we went through two audits and one forensic audit regarding our trading and our entire operation at your direction. I was surprised at the line of questioning because you hired Ernst and Young to examine our trading history since our inception."
Mr Gentile added the Canadian account was set up to reduce client costs, while the UK firm was intended to hold client assets because of the need to segregate these and management.