Caledonian depositors tried to withdraw US$68 million last week after the U.S. Securities and Exchange Commission accused the bank and its broker affiliate Caledonian Securities of violating U.S. securities law.
Chief Justice Anthony Smellie called the attempts to withdraw funds by bank customers a “virtual run on the bank” in a ruling that confirmed the appointment of controllers for the bank by the Cayman Islands Monetary Authority.
The bank is subject to a freeze order on US$76 million of its U.S. assets, and the operation of all services to customers and clients of the bank has been suspended.
The ruling rejected an attempt by the sole shareholder to put Caledonian into voluntary liquidation, stating that the appointment of liquidators had no legal effect given the regulator’s action of placing the bank into controllership.
According to the court document, CIMA acted out of concern about the reputational and regulatory implications of the SEC allegations and action, and in the interest of depositors.
The decision was also made, the chief justice wrote – quoting representations made by CIMA’s legal counsel – because of “evidence of attempts by officers of the bank to transfer funds away to a related party” and the “doubtful solvency of the bank.”
The petition filed on behalf of the joint voluntary liquidators appointed by the bank’s owner stated that the board of directors refused to provide a declaration of solvency for the bank.
The consolidated financial statements for Caledonian Bank show total assets of US$618 million, total liabilities of US$593 million and shareholder’s equity of $25 million.
“This state of affairs when taken with regard to the SEC [temporary restraining order] – will likely result in the bank being actually insolvent,” the chief justice wrote.
A number of depositors represented at the hearing supported the appointment of liquidators but were impartial to the appointment of controllers.
The court ordered the controllers to submit a report on the financial situation of the bank by a deadline determined by CIMA to both the regulator and the court. Once the report has been received, the controllers can petition to be appointed as joint official liquidators of the bank.
Last week, the SEC sued Caledonian Bank and Caledonian Securities and three offshore brokers in Belize and Panama for alleged violations of U.S. Securities Law in connection with the sale of unregistered, restricted shares to the public. The SEC alleges that the shares were part of a sham stock offering and penny stock pump-and dump-fraud.