Verdmont Capital S.A., which was sued along with Caledonian Bank and Caledonian Securities by the U.S. Securities and Exchange Commission for alleged securities law violations, reached an agreement to reduce its U.S. assets that are subject to a freeze order to US$2 million from US$19 million.
The reduction raises questions about the temporary restraining order for Caledonian Bank over US$76.6 million, which remains in place. A hearing on the continuation of Caledonian’s temporary restraining order is set for March 27.
The size of the initial restraining order, apparently double the estimated turnover of four alleged penny stock pump-and-dump schemes traded through Caledonian Securities, directly contributed to a run by depositors on Caledonian bank and its subsequent insolvency.
In contrast to Caledonian’s temporary restraining order, Verdmont’s asset freeze now covers substantially less than the sales proceeds of the alleged pump-and-dump schemes.
Under the preliminary injunction, Verdmont, a Panamanian broker dealer, has to hold $2 million in cash in a U.S. brokerage account and transfer clients’ funds in the name of Bamfield Equities, formerly known as Bartlett Trading, Chloe Company S.A., Jacametra Inversiones S.A., Creekside Capital Ltd. and Oakgrand Market Trading Inc., to a segregated account.
Verdmont opposed the initial temporary restraining order, stating that the funds were largely those of clients not connected to the lawsuit and sales of the four stocks concerned.
In court filings, Verdmont stated that it did not trade any of the four stocks on its own account, except for one day trade, which resulted in a profit of $11,300. The net commissions for the sales of the stocks amounted to $228,665.52, according to the broker.
The SEC civil lawsuit alleges that Verdmont, Caledonian and two brokers in Belize, Legacy Global Markets SA and Clear Water Securities Inc., sold restricted, unregistered shares to the public in the U.S. in violation of Section 5 of the U.S. Securities Act.
Verdmont claims that as broker it was exempt from Section 5 because it had “made a reasonable inquiry into the circumstances of its customers’ proposed sales.”
The broker submitted evidence that when it opened the accounts for three of its clients involved in the trading of three of the penny stocks, it requested completed know-your-customer questionnaires, including professional letters of reference. Verdmont said it also obtained certificates of incorporation for clients Lornex Financial in Nevis, Cayman-registered Nautilus Growth Fund and Samoa-based Bartlett Trading, which was renamed Bamfield Equities in February 2014.
The broker claimed that it had examined the stock certificates to ensure that no legend or other restriction was in place, and that it had obtained documentation on how the shares were acquired by the clients, such as subscription and purchase agreements.
The broker claims it further researched how the shares were registered with the SEC, contacted the stock transfer agents for confirmation that shares were valid and free trading without stops or restrictions, and conducted Bloomberg research to ensure that customers were not selling more than 5 percent of the outstanding shares. The SEC requires that the owners of 5 percent or more of a U.S. public company’s shareholdings reports their ownership.
Verdmont said it had also conducted WorldCheck searches on its clients. WorldCheck is a screening tool used to identify risky clients.
“None of Verdmont’s due diligence revealed any ‘red flags’ indicating that additional inquiry might be necessary,” the court filing said.
Of the three Verdmont clients named by the SEC, only Bamfield/Bartlett continues to have assets in the Verdmont client omnibus accounts in the U.S. The accounts for Lornex and Nautilus were closed on Oct. 16 and Oct. 10, 2014, respectively, Verdmont said. The broker said after searching its records, it could not find evidence that Maripose Acosiadios SA is or was a client, as suggested by the U.S. securities regulator in the lawsuit.
Verdmont’s trading records show that clients Lornex, Nautilus and Bartlett/Bamfield sold nearly $15 million worth of shares in three of the four penny stocks named in the lawsuit through the Panamanian broker. All three stocks, Goff Corp., Norstra Energy and Xumanii, turned out to be worthless and subsequently saw their share price collapse.