The temporary restraining order that froze $76 million of Caledonian Bank’s U.S. assets in the wake of a lawsuit brought by the U.S. Securities and Exchange Commission for alleged securities violations has been modified and reduced to $7 million.
Initially the restraining order encompassed all of Caledonian’s U.S. assets after the SEC sued the bank and its securities brokerage arm Caledonian Securities for allegedly selling restricted, unregistered shares to the U.S. public.
Caledonian Securities sold about $35 million of shares through U.S. brokers, the SEC claims. The virtually worthless shares were part of four apparent penny stock pump-and-dump schemes involving the stock of Swingplane Ventures, Goff Corp., Norstra Energy and Xumanii.
Although the freeze order was lowered to $76 million three days after the lawsuit was filed on Feb. 6, the scope of the restraining order, covering about double the estimated sales value of the shares concerned, contributed directly to a run on the bank by its depositors and “crippled” the bank, according to the bankruptcy filing by Caledonian Bank’s liquidators.
Caledonian Bank was forced to suspend operations on Feb. 10, four days after the SEC had filed its civil lawsuit, and the Cayman Islands Monetary Authority installed two controllers at the bank and its brokerage. The controllers were later sanctioned as official liquidators of the entities by the Cayman Islands Grand Court.
SEC lawsuits alleging violations of Section 5 of the U.S. Securities Act, which prohibits the sale of unregistered, restricted stock to the public, are often settled for a fine. In October 2014, broker-dealers G1 Execution Services and E-Trade Securities paid $1.4 million plus interest in disgorgement and a $1 million fine each to settle charges of violations of Section 5.
In January 2015, U.S. broker Oppenheimer paid two $10 million fines in two cases to settle several charges, including the sale of $12 million of unregistered penny stocks.
An October 2014 Risk Alert by the SEC’s Office of Compliance Inspections and Examinations stated that it had issued letters of deficiency for material control weaknesses or potential violations of law to 80 percent of 22 examined broker-dealers that are frequently engaged in the sale of microcap stocks. The vast majority of firms were referred to the SEC’s Division of Enforcement and other regulatory agencies.
The March 23 modified restraining order requires Caledonian to maintain a minimum balance of $7 million in its correspondent banking account at Morgan Stanley Smith Barney in New York. Within 10 days the liquidators have to provide a declaration that Caledonian’s funds at Morgan Stanley and at Northern Trust International Banking Corp. in Jersey City are needed to meet the claims of Caledonian’s customer depositors and creditors and that none of the current depositors of Caledonian effected trades in the four penny stocks.
The order stipulates that Caledonian has to make a reasonable effort to identify all proceeds from the sale of the penny stocks and produce customer files of individuals and entities that traded the shares, to the Monetary Authority in connection with an inter-agency request made by the SEC.
The liquidators have written to Caledonian Bank depositors that they will make an application to the Grand Court to seek directions whether they are allowed under Cayman’s Confidential Relationship Preservation Law to disclose the names and customer details of customers to the U.S. courts and the Office of the U.S. Trustee as part of the bankruptcy proceedings in the U.S.
The letter asked depositors who object to the information disclosure to do so before April 3.
The liquidators warned that although the information would be filed under seal there was no guarantee that the seal would not be removed later or that customers’ details would not become public through subpoenas or Freedom of Information requests at a later stage.
As of January, Caledonian Bank had total assets of approximately US$585 million, about 1,550 customers and nearly 1,900 active accounts.