After more than 44 years in business, Cayman bank Caledonian went into bankruptcy in February, just days after the U.S. Securities and Exchange Commission filed a lawsuit against Caledonian Bank, Caledonian Securities and three other broker-dealers in Belize and Panama in connection with sham stock offerings and penny stock pump and dump schemes that allegedly netted the orchestrators of the fraud US$75 million.
As of January 2015, Caledonian Bank had total assets of approximately US$585 million, about 1,550 customers and nearly 1,900 active accounts.
After U.S. courts froze all of Caledonian’s U.S. assets, depositors tried to withdraw US$68 million in a virtual run on the bank and all banking operations were suspended.
The Cayman Islands Monetary Authority placed the bank in controllership on Feb. 10, four days after the lawsuit was filed by the SEC, and revoked Caledonian’s banking license on Feb. 16.
The bank’s controllers filed for bankruptcy protection in the U.S. Bankruptcy Court of the Southern District of New York on Feb. 18 and later in Australia to prevent depositors from taking legal action in these countries before proceedings in the Cayman Islands are resolved.
The Cayman Islands Grand Court first confirmed the CIMA-appointed controllers and on Feb. 23 ordered the winding up of Caledonian Bank and Caledonian Securities, making the controllers joint official liquidators of the two entities.
Caledonian and its co-defendants Clearwater Securities Inc. and Legacy Global Markets SA in Belize and Verdmont Capital SA in Panama are accused of offering stocks for sale to investors in the U.S. without the required registration of the shares for public sale.
The SEC alleges that shares in four shell companies – Swingplane Ventures, Goff Corp., Nostra Energy and Xumanii Inc. – were subject to bogus registration statements that purported the stocks had been sold to public shareholders in Serbia, Mexico, Ireland, Norway, Panama and Jamaica.
The agency claims that the stock offerings were a sham and the shares remained in the control of the issuers and their affiliates. The restricted securities were then “passed off” as free-trading shares and sold to the public in the United States in alleged violation of Section 5 a) and c) of the Securities Act.
Judge slams SEC and depositors will receive about 90 cents on the dollar
Both Caledonian and Verdmont had their initial freezing orders substantially lowered but for Caledonian the reduction came too late to prevent the demise of the bank, when it was unable to meet all customer withdrawal requests prompted by the asset freeze.
District Judge William Pauley III at the Southern District of New York slammed the U.S. securities regulator for the effect the freezing order against Caledonian had on the bank and its depositors, calling it “a pre-emptive strike” and “incredible government overreach.”
Caledonian’s liquidators estimated in their second report to creditors of the bank, released Sept. 4, that depositors would receive between 89.5 cents and 94 cents on the dollar, provided the U.S. Securities and Exchange Commission’s claim against the bank was resolved and no new unaccounted claims were made.
Liquidators struck an agreement with the SEC to settle the lawsuit and in December informed creditors that the settlement terms do not include any financial penalties for the bank. Any financial claim by the regulator would have impacted the return to Caledonian’s depositors and creditors.
This settlement in principle must still be approved by the Cayman Islands Grand Court – a hearing is scheduled for Jan. 26, 2016 – and the U.S. District Court.
In the case, the SEC was forced to amend its initial claim against erdmont, pulling back on some of its initial accusations, but the securities regulator said it could not confirm whether Caledonian was involved in the scheme or had simply acted as a broker in the case, because the bank had not provided any customer information due to Cayman’s bank secrecy laws.
Caledonian Securities and Verdmont did not deny having traded the shares but asserted that they did so only on behalf of their customers.
Caledonian’s co-defendant Verdmont further claimed that as broker it was exempt from Section 5 because it had made a reasonable inquiry into the circumstances of its customers’ proposed sales. Verdmont applied for a judgment on the pleadings on the basis of the submitted evidence.
But on Nov. 10 the judge rejected the motion for a judgment on the pleadings, effectively ordering the case against Verdmont to go to trial. The judge said it was impossible to conclude on the basis of the pleadings whether Verdmont’s inquiry of its clients and their transactions was reasonable given their volume and timing, and the fact that they were coordinated across multiple entities holding accounts at Vermont.
“What are the odds that ‘independent shareholders’ around the globe would invest in such obscure enterprises and then decide – spontaneously and simultaneously – to sell their positions through the same Panamanian broker-dealer?” the judge asked in his written order.
The operators of Belize brokers Legacy Global Markets SA and Clearwater Securities, the other defendants in the case, have either been arrested or surrendered into U.S. custody in connection with separate SEC securities fraud investigations.