Caledonian Bank and the U.S. Securities and Exchange Commission have agreed to a settlement that permanently bars the Cayman bank and its subsidiaries from trading in penny stocks and imposes a $25 million fine, though the U.S. regulator says it will forgo the payment so Caledonian can pay its creditors.
In the settlement proposal, which still must be approved by a U.S. judge, Caledonian does not admit fault in the penny stock pump-and-dump scheme it is accused of helping to facilitate.
The SEC writes in the settlement proposal that high-level employees at Caledonian were complicit in a pump-and-dump scheme that netted about $38 million in proceeds. The SEC sued Caledonian a year ago, freezing millions in assets and causing a run on the bank that sent the company into bankruptcy and liquidation.
“They demonstrate that high-level employees at Caledonian executed the relevant trades with clear awareness of their customers’ highly suspicious pattern of selling large blocks of penny stocks for companies with no significant trading history or revenues,” the SEC said in the settlement.
The settlement includes thousands of pages of Skype transcripts between an unnamed high-level Caledonian employee and Brian De Wit, president of Legacy Global, another defendant in the civil case in the U.S. District Court in New York. The SEC writes that Caledonian employees deleted messages to hide their activities and at one point bragged to De Wit, who is also under a criminal indictment in the U.S., that the company’s “system makes it pretty easy.”
The SEC notes, “Together, this evidence paints the picture of Caledonian knowingly, or at least recklessly, assisting its clients in carrying out their pump-and-dump schemes.”
The SEC has not named the Caledonian employees involved in the scheme but does write that the employee most involved was Caledonian Securities Ltd.’s managing director. The SEC writes that parent company Caledonian Global Financial Services’ managing director was also actively involved.
The settlement includes new details about how the scheme worked to pump and dump four separate penny stocks. “Caledonian was well aware that its client, Legacy Global, was trading on behalf of entities and/or individuals who were using IBCs to skirt regulatory requirements,” the SEC writes.
The commission continues: “The chances that a customer could perfectly hit the crest of this uptick in trading volume and price without any information about the scheme being perpetrated (and upcoming aggressive touting campaign) are probably on par with the chances of winning the lottery.”
“A high-level Caledonian employee was aware that its trading in Norstra was extremely problematic. In total, Caledonian sold more than 5 million shares of Norstra for proceeds in excess of $4.5 million,” the SEC writes. “These proceeds were earned on a security that – according to Caledonian’s own employee – had never traded before. In other words, the same clients appeared to hit the lottery a second time.”
In another series of transactions with a separate penny stock, Caledonian sold 35 million shares for proceeds of approximately $6.8 million, according to the SEC.
A yearlong saga
The settlement proposal filed in New York on Monday could signal the beginning of the end to a yearlong saga that began last year. On Feb. 6, 2015, the SEC filed a lawsuit in New York against Caledonian Bank, Caledonian Securities and three other companies in Belize and Panama, accusing the companies of working together to offer sham stocks and pump-and-dump penny stock schemes.
The SEC quickly froze Caledonian’s assets and caused a run on the bank as depositors tried to withdraw US$68 million. The Cayman Islands Monetary Authority put the bank under controllership within days. Seventeen days after the SEC filed its lawsuit, the Cayman Islands Grand Court ordered the liquidation of Caledonian Bank and Caledonian Securities.
The judge in the U.S. case criticized the SEC for its move, calling the asset freeze order “a preemptive strike” and “incredible government overreach.”
The asset freeze order was later lowered, but the damage had already been done. Creditors in the bank’s liquidation expect to receive between 90 cents and 94 cents on the dollar as Caledonian’s assets are wound up.
The settlement agreement has already been approved by the Grand Court. The U.S. judge will have final approval.