The owner of Caledonian Bank and Caledonian Securities has filed a motion to intervene in the settlement proposed by the U.S. Securities and Exchange Commission and Caledonian’s liquidators.
Sentinel Trust Services, the legal owner of all of Caledonian’s equity, is asking the U.S. District Court for the Southern District of New York for permission to object to the settlement and to seek damages and sanctions against the SEC.
The settlement, which has been approved by the Cayman Islands Grand Court, still has to be sanctioned by the U.S. court to take effect.
Caledonian went into bankruptcy in February 2015, 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.
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, forcing Caledonian to suspend operations.
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.
Sentinel, which manages New World Star Trust, which in turn owns Caledonian, claims the freezing order by the SEC “precipitated significant collateral damage” that included the collapse of the bank and “the destruction of Sentinel’s equity interest in Caledonian.”
In the motion, Sentinel argues that the SEC’s “unequivocal” representation to the court that Caledonian “owned the securities, sold them to the public and lined [its] pockets with the proceeds” – even though Caledonian had made representations that it sold the securities as a broker on behalf of clients – had a direct impact on the magnitude of the freezing order.
The securities regulator said at the time it was not able to verify that Caledonian acted as a broker because Caledonian did not supply any client information, citing Cayman’s bank secrecy laws.
Sentinel quoted a pretrial hearing in May 2015 at which District Judge William Pauley III called the SEC’s action “incredible government overreach,” and the SEC’s lawyers admitted that the freezing order had caused a run on the bank, which led to its collapse.
However, the judge’s comment was made in relation to the potential impact of the size of the freezing order on Caledonian’s depositors rather than the bank’s equity owners. And Judge Pauley laid equal blame on Caledonian’s lawyers for agreeing to a freezing order that exceeded the owner’s net equity of $25 million.
“Given the egregious nature of the SEC’s conduct, and its draconian impact on Sentinel, the proposed [settlement] – which would sweep the SEC’s misconduct under the rug – is anything but ‘fair and reasonable,’” Sentinel claims. The trust services provider added that Caledonian’s liquidators refused to seek sanctions against or compensation from the SEC, “notwithstanding the compelling basis to do so.”
Sentinel said the proposed settlement “ignores and makes no provision for the damages caused by the SEC’s misconduct.” Allowing Sentinel to intervene would contribute to the full development of the underlying factual issues in the suit, “which Caledonian’s liquidators and their counsel have failed to do,” Sentinel said.
“The only practical avenue for Sentinel to recover for the destruction of its equity in Caledonian is to seek damages from and sanctions against the SEC.”
In the proposed settlement, the SEC acknowledged that after satisfying the claims of priority creditors, Caledonian will have no remaining funds and for that reason the regulator agreed to forgo a $25 million disgorgement, representing the owner’s equity, it otherwise would have sought.
The bank’s liquidators estimate that Caledonian’s creditors will receive about 90 cents on the dollar.
Under the settlement, Caledonian would neither admit nor deny the allegations.
To support the proposed settlement, the SEC submitted additional documents to the court, including the transcripts of Skype communications. The regulator alleges that the documents show high-level employees at Caledonian executed the trades “with a clear awareness of their customers’ highly suspicious pattern of selling large blocks of penny stocks for companies with no significant trading history or revenues, simultaneously with huge spikes in the volume and the price of those penny stocks.” The SEC said at least one high-level employee knew that the client’s trades coincided with highly optimistic press releases and Caledonian employees deleted other messages with clients to conceal their activities.
“Together, this evidence paints the picture of Caledonian knowingly, or at least recklessly, assisting its clients in carrying out their pump-and-dump scheme,” the SEC stated.
The SEC said that from 2012 through 2015 it had received 114 referrals from the Financial Industry Regulatory Authority, FINRA, about Caledonian in connection with the potential manipulation of penny stocks.