The Statement of Claim filed last month by the liquidators of Segoes against company directors John Kaweske and James Fontanetta stated the company started running into trouble with Cayman Islands regulatory authorities as far back as May 2003.
Despite the warning signs, the company continued conducting business in the Cayman Islands through October 2004 and ultimately created a deficit to its creditors estimated by the liquidators to be between US$15 and US$25 million.
Only six months after Mr. Kaweske bought Segoes Securities Ltd. through a company he owned called Segoes Holdings Limited, the Cayman Islands Monetary Authority found irregularities.
‘In May 2003, CIMA concluded that (Segoes) was conducting a banking business without the requisite licence under the Banks and Trust Companies Ltd,’ the claim stated.
Two months later, the Cayman Stock Exchange fined SEGOES for failing to provide timely financial information and audited accounts, among other things, the claim stated.
After CIMA’s conclusion in May 2003, Segoes Holdings incorporated Segoes Bond Fund Ltd. in the British Virgin Islands and erroneously purported it was a fund regulated under the BVI’s Mutual Fund Act 1996.
Under Cayman’s Securities and Investment Business Law enacted in 2003, Segoes was required to apply to CIMA for an SIBL licence by 30 January 2004.
Segoes applied for the licence one day before the deadline. The Statement of Claim stated that on 19 March, CIMA wrote Segoes and ‘raised a number of concerns about unanswered queries or incomplete information’ on the SIBL licence application. CIMA requested Segoes provide it with more information.
Less than a week later, the Cayman Stock Exchange suspended Segoes from membership for two months.
‘Such suspension can be lifted if the CSX is satisfied that matters outstanding at the date of suspension are remedied,’ the suspension notice stated.
On 12 May, 2004, the BVI Financial Services Commission issued a public advisory notice stating Segoes Bond Fund was not licensed, recognised or registered under that country’s Mutual Fund Act.
‘Members of the public are advised to use extreme caution with these companies,’ the advisory stated.
The CSX suspension was extended on 24 May 2004 pending the decision of the appeal by Segoes to the Disciplinary Appeal Committee, which was scheduled to be heard on 29 June.
On 28 June 2004 however, the CSX lifted the suspension and reinstated Segoes as a broker member.
Segoes did not provide CIMA with the additional information it had requested in March. Segoes then wrote to CIMA on 27 August stating it intended to withdraw its SIBL Licence application and instead sought to register as an Excluded Person.
The statement of Claim notes that CIMA refused to allow that application in the absence of the further information it had requested.
On 11 October, the CSX terminated the membership of Segoes. It later stated it had concluded Segoes was in breach of several of its rules.
Segoes formally withdrew its SIBL Licence application on 26 October 2004, and three days later, CIMA issued a notice confirming the withdrawal and stating that Segoes was not authorised to carry on securities investment business in or from the Cayman Islands.
By that time, a company called Segoes Securities (Belize) Ltd. was incorporated in Belize and Mr. Kaweske had also acquired a shelf company in Uruguay called Laxberg, Inc., which he later told clients had acquired Segoes on 21 October.
RSM Cayman’s Ken Krys, one of the Joint Official Liquidators of Segoes, said he thinks Mr. Kaweske and Mr. Fontanetta deliberately tried to stall for time.
He called Segoes’ request of CIMA for Excluded Person status another delay tactic example and said Segoes was just trying to delay as long as they could in order to remain doing business in Cayman.
Hurricane Ivan was a fortuitous event for Segoes, Mr. Krys said.
‘It bought them time and gave them the excuse they needed to leave,’ he said. ‘They were able to say they weren’t being kicked out, but that Cayman was no longer right for them.’
Mr. Krys, who served as CIMA’s Head of Compliance (Enforcement) before he left for RSM in May 2004, said the law did not allow CIMA to be more aggressive in its approach toward Segoes.
‘CIMA can only do so much,’ he said.
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