SEC Assailed by Judge for Triggering Cayman Bank Collapse

  • Cayman bank collapsed after asset freeze led to withdrawals
  • Judge calls SEC actions `ground for agency self-examination'

A U.S. judge criticized the Securities and Exchange Commission for freezing assets of Caledonian Bank Ltd. and causing its collapse, saying the case gives the regulator “fertile ground for agency self-examination.”

"Bureaucratic siloing and missed opportunities" ensured the failure of the 45-year-old Cayman Islands-based bank, U.S. District Judge William Pauley in Manhattan said Tuesday. Pauley also blamed the bank for agreeing to the regulator’s freeze on $76 million -- more than three times its capital.

"This case reveals the dire consequences that flow when the SEC fails to live up to its mandate and litigants yield to the government’s onslaught," Pauley said.

Judy Burns, an SEC spokeswoman, declined to comment on the judge’s remarks.

The SEC sued Caledonian and three other firms Feb. 6 claiming they sold worthless penny stocks in several pump-and-dump schemes, profiting from the illicit proceeds. In a hearing that was kept secret from the defendants, the SEC argued that an asset freeze was necessary to prevent the bank and Verdmont Capital SA from transferring funds offshore. Based on the SEC’s claims, Pauley froze their assets in the U.S.

Run on Bank

Lawyers for Caledonian and Verdmont later told the SEC their clients had acted as brokers, rather than trading for their own accounts. Most of the frozen assets belonged to depositors, not the banks, Pauley said. In the wake of the asset freeze, Caledonian investors and depositors rushed to withdraw their money. Within days the bank was forced into bankruptcy.

The SEC later changed or withdrew the claims that the banks had traded in the securities for their own profit, Pauley said.

The regulator is still suing Verdmont and Caledonian, claiming they sold non-exempt securities without valid registration statements. Verdmont asked the judge to throw out the lawsuit, a request Pauley denied, even as he criticized both the regulator and the banks.

The criticism follows a May hearing in which Pauley quizzed an SEC lawyer about the agency’s actions in the case.

"The bank collapsed because of your actions, didn’t it?" Pauley asked SEC lawyer Richard Simpson.

"Yes, your honor," Simpson answered.

"It’s stunning," Pauley said. "It’s incredible government overreach."

In February, Caledonian Bank filed a Chapter 15 bankruptcy, which shields U.S. assets of insolvent foreign companies.

The case is Securities and Exchange Commission v. Caledonian Bank Ltd., 15-cv-00894, U.S. District Court, Southern District of New York (Manhattan).

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