Published On:Wednesday, September 22, 2010
By NEIL HARTNELL
Tribune Business Editor
The liquidator for a former Bahamas-based broker/dealer that collapsed due to a $25 million trading hole is aiming to "finalise all outstanding matters before the end of 2010", with some $9.134 million still to be returned to some 80 fiduciary clients.
Anthony Kikivarakis, the Deloitte & Touche (Bahamas) accountant and partner, said he had continued to act as the court-supervised liquidator for Caledonia Corporate Management despite being instructed by the Supreme Court's deputy registrar, Ernie Wallace, to stop working until a new judge was appointed to oversee the case and approve payment of fees owing to him.
Tribune Business understands that a hearing has been scheduled before Justice Stephen Isaacs for next week, during which Mr Kikivarakis will seek an order allowing him to retain a further 2.5 per cent of client assets - roughly $1.675 million - to meet the liquidation's costs.
Alleging that, with Caledonia insolvent, there was just a balance of $40,000-$50,000 remaining in the clients' security account to finance his work, the initial 2 per cent of client assets paid in virtually exhausted, Mr Kikivarakis said he had already "foreshadowed my application to the court for an increase of the 2 per cent to 4.5 per cent".
The 2.5 per cent difference will come from a further 8 per cent of Caledonia client assets that were placed in trust to act as a reserve pending the outcome of an investigation by Mr Kikivarakis into an unexplained $500,000 shortfall.
His application for an extra 2.5 per cent is unlikely to please many Caledonia clients who are desperate to recover their remaining assets more than two years after the company was placed into court-supervised liquidation.
Alleging that he had been responsible for 500 Caledonia clients, including 220 fiduciary clients, Mr Kikivarakis said: "My role has been two-fold since the liquidation began , that of a liquidator of an insolvent company and that of trustee of fiduciary assets, the properties of various trust beneficiaries..
"The company has approximately $40,000 in cash, which I have allocated to pay the expenses of a former employee of the company and the payment of a computer lease maintenance fees, instead of the costs of my agents and I, although we have a first claim on these."
Account
Due to the clients' security account being "virtually exhausted", Mr Kikivarakis said he and his staff, plus attorney Alfred Sears of Sears & Co, had "not been paid for the work done over the past 15 months".
Yet he added: "I am aware of the concerns of the trust beneficiaries to have the balance of the assets returned to them, and to this end I plan to approach the court before the end of 2010 to have all outstanding matters finalised."
Mr Kikivarakis listed a variety of reasons for why he had been unable to return some 80 Caledonia clients' assets, totalling $9.134 million, to them.
Another 80 clients have received 90 per cent of their assets, worth $60.362 million, the remaining 10 per cent accounting for funds withheld to cover the liquidator's costs. Some 89 per cent of client assets had been returned, the liquidator alleged.
Caledonia collapsed into liquidation after suffering an almost-$25 million trading loss, which resulted when Jitney, its Canadian correspondent broker, sold off assets to cover an overdrawn margin loan balance that was not collateralised by the client who had created the 'hole' in question.
That overdrawn balance was in an account operated nominally by a Ron Wyles, whose trading activities were directed by George Georgiou, a Canadian who has since been of securities fraud in.
Much of the fraudulent activity was allegedly directed from the Caledonia account.
Jitney ended up selling off assets belonging to Caledonia clients other than Wyles/Georgiou because they were all pooled in one omnibus account with it, with no segregation. The duo had allegedly been engaged in short-selling, a high-risk trading strategy supposedly collateralised by so-called 'penny stocks', and incurred substantial losses that eventually sunk Caledonia.
July 05, 2010By NEIL HARTNELL Tribune Business Editor
A senior executive at a Bahamian broker/dealer has admitted that it used assets/funds against client wishes to fund other customers' margin loans for about 18 months before the appearance of the fraudulent 'pump and dump' scheme that caused the company's eventual $22 million collapse.
Court transcripts from the trial of Canadian George Georgiou, who was ultimately convicted of securities fraud, record Bahamian financial services executive, Robert Dunkley, a former investment advisor at Caledonia Corporate Management, disclosing that the broker/dealer had used client assets as collateral/security for the activities of other clients for some two-and-a-half years.
Under cross-examination by Georgiou's attorneys, Mr Dunkley confirmed that all Caledonia clients' money was sitting in one Omnibus account at the company's Canadian correspondent broker, Jitney.
"That enabled Caledonia to use other clients' money for reasons having nothing to do with those clients' wishes, correct?" Georgiou's attorneys asked.
"Correct," Mr Dunkley replied, "which we had operated, and never had problem on that basis for quite a while, probably for about a year-and-half before Mr Georgiou came into this."
Earlier in the trial, under examination by US government attorneys, Mr Dunkley gave details about how all Caledonia client assets came to be sitting in just one account belonging to its Canadian correspondent broker.
The former investment adviser sought to blame Jitney for the situation that led to the creation of the single Omnibus account, which meant that the Canadian broker was able to sell off other client assets on a margin call to cover the $22 million hole created by Georgiou's activities.
Mr Dunkley testified that prior to 2005, all Caledonia clients had their accounts properly segregated at Jitney, but then there was a Canadian regulatory change that required the Bahamian broker/dealer to provide Know Your Customer (KYC) information on all its customers.
"And Caledonia felt that this is something that the clients did not want," Mr Dunkley testified. "And Jitney had turned it around and said: 'OK, we will set up the account for you, but it has to be an Omnibus Account so all of the assets of all of the clients had to be in one account'. And they allowed us to operate that on a margin account basis.
"You know, just about all of our clients were good, honest, decent individuals, operating accounts. We probably had five or six accounts that were on margin. Five years of operating with those people, those accounts, we never had a problem, we never had a margin call.
"And it was venturing out into, taking on an aggressive account, one which was really more in the wholesale or venture capital type business we had no experience in" that got Caledonia into trouble.
Tribune Business revealed last week how Georgiou and his alleged co-conspirators, including supposed Canadian "mobster" Vince deRosa, repeatedly promised Caledonia that they would infuse more cash or stocks into the account to cover the expanding deficit that was occurring as a result of their 'margin' trading and 'short selling' strategies. However, none of these promises ever became reality.
"I lost every penny that I had," Mr Dunkley, who is now trying to open a Nassau pub, said. "When all is said and done, yeah, clients lost; we lost."
Asked what happened to Caledonia and the Omnibus account, he told the US court: "It went into ruin. If clients get..... you know, some made out not too badly, others have lost everything. I mean, that is the doom and gloom of it. And the clients are getting together to really bring a suit against Jitney, because we believe that they should never have allowed Caledonia to have operated that type of account."
Mr Dunkley was challenged on this by Georgiou's attorneys, who argued he was claiming that "Jitney should have saved Caledonia from itself".
The Bahamian executive reiterated that former Caledonia clients were going to take legal action against Jitney over the pooling of their assets into just one account, querying whether this was required by Canadian law or simply done as a way to retain the Bahamian broker/dealer as a client.
"In my mind, in retrospect, looking back on it, they should not have allowed Caledonia to operate an account like that, a margin account that is pooled with clients' - many different clients' - assets," Mr Dunkley testified. "Jitney should not have allowed Caledonia to operate a margin account that is a pooled account with clients' money in it."
Trial
The trial transcript provides a fascinating insight into how Georgiou was able to defraud not just Caledonia but a total of three Bahamian broker/dealers, one of which is a subsidiary of a Bahamas International Securities Exchange (BISX) listed company.
No details were provided of just how much exposure Alliance Investment Management, a subsidiary of Benchmark (Bahamas), faced as a result of Georgiou's activities, although the trial transcript noted the Bahamian broker/dealer was left with a "deficit" and detailed several rows between the convicted fraudster and Julian Brown, Benchmark (Bahamas) president and chief executive.
Under examination by US government attorneys, Georgiou admitted that a brokerage account at Alliance Investment Management ended up in deficit "at a different time and in a different way".
The US government attorneys revealed an e-mail sent by Ron Wyles, the nominee used by Georgiou for many of his brokerage accounts, to Mr Brown in which he asserted he was "the only authorised person entitled to place orders on the Bay Pointe account or give instructions whatsoever".
"He is sending that because there has been a lot of back and forth between Julian Brown and you, and Julian Brown and Ron Wyles, about your giving instructions in the account, isn't that true," the US government attorneys asked.
"There was a dispute that was trying to be resolved," Georgiou admitted. And he also conceded that there was "great conflict" between him and Mr Brown after a fellow conspirator, who turned government informant against him, failed to return a block of shares to Alliance Investment Management after finding he was unable to finance the trade.
The final Bahamian broker/dealer impacted by Georgiou's activities, the trial transcript showed, was Accuvest, which was left holding a $3.75 million deficit.
'Mobster boss' offered to rescue Bahamas broker
June,30,2010By NEIL HARTNELL Tribune Business EditorAn alleged Canadian mobster boss offered to acquire a 45 per cent stake in a former Bahamas-based broker/dealer to rescue it from its eventual collapse caused by the fraudulent $22 million scheme he and his associates perpetrated, US court documents reveal.
Court transcripts released yesterday from the trial of George Georgiou, a former Canadian stockbroker, disclose that his partner in the fraudulent "pump and dump" scheme he ran, "mobster" Vince DeRosa, offered to buy a stake in former Bahamian broker/dealer, Caledonia Corporate Management, as a solution to the "multi-million dollar hole" created by their trading activities.
The scheme was revealed in testimony under oath by Robert Dunkley, Caledonia's Bahamian former investment adviser, who made a number of other stunning admissions. These were:
* That he and other senior Caledonia executives allowed Georgiou to trade on margin using credit backed by the assets/cash of other Caledonia clients, exposing innocent trading customers to the huge losses some eventually suffered.
* That Matthew McNeilly, Caledonia's former chairman and owner, allegedly "asset stripped" the broker/dealer shortly before its early 2008 collapse, transferring all its "good" assets to another company, Ecosse.
* That Caledonia should have carried out more due diligence on Georgiou, who had been barred from working as a broker by Canadian regulators, DeRosa and their sources of wealth and business activities.
The evidence outlined in the eastern district court for Pennsylvania, adduced by Mr Georgiou's attorneys, also indicated that Caledonia's management may have either turned a "blind eye" to what was going on, or been lulled into a false sense of security, because they were earning huge commissions from the volume of trades initiated by the conspirators.
In his testimony, Mr Dunkley alleged that Georgiou's Caledonia margin account was some $8-$9 million overdrawn when he and DeRosa appeared in June 2007 with their offer to acquire a 45 per cent stake in the troubled Bahamian broker/dealer, presenting this as a solution to the problem.
"I'm not so sure whether it be a solution to it, but there was a clear indication that George Georgiou's group, he and Vincent DeRosa, wanted to buy a part of Caledonia," Mr Dunkley told the US court.
"It was June 18, [2007], and this is when Georgiou and DeRosa had come to really discuss them buying a major share of Caledonia. At that time we presented them with what their account situation was, and requested that they pay us the money that was owed before they got into any discussions on ownership."
He added that Ron Wyles, the person Georgiou used as a nominee or "front man" for his trading activities, had first proposed the scheme in May 2007, and acknowledged that if DeRosa and Georgiou had obtained an equity stake they would have had "control" at Caledonia and been able to "borrow more money."
Mr Dunkley said he did not see any documents relating to the ownership discussions until January 2008, when a company called Zaitech, beneficially controlled by Georgiou and DeRosa, was named as the purchaser of a 45 per cent stake in Caledonia.
Mr Dunkley testified that the Bahamian broker/dealer had wanted some $6 million from the pair before entering into ownership discussions, but alleged that because he was a director he knew nothing about how the talks were progressing until the January 2008 document. That was just weeks before Caledonia's collapse.
Under cross-examination by Georgiou's attorneys, Mr Dunkley agreed that by January 2008, Caledonia's financial structure had been radically altered through Mr McNeilly transferring "most of the assets" to another firm, Ecosse Services, even though he was still attempting to sell the "shell" of the Bahamian broker/dealer to Mr DeRosa.
"I think it was a panic situation," Mr Dunkley confessed. "I think it was one where the owner of Caledonia (McNeilly) decided he was going to bail, so he started another company and transferred - (was) at least in the process of transferring assets - probably in the beginning of January 2008.
"And he came to me and said: 'Robert, here is Caledonia, you can have what remains with Caledonia and go and work it out with Vincent and George', to which I said I will do whatever I can to try and save my clients' assets. And I did look at that as an alternative.
"And my decision in the end was that, nope, because I did not - quite honestly, did not trust George and Vincent DeRosa in the end."
Under continued cross-examination by Georgiou's attorneys, Mr Dunkley admitted that after learning of Mr McNeilly's asset transfers, he flew to Toronto to meet with both DeRosa and Georgiou to discuss Caledonia's potential sale.
He added, though, that this was "only in the vane that if there was any way that I could get assets back for my clients, or not put them in a position where they are going to be losing a tremendous amount of money, I would entertain it."
He acknowledged, though, that it was not the same Caledonia under discussion "from the standpoint of Matthew McNeilly having shifted assets."
Mr Dunkley agreed that the terms of the discussions involved William Jennings, Caledonia's managing director, convincing Mr McNeilly to "take those assets that had been spirited away because they had been cherry picked, and to put them back into the company."
This did not happen, though, with the assets in question eventually returned from Ecosse to Caledonia by the latter's liquidator, Deloitte & Touche (Bahamas) accountant and partner, Anthony Kikivarakis, in what has become a court-supervised liquidation.
Mr Dunkley described the liquidation process as "the most decent thing that could be done", and then gave what has probably been the first apology from any of Caledonia's management team to the company's 150-160 clients. Its total investment holdings had been $120-$130 million.
Describing himself as "extremely embarrassed", Mr Dunkley told the US court: "It is very unfortunate you know. A lot of the clients at Caledonia were people I have known for many years, and none of this would have happened without George Georgiou's involvement with Caledonia.
"I was simply there as an investment advisor with a book of a number of portfolios for good clients who are people that, you know, I've known for many, many years and I'm indebted to them, extremely embarrassed. I don't know how I can ever repay them for the situation George Georgiou put us in.
"We along the way had approached George Georgiou many times to please pay up. We trusted him, we were in a situation, a very, very bad situation that he created. It was not me, it was not us at Caledonia. We were remiss, or put it this way, we made our mistakes, I grant you that. With more knowledge, perhaps, with more due diligence, perhaps this wouldn't have happened. Unfortunately, it did, and it did based on the actions of George Georgiou."
Mr Dunkley admitted that Caledonia initially extended Georgiou a $3 million margin facility because they believed it was covered by some $30 million worth of shares. Yet the value of these shares, which were penny stocks, had been artificially inflated by Georgiou and were ultimately worthless.
Georgiou's attorneys questioned Mr Dunkley about whether Caledonia was using its other clients' assets to finance their man's trading activities, drawing from him the admission: "That's the way it ended up."
Realising that activity in the account was going to be extremely active, Mr Dunkley told Mr Jennings in early 2007 that a $1.5 million margin on the Georgiou account needed to be covered in two days, otherwise there would be a $1.1 million debit at its Canadian corespondent broker.
And there was evidence to suggest that the "very hefty commissions" earned on the account blinded Caledonia to what was really going on, an e-mail from Mr Dunkley to Mr Jennings stating: "As you will see, we are up nicely on the month to date, $32,000 as a result of the new Ron Wyles/Georgiou account. I think before month end we can add another $10,000-$12,000, correct?"
Georgiou's attorneys referred to this as "cannibalising other clients' assets".
Georgiou was ultimately convicted of running a securities fraud known as a "pump and dump" scheme, where he manipulated the price of several thinly-traded penny stocks he controlled via the Caledonia account.
To cover Georgiou's overdrawn margin balance, Caledonia's Canadian correspondent broker, Jitney, sold off all the securities, cash and assets held in the Bahamian broker's omnibus account, where all the latter's client assets were held. Thus several hundred clients were impacted by Georgiou's actions.
Georgiou was described as a "professional con man" by US government attorneys, who added that DeRosa "in his own words is a Canadian mobster". DeRosa has not been charged in connection with this case.
Regulator pledges probe ongoing into $25m failed broker
April,23,2010
By NEIL HARTNELL Tribune Business Editor
But Caledonia clients said to be further upset over liquidator's latest Supreme Court application for $540k in costs Deloitte partner charges $500 per hour for wind-up, and firm's fees in line with 'other major accounting firms in the Bahamas'
The Securities Commission's executive director yesterday pledged that the regulator was investigating the $25 million collapse of a Bahamian broker/dealer, as its liquidator applied for Supreme Court approval to pay another $544,000 in costs incurred by himself and his agents in the firm's winding-up.
Hillary Deveaux told Tribune Business that the capital markets/investment funds regulator was prohibited by Bahamian law from disclosing any details relating to matters it was investigating, but promised that the Securities Commission was looking into issues surrounding the collapse of Caledonia Corporate Management.
"I can assure you that we are investigating matters related to Caledonia," Mr Deveaux told Tribune Business. "We cannot disclose to the public any information on any investigations going on in the Commission; that's basically the position.
"We are, in fact, compelled by law not to make public any of our investigations dealing with matters arising out of the Commission. While they [Caledonia's clients] may see nothing happening, we are continuing with our investigations."
Mr Deveaux said the Commission's investigations were confidential until they were completed. He was responding after Tribune Business contacted him to relay complaints voiced to this newspaper by Caledonia's clients, many of whom were questioning what the Bahamian regulator had been doing since the broker/dealer's collapse more than two years ago, and whether it would take any action against the key parties involved.
Meanwhile, Anthony Kikivarakis, the Deloitte & Touche (Bahamas) partner and accountant who is acting as Caledonia's "court-supervised liquidator," has filed an affidavit with the Supreme Court seeking payment for the work done by himself, the firm and his attorneys on the winding-up between April 1-December 31 2009.
The costs hearing, and their taxation, was due to have taken place yesterday, but is understood to have been postponed until Friday, April 30, 2010, after the application once again drew the ire of many Caledonia clients and their legal representatives. Tribune Business understands that the Caledonia Clients Committee is due to meet this Monday to determine how it and its attorneys can be heard by the Supreme Court's deputy registrar, Ernie Wallace, with sources telling this newspaper they are unhappy about the situation.
Mr Kikivarakis's April 19, 2010, affidavit supporting his application for costs gives Bahamians an insight into the fees charged by professionals such as accountants and attorneys, whose earnings often appear out of reach of the average citizen.
The Deloitte & Touche (Bahamas) bills his hourly rate as Caledonia's liquidator at $500. This means that an eight-hour (daily) stint on the broker/dealer's wind-up could earn Mr Kikivarakis $4,000, a sum larger than most Bahamians' average monthly salary, and likely to make many wonder whether they are in the right job.
"My services as Official Liquidator are charged at an hourly rate of $500, which is within the range of $500-$650, the charge out rates applied by Deloitte for services as liquidator rendered by a partner," Mr Kikivarakis said in his affidavit.
"Regarding general administrative and accounting services, the prevailing fee schedule, on an hourly basis, applied by Deloitte during the material period (which I verily believe conform with those of other major accounting firms in the Bahamas), is as follows."
The affidavit lists these fees as thus: Partners (other than Mr Kikivarakis): $400-$600 per hour Managers: $225-$250 per hour Staff accountants: $50-$165 per hour Consultants: $50-$150 per hour Assistants: $50 per hour In his affidavit, Mr Kikivarakis asked for the Supreme Court to approve a $158,750 payment to himself; $321,345 to Deloitte & Touche (Bahamas); and $64,362 to his attorney, Alfred Sears, at Sears & Co.
The issue of the Caledonia liquidator's fees has arisen before, but Tribune Business has been told by reliable sources that the Clients Committee is "extremely unhappy" over the issue given the progress of the winding-up to date. Among the concerns are, as previously reported by Tribune Business, the fact that the liquidator has incurred $1 million in fees over the last year, despite the Caledonia matter having no presiding judge supervising it following the departure of former Senior Justice John Lyons some 11 months ago. Another issue that has angered many Caledonia clients is that in his last report to the Supreme Court, Mr Kikivarakis said he would seek court approval allowing him to retain a further 2.5 per cent of total client assets - roughly some $1.675 million - to meet the liquidation's continuing costs.
That is in addition to the previous 2 per cent, or $1.35 million, that clients paid into a security account to fund the liquidator, with some alleging they were told this was adequate to fund the winding-up. Thus the demand for more money has not gone down well.
The Clients Committee is also thought to be concerned that Mr Kikivarakis is seeking payment of more than $500,000 when, according to his last Supreme Court report, there was just $53,393 left in the Clients Security Account financing his work. This would mean that there are not enough funds to pay him, especially since Caledonia was insolvent and had no money of its own.
The liquidator also retained a further 8 per cent, roughly $5.36 million, of client assets in escrow as a reserve to cover the outcome of his investigation into "an unexpected shortfall" in Caledonia's accounts. Some clients, sources have told Tribune Business, are questioning why this sum was necessary given that there was an estimated shortfall of just $500,000-$1 million.
In a previous report to the Supreme Court, Mr Kikivarakis said he and Mr Sears took an 11 per cent and 20.83 per cent fee cut respectively after becoming involved in "a long, drawn-out battle" over his costs with the late Emerick Knowles, QC, and Brian Simms, partner and head of litigation at Lennox Paton.
Both men, representing Caledonia clients, had opposed a previous application for payment of his costs, and Mr Kikivarakis alleged that his time and money could have been better spent returning assets to clients.
The report also detailed how Caledonia clients, and the committee representing their interests, objected to the payment of some $43,000, shared between three attorneys, to cover their appearance costs in hearings to determine Mr Kikivarakis's fees, and those of his attorneys. The $43,000 came out of the Caledonia Clients Security Account, into which all the Bahamian broker/dealer's clients had been required by the Supreme Court to pay a sum equivalent to 2 per cent of their assets to cover the liquidator's costs.
Published On:Friday, April 23, 2010
Broker's $25m collapse 'struck' from indictment
December 2009
Published By NEIL HARTNELL Tribune Business Editor
An investor accused of defrauding two Bahamian brokerage houses out of a collective $29 million has won a partial victory in the US courts, after a judge agreed to strike out a part of the indictment alleging that his activities caused one of those firms to collapse into liquidation.
Justice Robert Kelly, sitting in the US district court for eastern Pennsylvania, ruled that the US governments allegations that George Georgiou's activities caused the $25 million collapse of Caledonia Corporate Management, the Bahamian brokerage firm, be "stricken" because they were potentially prejudicial to the Canadian investor's defence.
The words ordered removed from the indictment stated that "because Caledonia was unable to cover those massive losses, the firm could no longer operate and was liquidated".
The judge made this order in relation to various motions filed by Georgiou in a bid to dismiss the February 12, 2009, case brought against him by the US government and Federal Bureau of Investigation (FBI), who had accused the Canadian of "leading an international securities fraud conspiracy involving the manipulation of the stocks of four publicly traded companies from 2004 through 2008".
The four companies in question were thinly-traded stocks on the over-the-counter bulletin board, which Georgiou and his co-conspirators were alleged to have manipulated by artificially increasing the demand for, and prices, of the shares. The artificially inflated stock prices were also used as collateral to obtain margin loans from the two Bahamian broker/dealers.
"The indictment further asserts that Georgiou and his co-conspirators obtained the loans from two Bahamian brokerage firms, Caledonia Corporate Management Group and Accuvest," Justice Kelly said.
"Regarding Caledonia, paragraph 11 of counts six through eight of the indictment states: 'As a result of the false representations of defendant George Georgiou and his co-schemers concerning the collateral for the Caledonia account and their failure to provide additional assets, Caledonia was unable to cover the substantial deficits in the [Ron Wyles] account. Defendant Georgiou and his co-schemers caused Caledonia to suffer approximately $25 million in losses'."
That part will remain in the indictment when Georgiou's case eventually goes to trial, and Justice Kelly added: "Regarding Accuvest, paragraph eight of count nine states that Georgiou 'and his co-schemers did not repay the money that they had borrowed on margin and in cash loans from Accuvest, and their artificially inflated stock did not cover the loans. As a result, defendant Georgiou and his co-schemers caused Accuvest to lose at least $4 million'."
In addition, the judge noted: "Specifically, the indictment alleges that Georgiou used wire communications in interstate and foreign commerce to defraud Caledonia and Accuvest."
While Accuvest is still firmly in business, Caledonia has been in court-supervised liquidation since February 2008, a process that has not been controversy-free.
Complained
Several clients and their advisers have privately complained about the fees being charged by the liquidator, Deloitte & Touche (Bahamas) partner Anthony Kikivarakis, and his attorney, Alfred Sears, and the time taken to return their assets to them.
Caledonia collapsed into liquidation after suffering the Georgiou-inspired $25 million trading loss, which resulted when Jitney, its Canadian correspondent broker, sold off assets to cover an overdrawn margin loan balance that was not collateralised by Georgiou, who had created the 'hole' in question.
That overdrawn balance was in an account operated nominally by a Ron Wyles, whose trading activities were directed by Georgiou. Jitney ended up selling off assets belonging to Caledonia clients other than Wyles/Georgiou because they were all pooled in one omnibus account with it, with no segregation.
In his last report on the liquidation to the Bahamian Supreme Court, Mr Kikivarakis alleged that Caledonia "allowed clients to use other clients' assets" in their trading activities to cover overdrawn cash balances. These assets totalled $1.05 million, but some $468,000 used as collateral for this had been sold by Jitney.
Some $575,000 had been recovered from former Caledonia clients with overdrawn cash balances in the Jitney account, Mr Kikivarakis said. He added that 12 Caledonia clients had been allowed to operate margin accounts, and while four had "substantial overdrawn balances", only one did not have sufficient collateral - the Ron Wyles account.
Still, progress has been made in returning Caledonia clients' assets. As at July 31, 2009, Mr Kikivarakis said he had issued instructions to transfer $55.896 million worth of assets, out of a total $67.035 million, to the 80 Caledonia clients that accounted for an estimated 89 per cent of the company's business.
Initially, Mr Kikivarakis said it was estimated that a total $81.188 million was due to 220 Caledonia clients as at September 30, 2008. However, this was subsequently revised to $75.332 million, largely because it was discovered that $6.27 million worth of assets had been returned to four clients prior to the liquidation.
Out of the $11.139 million that had not been transferred to Caledonia's 80 most significant clients, as at the July 31, 2009, date, Mr Kikivarakis said some $5.439 million of this amount was transferred subsequently once instructions were received from the clients. A further $3.481 million had been returned to another five clients.
As for the remainder, the liquidator said six had yet to provide him with the correct or necessary instructions to transfer $2.381 million worth of assets; five clients had authorised him to sell $1.235 million worth of assets and return the cash proceeds to them; and another $850,440 was being held up because two clients had yet to comply with the Supreme Court's order to pay 2 per cent of their assets into escrow to cover the liquidator's costs.
However, Mr Kikivarakis said $4.388 million belonged to 126 Caledonia clients who had not given him instructions to transfer their assets.
More than 100 smaller Caledonia clients still waiting asset return,
More than 100 smaller Caledonia clients still waiting asset return,
90% asset return for 80 clients of collapsed broker * Liquidator of firm with $25m trading hole says release process 'arduous and time consuming to say the least' * More than 100 smaller Caledonia clients still waiting asset return, although some concerned at 8% asset retention * Real Estate Association turns down licence application by Caledonia's former head trader
By NEIL HARTNELL
Tribune Business Editor
EIGHTY clients of a former Bahamian broker/dealer that collapsed after suffering a $25 million trading loss have had 90 per cent of their assets returned to them, the company's liquidator has confirmed, although more than 100 others with small accounts are still outstanding in a process that has been described as "arduous and time consuming to say the least".
A July 29, 2009, update sent to Caledonia Corporate Management clients on behalf of the liquidator, Anthony Kikivarakis, informed them that returning 90 per cent of their assets, in compliance with two Supreme Court orders, was the "number one priority" for the court-supervised liquidation.
Tiffany Russell, an agent for Deloitte & Touche (Bahamas) partner and accountant, Mr Kikivarakis, wrote that the liquidation team had spent most of its time complying with the October 21, 2008, and December 19, 2008, orders of former senior justice John Lyons to release 90 per cent of all client assets.
"This task has been arduous and time-consuming to say the least," the client update said. "Due to the challenges faced in this process, Mr Kikivarakis approached Senior Justice John Lyons and explained the situation to him.
"In response to this, Justice Lyons instructed him to continue with the release of 90 per cent of clients' assets to them, and to make this his number one priority."
Ms Russell added, though, that the return of client assets had been interrupted by Justice Lyons' retirement, as his and the Supreme Court's permission was being sought before any asset releases. Currently, the Caledonia liquidation has yet to be assigned to another judge.
"It should be noted that Mr Kikivarakis and his agents have already issued instructions to release most of the assets held on behalf of clients to them," the Caledonia client update revealed.
"Nevertheless, we are working on returning assets to over 100 clients, primarily clients with small asset balances. However, this process was interrupted with Justice Lyons' retirement as a judge in the Supreme Court of the Bahamas.
"Previously, Justice Lyons had approved the release of 90 per cent of 80 clients' assets to them. After Justice Lyons' retirement, the company's liquidation case has not been transferred to a new judge as yet, and therefore we have not been able to obtain the court's approval to release additional batches of client assets."
Caledonia Corporate Management collapsed and fell into what ultimately became a court supervised liquidation after one of its clients was allowed to operate an overdrawn margin account, which was not properly collateralised, plunging the company into a $25 million trading loss.
The man directing activity in this trading account, George Georgiou, has since been charged by the US federal authorities with running a fraudulent stock manipulation scheme, and his trial is due to take place later this year.
Caledonia's trading clients had all their assets pooled into one omnibus account by its Canadian correspondent broker, Jitney. To cover the margin loss created by the activities of Mr Georgiou and his associates, Jitney sold off securities and other assets belonging to other Caledonia clients, leaving many suffering a severe loss and hardship.
Justice Lyons has already advised "that the loss incurred in the Jitney account would be borne by the specific clients' whose securities and cash had been used to cover the shortfall in the Jitney accounts".
Mr Kikivarakis, in his client update, revealed that he had been liaising with Denys Bourbeau, a member of the Caledonia Client Monitoring Committee assisting him with the liquidation, and Richard Perdue, providing them with such assistance as the court allowed as they mulled bringing a lawsuit against Jitney and the chief Canadian custodian used by Caledonia, Penson Financial Services.
Judging by Caledonia's balance sheet as at March 7, 2008, Mr Kikivarakis as liquidator is in no position to take action against Jitney and other involved in the company's collapse, as liabilities exceed assets by $23.814 million.
The Caledonia liquidation seemingly continues to move forward, although sources have told Tribune Business that there is disquiet among some clients and attorneys over the December 19, 2008, court order that authorised Mr Kikivarakis to retain a further 8 per cent of client assets.
An initial 2 per cent of client assets were retained to cover the liquidator's costs, and placed in escrow at EFG Bank & Trust (Bahamas), but Justice Lyons authorised a further 8 per cent to be retained to cover "a shortfall of at least $500,000" in client accounts other than at Jitney.
"Thus I did not have 100 per cent of the clients' assets in my possession or under my control, and therefore I was unable to comply with" the previous court order, authorising the return of 90 per cent of client assets, Mr Kikivarakis had said in his second report to the Supreme Court.
The Securities Commission has also been criticised by some Caledonia clients, who have openly questioned to Tribune Business why the capital markets regulator has yet to undertake an in-depth investigation of the events that led up to the company's collapse.
In response, Hillary Deveaux, the Securities Commission's executive director, told Tribune Business: "We are still investigating the matter."
He added: "We are concerned as to how the public perceives the Commission to be executing its mandate. We need to fully investigate these matters before we can deal with these things. It takes a long time to investigate these situations.
"We rely, to a great extent, on the forensic determinations of the liquidator. We are well aware of the situation. The company is in the hands of the liquidator, and we don't want this to end up like other situations. People have to see justice being done.
"We are still investigating the matter, and the major part of our investigation will be the results of the findings of the liquidator."
Elsewhere, Tribune Business has learnt that the Bahamas Real Estate Association (BREA) has turned down an application by Robert Dunkley, the former head of trading at Caledonia, for a realtor's licence.
Sources close to BREA confirmed that, following an interview, Mr Dunkley's licence application was rejected. It is understood that this decision was partly due to concerns about the Caledonia situation, and also the fact that H. G. Christie, the company Mr Dunkley is working for, had named him in advertisements as the primary listing agent for Doctor's Hospital's $9 million Western Medical Plaza prior to him obtaining a realtor's licence.
Published On:Wednesday, September 02, 2009
Jitney/Penson did not follow “Know Your Client” policies (“KYC”).
Jitney/Penson knew or ought to have known that a broker-dealer's clients do not automatically pledge their investments for the benefit of strangers. Jitney neglected to perform a basic due diligence exercise and KYC that is mandatory in the Canadian and Bahamian investment industry. They have made a mockery of the KYC rule and the laws of their own jurisdiction.
As a consequence, Jitney has cleared all of Caledonia's liabilities by using cash belonging to clients of Caledonia and also by selling a sufficient amount of securities belonging to clients of Caledonia to satisfy the Caledonia debt.
Jitney knew that Caledonia is a broker-dealer dealing in securities for clients and that the cash and securities deposited with them in Caledonia’s account were client assets and could not possibly have been pledged as collateral for any debt. A basic cursory review of Caledonia’s balance sheet by Jitney’s management and compliance department would indicate that the assets deposited with Jitney could not possibly be Caledonia’s own funds.
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