CIMA under fire in Caledonian saga

| 23/11/2015 | 22 Comments
Cayman News Service

Caledonian House

(CNS Business): The Cayman Islands Monetary Authority (CIMA) is in the firing line for failing to support Caledonian, as the fallout from the bank’s collapse continues. Published court documents showed there was no need for the freezing order on its US assets, which ultimately led to Caledonian’s insolvency. Questions are also being asked about Caledonian’s contribution to its own demise and how CIMA, the US regulator and a highly respected judge, between them, managed to make such a costly mistake.

CIMA has been accused of having its head in the sand and not standing up to what US Judge William Pauley said was the Securities Exchange Commission’s (SEC) “incredible government overreach”. The contention of many in the financial sector and across the community in Cayman is that CIMA has let the industry down and should have worked with the SEC to ensure a less severe outcome than the excessive force of a freezing order. With Caledonian entering liquidation, the net result was the loss of several jobs and the end of a significant and well-regarded player in the local banking market, with over 40 years of history.

“With the benefit of hindsight there is no justification for what happened,” said Ian Huskisson, partner at Travers Thorp Alberga. “It’s a shame and there are lots of people to blame, including CIMA. It is their role to look after the financial services industry here and in particular the people that deposit money in banks and if they sit back and allow this to happen, or worse, encourage it, that is highly regrettable.”

One local insolvency practitioner said that in his experience of working with CIMA it has been extremely difficult to get them to take any type of enforcement action, typically citing the problem of needing to get board approval, which would take a couple of months. “That is the fairly standard message we see on a number of our cases, so it was surprising that it all seemed to happen so quickly, but it’s not clear how long CIMA were working with the directors,” he said.

Huskisson said that in most instances CIMA will do a good job and cooperate and work well with international regulators, which is what they are supposed to do. “But in this case they should have stood up for the industry and said, ‘hang on a minute, you shouldn’t be doing this to one of our banks.’ You have to put this episode down as a major mistake by both sets of regulators and not one to be repeated but I don’t think it is really a sign of major institutional problems,” he said.

A CIMA spokesperson told CNS Business, “We are confident that CIMA acted appropriately and within its legislative mandate, in all the circumstances.”

The judge also had some harsh words for Caledonian for allowing its depositors’ assets to be held hostage and agreeing to the freezing of its US assets, in what he saw as an anxious desire to appease the regulator, sparking the run on the bank. Caledonian’s directors have also been criticised for effectively pulling the trigger themselves, and appointing Zolfo Cooper as Voluntary Liquidator. CIMA then appointed EY as controllers and Caledonian was placed in official liquidation.

So far, the Cayman government has not responded to questions regarding how similar regulatory failures can be avoided in the future.

“What annoys me the most about this episode is that Judge Pauley tore into the SEC but he signed off on the freezing order in the first place, so where is his accountability?” the insolvency specialist said. “Either something criminal has happened or the judge has messed up. If the SEC misled the judge then they have committed an offence, but if they didn’t then the judge gave the wrong order and I’m not sure if this will come out because the settlement is likely to be confidential.”

“Having been in the situation of responding to emergency court applications myself, it is quite difficult because things happen so quickly,” Huskisson said. “The SEC are generally rightly taken very seriously by the court and if they say there has been a fraud then the Court is going to take it seriously. Where they went wrong is somehow they thought money they were freezing was the bank’s money and not that of the depositors, against whom the SEC had no claims. Ironically, it seems that depositors will get most of their money back. This is a big slap in the face for the bank because part of the basis for CIMA intervening was to protect the depositors. It now seems clear their money was never at risk.”

It is understood that a settlement with Caledonian has been approved by the SEC but its overzealous pursuit leading to the unfortunate and unnecessary collapse of the bank certainly looks to have been influenced by the outdated image of Cayman as a tax haven.

“If it had been a better known bank based onshore, I doubt the SEC would have gone in as hard and quickly as it did,” said Huskisson. “It is very unfair for anyone to reach the conclusion that because it is a small bank in the Cayman Islands then there must be something illegal going on. The bigger problem for the islands and the industry is that some people in power still think that is what happens here.”

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Category: Finance, Financial Crime

Comments (22)

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  1. Anonymous says:

    The liquidator has reached a settlement with the SEC for the grand sum of ZERO in fees, fines or penalties.

    Where is the statement from the Board of CIMA explaining how they allowed a foreign regulator to destroy a local institution based on mere allegations with no facts to support the claims. The only winner in this fiasco was E&Y with millions in liquidation fees.

    A real wake up call for anyone whose livelihood depends on CIMA regulation.

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  2. In case you were wondering... says:

    ...just how bad the paper flowing through Caledonian was?

    http://promotionstocksecrets.com/swingplane-ventures-inc-swvi-waiting-for-takeoff/

    This information was readily available in 2012.

    Obviously they were not doing much of a review on the penny-stock Companies they were handling... or maybe they were and just didn't care because there was money to be made.

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    • No Armchair QB Please says:

      Once again, you're quick to criticize in hindsight. You point to one website which has this info today. Who knows whether this website is new or old? And you have no idea what other info was provided to Caledonian and many other banks and brokers that traded this stock, which would have included notarized certs and legal opinions from US lawyers and sign off from larger brokers in the US.

      Whatever you conveniently point to now doesn't change a few simple facts:

      1) Many other financial institutions in Cayman, the USA and other countries traded this stock. Only Caledonian faced a freeze of 100% of their assets without notice. Was this fair?

      2) The OTC market is regulated by FINRA. It appears that they failed to properly regulate it. To compensate for their failure, they attacked a smaller, weaker party in a foreign jurisdiction.

      3) CIMA appeared to do nothing to assist/intervene in the situation.

      4) Even if this was stock was junk, Caledonian clearly provided a trade execution service only. It did not trade on its own behalf. Yet the SEC improperly obtained a temporary restraining order (according to Judge Pauley) by telling Judge Pauley that Caledonian was a "flight risk" and that they were trading on their own account. Both lies. The SEC (with complicity of CIMA) destroyed a 45 year old institution, 65 jobs and tens of millions in equity. Was this proportional?

      Offshore brokerage firms are only able to enter the US market by utilizing (entering through) US licensed brokers. This is meant to put the onus on the US brokers to apply US regulations to every trade. As a non-US broker, Caledonian would not have the same regulatory requirements as a US broker, but would instead rely on its US broker counterparties for assistance in monitoring things like this. Those US brokers failed in their direct regulatory obligations. But they faced no regulatory action. Only Caledonian was targeted.

      That's the point.

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      • Anonymous says:

        They had usa citizens, with usa certifications that allow them to put through brokerage trades. This 'incident' smells similar to the one that happened in Singapore/Indonesia which was also headed by the same 'owner'

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    • Anonymous says:

      ...just how bad the paper flowing through Caledonian was?

      ....How does 1 article prove that?

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      • In case you were wondering... says:

        Well it is an article that collates information that is readily available in the EDGAR database. Between the companies filings and Google you can figure out if something is a sham in about 20mins. No word of a lie. You should try it sometime with the companies that appear in the penny stock websites.

        There are multiple companies like this named in the SEC investigation and it would be incredibly naïve to think that the companies named publically were the only pieces of toilet paper that were flowing through.

        During due diligence someone should have been considering the question: Is the company and its management in the business of actually making a product or providing a service? Or is the business of the company floating shares to sell into the market.

        To put another way if the business plan appears to be an obvious fraud then you shouldn't deal it in.

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        • No armchair QB please says:

          Thanks for the advice. Maybe you can help me pick last week's lottery numbers too.

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          • Johnny Football says says:

            Except lottery numbers are random. This was not random, however if you want/need to believe that Caledonian was blameless here be my guest.

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    • Anonymous says:

      In case you were wondering... works for CIMA

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      • Expat Andy says:

        You may be right for the "for" but no one actually works "at' CIMA...

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  3. Anonymous says:

    1:39pm is correct. lets not forget that years ago this Government removed Tim Ridley when he and Cindy locked horns on proper leadership. We all knew that Ridley was unceremoniously removed by the Govt and Cindy had the last laugh (and to make matters worse Alden replaced Ridley with his cousin). That was this Govt's reaction to the standoff between Cindy and Tim Ridley. Well the joke was really on us. We are all paying to allow Cindy to run her own fiefdom. In the best interest of these Islands I hope the PPM does something different and actually tries to put the best person in place for that particular job. Unfortunately at this point in time Cindy is really not that person. I am not saying that Cindy is not a bright lady but she is not equipped to lead CIMA and certainly not for times such as these. I am also trusting that as a leader, Alden has matured and he too will make better decisions.

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  4. CAUCUS... CAYMAN FINANCE ...CIMA.. ???? says:

    This should be a lesson to the PPM , and ALL future Governnents, that CAUCUS ( whomever that is? as they were NOT on my election ballot) NOR Chamber of Commerce, NOR CIMA have the expertise to deal with these 'Big Boys'. We are outwitted, out of depth, experience and training - AND our response is Budget Cuts!!! Seriously - while the Civil Service gets bigger ( literally bigger as they are now using work time to go to the Gym). God help us!!!

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  5. Anonymous says:

    The records show that CIMA put Caledonian Bank into controllership before the directors put the company into liquidation. Voluntary liquidation was a reaction to controllership and the inevitable forced liquidation. Forced liquidation was inevitable because the controllers (E&Y) were the ones who got to recommend whether the business should be put into liquidation. Oh! And guess what! They also nominated themselves to be the liquidators too! No conflict of interest there.

    Now, we should all be looking at the fees charged by the liquidators. The liquidators have only published the first 3 months of the liquidation fees, even though the company has been in liquidation for 10 months. These records show that liquidation costs for 3 months averaged $1.6 million per month! And that is only for Caledonian Bank. It does not include Caledonian Securities. For Caledonian Securities, the liquidators made all clients pay up 1% of the value of their portfolio in order to get their own assets returned to them. The liquidators have collected millions on this.

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  6. Anonymous says:

    This is literally the worst nightmare of every single one of us that works in financial services. Sudden, surprise attack by a foreign regulator, with no opportunity to tell your side of the story and no assistance from your own regulator. It's not fair to now point blame at the victim (Caledonian), saying that they should have fought back harder. Not fair at all.

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    • Anonymous says:

      I imagine they fought as hard as they could. The truth is, they had no chance, they didn't go to school with the head of CIMA!

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  7. The Truth says:

    It's not fair to criticize the directors of Caledonian in this case. They got ambushed by the SEC. Remember that the SEC started heir action. By freezing ALL of Caledonian Bank's assets. When the directors agreed to the $76m freeze, it's not like they had much of a choice. The SEC had already frozen over $400m.

    Read the affidavit of Gerald Hodgkins, SEC attorney. The SEC admits to being aware that they had frozen depositor money within 24 hours after their action started. The SEC also confirmed that Caledonian informed them of their capital base and pleaded with the SEC to reduce the freeze to $10m. But the SEC refused to do so without giving any reason. Agreeing to $76m was just "less bad" than the situation that they were already in.

    Let's also remember that Judge Pauley, the judge that recently criticized Caledonian for accepting the $76m freeze, is the same judge that ordered the freeze on all of Caledonian's assets in the first place. Read the transcript of the hearing where he ordered the initial freeze. He literally asked for only the "reader's digest version" of the facts. Maybe he should accept some of the blame himself.

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  8. Anonymous says:

    Can anyone answer this question? When CIMA gets money printed, is it being loaned to us at interest or do we have something tangible with which to back it up like gold, silver, real estate, other investments.
    My only concern is that the people as a whole (including myself) are pretty much ignorant about this. The answer to this question would determine who really owns Cayman.
    My three guesses are the Crown, the people or the banks.
    Anyone else like to take a shot at this. Perhaps this could be posted as a viewpoint?

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    • Anonymous says:

      Ever looked to the CIMA Law for the answer? It used to be stressed as a matter of national pride and perhaps it is assumed that everyone knows it, forgetting the new arrivals and the young.

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  9. Anonymous says:

    Calling Caledonian a "well-regarded player in the local banking market" is a stretch. Their main brokerage clients were well known (or infamous) penny-stock 'pump and dumpers' with a long record of civil allegations. Even if Caledonian was only acting as an agent in the illegal trading activity rather than a principal, their KYC procedures were lax. Why would any bank want to take on these clients with long and shady records?

    Caledonian was doomed regardless if there was only a limited asset freeze. There would have been a run on the bank regardless as soon as the SEC allegations were made public, and they wouldn't have been able to survive the liquidity gap without
    controllers being put into place for an orderly process.

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    • Anonymous says:

      You ignore the fact that two other Cayman banks had the same clients at the same time. And you ignore the fact that these stocks were also traded by many other brokerage firms around the world, including BoNY and RBC.

      If you're so willing to condemn them because they had a couple of clients that you say were so obviously bad, then are you willing to forgive Caledonian for the "respectable" clients that they had? They had thousands of clients. And you're condemning them because of a couple of clients that you say are "obviously bad"? Why don't you look at all the charitable work that they did over the years and factor that into your comments?

      Stop playing armchair quarterback. You're missing the point. They got charged with something they didn't do. The mere allegation destroyed their business. And now even the judge in NY is saying that the SEC was wrong and that this should not have happened to Caledonian. Judge Pauley's recent decision was a judgment on a request for a summary dismissal by Verdmont. Caledonian wasn't even part of that motion. They had no representation at that motion. Pauley dispensed with the motion in a single page, yet he went on for 31 more pages about Caledonian, criticizing the SEC.

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      • The truth hurts! says:

        Leaving CIMA aside and leaving "two other Cayman banks" out of the picture for a moment. This only goes to show how large the target is on offshore banking/brokerage firms. In this environment Cayman institutions need to be squeaky clean as compared to their U.S. counterparts (3rd shadiest country in the world, up from 6th in 2013).

        The moaning after the fact doesn't help. Quite honestly for those who play in the penny-stock realm Caledonian was known as the place to go to clear sketchy paper. When other banks were backing away from the market Caledonian was filling its boots in this "lucrative niche". I honestly don't think they understood the risk or what they were doing. That being said in 2013 people who trade OTC/Pinks were already expecting Caledonian to blow up because of some of the pump and dumps that ran through there.

        Caledonian was not squeaky clean and they paid the price. Looking back on the coverage of liquidation Caledonian had wanted to go through a voluntary liquidation before CIMA stepped in. This was due to the freeze and bank run. But believe me even if the SEC had only frozen $2-3 million in assets there would have been a run. Given the charges and any sort of freeze the damage was done.

        Perhaps SEC overreach and CIMA's actions didn't help the situation but that was just gas on the fire. Caledonian lit the match themselves and the bank was going to burn it was only a matter of time.

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  10. Anonymous says:

    There are some very polite words in here. Most everyone I know in the finance sector believe that current leadership of CIMA needs to change and change quickly, if Cayman is to survive as a finance centre.

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