Securities and Exchange Commission v. Caledonian Bank Ltd., et al., Civil Action No. 15-CV-00894

The Securities and Exchange Commission has charged five offshore entities with offering and selling unregistered penny stocks into the public markets.

According to the SEC’s complaint filed on February 6, 2015, Cayman Islands-based, Caledonian Bank Ltd. and Caledonian Securities Ltd., Belize-based, Clear Water Securities, Inc. and Legacy Global Markets S.A., and Panama-based, Verdmont Capital S.A. (collectively, the “Defendants”) conducted unregistered sales of securities, reaping over $75 million in illegal sales proceeds. Simultaneous with filing its complaint, the SEC obtained an emergency court order freezing assets of the Defendants located in the United States.

The SEC alleges that the Defendants sold penny stocks in unregistered distributions from their U.S. brokerage accounts of four shell company issuers, namely, Swingplane Ventures, Inc., Goff Corp., Norstra Energy Inc. and Xumanii, Inc. Each of the unregistered distributions took place through virtually the same scheme. The issuers first filed with the Commission bogus Forms S-1 that purported to register sales of securities to public investors when, in fact, no bona fide sales occurred because the securities purportedly sold remained in the control of the issuers and their affiliates. In the sham offerings, the issuers pretended to sell securities to investors residing in such places as Serbia, Mexico, Ireland, Norway, Panama, and Jamaica, while the issuers or their affiliates maintained control and possession of the stock certificates in a scheme where: (1) restricted stock was passed off as “free trading” unrestricted stock; (2) the share certificates issued were subsequently transferred, without restrictive legends, to the Defendants; and (3) the Defendants deposited the shares into their U.S. brokerage accounts and sold the shares to the public.

The complaint further alleges that the issuers or their affiliates directed the transfers of restricted securities to the Defendants, often through various offshore nominee entities intended to conceal beneficial ownership of the securities. Once the shares, which were controlled throughout by the issuers or its affiliates, were held in names of the Defendants, the shell company issuers announced a reverse-merger or business combination with a purportedly operating enterprise. The Defendants then offered and sold into the public markets hundreds of millions of shares of the four issuers in unregistered distributions simultaneously with aggressive and extensive promotion campaigns. Each of the four stocks lost virtually all of their market value within months of the unregistered sales. In doing so, the complaint alleges that the Defendants operated as affiliates, dealers, sales outlets and underwriters by offering and selling the penny stocks from brokerage accounts in the United States.

The SEC’s complaint, which was filed in the U.S. District Court for the Southern District of New York, seeks, among other things, to permanently enjoin the Defendants from violating Section 5(a) and 5(c) of the Securities Act of 1933, prohibiting the Defendants from participating in an offering of penny stock, the disgorgement of all proceeds obtained in the unregistered distributions, and civil penalties.

Following the SEC’s complaint, the Cayman Islands Monetary Authority issued a public notice on February 10, 2015 advising that it appointed two Controllers to assume control of the affairs of Caledonian Securities Limited and Caledonian Bank Limited. That same day, Caledonian Bank’s shareholders voted to place the bank into voluntary liquidation.

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