By David Marchant From OffshoreAlert

A federal judge in the United States has accused the U. S. Securities and Exchange Commission of “incredible government over-reach” in forcing the closure of Cayman Islands-licensed Caledonian Bank and rebuked the bank’s counsel for allowing it to happen.

District Judge William H. Pauley III could barely contain his anger during an “initial pre-trial conference” hearing that was held at federal court in Manhattan on May 21st, even threatening to summon the SEC’s Washington, D.C.-based Director of Enforcement, Andrew Ceresney, to appear before him in Manhattan to explain his division’s actions.

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For more on this story go to: http://www.offshorealert.com/GetArticle.aspx?id=52291

The following is an excerpt from the
UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

SECURITIES AND EXCHANGE COMMISSION,
Plaintiff,
v.
CALEDONIAN BANK LTD., et al.,
Defendants.

Before:
HON. WILLIAM H. PAULEY III
District Judge

APPEARANCES

RICHARD E. SIMPSON
A. DAVID WILLIAMS
Securities and Exchange Commission
Attorneys for Plaintiff

CARTER LEDYARD & MILBURN LLP
Attorneys for Defendant Verdmont Capital
BY: ROBERT J.A. ZITO
RARK R. ZANCOLHI
THEODORE Y. MCDONOUGH

PROSKAUER ROSE LLP
Attorneys for Caledonian defendants

SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300
BY: MARGARET A. DALE
SIGAL P. MANDELKER

(EXCEPT ONLY – EDITED FOR RELEVANCE)

THE COURT: I want to turn next to the Caledonian defendants. What is the status of this matter with respect to the Caledonian defendants, Mr. Simpson?

MR. SIMPSON: We are in settlement negotiations with them and we have exchanged drafts of settlement papers. I believe that we are very far along in agreeing to those drafts.

THE COURT: Can you describe for me how the SEC went from a $76 million asset freeze of Caledonian to a $7 million asset freeze?

MR. SIMPSON: Your Honor, Caledonian moved for a liquidation in the Cayman Islands and then they filed a bankruptcy petition here in the United States. At their
request, the liquidator wanted to have funds to be able to start distribution proceedings there. We negotiated a $7 million freeze based on the fact that they were in bankruptcy and they did not have enough funds to pay the depositors.

THE COURT: Wasn’t it the initial $76 million asset freeze that led to the collapse of Caledonian?

MR. SIMPSON: Your Honor, I believe it was the filing of the complaint that caused the run on the bank.

THE COURT: The bank couldn’t satisfy the depositors because there was an asset freeze, right?

MR. SIMPSON: I believe that at the end there was a problem with paying off the depositors because of the asset freeze.

THE COURT: Was the SEC aware at the time that it came before me with its ex parte application that Caledonian Bank’s net equity was only $$25 million and that anything above that amount represented depositors’ money?

MR. SIMPSON: No, your Honor.

THE COURT: When did you learn that?

MR. SIMPSON: I believe we learned that over the weekend after the filing of the complaint.

THE COURT: When you learned that, did you bring that to the Court’s attention or seek a reduction in the assets that were being frozen?

MR. SIMPSON: We did not, your Honor.

THE COURT: Why not?

MR. SIMPSON: We were negotiating with Caledonian and I believe they requested a reduction in the freeze amount. We took that to a very high level within the commission and decided that we were not going to agree to that.

THE COURT: How could the commission think that they are entitled to a freeze of seizing moneys that belong to depositors?

MR. SIMPSON: Your Honor, I believe that we were negotiating with Caledonian on that issue and we did not specifically address that issue.

THE COURT: The bank collapsed because of your actions, didn’t it?

MR. SIMPSON: Yes, your Honor.

THE COURT: It’s stunning. It’s incredible government overreach. You wrote me this rather casual letter in which you disclose that you have made all kinds of erroneous allegations relating to Verdmont. I’m going to turn to Verdmont in a moment. Are there a lot of erroneous allegations relating to Caledonian in the complaint?

MR. SIMPSON: I don’t believe so, your Honor.

THE COURT: Before I get to Verdmont, I want to inquire of Caledonian. Ms. Dale or Ms. Mandelker, your client’s equity was $25 million. Why did you agree to a $76 million asset freeze?

MS. DALE: Your Honor, we were in a bad place on Friday afternoon the 6th of February. The Court had entered a restraining order that actually restrained all of Caledonian Bank’s assets in the United States. When we got knowledge of that order late in the afternoon on the 6th, we contacted the SEC to begin to negotiate a reduction, fearing exactly what transpired, which was there would be a run on the bank. I believe on Sunday of that weekend we negotiated with the SEC and achieved a reduction of the freeze from all moneys in the United States to $76 million, which was essentially twice the proceeds that passed through Caledonian Bank’s omnibus accounts for the four securities. We thought that may continue to allow the bank to proceed. But it didn’t. Over the weekend more and more depositor requests were
coming in for withdrawals. Actually, I believe we negotiated further and were seeking a resolution of the entire action over the weekend and on that Monday. That did not come to fruition. The bank did a voluntary liquidation I believe on the 10th of February, which was a Tuesday. I’m not sure that entirely answered your question. We were trying to save the bank, resolve the objection, and move on in those first days after we received notice of the claim.

THE COURT: When did your firm inform the SEC that Caledonian’s net equity was 25 million?

MS. DALE: Probably either that late Friday afternoon or Saturday, your Honor.

THE COURT: How could you conceivably agree to an asset freeze of 76 million when you knew that your client’s net equity was 25 million?

MS. DALE: Your Honor, we weren’t necessarily in the driver’s seat on that negotiation. We were constrained by time.

THE COURT: Who was in the driver’s seat?

MS. DALE: There was a full-on restraining order for every dollar that was in the United States for Caledonian Bank. At that point we were trying to do our best, as I said, to work out a resolution as quickly as possible to allow the bank to not fail.

THE COURT: Why didn’t you contact the Court about that?

MS. DALE: We actually were in touch with your Honor, the Part I judge, on Sunday for the reduction of the restraining order to $76 million, and we were continuing to negotiate. I believe we had a phone conversation with the Court that Monday on which we were explaining what we were doing and how we were acting to try to resolve it. We thought maybe with the $76 million that the withdrawal request would not exceed the amount available so that we would be able to continue to survive. That just didn’t work out.

THE COURT: You knew that every dollar over 25 million that was frozen belonged to somebody else, your depositors, right?

MS. DALE: That was our understanding, yes. I think what we were hoping, your Honor, was that we could resolve the matter, there wouldn’t be the run of the withdrawals, and that by putting $76 million aside for a few days, we could manage to a resolution. That’s what we were trying to do. Once the withdrawal requests exceeded whatever we had in the United States minus $76 million, then the shareholders of the bank made the decision to go into voluntary liquidation. They didn’t want to start allowing some people to get full withdrawals and others not.

THE COURT: It’s stunning. It’s really stunning. You bear as much responsibility for what happened as the SEC did in this foolhardy exercise. What is the status of Caledonian’s liquidation proceeding?

MS. DALE: The status is that they have met with creditors of both the bank and the securities entities in the Cayman Islands, they have issued reports to the creditors examining what the financial situation is, and they are hopeful to begin distributions very soon. They need to do know-your-customer investigations before they can actually make distributions, but they actually are hopeful that they can begin those distributions in the next 60 to 90 days. I don’t know if your Honor is aware, but in the bankruptcy action here in the Southern District of New York, all of the money that had been in the United States and tied up with the chapter 15 has now been allowed to be removed back to the Cayman Islands, and they are in the process of taking that money out, which then will give them a corpus to begin those distributions.

THE COURT: I was not aware of that. How much money was transferred out in the chapter 15?

MS. DALE: I don’t believe it actually has been transferred out, your Honor. There’s about $350 million in the United States, approximately.

THE COURT: Anything else? Thank you.

MS. DALE: Thank you.

The rest of the transcript is available at OffshoreAlert.

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