MANHATTAN (CN) - Though it has some soul-searching to do for "overstating its case" against a Cayman Islands bank that it bankrupted, the Securities and Exchange Commission can still advance on that outfit's co-defendant in Panama, a federal judge ruled.
When it brought its federal action on Feb. 6, 2015, the commission accused Caledonian Bank and four other financial institutions of making more than $75 million from unregistered sales of "virtually worthless" penny stocks.
In testament to a "seemingly thorough investigation," the commission flooded the court with a strongly worded complaint, memorandum, four declarations and a 676-page appendix of exhibits, U.S. District Judge William Pauley noted Tuesday.
Pauley said this evidence led him to freeze Caledonian's assets wit a temporary restraining order later that day.
Though the bank filed for bankruptcy days later, Pauley noted that the commission later "blunted many of the harshest and most categorical allegations" against the remaining defendants in an amended complaint.
Pauley cast a wary eye on these allegations Tuesday upon a motion to dismiss from the still-standing Panama-based defendant, broker-dealer Verdmont.
Though he found that "bureaucratic siloing and missed opportunities" are to blame for Caledonian's "denouement," he said the revised allegations against Verdmont plausible enough to survive a motion to dismiss.
"This case reveals the dire consequences that ?ow when the SEC fails to live up to its mandate and litigants yield to the government's onslaught," the scathing opinion states.
"By overstating its case, the SEC can do great harm and undermine the public's confidence in the administration of justice," Pauley added later. "And that damage can be compounded when financial institutions, anxious to appease a regulator, submit to unconscionable terms and permit their depositors' assets to be held hostage without seeking immediate relief from a court. As this case demonstrates, these concerns are not hypothetical."
Despite the "lesson" of the recent past, "it is in the public interest for the SEC - exercising its power fairly and its resources efficiently - to follow where its plausible allegations lead," Pauley wrote.
Robert Zito, an attorney with Verdmont for the Wall Street-based firm Carter Ledyard & Milburn, noted in a phone interview that the judge had to accept the commission's allegations against his client as true at this stage of the proceedings.
"We are hopeful that we will prevail at the end," he said.
As for the judge's blistering critique of the SEC, Zito commented: "I think the judge said it all."
"The objective facts are egregious," he added later.
The SEC declined to comment.