MANHATTAN (CN) — Broker-dealer Verdmont Capital's Panamanian headquarters may be located in a tropical city, but its assets must remain frozen until "pump and dump" allegations go to trial, a federal judge ruled Friday.
The Securities and Exchange Commission charged Verdmont, along with the Cayman Islands-based Caledonian Bank and two other institutions, early last year.
Dumping hundreds of pages of exhibits on the court, regulators claimed that the companies made more than $75 million from unregistered sales of "virtually worthless" penny stocks.
The explosive allegations sank Caledonian, which declared bankruptcy soon after the lawsuit was filed on Feb. 6, 2015.
But U.S. District Judge William Pauley found last year that the commission charged far more than it could prove, blasting regulators for "bureaucratic siloing and missed opportunities" in a scathing ruling months later.
The judge nevertheless allowed allegations against Verdmont to proceed.
Since that setback, the government's fortunes have turned.
Earlier this year, Pauley's outrage turned to Verdmont Capital's principals and counsel for extravagantly billing the government to take a deposition in London, and attempting to make the Securities and Exchange Commission foot the bill for what the judge called a "bacchanalia."
Pauley dealt Verdmont another blow Friday morning, setting the case for trial and refusing to remove the nearly $240,000 minimum-balance restriction on its accounts.
"The SEC alleges that Verdmont's sales — which occurred shortly after the stocks first began public trading and experienced massive price swings — were part of a scheme to 'pump and dump' these securities," the judge's 12-page ruling states. "However, the SEC is not alleging that Verdmont's participation amounted to fraud."
Pauley said that regulators sued Verdmont under a strict-liability provision holding the company liable for "selling the securities for its clients in unregistered, non-exempt transactions that occurred shortly after public trading began."
Verdmont insisted that its sales were "bona fide" offerings to the public, but the judge remained skeptical.
"Indeed, the SEC's trading data shows that there was zero — or virtually zero — volume in the relevant securities until less than forty days before Verdmont began selling for its clients," the opinion states.
Regulators also submitted evidence from a confidential witness who claims that the "indications of interest" were "sham quotations designed to perpetuate the penny-stock scheme," according to the ruling.
"In view of this evidence, the answer to the question of whether the 'indications of interest' — the zero-dollar quotations — constituted bona fide offers to the public is, at minimum, a material disputed fact," the opinion states.
Neither Verdmont's attorney Robert Zito, a partner at the Wall Street-based firm Carter Ledyard & Milburn, nor the Securities and Exchange Commission responded to emailed requests for comment.
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