In September this year lawyers for the United States Securities Exchange Commission (SEC) in Colorado filed an action in the US District Court against several parties with links to numerous nations. The action listed as defendants Mediatrix Capital Inc., Blue Isle Markets Inc., Blue Isle Markets Ltd., Michael S. Young, Michael S. Stewart and Bryant E. Sewall.
The case involves individuals and premises in the US; across various Caribbean nations, like the Bahamas, Puerto Rico and the Cayman Islands; and even the Asian-Pacific nation of New Zealand. The SEC’s filing of this action, its allegations, and the outcome to date have been immensely consequential. To anyone with an interest in the local finance industry, an understanding of this case and its impact is essential.
The SEC’s Allegations
The SEC’s complaint is reliant on a number of US statutes, from the Securities Act of 1933 and the
Securities Exchange Act of 1934, to the Investment Advisers Act of 1940.
According to the allegations of the SEC, beginning March 2016 Mediatrix Capital Inc. and its three principals, Michael Young, Michael Stewart and Bryant Sewall, falsely represented to investors that they held a very profitable algorithmic trading strategy that they deployed in their fund’s investment strategy; one that had returned in excess of 1,600% since its inception, and that there had never been an unprofitable month. The SEC claims in its supporting material that the defendants misled investors by falsifying account statements, and misappropriated in excess of US$ 35mn. Allegedly, the defendants misappropriated this money for their own purchasing of luxury properties in the Caribbean and in the US, among other personal uses.
The Outcome
A week following the filing of this action the SEC announced that it had obtained a temporary restraining order and asset freeze against the three individual and three company defendants.
The SEC claims the conduct of the defendants saw US$ 125mn of funds provided by investors placed at risk, and that the defendants engaged in activity that was fraudulent and “Ponzi-like”.
In building and pursuing this case, the SEC has offered a window into the complexities of an international investigation. In remarks following the granting of the temporary restraining order, the scale and scope of this investigation was highlighted by the SEC as it noted, with appreciation, the assistance of the Securities Commission of the Bahamas, the Cayman Islands Monetary Authority, the Central Bank of Armenia, the New Zealand Financial Markets Authority, the Czech National Bank and the UK Financial Conduct Authority.
The Caribbean Entities the SEC Says Were Involved
As detailed in the beginning of this article, this case involves entities in a number of Caribbean nations. The SEC says Mediatrix Capital Fund Ltd. was registered as an International Business Company within the Bahamas. Mediatrix Capital PR LLC is a Puerto Rico limited liability company that the SEC alleges the defendants formed to receive the proceeds of fraudulent activity. The SEC also alleges that one or more of the defendants used the Cayman Islands entity Blue Isle Markets Inc. to transfer funds and commingle it with Blue Isle Markets Inc.
Although these jurisdictions have been scrutinised from afar before, the distinctive qualities of this case mean it has garnered broad and diverse attention within the media, sparking another round of debates about the environment in which such operations occurred across the aforementioned Caribbean territories.
The Future
This matter has given an insight into the changing nature of law and its relationship with the financial sector. The particular allegations of the SEC have been addressed in the previous paragraph, and the specifics of this case and commentary on it are confined therein. Generally speaking, this case has shone a light on the growing complexity of how business operates within an increasingly digitised and economically borderless world.
For the Caribbean, this trend places hurdles in the path of economic growth and diplomatic relations. Many nations across this region have long been attractive to foreigners and multinational companies for the advantageous legal and financial incentives offered by domiciling locally. This has seen the financial services industry (and associated legal industry) across many countries come to rely on foreign business, especially given their comparatively small populations and economic size.
Increasingly there is growing pressure on professionals and businesses in this field, both those who provide services to the market, and those who are customers within it. In recent years the European Union has released a ‘blacklist’ of alleged tax havens, with several Caribbean nations named on it.
Many, if not most, democratic nations now face a legal landscape where the vision of how sovereign states enforce law has been far outpaced by the technological advances of business and the rapid growth of globalisation. Put simply, the capacity for businesses to solicit clients, take money, and evade accountability has far outpaced what writers of democratic constitutions could imagine years ago. The implications of this are not confined to business.
Protecting the Public in the Digital Era
In the years ahead public authorities will surely make inroads in the quest to ‘catch up’, reassert themselves and better protect the public interest. But the nature of government, and the way the wheels of it turn slowly, mean this process will not be rapid. In the intervening years it’s more important than ever that investors are proactive in guarding their capital from misuse and abuse.
