‘ILL-ADVISED’

The Supreme Court dislodged the Financial Services Commission’s (FSC) control over Stocks & Securities Limited (SSL) while noting that the regulator was aware of its problems over the years but “saw no need” to shut it down.

Yesterday, Justice David Batts ruled that the FSC’s temporary management of SSL through Kenneth Tomlinson was “ill-advised” and must cease with “immediate effect” and control given to SSL-appointed trustee Caydion Campbell.

The FSC sued SSL and Campbell on January 25, 2023, claiming that Campbell’s appointment to pursue the winding-up of the company was in breach of directives and an attempt to frustrate investigation of a multibillion-dollar fraud at the 50-year-old company.

Batts declared Campbell’s appointment on January 16, 2023 was “valid” and takes precedence over the temporary manager whom the FSC put in place on January 17, 2023.

SSL reported the fraud to the FSC on January 10, 2023 and two days later the FSC issued the directives, which covered how assets were to be dealt with.

A trustee is a person or firm that holds and administers property or assets for the benefit of a third party or beneficiary. Their work involves validating claims from creditors, customers and investors.

Justice Batts dismissed the FSC’s claim that the members’ voluntary winding-up of SSL and reorganisation through takeover by an investor would be against the public interest.

“It is apparent from the statutory scheme that winding-up proceedings pose no threat to the creditors of the 1st defendant (SSL) or to the public,” he wrote in his 40-page judgment. “It would be strange if there was any danger to the public, because the Financial Services Commission Act provides for the institution of winding-up proceedings as the ultimate weapon in the regulator’s arsenal.”

He added: “In this case, the 1st defendant (SSL) had for some years been in a precarious position and was under ‘enhanced supervision’. The regulator up to the 10th January 2023, the date it was informed of the fraud, saw no need to wind up the 1st defendant”.

In 2017, FSC flagged SSL for a “culture of non-compliance and mismanagement of client funds”.

The FSC had applied in March 2023 to pursue the winding-up of the SSL itself. But the trustee, who also won a counterclaim against FSC, will now lead that process under court supervision.

Batts said there is “nothing” in the FSC directions which blocked SSL from pursuing winding-up, and further that there was no statutory provision requiring the regulator’s consent before a company goes into liquidation.

To pursue the winding-up, SSL directors declared solvency on January 16, 2023, an action the FSC said was premature especially because the size of the of the fraud was not known.

Batts accepted that “at the date the declaration was filed the company was already in an insolvent position” but “whether the declaration of solvency was truthful or inaccurate is irrelevant because the declaration was unnecessary for the winding-up process”.

The judge said the FSC was not without recourse in seeking to control the firm as it could have applied to the court to have the winding-up converted to a creditors’ winding-up under the supervision of the court.

“However, the course adopted, of appointing a temporary manager, was ill-advised because it is ineffective to stop winding-up proceedings which have already started,” he said, noting that the FSC was seeking to halt a process it “had no legal authority to curtail”.

The FSC’s case was led by Lisa White, a senior attorney in the Attorney General’s Chambers.

In a statement, the regulatory body said the judgment “validates” its regulatory actions against SSL. It said it “will remain actively involved in this process ensuring that the winding-up process is conducted transparently and in the best interests of all stakeholders”.

“The FSC respects the court’s decision; however, the Commission is currently reviewing the judgment and assessing the available options, including potential further applications to the court in furtherance of its mandate as regulator,” said Executive Director Lieutenant Colonel Keron Burrell.

King’s Counsel Caroline Hay, who represented the trustee, said her client is “very happy” as his integrity, reputation and competence were challenged.

“We’re also very happy for the creditors and the other persons who were affected by this unnecessary litigation,” the told The Gleaner. “I think that it (judgment) is a wonderful addition to the jurisprudence of the region ...It will assist regulators with determining where are the appropriate bounds.”

Opposition Spokesman on Finance Julian Robinson has expressed “deep concerns” over the ruling, saying the Opposition is ready to support efforts to strengthen Jamaica’s regulatory framework.

“The Government needs to act quickly to address the situation. This ruling sends a troubling signal to financial markets and investors regarding the capacity of Jamaica’s regulatory framework to handle crises within the financial sector.”

SSL was represented by King’s Counsel Carlene Larmond, whom the court appointed as an independent attorney for the entity after concerns were raised that the FSC, while suing the SSL, was exercising control over the entity’s operations.

The fraud case has ballooned to over $5 billion, with sports legend Usain Bolt among the affected clients.

jovan.johnson@gleanerjm.com

Key Orders of Justice Batts

1. Injunction granted on January 25, 2023 discharged and the temporary management put in place by the FSC shall cease with immediate effect and discharged.

2. Defendants (SSL and Campbell) are at liberty to pursue recovery of damages pursuant to FSC’s undertaking as to damages.

3. Winding up of SSL lawfully commenced on January 16, 2023 shall recommence but shall be subject to the supervision of the court with liberty to creditors, contributors and all relevant interested parties to apply to the court and be subject to such further or other conditions as the court may order.

4. Temporary Manager and FSC shall provide the trustee with all reports and other pertinent information in their possession as well as all relevant information he may request in furtherance of his duties.

5. Trustee is ordered and directed to invite all known potential and contingent claimants and/or creditor of SSL to submit proof of claims for adjudication and proving by the trustee and/or for their admission or voting at a meeting and/or ranking for distribution and/or payment or for the reorganisation of the business or otherwise.

6. There is a stay of all pending or other proceedings against SSL and no suit, action, or other proceedings including criminal proceedings shall proceed with or commenced against SSL unless the permission of the court is obtained.

7. The trustee shall submit a report to the court within 90 days of the order and the court will convene on September 26, 2024 at 10 a.m. in open court to consider any applications.