By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A Bahamian-owned broker/dealer’s directors “held the honest belief” that it was permitted to borrow almost $4 million in client assets without permission, then use them as it saw fit.

Tillerman Securities is alleging that its ‘standard client agreement’ with customers enabled it to do this, and that its principals’ use of client monies without consent was “not the actions of thieves or embezzlers”.

The broker/dealer, based on One George Street in the heart of downtown Nassau, acknowledged that the decisions of its directors, chiefly Hans Christian Saunders, the managing director, Anthony Dupuch and attorney Craig F. Butler, may have been “unwise” but did not amount to criminal conduct.

The assertions are contained in Tillerman Securities’ submissions to the Supreme Court, as the broker/dealer attempts to fight-off efforts by the Securities Commission to wind-up its business via the appointment of a provisional liquidator.

The matter is due to be heard by the Supreme Court on January 23, 2017, with Tillerman also seeking a stay of the Securities Commission’s decision to render its registration “ineffective” - meaning that it is no longer able to operate.

The capital markets regulator, following an 18-month saga, is alleging that it is “in the public interest” for Tillerman to be wound-up because of its “improper use” of client monies (see other article on Page 1B).

The Securities Commission is also claiming that the broker/dealer is “insolvent” due to consistent loss-making, and has failed to both reimburse its clients and remedy its regulatory capital deficiencies, despite being given every opportunity to do so.

However, in its defence, Tillerman said it now found itself “in very peculiar and complex circumstances” as a result of its problems and the Securities Commission’s subsequent regulatory response.

“In 2013, Tillerman’s original business model of being a licensed broker/dealer of securities began to falter. The directors agreed to change the business model to that of an online discount brokerage,” Tillerman’s written submissions admitted.

“Tillerman’s directors held the honest belief that Tillerman’s standard client agreement allowed for borrowing client assets, so Tillerman began borrowing from its clients’ assets in order to meet operating costs and pay for the development of the new software that Tillerman needed.”

Tillerman’s argument appears to be based on the ‘margin accounts’ that broker/dealers throughout the world typically maintain on behalf of their clients.

These facilities see broker/dealers make loans to their clients, which are typically secured by securities (stocks, bonds) that are pledged as collateral by the latter.

Tillerman, though, is arguing that its ‘standard client agreement’ as it relates to ‘margin accounts’ enabled it to use assets pledged as security as it saw fit.

“The securities or other instruments (securities) in my margin account may be carried as general loans, and may be pledged, hypothecated or otherwise used by Tillerman in a financing transaction,” the client agreement’s section 30, titled ‘Maintenance of Collateral’, reads.

Most executives in the Bahamian financial services industry, though, are likely to regard Tillerman’s “honest belief” claim as extraordinary, and something that to-date has been unheard of.

Broker/dealers, in particular, are holding client assets such as securities and cash on trust, meaning that at all times they have a fiduciary duty/responsibility to look after them and act in the client’s best interests.

Documents attached to the Securities Commission’s legal filings allege that Tillerman used client monies without consent to finance its transition to an online discount broker, via the development of a trading platform called Reign Trader.

“Tillerman developed an online trading platform, called Reign Trader, at a cost of approximately $1 million. Tillerman estimates that clients’ monies provided 90 per cent of the funding for this development,” the Commission’s executive director, Christina Rolle, wrote in a December 11, 2015, letter to the broker/dealer.

She added that the clients were unaware that their assets had been used for this purpose, and to “conduct trades” on the Reign Trader platform for purposes of ‘beta testing’ it. These trades had “not necessarily” received client instruction and approval.

“Since going live, the online trading platform, Reign Trader, has attracted 35,000 new client accounts to Tillerman, 700 of which are currently funded and actively trading,” Ms Rolle added.

Mr Saunders, in an October 25, 2015, letter to the Securities Commission touted Reign Trader as an “incredible avenue” that would enable Tillerman to break into the Chinese retail market segment that is trading securities via their mobile phones.

However, acknowledging the broker/dealer’s regulatory violations, Mr Saunders attempted to argue that sincere motives lay behind the breaches.

“While this is a very difficult chapter that we find ourselves in, we are hopeful that our story will not end as yet another Bahamian tragedy,” Mr Saunders wrote in response to the Securities Commission’s inspection findings.

“We believe that we are on the verge of becoming just the opposite. We believe that we have developed a very unique model that could be a truly inspirational Bahamian success story.”

However, in the same letter, he confessed: “While we acknowledge the inadequacies of our behaviour that have brought about this current circumstance, we believe that the finding of the recent inspection should have concluded the following.

“Our activities have been aimed entirely at financing the growth and development of the firm. We did not set out to arrive at the place, and the experience has caused us nothing but anguish...... It has been incredibly challenging to find ways to stay in this industry in an honorable and progressive fashion.”

Tillerman, in its November 10, 2016, written submissions to the Supreme Court, said 13 clients - accounting for 70 per cent of its business - had agreed to provide ‘retroactive consents’ for its use of their assets.

This was part of a wider agreement designed to convert the shortfall in client assets into a loan to Tillerman, with the debt then moved off the broker/dealer’s books into a new company, and secured by $6.1 million in Bahamas-based real estate assets.

The clients, according to Tillerman, were to be repaid with revenues derived from the Reign Trader platform, but this was “being damaged severely with each day that passes” because the broker/dealer is unable to operate as a result of its registration being withdrawn by the Securities Commission.

Arguing that Reign Trader’s promise was now in danger of being “snuffed out” by the regulator’s winding-up petition, Tillerman alleged that the Securities Commission was acting prematurely by not waiting for the ‘retroactive client consent’ deal to take effect.

In calling on the Supreme Court to give it more time to finalise this agreement, and ‘stay’ the Securities Commission’s wind-up bid, Tillerman argued: “Although the decision to borrow client assets may have been wrong, it was made in good faith at the time.

“No attempt was ever made to disguise or cover up the borrowings; they were reported to the Securities Commission.”

While admitting that Tillerman is “insolvent at present”, the broker/dealer and its principals argued that client assets were not in danger, and that there were no ‘public interest’ grounds for appointing a provisional liquidator.

“Whatever view the court may take of Tillerman’s borrowing of client assets, these are not the actions of thieves or embezzlers,” Tillerman argued.

“Criminals do not compile an inventory of the goods they have stolen and then provide it to the police with regular updates. The directors may have made choices that were unwise, but they were not criminal.”