• Approves provisional liquidator appointment

• ‘No real counter’ from crowd-fund platform

• Backs Commission; move ‘in public interest’

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Chief Justice yesterday ruled “there is more than sufficient evidence” of ArawakX’s $2.4m insolvency to justify appointing a provisional liquidator to take control of its affairs and protect assets.

Sir Ian Winder, deciding in favour of the Securities Commission, said he was satisfied the regulator had made “a prima facie case” to oust directors and management of The Bahamas’ first-ever crowd-funding platform on the basis of its solvency deficiency, alleged legal and regulatory breaches that include the “commingling” of client and company monies, and corporate governance deficiencies.

In particular, Sir Ian found ArawakX and its principals provided “no real evidence.... to counter” the capital markets regulator’s assertions that it was insolvent since draft audited financial statements showed negative equity of $2.3m at end-July 2022.

“I accept, on the evidence, that the Commission is satisfied that the company’s insolvency issues, governance irregularities, regulatory breaches and possible criminal infractions have together become insurmountable, resulting in there being more than sufficient cause to have the company wound-up,” the Chief Justice wrote in yesterday’s 19-page verdict.

“I am satisfied that the Commission has made out a case that there is a necessity to appoint provisional liquidators to prevent mismanagement or misconduct on the part of the company’s directors and that it is in the public interest.”

The only outstanding issue yet to be determined is the provisional liquidator’s identity. ArawakX and its principals have objected to the Securities Commission’s choice of James Gomez, the Ecovis Bahamas accountant and partner, having previously implied in legal filings that he has several potential conflicts of interest should he take on the assignment.

Several allegedly revolved around Mr Gomez’s chairmanship of Bahamas Resolve, the bail-out vehicle that helped rescue Bank of The Bahamas by taking on its toxic commercial mortgage loans in 2014 and 2018. The crowd-fund platform is embroiled in a legal dispute with the BISX-listed bank, which previously rejected its $33m damages demand to settle.

Sir Ian yesterday asked the Securities Commission to supply him with alternative provisional liquidator selections, and the two sides are due to appear before him again to determine who will ultimately take control of ArawakX’s affairs, management and corporate records.

Even though the provisional liquidator’s appointment has now been approved by the Supreme Court, that is not the end of the ArawakX saga. Its principals, D’Arcy Rahming senior and his son, can seek to appeal the Chief Justice’s ruling. And there would still have to be a further hearing on the Securities Commission’s winding-up petition to place it in full litigation.

Detailing the road to yesterday’s ruling, Sir Ian said the Securities Commission’s concerns arose when it was approached on October 11, 2022, by James Campbell, the former Colina Insurance Company president, Felix Stubbs, the former IBM Bahamas chief, and Hillary Deveaux, the ex-Securities Commission executive director.

The trio, acting as whistleblowers, voiced “concerns about how the company was being run... They expressed a number of concerns which alerted the Commission to some regulatory issues with the corporate structure of the company regarding both directorship and share capital”.

These issues included ArawakX being “cash strapped” since inception, with $1.5m raised from investors having already been spent “as only one of six crowd-funding offerings that were listed on the platform met its ‘minimum ask’ amount”.

Other allegations concerned non-payment of staff; excessive travel and spending by leading ArawakX executives; and $40,000 being moved from the crowd-funding platform’s client accounts to its own, which was later described as “an error”. The Securities Commission was also unaware that Mr Campbell, ArawakX’s largest investor with $1.6m, had been appointed a director of ArawakX

The regulator also learnt that MDollaz Technology, an unregulated entity, was used to receive investor funds. ArawakX, when contacted by the Securities Commission, confirmed staff had not been paid their entire salary but were being compensated. It also acknowledged “a temporary issue with commingling of investor funds, but this was corrected”.

However, ArawakX’s fiduciary and operating accounts were all frozen by Bank of The Bahamas just weeks later as a result of the battle for control between Mr Campbell and the Rahmings. This triggered a Securities Commission inspection on January 7, 2023, which resulted in the March 23, 2023, imposition of restrictions and conditions on the crowd-funding platform’s licence.

Further investigations through August 2023 led to ArawakX’s registration ultimately being suspended, following the previous imposition of a “cease order” that stopped it accepting investor monies or conducting further crowd-fund offerings.

Sir Ian noted the Securities Commission’s complaint that ArawakX breached several sections in the Securities Industry’s regulations, requiring it to obtain prior permission for any “material change”, after it increased its share structure from 5,000 to 10m.

“The Commission also says that the company gave different valuations of the company to persons without any support for the valuation,” the Chief Justice added. “The valuations ran from over $4m in 2022 to over $201m in 2020, notwithstanding that during these time periods show the company was indebted.”

The Securities Commission alleged that ArawakX was in breach of regulatory solvency standards and, following several suspensions of its registration, moved on the winding-up after the Rahmings failed to produce a plan to restore the crowd-funding platform to solvency “that did not involve earning its way” out of financial trouble.

ArawakX, though, accused the Securities Commission of failing to give it due process and a fair hearing to address the concerns. It argued that the regulator had not acted “reasonably, fairly and impartially”, and alleged that the restrictions imposed on its operations “had a considerable impact on its business”.

The Securities Commission, in submissions to the Supreme Court for the provisional liquidator’s appointment, asserted: “MDollaz has demonstrated through both its actions and its omissions that it cannot be allowed to continue, not least because it is insolvent, but also because the breaches committed cannot be regularised by the Commission.”

It alleged that MDollaz, ArawakX’s immediate parent, had both misused client funds and failed to obtain the regulator’s permission for share offering or distribution. “Notably, the omission didn’t cure the action but compounded it, because MDollaz via its principals should never have used client funds, which appears to have then led to soliciting persons via the unlawful offering of shares to the public,” the Commission said.

“MDollaz situation is fairly simple. They are insolvent and have been for quite some time. The audited financials confirm this. The Commission cannot be seen as a prudent regulator to allow a regulated entity that is very clearly insolvent to the tune of $2m to continue soliciting funds from the public without the required approvals and promoting itself as a properly-run operation.”

ArawakX, though, argued that the Securities Commission had failed to show there was “a reasonable and legitimate public interest” in having the crowd-fund platform wound-up. It argued that the Securities Industries Act’s sections 133 and 134 required that “a hearing” be held before a winding-up application is presented to the court, and this was not done.

However, the Chief Justice rejected this argument, adding that the two sections should not be read together and the Securities Commission has “an unfettered jurisdiction” to approach the courts without giving a licensee a hearing so long as this is in the public interest.

And, while appointing a provisional liquidator is “a serious step”, he added that it did not necessarily mean ArawakX will go into full liquidation. To secure the former, the Securities Commission only needed to establish “a prima facie case”, which “is not a very high bar at all”, and Sir Ian found that the crowd-funding platform’s matter “easily qualifies”.

“There is more than sufficient evidence to find that the company is insolvent, if only to a prima facie standard,” Sir Ian ruled. He cited ArawakX’s draft financial statements, including the $2.3m negative equity that had risen “substantially” from a negative $551,000 in 2021, and the “major net loss” of $1.75m for that year. This had “grown by two times” compared to 2021’s $909,000 loss.

ArawakX’s $200,000 income was only sufficient to pay its rent, and no other operating expenses, while the raising of $1.9m from investors had not been approved by the Securities Commission. Accounts payables had risen by 1,032 percent; additional debts of $500,000 were identified; there were insufficient assets to meet all debts; and some investors and staff had been unable to receive refunds and salaries, respectively.

Sir Ian said he rejected arguments by Khalil Parker KC, ArawakX’s attorney, that “there was no acute risk of mismanagement or misconduct” if a provisional liquidator was not appointed, because “the Commission has made out a case that there have been numerous breaches by the company of the provisions” of the Securities Industries Act, accompanying regulations and crowd-funding rules.

He added that these had occurred at the hands of ArawakX’s management and directors, and it was “noteworthy” that some of these breaches “warrant criminal penalties”. Sir Ian said: “In all the circumstances, I am satisfied that there is a prima facie case for the making of a winding-up order and that the appointment of a provisional liquidator is necessary to prevent the dissipation or misuse of company assets.”

It was also necessary “to prevent mismanagement or misconduct on the part of the company’s directors”, and Sir Ian ruled: “Continued control and involvement of the directors and management ought to be arrested, and a provisional liquidator installed, until the hearing of the winding-up petition which may result in the condemnation or vindication of their actions.”

Michael Scott KC represented the Securities Commission.