U.S. judge approves but critiques SEC's 'phantom' deal with bank

September 28, 2016 1:28 PM EDT

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By Nate Raymond

NEW YORK (Reuters) - The U.S. Securities and Exchange Commission on Wednesday won approval of a settlement with failed Cayman Islands-based Caledonian Bank Ltd, despite criticism by a federal judge of the regulator's handling of the case and of the accord itself.

U.S. District Judge William Pauley in Manhattan questioned whether the SEC's $25 million settlement with Caledonian was in the public's interest, given that the regulator had turned that sum into a "phantom judgment" by waiving payment.

Pauley, who has previously scolded the SEC for blunders that triggered the bank's collapse in February 2015, said the settlement "raises many questions," including how victims would benefit from the non-monetary accord.

But Pauley noted the ability of judges to block regulatory settlements was narrowed in 2014, when an appeals court voided a judge's rejection of a $285 million accord between the SEC and Citigroup Inc.

"For better or worse, the public's interest in 'knowing the truth' behind a litigation is not to be considered to evaluate the decree," Pauley wrote.

Neither the SEC nor Caledonian's lawyer responded immediately to requests for comment.

The SEC in 2015 sued Caledonian and three broker-dealers in Belize and Panama, accusing them of offering and selling unregistered penny stocks to investors through several "pump-and-dump" schemes.

The SEC obtained an order freezing their assets, resulting in nearly $76.7 million in Caledonian's U.S.-based accounts being frozen.

Pauley said it later turned out Caledonian had received only $1.4 million in connection with the alleged schemes. The SEC discovered the disparity soon after getting the freeze order, but failed for months to tell the court, he said.

In the interim, a run on the bank occurred, and Cayman Island authorities placed it into liquidation.

The SEC and Caledonian's liquidators subsequently negotiated a settlement in which the defunct bank would be enjoined from future U.S. securities law violations and would forfeit $25 million, for which the regulator would waive payment.

Pauley approved the deal despite calling that arrangement "seemingly illusory" and "somewhat of a legal fiction." He also said the proof the bank exercised control over the alleged pump-and-dump scheme was "relatively thin."

His ruling on Wednesday came after months of scrutiny by Pauley, who at one point in April questioned whether the $25 million would be included SEC's end-of-the-year statistics. The SEC later told Pauley it would not.

The case is Securities and Exchange Commission v. Caledonian Bank Ltd. et al, U.S. District Court, Southern District of New York, No. 15-00894.

(Reporting by Nate Raymond in New York; Editing by Alan Crosby)



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