Subscribe now & get informed!
Browse by Categories
News Details
* Officials hit offshore bank with cease-trade orderAccording to the commission, an account opened by Hypo Alpe-Adria-Bank (Liechtenstein) AG at Gateway Securities has been selling large amounts of an OTC Bulletin Board stock, which has been indiscriminately hyped over the Internet.
The action, part of the commission's campaign to curb illicit bulletin board activity in B.C., reopens a long-running controversy over whether brokers should be required to determine who beneficially owns accounts run by offshore banks.
The OTC Bulletin Board is a quotation system run by the National Association of Securities Dealers in the United States. It has little oversight, making it an attractive forum for scurrilous promoters who often use offshore banks to hide their share dealings.
On Thursday, the commission issued a temporary cease-trade order against Hypo bank, alleging that its account at Gateway Securities was being used to dump shares of a bulletin board stock that was being hyped by spam.
The name of the stock was not identified. Lang Evans, the commission's director of enforcement, said the name would likely be released at a hearing Sept. 11.
Reciting the events that gave rise to its concern, the commission said that from April 18 to May 31, Gateway executed trades for the Hypo account in shares quoted on the bulletin board and the "pink sheets," another U.S. over-the-counter market that has even lower standards than the bulletin board.
On May 16 and 17, e-mail spam identifying the bulletin board stock as a security that was "getting ready to make a run for the top!" was sent over the Internet.
Trading volume in that stock jumped from 34,250 shares on May 16, to 1,140,000 shares the following day. The Hypo account accounted for 28 per cent of trading volume on this day, the commission said.
Of the different stocks that changed hands that day, 12 per cent were the subject of spam, and 86 per cent of the transactions in those stocks were sales.
"The high volume of sales of spammed securities from the account is a potential indicator of selling into a market manipulation," the commission alleged.
The commission said that, after being approached by commission staff, Gateway agreed to suspend trading in the account.
Hypo, which also operates accounts at other B.C. brokerage firms, claimed that because of Liechtenstein banking laws, it was unable to provide the names of beneficial owners.
The commission said that, without knowing their identity, it is "unable to effectively investigate whether the beneficial owners have engaged in illegal activity."
Also, without knowing the beneficial owners, brokerage firms that are operating the accounts "are unable to fulfill their 'know your client' obligations" as prescribed by the Securities Act and the Investment Dealers Association of Canada.
The Securities Act states that brokers must "learn the essential facts relative to every client, including the identity, credit worthiness of the client, and the reputation of the client if information known to the registrant causes doubt as to whether the client is of good business or financial reputation."
However, this requirement does not apply if the broker "executes a trade on the instructions of a dealer, portfolio manager, investment counsel, bank, trust company or insurer and is reasonably satisfied that the person giving the instructions is authorized to carry on business" in that capacity.
This means that a broker who is running an account for a widely held mutual fund, for example, does not have to disclose the identities of each mutual fund holder. But it is less clear whether a broker has to learn the identity of an offshore bank that is dealing suspicious bulletin board stock.
The IDA has a similar rule, as well as a policy stipulating that brokerage firms must install a compliance system "to detect account activity that is or may be a violation of applicable securities legislation."
In a 2000 case involving Vancouver broker Jean Claude Hauchecorne, who was running accounts for a controversial Swiss bank called Anker Bank, the commission ruled that brokers must look "behind any corporate veil to determine who has a financial interest in the account."
The ruling dismayed several Vancouver-based brokerage firms, who argued that a rule requiring corporate clients to disclose their beneficial owners would be impractical and deter international investment in the B.C. securities market.
The issue was deferred, and there has still been no definitive ruling on the matter, perhaps because the issue is better handled on a case-by-case basis.
It is clear, however, that the commission is pressing the issue as it relates to OTC stock dealing. In June, BCSC chairman Doug Hyndman proposed a five-point plan to curb illicit bulletin board activity. One of those points was a new compliance system for dealers who trade on the U.S. OTC market.