Canada’s regulator of stockbrokers is appealing a Vancouver hearing panel decision that has tested the scope of so-called “gatekeeper” guards against fraud and stock market abuse.
The Canadian Investment Regulatory Organization (CIRO) has filed a request for review with the 小蓝视频 Securities Commission (小蓝视频SC) in the matter of registered stockbrokers Teymur Englesby and Cale Nishimura of PI Financial Corp., now known as Ventum Financial Corp.
The July 22 panel exonerated Englesby and Nishimura of allegations by CIRO’s enforcement division that they had failed to fulfill their roles as gatekeepers to the capital markets.
The allegations largely concerned how Englesby and Nishimura facilitated penny stock transactions, between December 2017 and October 2018, for West Vancouver resident Cameron Paddock and others, who allegedly participated in a consultant scheme abusive to the capital markets.
CIRO’s enforcement division launched its own investigation in 2019 after receiving information of the 小蓝视频SC’s investigation into of a group of entities known collectively as the Bridgemark Group.
The alleged scheme saw dozens of “purported consultants” buy over $50 million worth of newly issued shares from low-value, non-revenue-producing public companies listed on the Canadian Securities Exchange (CSE) via private placements, while simultaneously obtaining lucrative consulting contracts. The commission alleged consultants did little to no work and quickly sold those shares, via stockbrokers, to retail investors.
The scheme, as alleged, resulted in a class action lawsuit from retail investors against numerous 小蓝视频SC respondents, in addition to the companies, resulting in settlements and ongoing negotiations.
And while the commission dropped many allegations, it reached several administrative settlements with key respondents, including Paddock, who admitted to insider trading and conduct that was “abusive to the capital markets through a pattern of acquiring and then selling shares of companies for which he was acting as a consultant.”
The CIRO enforcement division alleged in a hearing notice that Paddock, among others, used the services of Nishimura and Englesby to deposit company shares and withdraw money via trading accounts.
CIRO alleged the duo “facilitated activity for several accounts … which generated a number of indicators or red flags which suggested that the accounts may have engaged in suspicious activity.”
One red flag was uneconomic trading, CIRO stated.
The hearing notice stated Paddock and Cameron Paddock Corp. conducted uneconomic trading of eight companies, with the largest loss ($751,076) coming from trading shares of Beleave Inc.
Beleave Inc. and the 小蓝视频SC reached a non-monetary settlement June 5, 2019 in which Beleave admitted it sold $10 million of shares through two private placements while “returning $7.5 million through prepaid consulting fees to the placees, a group of purported consultants (the Purported Consultant Group) who provided no consulting services.”
At the hearing, a CIRO investigator noted Englesby and Nishimura told them in a pre-hearing interview that they did not monitor Paddock’s accounts for “uneconomic trading,” despite the investigator calculating Paddock’s trading losses amounted to $1.8 million in a matter of months.
The quick sale of private placement shares, followed by large withdrawals of the proceeds and coupled with activity out of line with historical client activity, was another red flag for Englesby and Nishimura, CIRO claimed.
As well, Englesby and Nishimura told investigators they did not review CSE Form 9 documents, which include relevant information about the private placements, such as the buyers, the number and price of shares, purchasing exemptions and relationships to the company.
If Englesby and Nishimura had reviewed these documents, CIRO argued, they could have been more informed to ask questions about the transactions.
“By not asking such questions and by simply executing the client’s sell orders, it is alleged that the respondents failed to fulfil their roles as gatekeepers to the capital markets,” CIRO alleged.
CIRO’s enforcement division ultimately sought sanctions against Englesby and Nishimura, including a possible reprimand, fine, suspension, prohibition and/or disgorgement of the $147,081 that went to PI Financial Corp.
But at the hearing, PI Financial Corp.’s vice-president of compliance, corporate secretary and chief compliance officer Richard Thomas testified that the stockbrokers’ primary responsibility is to deal with Know Your Client (KYC) matters involving their clients.
Thomas told the panel that, “in the KYC context,” stockbrokers have a responsibility to identify suspicious activity, and what is considered to be suspicious “can be very subjective,” according to the panel’s written decision summarizing Thomas’ testimony.
Thomas relied on the obligations laid out in his firm’s manual for stockbrokers that instructs them to “be aware of client trading activities which might be in breach of securities law or impinging the integrity of the capital markets.”
And, Thomas noted, “such trading activities were not referenced in the statement of allegations and that the red flags set out in the statement of allegations were not related to market manipulation or insider trading.”
Nor did the allegations cite money laundering as a red flag, which is also in the PI manual, Thomas noted.
Thomas also told the panel it is not uncommon for investors to divest of entire shareholdings. Thomas said stockbrokers (at least those at PI Financial/Ventum) are only to confirm the validity of the ownership of shares “and not to inquire with the client as to the origin of the shares, when they were acquired or their acquisition price.”
Thomas also stated that “it was not unusual for consultants to receive shares in the companies for which they were consulting and then to sell these shares into the market.” (The Bridgemark Group case saw consultants buy shares in private placements, via exemptions, while being awarded cash contracts—not shares—for purported consulting.)
Furthermore, Thomas said reviewing Form 9 documents is not an obligation for his stockbrokers and Thomas “testified that he had only once reviewed a Form 9 during his years in the investment industry.”
CIRO’s enforcement division in turn took a different view of Thomas’ views on gatekeeper interpretations.
The hearing panel’s decision noted that the CIRO enforcement division characterizes a stockbroker’s obligation to act as a gatekeeper as “broad in scope.”
The panel also stated that counsel for the enforcement division, “as a specialized tribunal having heard all the evidence in this matter, is in much better positioned than PI’s CCO to determine if the evidence before the panel amounted to an obligation on [Englesby and Nishimura] as gatekeepers to ask the relevant questions.”
What makes this exchange of facts and opinions unique is the many hats Thomas wears, including with respect to CIRO enforcement and policy.
In addition to his longstanding executive role at PI Financial/Ventum—dating back to 2003 when he became president of the brokerage—Thomas is chair of the CIRO Pacific Regional Council. He is also a member of the CIRO National Hearing Committee, and is listed as an adjudicating member on CIRO hearing panels for the Pacific district.
For example, on November 5, 2021, Thomas was one of three hearing panel members who signed off on a settlement agreement with stockbroker Larry Martin, who admitted to facilitating unprofitable transactions involving millions of dollars’ worth of shares of companies linked to the commission’s Bridgemark Group consulting case.
In conclusion, Martin’s settlement agreement stated that he “had the primary gatekeeper responsibility to question any activity that may be regarded as suspicious and to obtain reasonable explanations to satisfy himself that the activity was legitimate.”
Martin agreed to pay a $50,000 penalty, $20,000 in costs to the regulator and $32,000 as disgorgement of commissions he earned from his brokerage firm Leede Jones Gable Inc., which was fined $150,000 last February for failing to “adequately supervise” Martin.
CIRO has, notably, reached two other settlements with 小蓝视频 stockbrokers who transacted for Bridgemark Group respondents.
Tiffany Sweeney of Research Capital reached a settlement with the Investment Industry Regulatory Organization of Canada (IIROC) in September 2022, after admitting she “failed to fulfill her gatekeeper responsibilities” and “communicated with her clients using unapproved third-party communication applications” contrary to rules. Sweeney was suspended for one month and paid a $50,000 fine.
A CIRO hearing panel also approved a settlement agreement between the regulator and broker Robert Barber of Research Capital on May 26, 2023. Barber failed his gatekeeper role working for Aly Mawji, who was sent to prison in Germany in 2012 after his well-publicized role in manipulating De Beira Goldfields Inc. stock.
Returning to the case against PI Financial Corp. stockbrokers, the hearing panel ultimately ruled in favour of Thomas’ colleagues.
“It is clear to the panel that what is required of it in making its decision is to firstly define the gatekeeper obligation which was facing” Englesby and Nishimura.
But the panel never did this.
Instead, it ruled there were no “triggering events,” which should have reasonably raised a concern in transactions handled by Nishimura and Englesby.
As an example, “there is no evidence before the panel to suggest that [Englesby and Nishimura] had an obligation to investigate the relevant Form 9s to determine this cost base prior to enabling the trading of these shares,” the panel stated.
In other words, the panel sided with Thomas’ assertions, and not the broader scope of gatekeeper duties the CIRO enforcement division had envisioned.
Glacier Media contacted Thomas to get a clearer understanding on this case and other cases related to Bridgemark Group, including that of Martin. Glacier Media also reached out to Thomas for a clearer understanding of the intersecting roles he plays with CIRO, which is an industry-governing regulator with arms-length oversight from the commission.
Thomas said he would let his testimony speak for itself, noting he was presenting the facts from PI Financial’s policies and his experience.
As for how the PI Financial case has differed from others related to Bridgemark Group, Thomas said, “there’s very little connection between those two types of cases” and “the relevance of settlements is quite limited to cases where there’s a full hearing of the facts and arguments with respect to the application of those facts to regulatory liability.”
Thomas said comparisons can’t be drawn.
“That’s the challenging part with settlements versus a fully canvassed hearing.”
As for how Thomas managed his own testimony in front of hearing panel colleagues, he said: “What discussions I had or didn’t have I’m not going to talk about those at all.”
Thomas noted CIRO staff did not challenge his participation before the hearing panel.
