A case before Canada’s regulator of stockbrokers in 小蓝视频 has a prominent stock market observer “baffled.”
Former Vancouver Sun business columnist David Baines says he was surprised to hear 小蓝视频 stockbrokers, who may trade large amounts of high-risk shares of penny stock companies, appear not to be routinely checking private placement disclosure forms as part of their due diligence obligations.
Those forms — known as Form 9s — listed the names of every person or company that bought stock directly from the company. They also disclosed how much stock the purchasers bought and at what price.
Until 2018, the Canadian Securities Exchange (CSE) required issuing companies to file these forms, which were publicly disseminated. This disclosure has since been curtailed. The 小蓝视频 Securities Commission (小蓝视频SC) had a similar requirement — on what was called Form 20s — but that disclosure has also been restricted, ostensibly for privacy reasons.
“Form 9s and form 20s were always the starting point for any serious investigation. That’s why I complained so bitterly when both the 小蓝视频SC and the CSE decided to withhold this information from public view," Baines told Glacier Media in an interview.
As a columnist for the Vancouver Sun, Baines covered the 小蓝视频 junior stock market for 25 years and won many national and local awards for his coverage, which included many articles stressing the value of private placement disclosure.
However, a Canadian Investment Regulatory Organization (CIRO) hearing panel, in a (now Ventum Financial) in Vancouver, dismissed the value of this sort of disclosure.
CIRO investigators alleged PI Financial stockbrokers Teymur Englesby and Cale Nishimura failed their roles as gatekeepers to capital market misconduct when they did not review Form 9s related to transactions of an alleged consulting scheme, from 2017 to 2018, orchestrated by a group the commission dubbed the Bridgemark Group.
The scheme, as alleged by the commission, saw consultants buy shares via private placements while the companies simultaneously handed back much of the money via consulting contracts. The issued shares were then sold to retail investors for a fraction of the private placement cost while the consultants did little or no actual work.
At issue is how CIRO investigators asserted stockbrokers ought to be reviewing Form 9 disclosures for public companies.
Had Englesby and Nishimura done so, CIRO investigators assert the two would have asked more questions of at least one client who was subsequently found, via a settlement, to have committed insider trading and abuse of the capital markets.
The forms, CIRO investigators argued, could have led to a finding that the consultants were engaged in uneconomic trading — a red flag.
The hearing panel decided otherwise, last June, largely on the testimony of Richard Thomas, PI's chief compliance officer.
Thomas told the panel that the two brokers were not obliged to review the Form 9s and he himself had only once reviewed a Form 9 during his 20-plus years in the investment industry.
The hearing panel of John Rogers, Nigel Potts and William Wright sided with Thomas’ much narrower definition of stockbroker gatekeeper obligations, ruling the two brokers did not have a formal obligation to check the forms.
The panel noted that Thomas' opinion "might not be considered to be an unbiased observation," which Baines regards as an understatement considering Thomas is PI's chief compliance officer and was testifying on behalf of his two employees.
Baines also noted that Thomas also has several close professional connections to CIRO. He is chairman of the CIRO Pacific Regional Council and a member of the CIRO National Hearing Committee. He also serves as an adjudicator on CIRO hearing panels for the Pacific district.
Thomas previously told Glacier Media the panel nor CIRO counsel raised any concerns with his testimony wearing his hat as PI Financial CCO.
The panel members also weighed in with their personal views: "Based upon the Panel’s experience it is not common practice for registered representatives (stockbrokers) to conduct a review of relevant Form 9s prior to effecting the trading in the shares referenced therein,” they stated in their decision.
Baines said the panel’s statement is “completely unsupported as the panel gave no indication what their experience has been.”
Baines said he is surprised by the ruling because when the Bridgemark notice of hearing was issued, the first place he looked was the Form 9s.
“Form 9s were key to understanding how that scheme was structured. And here we have the panel dismissing their probative value and the head of PI compliance saying he only looked at Form 9s — and presumably the 小蓝视频SC Form 20s — on only one occasion. I am completely baffled by this."
CIRO counsel is now appealing the Englesby and Nishimura case before the 小蓝视频 Securities Commission.
The parties have until Dec. 23 to file submissions. The hearing is scheduled to start on Jan. 23, 2025.
