IDA, BCSC and RS fine Union Securities $1.77-million
April 18, 2006
The B.C. Securities Commission, the Investment Dealers Association and Market Regulation Services, in a three-pronged regulatory action, have levied a combined $1.77-million in penalties on controversial Vancouver brokerage Union Securities Ltd. and its three top officers, John Thompson, Rex Thompson and Norm Thompson.
The brokerage's sins range from supervisory problems in Vancouver, Calgary and Toronto to a 47-per-cent deficiency rate in its order tickets.
The IDA has also permanently banned John Thompson, Union's chief executive officer, from serving as an ultimate designated person. The penalties were contained in three settlement agreements made public Tuesday. Union, owing to its co-operation with investigators, dodged more severe fines.
The extensive allegations do little to help Union's already tarnished reputation. In the three settlements, Union admits to at least 13 examples of misconduct.
The most glaring example, used by the BCSC, is 40 shady U.S. clients Union served between 1999 and 2001. The description does not quite fit the typical investor pictured in brokerage advertising.
The clients traded heavily on the barely regulated OTC Bulletin Board, they usually paid full commissions for execution-only services, their trades made no economic sense and they often wired money straight to third parties. Most of the clients had no geographic connection to Vancouver, and they seldom met their brokers.
Four Union brokers, including in-the-news Trevor Koenig, served the clients. Mr. Koenig, who worked at Union's White Rock branch, pled guilty in 2001 to fraud in the United States for helping Mafia-linked promoter Edward Durante make $36-million (U.S.) manipulating three OTC-BB companies.
After Mr. Koenig went to jail, the IDA told Canadian brokerages they could no longer serve U.S. clients without registering in the client's jurisdiction. Union, with three brokers relying on U.S. trades for over half of their commissions, quickly did an end-run around that rule.
According to the IDA settlement, Union told its U.S. clients to set up holding companies in the Yukon, where the government would let anybody set up a holding company, even non-residents. Using the Yukon companies as fronts, the clients continued doing business at Union.
The IDA settlement also has Union trampling on new rules in the U.S. to combat naked shorting. Starting in January, 2005, any brokerage shorting in the U.S. had to meet tougher requirements to ensure shares could be borrowed to cover the short.
The idea, it seems, was to make it harder for potentially abusive naked shorting by requiring brokerages to do a "locate" on shares to cover. The IDA identified several companies, trading on the OTC-BB, where Union did not do a proper locate.
If the brokerage's Vancouver troubles were not enough, the IDA also identified supervision problems at the brokerage's Calgary and Toronto offices. In one example, Union failed to supervise a Toronto broker in 2001 who was supposed to be under strict supervision -- his credentials included a garnishee order and several lawsuits.
In spite of the strict supervision, Union admits nobody noticed six months of unauthorized trading on one account.
In another fail-to-supervise example, a Calgary broker invested two unsophisticated clients, a flight attendant and a project manager, in high-tech options. They lost a combined $71,000 (U.S.) over two months while the broker made $2,900 in commissions.
The IDA says the penalty would have been much higher if Union did not co-operate with the court-appointed monitor the regulator secured last summer. The IDA brought in the monitor to correct a "culture of indifference toward compliance issues."
Although the monitor's initial job was done last December, Union has agreed to three more years of regular compliance checkups from the monitor, with the brokerage footing the bill.
The IDA fined Union $1-million. The BCSC fined Union's three top officers, John Thompson, Rex Thompson and Norm Thompson, a combined $625,000.
Rounding out Union's day of settlement, Market Regulation Services fined the brokerage $150,000 for a messy trail of paper tickets. According to RS, 47 per cent of Union's tickets were deficient in one way or another in 2003. For example, 15 per cent were missing a volume and 19 per cent were missing the price.
By 2005, with some prodding from RS, the figure improved to 28 per cent.
The settlements wrap up one of the most extensive, co-ordinated operations undertaken by B.C.'s three stock market regulators.
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