Failure to act as a gatekeeper ends in more than $100,000 in fines

In a recent settlement agreement between the Investment Industry Regulatory Organization of Canada (IIROC) and Vancouver, British Columbia based registered representative, Larry Martin, the regulator levied sanctions of $82,000 plus costs in the amount of $20,000, after Martin admitted that he failed to properly performs his role as gatekeeper to the capital markets.

Specifically, Martin is accused of failing to monitor corporate investment accounts he was responsible for servicing after the accounts generated a number of red flags indicating the account holders may have engaged in activity that was suspicious.

Registered in the securities industry since 1984, Martin has worked at Leede Jones Gable Inc. as a registered representative, executive and director since 2004. IIROC formally initiated an investigation into Martin’s conduct in November 2018.

Foreign jurisdictions 

In addition to the red flags – the accounts in questions had foreign jurisdictions associated with them, large numbers of shares were deposited to the accounts and sold shortly thereafter, the trading was unprofitable and the value of assets held in the accounts was often significantly higher than the asset disclosure value listed on client account forms – the IIROC settlement agreement also states that a number of inquiries from the firm’s compliance department, at a minimum, should’ve caused Martin to question the clients about activity in the accounts.

In just one instance, an account’s client was a holding company incorporated in the Marshall Islands with a corporate mailing address in the United Kingdom, a corporate bank account in St. Vincent and the Grenadines, all while the client in question was a Canadian citizen who resided in the Czech Republic. Another account was held by an equity investment holding company incorporated in Hong Kong with a financial institution in St. Vincent and the Grenadines. The client associated with the “K Account” was a citizen of Switzerland, while the president of “K Ltd.” was RW – the previously mentioned Canadian citizen who resided in the Czech Republic. 

Selling shares immediately upon receipt 

In these accounts and others, a large number of shares listed on the Canadian Securities Exchange and the OTC Markets Group in the United States were deposited into the corporate accounts, often by way of physical share certificates. Generally the accounts sold or attempted to sell the shares immediately upon receipt. Overall, each of the accounts in question lost significant money on the sales. Shortly after the shares were sold, all or most of the proceeds would be transferred out of the corporate accounts. 

Other red flags included the fact that in a number of instances, the same issuers were being deposited to the corporate accounts around the same time. Where new client account forms indicated liquid assets of just $50,000, in one instance more than $800,000 was transferred out of the account.

Another account, dubbed the CMGT account in the IIROC settlement agreement, was held by a company incorporated in the Cayman Islands. Although Martin believed the CMGT was Oliver-Barret Lindsay’s personal holding company, the company was in fact a Cayman Islands-based broker dealer which Lindsay owned. From June 2016 to July 2018, $30,000 USD was deposited into the account, while nearly $5.5-million USD was withdrawn. Where the client’s account opening forms stated estimated net liquid assets of $2-million, the account was known to hold more than $14-million at times. On July 13, 2018, the U.S. Attorney’s Office of the Southern District of California announced that Lindsay, along with Gannon Giguiere had been indicted by a federal grand jury for securities fraud. Lindsay pled guilty to a charge of conspiracy to commit securities fraud and manipulative trading. To date, he has not been sentenced.

“As the responsible registered representative for the corporate accounts and the CMGT account, Martin 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,” the settlement agreement states. “By failing to make further review and investigation, Martin failed to fulfill his gatekeeper responsibilities.”