BCSC seeks information on San Telmo trading from LOM 2004-11-24 22:14 ET - Street Wire Also Street Wire (C-NCR) Northern Continental Resources Inc
Also Street Wire (C-STU) San Telmo Energy Ltd
by Stockwatch Business Reporter The British Columbia Securities Commission heard submissions from staff and the respondent's lawyers in the matter of the non-compliance of LOM (Holdings) Ltd. and Lines Overseas Management Ltd. (collectively, LOM) in a BCSC investigation into an odd trading pattern in San Telmo Energy Ltd. in 2002 and 2003. BCSC staff also mentioned that they would like to know who was behind some trading in Northern Continental Resources Inc., but no further mention of that company was made at the day-long hearing. The people The BCSC's notice of hearing was against LOM (Holdings), LOM Securities (Bahamas) Ltd., LOM Securities (Bermuda) Ltd., LOM Securities (Cayman) Ltd., Lines Overseas Management, Donald P. Lines, Brian N. Lines, Scott G.S. Lines, Malcolm Moseley, David McNay and J. Scott Hill. LOM (Holdings) is the parent company of all other corporate respondents, publicly traded on the Bermuda Stock Exchange. Lines Overseas Management takes care of all of the managerial support for the companies. Donald P. Lines is the chairman and a director of Lines Overseas, and was the head of the Bank of Bermuda for 20 years until he retired. He joined LOM in 1994. Brian and Scott Lines, the sons of Donald Lines, started LOM in 1992, and both still head the companies. Brian Lines is the president and a director, and Scott Lines is the managing director. Of the remaining individual respondents, Mr. Moseley is a director and chief financial officer; Mr. McNay is the vice-president of investment administration, and Mr. Hill is the vice-president of compliance. The effort Market Regulation Services noticed an odd trading pattern in San Telmo's shares, between Sept. 1, 2002, and March 28, 2003, done by LOM-owned accounts. The information was passed onto the commission, which started an investigation into the trading. During the relevant period, the LOM accounts accounted for approximately 15.5 per cent of the purchases and 35 per cent of the sales of San Telmo's shares; engaged in 11 trades between two LOM accounts; and were responsible for 20 per cent of the trading upticks. Because LOM is resident in Bermuda, the commission asked the Bermuda Monetary Authority (BMA), the regulator in that country, for its help in finding out who owned the accounts at LOM. When those demands were not met, LOM was sent an investigation order directly, in April, 2004. Sasha Angus, the commission's director of enforcement and presenting on behalf of commission staff, alleged that instead of helping, LOM whipped up a lawsuit and served it on the BMA to prevent the BMA from helping the BCSC. The reasonings behind the lawsuit, Mr. Angus said, was that LOM claimed under Bermuda laws, it could not give out the names of its clients. The United States Securities and Exchange Commission also launched an action against LOM, as detailed in Stockwatch on June 25, 2004. The BCSC filed its notice of hearing against LOM on June 1, 2004, and the process slowly wound its way to the hearing held Nov. 24 in Vancouver. The hearing Mr. Angus presented the commission staff's side of the story, assisted by Doug Muir. Nigel Campbell and David Gruber of Blake Cassels represented LOM. Mr. Angus stated that while LOM is based in Bermuda and has offices in the Bahamas and the Cayman Islands, it has a large presence in Canada, conducting approximately 10,000 trades totalling over 800 million shares in the last 12 months, in Canada alone, worth $1.2-billion, which constituted about 40 per cent of LOM's total business for the year. The way LOM acts, Mr. Angus explained, is that it is the legal owner of all its accounts, and the beneficial owner of the accounts are not disclosed. This makes LOM's clients opaque, through the secrecy laws in the Caribbean countries, making the system perfect for those who wish to hide their activities. Mr. Angus directed the panel to an affidavit sworn by Alan Costin, an investigator with the BCSC. In it, Mr. Costin described how he looked at LOM's documentation, and pointed to a paragraph in the company's 2003 financial statements. The company's auditor, PriceWaterhouseCoopers, stated in its letter prefacing the financial statements, that it was unable to determine if the company's financial statements were presented fairly. "Management has advised us that the Company and certain members of management are subject to certain regulatory investigations and enquiries," the letter states, "from which the Company may become liable to monetary fines or other regulatory action ... The Company's legal counsel has advised that full access by us to all information would constitute a waiver of attorney/client privilege and such a waiver is not in the Company's best interests. Because of this we have been unable to obtain sufficient appropriate audit evidence to form an opinion with respect to the possible impact of any such matters on the consolidated financial statements." Panel chair Brent W. Aitken interjected into Mr. Angus's opening, asking if he knew who the shareholders of LOM (Holdings) were. Mr. Angus later stated that LOM (Holdings) is public in Bermuda, answering Mr. Aitken's question. Robert J. Milbourne and Roy Wares make up the remainder of the BCSC panel. Returning to his opening, Mr. Angus said that while, over the past year, the BMA and the Cayman Islands Monetary Authority (CIMA) have returned with information, LOM specifically has not complied. The BCSC should not have to go to another authority, which Mr. Angus described as time consuming and cumbersome, when the company is operating under the jurisdiction of B.C. Part of the conditions for the BCSC receiving the information from the BMA and the CIMA was that the information be considered confidential, and not shared with any third party without the consent of the organization. Mr. Angus added that the BCSC had received written approval by the Caribbean authorities to present the information in the public hearing on the matter. LOM provided the BMA with a sheet of trading activities, but each account was owned by an LOM subsidiary, not listing the beneficial owners. By Dec. 30, 2003, LOM had gone to the Bermuda courts, asking if the BMA had the authority to force LOM to give information to foreign authorities, namely the BCSC and the SEC. Mr. Angus stated that LOM was basically saying that it would not release client specific information, telling the BCSC what it was doing, but not what the clients were doing. That left the BCSC with no chance to see if insider trading is going on, no chance to see if the price of San Telmo was being manipulated, because no one would see the names. In the communication with the BCSC, LOM indicated that it would rely on the laws of where it was incorporated, namely Bermuda, not where it did business, in B.C. Mr. Angus made much of this comment, because in other documents, namely account opening forms for B.C. accounts, papers were signed indicating that LOM recognized that it was under B.C. law. On April 23, 2004, the BCSC issued an investigation order after LOM did not produce the documents. The order was aimed at San Telmo and the LOM companies, Donald Lines and other, including Janice Gurian and Philip Gurian, saying those individuals may have broken sections of the B.C. Securities Act. (Mr. Gurian, an alleged Mafioso, whose name has come up 209 times in the BCSC's just-completed hearing into Pacific International Securities, is also a target of the SEC, relating to his alleged trading through LOM of HiEnergy Technologies Inc.) After the BCSC issued the order, Mr. Campbell, LOM's lawyer, started communication with the commission. The LOM lawyer said that his client would contact its clients to ask them to respond to the BCSC order, to avoid breaking Bermudian laws. The BCSC did not want to allow that, because in an investigation, the commission wanted to avoid the possibility of collusion. By May 7, 2004, Mr. Campbell said that he was not going to comply on behalf of LOM, but he would ask the clients to comply, what Mr. Angus called "an intolerable state of affairs." Eight clients responded. Three accounts were held by LOM employees and one was an LOM corporate account. Mr. Angus then took the panel to a list of brokerage houses in B.C. where LOM had accounts. In accounts at Northern Securities, Raymond James, Union Securities, Research Capital and Desjardins Securities, LOM owned the account, but indicated that there was another behind-the-scenes owner. The same situation happened at Haywood Securities, although that account was run by Bolder Investment Partners for LOM. The account at Canaccord Capital was held by LOM alone. Another area of concern to Mr. Angus was that LOM had access to the TSX-V directly through a direct market access account with ITG Canada, under which LOM could and did trade directly, not bothering with a broker. Mr. Campbell later pointed out that LOM has not used that direct trading access since the beginning of the year. This is where Northern Continental comes in, as an RS representative contacted ITG asking for help in identifying the owner of 100,000 Northern Continental shares. The ITG representative forwarded the e-mail to Mr. Hill of LOM, who stated that LOM Cayman was unable to supply the name due to secrecy laws. The account was closed in 2003, and Mr. Hill assured the commission that the transaction looked all right to LOM. Mr. Angus said that any investigator would take small comfort in Mr. Hill's assurances. In the agreement with ITG, Mr. Angus pointed out that LOM listed itself as a mutual fund with net assets of more than $100-million, when in fact it was a broker. This allowed LOM to trade at will, essentially, as the only thing ITG kept an eye on was that no single trade exceeded more than $10-million. An ITG compliance officer described the deal as "quick and discrete," another phrase that disturbed Mr. Angus. LOM's side of the story Mr. Campbell's evidence focused on affidavits by Mr. Hill, one of which was sworn on Tuesday. He said he was concerned about the inclusion of the direct access for LOM, which he viewed as irrelevant. The issue before the panel was the non-disclosure, not the direct access. The issue at hand was if BCSC staff should be obliged to make regulator-to-regulator contact before making unilateral demands of LOM, in circumstances where the information being sought was resident in the Caribbean, where confidentiality obligations existed. LOM was put in the middle of a dilemma, for if it bowed to the demands of the BCSC, it was forced to breach laws of the home jurisdiction. LOM sought a middle way in the matter. Mr. Campbell then turned to an issue brought up by Mr. Angus, that Mr. Costin had received information from the regulators in Bermuda, the Bahamas, and the Cayman Islands, but had not yet reviewed the information. In Mr. Campbell's view, that was unsatisfactory, because it is quite possible that all the information the BCSC needs, it already has. As to the insinuations that LOM had been blocking the BCSC at every turn, Mr. Campbell said, "I do believe that when you look at the record, you'll see quite the opposite." He pointed to numerous communications between the BCSC and his office, over the past several months, as the spirit of co-operation LOM had in the matter. Mr. Campbell said that LOM is not the subject of an investigation. If the panel believed the innuendo that LOM was standing up to RS, or to the SEC, that was a smokescreen. It just happened that LOM had some offshore accounts and clients who were trading in San Telmo, and the BCSC needed that information. Mr. Campbell was there in one capacity: should LOM have provided the information, which was housed in the offshore jurisdiction? After lunch, Mr. Campbell said that his clients faced serious domestic sanctions if they give out the client identification information unilaterally, which is why he suggested contacting the LOM clients directly. He suggested an alternative, of applying to the courts in both countries, although he conceded that was a rather complicated route. However, it seemed unfair not to allow LOM an alternative to violating Bermuda law in order to satisfy B.C. law. After describing more of the details on communications between the BCSC and his office, Mr. Campbell ended his evidence by saying that there was no evidence that his clients had done anything wrong, regarding the trading of San Telmo, and asked the panel to remember that was what the hearing was all about. Reply Mr. Angus took "fundamental issue" with Mr. Campbell's comment that LOM was being unfairly targeted. The respondents were saying that it did not have to deal with B.C. laws, because it was based in a foreign jurisdiction. The BCSC wanted information from LOM directly, to avoid any conditions imposed upon it by the BMA. He then moved to the fact that only eight clients consented to release the information, which was his point, Mr. Angus argued. The BCSC needed trading information, and it would not be able to get that if the clients who would end up being targets of the investigation could hide themselves behind LOM. The way LOM was acting in B.C., having it act as the owner of local brokage accounts, while taking orders from clients offshore, made it impossible for the BCSC to regulate the trades. He added that the accounts' beneficial owners were hidden away, and the BCSC would have a very difficult time in maintaining its regulatory role over LOM. As sanctions, Mr. Angus said that staff were seeking an indication that LOM and the individual respondents would comply with B.C. laws in the future, and $100,000 in penalties for all of the corporate respondents, and $10,000 for each individual. Mr. Campbell replied that Mr. Angus seemed to be taking the panel off in the wrong direction, and brought the matter back to the notice of hearing once again. The proper method for not producing documents was to go to court, not a commission panel, Mr. Campbell argued, which BCSC staff had chosen not to do. The information had been produced by the Caribbean authorities, and Mr. Campbell said that was all the BCSC needed. Sanctions were not appropriate, Mr. Campbell said, as LOM was not the target of the investigation. The panel thanked each side for their submissions, and adjourned the hearing. The decision has been reserved. SEC's case The SEC itself sought information from LOM and Scott Lines in June of 2004. The SEC subpoenas requested that LOM hand over documents in connection with an SEC investigation into SHEP Technologies, HiEnergy Technologies Inc. and Sedona Software Solutions Inc., all at one time listed on the OTC Bulletin Board. The SEC initiated separate investigations on Sedona, SHEP and HiEnergy, looking for information about possible fraud and market manipulation. The Sedona investigation began on Jan. 29, 2003, and during the course of that investigation, SEC staff identified allegedly fraudulent activities in the securities of SHEP. The subpoena asked for information for each LOM account that bought or sold HiEnergy stock since Jan. 1, 2002, any Sedona stock since Jan. 1, 2003, and any SHEP stock since Dec. 1, 2001, as well as a myriad of account documentation. The SEC alleges that HiEnergy, unrelated to either Sedona or SHEP, was secretly controlled by Mr. Gurian, a name that has appeared in many Stockwatch stories and has been linked with the Mafia. The SEC court application was broken by David Marchant's Offshore Alert on June 11, 2004, one day after the SEC filed its application in court. LOM issued a press release on June 14, denying that it engaged in securities fraud as the SEC alleged. Under Bermuda laws, the company was prevented from providing information on its clients' trading activity. LOM pointed out that American courts "must respect the duties imposed by the laws of other nations, even smaller nations, and not unilaterally seek to enforce American administrative subpoenas against entities and persons in other countries." After considering all the evidence, on Aug. 17, 2004, a magistrate judge in the U.S. District Court for the District of Columbia ordered LOM to demonstrate why it and managing director Scott Lines should not be ordered to comply with the subpoenas served by the SEC. Regarding the reserved decision in the B.C. matter, there was no indication as to when it might appear. |
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