A pump-and-dump scheme straight out of a textbook; B.C. Securities Commission issues sanctions on a cut-and-dried case of market manipulation
19 March 2015
The Globe and Mail (Breaking News)
Where stocks are frequently traded in liquid markets, making money on them requires a super-power that probably doesn’t exist. To make money (consistently, that is) in Google stock, you’ve got to be better at analyzing information about Google than thousands of highly paid analysts and traders who themselves can’t beat each other consistently. And if you find someone who has this power, it will cost you a lot of your money to have them invest it for you. And you probably haven’t found them. If you don’t want to believe me, believe Cliff Asness and John Liew (http://www.institutionalinvestor.com/Article/3315202/Asset-Management-Equities/The-Great-Divide-over-Market-Efficiency.html).
Alternatively, you could find a stock that is lightly traded, round up a bunch of buddies, buy a large position in that company, trade that stock amongst yourselves to push up the price, then find someone who will buy the artificially inflated stock and book a flight to Mexico.The last part of that plan I heartily recommend, because if you stay in Canada, you’re going to get hammered by our securities regulators. Just ask Thalbinder “Thal” Poonian and his coterie of affiliates (http://www.canlii.org/en/bc/bcsec/doc/2014/2014bcseccom318/2014bcseccom318.html) who got hammered by theB.C. Securities Commission to the tune of about $28.5-million – that’s the roughly $7-million they made, and another $21.5-million in sanctions, or three times their initial profit – and received permanent trading bans.
My colleague Janet McFarland wrote about the decision back in September (http://www.theglobeandmail.com/report-on-business/industry-news/the-law-page/five-investors-manipulated-share-prices-bcsc-rules/article20519867/) when it first came down, and on Wednesday the BCSC announced its sanctions against the defendants. Market manipulation cases happen so infrequently that it’s worth taking a closer look at this one, if only because it’s basically the platonic ideal of a manipulation case – buy stock, create the illusion of value, dump stock – and a great example of why, for all the talk of price discovery and efficient markets I often engage in, securities laws matter in a very concrete way.
Phase one of Mr. Poonian’s plan was to accumulate a position. Mr. Poonian and his compatriots began accumulating stock in OSE Corp, a TSX Venture listed company back in 2007. From May 2007 to December 2007, Mr. Poonian, his family and related individuals and companies acquired 88.3 per cent of OSE’s shares through open market acquisitions and private placements. During this period, excluding the private placements, OSE shares were traded a grand total of 75 times at an average price of about $0.26.
The next phase of the plan was to use that position to push up the price of OSE’s stock. During that period – which lasted for about two weeks between December 20, 2007 and January 2, 2008 – parties related to Mr. Poonian constituted 81 per cent of the OSE shares traded. They conducted numerous trades, often through disguised vehicles, where related parties were on both sides of the trade (a “wash trade”) and would trade frequently during the last thirty minutes of trading. Amazingly, from the start of the period to the end, OSE shares increased in value by 417 per cent to $1.21 without the company disclosing any material information.
This is where you kind of have to admire the long game of Mr. Poonian and company. The ‘dump’ took a longer period of time. From January 2008 to March of 2009, they executed a patient but straightforward strategy of buoying up the price of OSE’s shares and gradually selling them off. Over the course of the period, Mr. Poonian and his affiliates’ trades were on 65 per cent of all buy volume and value and about 90 per cent of all sell value and volume. That amounted to buys of about $18-million and sells of about $25-million for a tidy profit of just of $7-million. All the while, Mr. Poonian continued his strategy of pushing up the stock price through wash trades and by fostering misleading trading activity.
To use an old adage in a slightly bastardized way, that’s $7-million made off stock that wasn’t backed by much more than the clear blue sky (http://en.wikipedia.org/wiki/Blue_sky_law).
Now, you can’t make $7-million selling to yourself. You have to make $7-million by selling to a third party who has fallen for your ruse. And who did Mr. Poonian sell his shares to?
Oh, obviously the clients of a company that “helps” people in financial distress access funds in locked-in RRSPs and retirement accounts. In this case, Phoenix Credit Risk Management Consulting Inc. and its related companies. During 2008 and 2009, Mr. Poonian and his affiliates paid commissions totalling around $2.5-million to Phoenix who then arranged for its clients to buy OSE shares at a price often dictated by Mr. Poonian himself. On March 31, 2009, OSE’s share price was $0.08, down from a high of around $2.99 per share, all without any material disclosure.
This is terrible and flatly illegal.
Legally, Mr. Poonian’s actions were market manipulation by every measure. The basic test of whether Mr. Poonian created a misleading appearance of trading activity, and an artificial price for, the OSE shares was an easy pass.
There are ostensibly a lot of villains in financial markets, – HFTs who “front run” trades, skinny quants in front of glowing screens in dark rooms who conjure up complicated derivatives, amoral insiders who trade on material non-public information – but mostly, the world isn’t so Manichean. All these things have their defenders — high frequency traders add liquidity, derivatives allocate risk, and even insider trading has its proponents (http://reason.org/news/printer/-7256) who trumpet its price discovery property. The debate over these rules takes place at a higher level and tends to be more rarified. A case like Mr. Poonian’s is a way to remember that securities laws really can be watching out for investors: they protect people from being defrauded.
Here, the victims are obvious – financially unsophisticated people in desperate straits – and the harm from the violation is very direct. Someone took advantage of them through an elaborate lie and it cost them money. They were exactly the kind of people that securities laws are meant to protect.
As for Mr. Poonian, the BCS-proclaimed “mastermind” behind this scheme, and his compatriots, they couldn’t have set up a more textbook market manipulation scheme. For all my talk of super-powers earlier in this piece, it seems that Mr. Poonian lacked a more basic power: the willingness to read securities laws.
BCSC sanctions pump-and- dump traders; Don Cayo: Five people receive total of more than $28 million in penalties, market bans
19 March 2015
The B.C. Securities Commission has handed more than $28 million in penalties to five British Columbians for committing what it characterized as a sophisticated pumpand-dump stock manipulation whose victims included the financially strained clients of an Ontario debt settlement company.
In a decision released Wednesday, a panel of the commission ordered that the five individuals pay back $7.33 million in net proceeds from the share sales and $21.5 million in fines starting with $10 million to the purported “mastermind” of the scheme, former junior mining executive Thalbinder Singh Poonian.
Poonian said he plans to appeal the decision to B.C. Supreme Court, arguing the process of the proceedings was unfair.
The scheme, the decision said, took place between 2007 and 2009 and involved acquiring the majority of shares in Ontariobased OSE Corp., a TSX-Venture-Exchange-listed junior energy company, trading the shares between their accounts and those of secondary nominees recruited for the venture to inflate their value, then selling them off to unsuspecting investors and allowing the price to collapse.
The liability decision said many of the buyers were the financially distressed clients of Richmond-Hill based Phoenix Credit Risk Management Consulting Inc., who the commission estimate lost $7.1 million in the scheme.
In its decision on liability, the panel concluded that Poonian played a key role choosing OSE as a company, arranging to acquire control of a majority of shares and engaging in trading of those shares through his accounts and those of others.
“His conduct was the most egregious and the administrative penalty against him should reflect this and his leading role in the manipulation,” the commission panel concluded. The panel also fined Poonian’s wife Shailu (Sharon) Poonian, Robert Joseph Leyk and Manjit Sihota each $3.5 million and Perminder Sihota $1 million in the scheme, saying that the penalties imposed “must be sufficient to ensure that the respondents and others will be deterred” from similar behaviour.
It also banned all five participants from acting as a director or officer, or serving in any capacity for any issuing company in B.C., with one exception.
Manjit Sihota was allowed to remain a director of Richmond Plywood Corp. Ltd., an employee-owned firm that is not a share-issuing company, as long as it remains a non-issuing company.
However, Poonian argued that neither he nor his wife, nor any other participants, made any money from the scheme and that he wasn’t given full disclosure of the evidence that the BCSC held in the case.
On Feb. 26, Poonian won a ruling that the BCSC must disclose by April 10 most of the documents he is looking for.
The commission had argued they weren’t relevant to its prosecution and was overruled in its argument it didn’t need to release them under provisions of litigation privilege.
“My argument from Day 1 has been that they’ve yet to put forward a single complaint from any stakeholder of OSE (or other companies) I was involved in,” Poonian said.
The complaints, he said, were from other regulators – the Ontario Securities Commission and the Investment Industry Regulatory Organization of Canada, the disciplinary body for stockbrokers.
Included in the evidence at the BCSC hearing was a 2011 settlement agreement between the Ontario Securities Commission and principals of Phoenix in which they acknowledged recommending that clients buy shares in OSE and another company, for which Poonian paid commissions of between 10 and 28 per cent. The Phoenix principals and their companies were ordered to pay $3 million in penalties in the case.
It was that pool of investors that make the OSE case stand out, said Teresa Mitchell-Banks, the BCSC’s director of enforcement.
Unlike other pump-and-dump manipulations that involve significant promotions, she said, Poonian had a “readyto-go pool of investors” with Phoenix.
“Rather than just unload (OSE shares) into the market, they had a pool of victims, which Phoenix facilitated the selling (of),” Mitchell-Banks said.
In the settlement agreement, the Phoenix principals said part of their business involved helping people unlock RRSP funds to pay off debts.
And in some cases where clients had some funds left over, Phoenix representatives recommended they buy shares in Poonian’s companies – OSE or Great Pacific International.
Mitchell-Banks said those “already financially compromised clients just took a terrible financial beating.”