Vancouver-headquartered investment and brokerage firm Canaccord Genuity Group Inc. (TSX:CF) has agreed to pay a $2.85 million penalty for failing to fulfill its gatekeeper obligations in facilitating more than $779 million in penny stock transactions for a British company.
The Canadian Investment Regulatory Organization (CIRO) stated May 28 it had reached a settlement with Canaccord on May 16 through a hearing panel, which outlined the arrangements in a settlement agreement posted late last month.
In May 2021 Canaccord opened accounts for Crito Capital LLP, which was registered with the U.K.’s Financial Conduct Authority and associated with Crito Capital LLC, a broker-dealer registered with the U.S. Securities and Exchange Commission.
Crito’s primary business was buying and selling penny stocks on American over-the-counter markets for its underlying clients.
Between May 2021 to September 2023 Canaccord facilitated roughly 5,943 sells and 278 buys of which the bulk were trades on the Nasdaq or OTC markets, generating proceeds of approximately US$779,421,407 for Crito clients.
Canaccord received total commissions of US$4,762,737 for its services.
Canaccord became aware in November 2021 that Crito’s liaison to Canaccord, Stuart Jeffrey, was subject to an SEC complaint for unregistered trading via unregistered entity GEL Direct Trust, which Crito was engaged with.
It was not alleged in the SEC complaint that Jeffrey or GEL engaged in market manipulation or abuse, or that the underlying trading was unlawful, CIRO noted. However, at least two of Crito’s clients faced SEC sanctions, including penny stock bans, after complaints of market misconduct.
But despite these allegations, Canaccord continued to execute trades on behalf of Crito LLP. And, in some instances, the agreement states, “Canaccord’s traders and staff identified potential red flags with respect to the trading activity by certain of Crito LLP’s underlying clients and reports of regulatory proceedings against certain of them.”
However, many of these red flags were not reported to Canaccord’s compliance department which nevertheless had access to documents and “in cases where concerns were identified by Compliance, further inquiries should have been made to ensure that appropriate steps had been taken to address the concerns,” the hearing panel stated.
In one example provided in the hearing panel’s agreement, a Canaccord trader raised the potential for money laundering, but the compliance team was not copied on those emails.
“For a period of time, Canaccord removed Jeffery from the day-to-day activities of the Crito Accounts and another Crito LLP employee assumed trading authority for Crito,” stated the hearing panel.
“However, Canaccord later resumed dealing with Jeffery, including taking trading instructions from him and receiving some emails from his GEL email account.”
According to CIRO, Canaccord is supposed to follow its policies on handling red flags including clients seeking to deposit a large volume of shares in an obscure company particularly one traded on the OTC market.
Canaccord’s policies and procedures also recognize that offshore corporations are considered higher risk.
Canaccord “failed to act as a gatekeeper to the capital markets in relation to the trading activity in low-priced securities listed or traded over-the-counter in the U.S. by Crito LLP,” the hearing panel concluded.
CIRO’s enforcement division and Canaccord agreed that a “reasonable approximation” of the amounts obtained by Canaccord as a result of its failure to discharge its gatekeeper obligation was $2.2 million, which the hearing panel ordered disgorged.
Additionally, the company was fined $600,000 and ordered to pay hearing costs of $50,000.
Canaccord reported $6.1 billion in assets, $1.5 billion in revenue and net income of $30 million in 2024.
