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Regulators probe Bermuda brokerage
By KAREN HOWLETT AND PAUL WALDIE
Thursday, January 13, 2005
A Bermuda brokerage firm active in Canada and accused of providing a “cloak of secrecy” to its clients, is under investigation by Canadian and U.S. regulators over its role in a series of alleged stock market manipulations.
The saga involves LOM (Holdings) Ltd., which operates brokerages in offshore banking havens Bermuda, the Bahamas and Grand Cayman, and whose clients traded through at least seven Canadian brokerage firms. Bermuda businessman Donald Lines and his sons, Brian and Scott, are the brains behind LOM. Donald Lines, a former chief executive officer of the Bank of Bermuda, founded LOM in 1992. He has worked in Canada and his sons were born and raised in Montreal, their mother's hometown.
The British Columbia Securities Commission said yesterday it plans to hold a hearing to determine whether it should stop the LOM group from doing business in the province because it may be acting as a front for undisclosed investors.
The regulator noted that LOM has been active in Canada, trading more than 800 million shares with a market value of $1.2-billion last year.
The LOM case raises the thorny problem of offshore brokerages located in secrecy havens that use established firms to do their transactions. Confidentiality is at the heart of offshore trading. Once an account is opened, it can be used by hundreds of individuals whose identities are known only to the offshore brokerage's officers.
“The problem with LOM is anybody can hide behind it,” Lang Evans, director of capital markets regulation at the BCSC, said in an earlier interview. “Individuals [are trading] without revealing who they are. That's not acceptable to us,” he said.
Canadian regulators introduced rules two years ago requiring banks and brokerage firms to lift the veil of secrecy on accounts opened in a company name. As part of an international crackdown on secrecy havens, Canadian firms are required to know the end beneficiaries of an account — those with a financial interest in it — rather than just the names of the corporate entity fronting the transactions.
In the United States, the Securities and Exchange Commission is investigating allegations that Brian and Scott pocketed profits totalling $4.4-million (U.S.) by manipulating the share price of two tiny, Vancouver-based companies, Sedona Software Solutions Inc. and SHEP Technologies Inc. The SEC also believes that two Vancouver residents participated in the stock manipulations through accounts at LOM.
LOM is accused by the SEC of destroying records and filing false reports to the regulator in connection with its probe. The family denies any wrongdoing and has challenged the jurisdiction of the SEC to seek information in connection with investigations into alleged fraud and stock manipulations.
A U.S. district court ordered LOM on Jan. 7 to comply with four subpoenas served on Scott Lines. The SEC said the company and Mr. Lines have refused to produce documents and to testify before the regulator.
LOM said in a statement this week that it plans to request a review of the court decision, handed down by U.S. district court Judge Alan Kay.
In an affidavit filed in court, Scott Hill, LOM's vice-president of compliance, denied the SEC allegations. Mr. Hill also said LOM has produced hundreds of documents requested by the regulator and that it has been constrained by Bermuda's confidentiality laws from disclosing client information. (Bermuda recently amended its banking law because of the LOM case.)
The SEC says LOM markets itself as an offshore brokerage where customers from around the world can trade behind a “cloak of secrecy.” In court documents, the SEC describes LOM's trading activity as “staggering.” In one two-week period last year, the firm traded 151 million shares in a variety of companies through one account.
For its part, the BCSC launched an investigation back in October, 2003, into a series of trades in the shares of a company listed on the TSX Venture Exchange called San Telmo Energy Inc. LOM made the trades between September, 2002, and March, 2003, through accounts at Canadian investment dealers on behalf of undisclosed beneficial owners, says a BCSC panel in its reasons for ordering the hearing, set for Jan. 31.
The list of dealers reads like a Who's Who of Vancouver's Howe Street and includes Raymond James Ltd., Haywood Securities Inc. and Georgia Pacific Securities Corp.
The BCSC panel said the accounts were contrary to the brokerage industry's “know your client” rules because the actual owner of the trading accounts were not revealed. While the panel noted that this issue was not initially before it, it said “we cannot turn a blind eye to the evidence.”
The matter went to a hearing last November because LOM did not respond to a demand for information about trading in the accounts at the Canadian brokerage firms.
© The Globe and Mail
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