INVESTMENT INDUSTRY REGULATORY ORGANIZATION OF CANADA

IN THE MATTER OF:

THE RULES OF THE INVESTMENT INDUSTRY REGULATORY

http://
ORGANIZATION OF
CANADA
docs.iiroc.ca/
DisplayDocument
.aspx?
DocumentID=FD
8C891109004359
DOUGLAS TERRENCE
STEER
84305198BCA9E
B3D&Language=
en
AND

NOTICE OF HEARING

TAKE NOTICE that pursuant to Part 10 of Dealer Member Rule 20 of the Investment Industry
Regulatory Organization of Canada (IIROC), a hearing will be held before a hearing panel of
IIROC (Hearing Panel) on January 27, 2015 at Reportex Agencies Suite 1010 925 West
Georgia Street, Vancouver, British Columbia at 10:00 a.m. or as soon thereafter as the hearing
can be heard.

TAKE FURTHER NOTICE that pursuant to Rule 6.2 of IIROCs Dealer Member Rules of
Practice and Procedure (Rules of Practice and Procedure), that the hearing shall be designated
on the:
The Standard Track
The Complex Track

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THE PURPOSE OF THE HEARING is to determine whether Douglas Terrence Steer (the
Respondent), who at all material times was a Registered Representative (RR) working at
Canaccord Capital Corporation (Canaccord) in Vancouver, British Columbia, committed the
following contraventions that are alleged by the Staff of IIROC (Staff):

Count 1
From April to September 2009, the Respondent facilitated the deposit of share certificates in six
client accounts, and the subsequent sale of those securities and withdrawal of the proceeds of
sale:
(a) Without using due diligence to learn essential facts relative to his clients and / or
their orders contrary to IIROC Dealer Member Rule 1300.1 (a); and
(b) Without properly acting as a gatekeeper to the capital markets by making diligent
inquiries to reasonably assure himself that the transactions were being made for
legitimate investment purposes, in circumstances which necessitated such inquiry,
contrary to IIROC Dealer Member Rule 29.1.

Count 2
From April to September 2009, the Respondent acted contrary to IIROC Dealer Member Rule
29.1 by effecting transactions in his clients accounts based on instructions that he accepted from
an individual who was not authorized to give instructions on the account.

PARTICULARS
TAKE FURTHER NOTICE that the following is a summary of the facts alleged and to be
relied upon by Staff at the hearing:

Overview
1.

These particulars relate to the period of time between April and September 2009 when
the Respondent was an RR working at the Vancouver head office of Canaccord. The
Respondent was the RR responsible for the client accounts of 23 different corporations
which were each beneficially owned by one of 13 individuals. The individuals lived in
Europe but the corporations were incorporated and managed in Panama by the same
corporate trust and services firm. The Respondent knew that each of the beneficial
owners was ultimately connected to the same individual.

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2.

On eight days, between April and September, 2009, six of these accounts received share
certificates for a total of 194 million shares of a company that traded on the Over-TheCounter Bulletin Board (OTCBB). Almost immediately after the certificates were
deposited, the shares were sold into the market for proceeds of approximately
$15,000,000. Within days of the settlement of the trades, all of the proceeds were wired
to different European banks on the instructions of an individual who was not authorized
on the account.

3.

The Respondent thereby executed each of the clients transactions without learning
necessary facts related to the clients and to their orders. In addition, he executed these
transactions in circumstances which necessitated further inquiries on his part and thereby
failed to act as a gatekeeper to the capital markets.

The Respondent
4.

The Respondent was first registered in 1990 and worked as an RR at the Vancouver head
office of Canaccord for more than 20 years until January, 2011. He joined Jordan Capital
Markets Inc. in Vancouver later in January 2011 and worked there as an RR for
approximately 10 months until November, 2011. He has not worked for an IIROCregulated firm since that time.

The Panamanian entities

5.

At Canaccord, the Respondent was the RR responsible for as many as 23 investment

accounts for companies that were incorporated and managed by International
Management & Trust Corp. of Panama (Intertrust). Intertrust provided confidential
offshore financial, incorporation, management and administrative services in the
Republic of Panama.

6.

These 23 companies were beneficially owned by one of 13 individuals residing in

Europe, including a Hungarian national named EE, his personal assistant UA, and 11
others, each of whom was connected to EE or to UA.

EE and the connected beneficial owners

7.

EE was the beneficial owner of three of the Panamanian companies, one of which opened
an investment account at Canaccord in 2000. EEs wife beneficially owned two of the
other Panamanian companies, including one which opened an investment account at
Canaccord in 1999.

8.

The Respondent had no knowledge of how or why EE and the companies he beneficially
owned first came to deal with and have investment accounts at Canaccord. The
Respondent had no knowledge of why any of the other 12 individuals owned Panamanian
companies or why those Panamanian companies opened investment accounts at

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Canaccord, other than his supposition that they did so because EE did. The Respondent
had no knowledge of why EE owned Panamanian companies.
9.

The Respondent had no knowledge of EEs career other than to suppose that he was a
retired businessman and an investor who maintained a living from his investment
accounts. The Respondent understood that EE resided in Rome and in Hungary.

10.

UA was the beneficial owner of two of the Panamanian companies, one of which opened
an investment account at Canaccord in 2002. UAs husband beneficially owned two of
the other Panamanian companies.

11.

The Respondent understood that UA, who was a Swiss national residing in Italy, was a
colleague of and an assistant to EE.

12.

UAs daughter, BA, was the beneficial owner of two of the Panamanian companies.
BAs husband was the beneficial owner of another one.

13.

The Respondent understood that BA was a ballet instructor, her husband was a chef, and
they both lived in Italy.

14.

A Hungarian national named EH was the beneficial owner of another two of the
Panamanian entities. The Respondent understood EH to be a friend of EE.

The six relevant Panamanian entities

15.

By 2008, the Respondent was the RR responsible for 19 investment accounts at

Canaccord for these Panamanian companies, including the following:
Name of Company
ARDE*
FRIB*

Beneficial Owner
EE
UA

In March 2008 the Respondent opened investment accounts at Canaccord for another four
companies.
Name of Company
BELL*
BIGB*
DIOM*
MARE*

Beneficial Owner
BA
EH
UA
EE

16.

Each of these latter four Panamanian entities passed Directors resolutions and signed
account opening documents on the same day, namely March 10, 2008.

17.

All six companies were managed by Intertrust and had the same address in Panama.

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18.

Each of the six companies indicated that they held bank accounts at the same bank in
Hungary. The Respondent had no knowledge as to why Italian residents who beneficially
owned Panamanian entities would have bank accounts in Hungary other than to suppose
it was because that is where EE had bank accounts.

19.

The Respondent signed New Client Account Forms for each of the six companies to open
their investment accounts at Canaccord.

Transactions not questioned

20.

On eight days, between April and September, 2009, these six accounts received share
certificates for a total of 194 million shares of an OTCBB company, Spongetech Delivery
Systems Inc. (Spongetech). Almost immediately after they were deposited to the
Canaccord accounts, these shares were sold for proceeds of approximately $15,000,000.
Almost immediately after the sale, the proceeds were then wired to banks accounts in
Switzerland, Liechtenstein or Hungary at the instruction of UA.

The first 157 million shares and the 600% price increase
21.

Certificates for the first 124 million shares were received as follows:
Date
April 16, 2009
April 21, 2009
May 21, 2009
June 26, 2009

22.

Shares
20,000,000
30,000,000
20,000,000
20,000,000
17,000,000
17,000,000

Account
BELL
BIGB
MARE
DIOM
MARE
DIOM

Starting on April 16, 2009, the Respondent accepted orders from these four Panamanian
companies to sell these shares into the market in an orchestrated manner. The sales were
orchestrated such that one account sold all of its deposited shares first and then the others
began selling in order as follows:
a) BELL sold its 20 million shares over three consecutive market days (April 16, 17
and 20).
b) BIGB then sold its 30 million shares over the next six consecutive market days
(April 21, 22, 23, 24, 27 and 28).
c) MARE sold its first 20 million shares over four consecutive market days (May 21,
22, 26 and 27).
d) DIOM then took over the selling on May 27 and continued over the next three
consecutive market days (May 28, 29 and June 1).
e) MARE and DIOM also coordinated the selling of their next allotment of shares.
MARE sold its next 17 million shares on the three consecutive market days (June
29, 30 and July 1), followed by DIOM which sold its next 17 million shares on
the next five consecutive market days (July 2, 6, 7, 8 and 9).

23.

The Respondent was aware that this selling was being directed by EE.

24.

Almost immediately after the shares were sold and in most instances before the trades
had settled, the Respondent accepted instructions from UA, who was not authorized on
the accounts, to wire the proceeds of sale totaling $6,301,500 to different European banks
as follows:
Account
BELL
BIGB
MARE
DIOM
MARE
MARE
DIOM
DIOM

Last Trade Settled

April 23
May 1
June 1
June 4
July 7
July 7
July 14
July 14

Wire Instruction
April 20
April 29
May 27
June 5
July 7
July 7
July 13
July 13

Bank
Switzerland
Switzerland
Switzerland
Switzerland
Liechtenstein
Liechtenstein
Hungary
Hungary

Amount
$341,239
$465,237
$800,399
$751,919
$800,000
$1,216,526
$800,000
$1,126,579

25.

During the period of this selling the market price of Spongetech rose more than 600%
from 1.83 cents to over 11 cents.

26.

On July 3, 2009 and again on July 8, 2009 Canaccords compliance department

(Compliance) noted that both the MARE and DIOM accounts had each received in 37
million shares of Spongetech which represented 5.1% of Spongetechs 723 million
outstanding shares outstanding. Compliance questioned the Respondent as to whether the
beneficial owners of MARE or DIOM were insiders of Spongetech.

27.

The Respondent told Compliance that neither MARE nor DIOM had beneficial owners
who were insiders of Spongetech. The Respondent claimed that both MARE and DIOM
had sold shares into the market before they acquired additional shares even though the
Respondent had no knowledge as to how or when either of the Panamanian companies
had acquired these shares.

28.

The Respondent did not tell Compliance that he knew that MARE and DIOM as well as
BELL and BIGB were all connected to the same individual beneficial owner and were
acting in concert. The 40 million shares deposited to DIOM and MARE accounts on May
21, 2009 represented more than 5.5% of the outstanding shares of Spongetech.

29.

After that Compliance inquiry, additional share certificates continued to be deposited into
the accounts of the Panamanian entities. Certificates for the next 33 million shares were
received as follows:
Date
July 14, 2009
July 16, 2009

Shares
16,500,000
16,500,000

Account
MARE
DIOM

30.

Similar to the first 124 million shares, these 33 million shares were sold in an
orchestrated manner over consecutive trading days from July 14 to July 21 and the
proceeds of $3,190,637 were immediately wired to a bank in Hungary.

31.

For these first 157 million shares deposited into his clients accounts, the Respondent did
not know how his client had acquired the shares and did not make any inquiries to
determine how they had acquired the shares. No documentation accompanied the share
certificates to explain how the shares had been acquired.

Another 37 million shares and a $3 million insider discount

32.

An additional 37 million shares were received in August and September as follows:

Date
August 18, 2009
September 4, 2009

Shares
16,500,000
16,500,000
2,000,000
2,000,000

Account
MARE
DIOM
ARDE
FRIB

33.

With these two deposits, the Respondent signed and submitted a Certificate Deposits of
US OTC Issuers Compliance Letter (Compliance Letter) to Compliance. This letter
confirmed that the Panamanian entities had acquired the shares in a private transaction
with RM Enterprises which was an affiliate or insider of the issuer Spongetech.

34.

A Stock Purchase Agreement and a letter from Spongetechs counsel accompanied the
first Compliance Letter which resulted in the deposit of share certificates for a total of 33
million Spongetech shares into the accounts of MARE and DIOM on August 18, 2009.

35.

The Stock Purchase Agreement was irregular in that it was not signed by a representative
of either MARE or DIOM. It indicated that MARE and DIOM had acquired their shares
in the same transaction on August 10, 2009 with RM Enterprises, which was an insider of
Spongetech. The cost for MARE and DIOM to acquire the shares from the insider was
one cent when the market price of Spongetech was over 900% higher at more than 10
cents.

36.

The Respondent had no knowledge of and did not question how MARE or DIOM came
to know RM Enterprises or what their relationship was with the insider of Spongetech
that allowed them to acquire these shares at a discount of approximately $3,000,000.

37.

The Respondent then accepted orders from DIOM and MARE pursuant to which the 33
million shares were sold in an orchestrated manner. MARE sold its shares exclusively on
four consecutive market days (August 19, 20, 21, and 24). On August 25 MARE
continued selling until it had sold all of its shares. After MARE had finished selling its
shares, DIOM started selling its shares, later on August 25. DIOM then continued the

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selling and sold exclusively on two more consecutive market days (August 26 and 27)
until it had sold all of its shares.
38.

The Proceeds of $5,109,563 from these sales were immediately wired to a bank in
Hungary.

39.

The second Compliance Letter, which resulted in the deposit of share certificates for the
final four million Spongetech shares to the accounts of ARDE and FRIB on September 4,
2009, was also accompanied by a Share Purchase Agreement and a letter from
Spongetechs counsel.

40.

This Stock Purchase Agreement was irregular in that it was not signed by a representative
of either ARDE or FRIB. There were three different agreed prices at which the shares
would be acquired (1.25 cents/share, 12.5 cents/share, and 7.5 cents/share). It was dated
September 3, 2009 and indicated that ARDE and FRIB would acquire the shares from
RM Enterprises which was an insider of Spongetech.

41.

The Respondent had no knowledge of and did not question how ARDE or FRIB came to
know RM Enterprises or what its relationship was to the insider of Spongetech.

42.

The Respondent then accepted orders for ARDE and FRIB to sell the 4 million shares
into the market on September 11, 2009. The proceeds of $576,446 from these sales were
later wired to a bank in Hungary.

Commissions earned
43.

These sales generated gross commissions of $129,245 USD. The Respondent earned
50% of those gross commissions as income. At the time of the transactions the value of
one US Dollar ranged from between $1.10 - $1.20 Canadian dollars.

Failure to act as a Gatekeeper

44.

A reasonable RR would have viewed the above noted account activity as suspicious or
worthy of inquiry.

45.

Canaccord had clearly outlined its expectations for RRs dealing with OTCBB securities
in a memorandum to all staff in July 2007. That memo reminded RRs that it was
imperative for them to know the account and know how the client came by the
securities. The memo further reminded RRs that:
You must thoroughly understand the business your clients are asking you to transact so that you
do not find yourself an unwitting participant in a manipulative or law breaking scheme.

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46.

On October 5, 2009 the United States Securities and Exchange Commission (SEC)
announced the temporary suspension of trading in Spongetech shares because of
questions raised about the accuracy and adequacy of publicly disseminated information
related to Spongetech.

47.

In May 2010, the SEC filed a Civil Complaint against certain parties including RM
Enterprises alleging that they participated in a scheme to pump Spongetechs share price
and then dump shares by illegally selling them to the public through affiliated entities in
unregistered transactions. Five individuals have since pled guilty in related criminal
proceedings.

48.

The SEC Civil Complaint named MARE and DIOM as examples of transferees who
received shares that had restrictive legends improperly removed, but none of the
Panamanian entities or individuals associated with them named in these Particulars were
defendants in the SECs Civil Complaint or in the related criminal proceedings.

GENERAL PROCEDURAL MATTERS

TAKE FURTHER NOTICE that the hearing and related proceedings shall be subject to the
Rules of Practice and Procedure.

TAKE FURTHER NOTICE that pursuant to Rule 13.1 of the Rules of Practice and Procedure,
the Respondent is entitled to attend and be heard, be represented by counsel or an agent, call,
examine and cross-examine witnesses, and make submissions to the Hearing Panel at the
hearing.

RESPONSE TO NOTICE OF HEARING

TAKE FURTHER NOTICE that the Respondent must serve upon the Staff of IIROC a
Response to the Notice of Hearing in accordance with Rule 7 of the Rules of Practice and
Procedure within twenty (20) days (for a Standard Track disciplinary proceeding) or within thirty
(30) days (for a Complex Track disciplinary proceeding) from the effective date of service of the
Notice of Hearing.

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FAILURE TO RESPOND OR ATTEND HEARING
TAKE FURTHER NOTICE that if the Respondent fails to serve a Response or attend the
hearing, the Hearing Panel may, pursuant to Rules 7.2 and 13.5 of the Rules of Practice and
Procedure:
(a) proceed with the hearing as set out in the Notice of Hearing, without further notice to the
Respondent;
(b) accept as proven the facts and contraventions alleged by Staff in the Notice of Hearing;
and
(c) order penalties and costs against the Respondent pursuant to Dealer Member Rules 20.33,
20.34 and 20.49.

PENALTIES & COSTS

TAKE FURTHER NOTICE that if the Hearing Panel concludes that the Respondent did
commit any or all of the contraventions alleged by Staff in the Notice of Hearing, the Hearing
Panel may, pursuant to Dealer Member Rules 20.33 and 20.34, impose any one or more of the
following penalties:
Where the Respondent is/was an Approved Person:
(a)

a reprimand;

(b)

a fine not exceeding the greater of:

(i) $1,000,000 per contravention; and
(ii) an amount equal to three times the profit made or loss avoided by such
Approved Person by reason of the contravention.

(c)

suspension of approval for any period of time and upon any conditions or terms;

(d)

terms and conditions of continued approval;

(e)

prohibition of approval in any capacity for any period of time;

(f)

termination of the rights and privileges of approval;

(g)

revocation of approval;

(h)

a permanent bar from approval with the IIROC; or

(i)

any other fit remedy or penalty.

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TAKE FURTHER NOTICE that if the Hearing Panel concludes that the Respondent did
commit any or all of the contraventions alleged by the Staff in the Notice of Hearing, the Hearing
Panel may pursuant to Dealer Member Rule 20.49 assess and order any investigation and
prosecution costs determined to be appropriate and reasonable in the circumstances.

DATED at Vancouver, this 9th day of December, 2014.

Warren Funt_______________________________
Warren Funt
Vice-President, Western Canada
Investment Industry Regulatory Organization of Canada
Suite 2800, 1055 West Georgia Street
Vancouver, British Columbia V6E 3R5