A hearing panel of the Investment Dealers Association of Canada has found three brokers with Rampart Securities Inc. guilty of participating in a trading scheme in the Over-the-Counter market.

The decision was handed down on August 9, following a disciplinary hearing that commenced on April 18 and concluded on June 13.

Sean Shanahan, Stephan Katmarian and Nicole Brewster were registered representatives at, Rampart, a former member of the IDA.

In addition, Shanahan and Katmarian were found guilty of failing to conduct due diligence in relation to transactions which were found to be part of a RRSP stripping scheme.

During the period of April and May 2000, while registrants at Rampart, the trio participated in a scheme in which the shares of Alive International Inc. were purchased and sold at contrived prices for the purposes of unduly benefiting one Rampart client, NOA Ltd., to the detriment of other clients at Rampart.

The trading scheme involved clients of Shanahan, Katmarian and Henry Cole, then president of Rampart, selling their Alive shares to NOA at prices between $1.00 and $1.25 per share.

Shanahan, Katmarian and Brewster also sold their own personal shares to NOA. NOA would then resell the shares within minutes or hours to other clients of Rampart with a mark-up on the price. NOA profited each time it bought and sold Alive shares. When the price of Alive shares fell significantly in April 2001, NOA’s account was closed at Rampart. By that time, NOA had realized a profit of $1,173,500 from trading in Alive shares.

The panel also found that Shanahan, Katmarian and Brewster were very much involved, in one way or another, with three key companies — NOA Ltd, Saks Fund International Ltd. and Constantine Inc. — to create the scheme of contrived prices.
The panel determined that Shanahan had a beneficial interest in NOA as well as in Saks Fund International Ltd.

The alleged principals of Saks requested and received information from Brewster, Shanahan’s assistant at the relevant time, that would normally be solely of import to and the responsibility of the beneficial owner of the accounts.

While the panel did not find evidence that Katmarian had a beneficial interest in Constantine Inc., for which he was the registered representative and which also profited from trading in Alive, they found troubling evidence of his involvement with the company; the panel found that Katmarian’s trip to the Bahamas on May 28, 1998 was very suspicious because Constantine was incorporated on May 29, 1998, all prior to the completion of the Alive IPO.

The panel also determined that a substantial number of shares of Alive were transferred from Saks and Constantine to NOA, which traded exclusively in Alive shares throughout the material time.

The IDA panel dismissed charges against Derek Hume, a registrant at Rampart who was working in the capacity of a trader during the relevant time, saying that while Hume may have facilitated some of the Alive trades, he would have merely been processing crosses, which, in his opinion, were not unusual against a thinly traded stock such as Alive and ones that were within the bid and offering prices.

In a second charge involving Shanahan and Katmarian, the panel found both guilty of failing to use due diligence relative to a group of clients who opened accounts for the purpose of purchasing shares in three private corporations, and thereby failed to learn the essential facts relative to the clients.

Those transgressions took place during the period of November 1998 to November 1999, while the pair were registrants at Rampart and members of Rampart’s Corporate Finance Group.

The panel found that the purchase orders taken for these clients could not be considered to be within the bounds of good practice, given the nature of the transaction, a locked-in RRSP stripping scheme.

An allegation related to the second charge that Shanahan and Katmarian failed to ensure that the purchases of shares in three private corporations were appropriate for the group of clients was dismissed by the panel.

A hearing date will be set for a penalty hearing on the above charges.