Two men closely affiliated with the Canadian Trading & Quotation System Ltd. have been cited by Ontario Securities Commission enforcement staff for trading violations, none of which are related to the operations of the CNQ.

The alleged violators are Toronto securities lawyer James Patrick Boyle, a CNQ founder and minority shareholder, and John Michael Malone, the exchange’s chief operating officer.

CNQ president and CEO Robert Cook dismisses the OSC’s allegations as irrelevant. “None of the allegations have anything to do with CNQ, and, in fact, they predate the formation of CNQ,” he said in an interview.

However, if a hearing panel finds that Boyle and Malone breached securities rules, it remains to be seen whether the OSC will view the matter as irrelevant.

The CNQ was created in 2003 after Canada’s “big bang,” which saw the consolidation of senior equity trading at the Toronto Stock Exchange and the dismantling of the old Canadian Dealing Network and concurrent transfer of most junior companies to the TSX Venture Exchange.

That left a void for an alternative trading market, which the CNQ has been attempting to fill. Its big selling points are minimal rules (it defers to the myriad rules already imposed by provincial regulation); low cost (a flat fee of $10,000 to list and $300 per month thereafter); and transparency (the CNQ Web site provides complete details of who’s bidding and asking for shares, and at what price).

The exchange has been in business for two years now, but it remains a relative pipsqueak.
It has only 49 listed companies, of which 19 are based in British Columbia. Its largest is Vancouver-based Creation Casinos Inc., a spinoff of Great Canadian Gaming Corp., with a total stock market value of $80 million.

Trading activity is skinny. On Sept. 16, the CNQ traded a total of 743,433 shares worth only $119,076. By comparison, the TSXV has more than 2,500 companies and on Sept. 16 traded 103 million shares worth $82 million.

OSC enforcement staff cited Boyle, Malone and a third man, promoter Larry Melnick, on August 5. But until the Vancouver Sun reported the allegations on Sept. 16, there had been no publicity about the matter. Cook has also been slow to spread the news. Don Gordon, the CNQ’s “senior advisor” in Vancouver, told the Sun he had no idea Boyle and Malone had been cited.

Boyle is the principal of Boyle & Co. LLP, a Toronto law firm that specializes in securities matters. The firm’s Web site notes that Boyle “was a founder and principal architect of CNQ, Canada’s new stock exchange, designing both the regulatory and market models.” Cook says Boyle is still a minority shareholder of the CNQ but plays no active role in its affairs. He is not listed as either an officer or a director.

The CNQ Web site states that Malone, as the exchange’s chief operating officer, “manages all daily operations of CNQ and its Web site, and is responsible for overall operational planning and the implementation of CNQ policies and procedures.” He is not listed as a director.

Melnick is a long-time stock promoter who is president of Champion Natural Health.Com Inc., a Toronto-based company whose shares trade on the CNQ. Cook says Melnick is neither an officer nor director of the CNQ and plays no role in the exchange’s affairs.

In its statement of allegations, the OSC alleges that Boyle was the “principal architect” of a stock scheme involving three reporting issuers in Ontario: Complex Minerals, GoldMint Explorations Ltd. and Nucanolan Resources Ltd.

The OSC alleges that in each of these companies, Boyle, Malone and Melnick engaged in unregistered trading and facilitated unlawful distributions of securities. “The predominant purpose of the unlawful trading and distributions was to create tradable securities for sale to the public,” the OSC alleges.

The OSC claims that more than 24 million shares were distributed to broker-dealers, which in turn sold them to the public. Boyle reaped $1.8 million and Melnick $1.5 million, which was funnelled through an Antiguan company. The last payout was in 2002.

Malone received only $2,000 cash from Boyle in April 1996 and a $4,500 cheque from the Antiguan company in October 1997, the OSC claims.

A first hearing is set for Oct. 27. Boyle is represented by former OSC director Joe Groia, best known as the lawyer who has hamstrung the commission’s efforts to prosecute former Bre-X Minerals Ltd. geologist John Felderhof. IE