Toronto-based research Capital Corp. and its CEO have been assessed $200,000 in fines and costs for failing to supervise properly an employee who allegedly conducted illicit dealings in OTC Bulletin Board stock for shady clients in Canada and the U.S.

On Nov. 25, the Investment Dealers Association of Canada announced that Research Capital and Patrick Walsh, the firm’s chairman and CEO, have agreed to pay a $160,000 fine and $40,000 in costs after admitting they failed to supervise one of the firm’s brokers adequately. That broker is identified only as “S.T.” in the IDA release but is known to be Stephen Taub.

Taub worked at Toronto-based Brant Securities Ltd. from 1995 to 2001 and then at Research Capital from 2001 to September 2004. At Research Capital, Taub served clients — many of them notorious stock offenders — who traded mainly on the OTCBB in the U.S. On Oct. 21, he was cited by the IDA in connection with these dealings. A hearing is pending.

The OTCBB is a virtually unregulated trading forum that has become home to hundreds of outrageous stock promotions and a magnet for scurrilous promoters. It is not an exchange in the traditional sense; it is strictly a quotation service. There are no listing agreements nor standards for continued listing such as imposed by the Toronto Stock Exchange or the TSX Venture Exchange.

Many Canadian promoters who have been barred from dealing on Canadian exchanges have turned to OTCBB issues and have found Canadian brokerage firms willing to trade for them. Regulators on both sides of the border have cited several Canadian firms — most recently Vancouver-based Union Securities Ltd., now under IDA supervision — for acting as conduits for illicit OTCBB dealings and hiring brokers with criminal and regulatory offences to conduct these dealings.

The Research Capital settlement agreement notes that Taub, too, has had problems with regulators. Details are not provided in the agreement, but regulatory records show Taub was fired from Merit Investment Corp. in 1995 after conducting what amounted to manipulative trades in an Alberta Stock Exchange issue called Ultra Pure Water Systems Corp. In 1997, after moving to Brant Securities, the TSE reviewed the matter and slapped him with a $50,000 fine and a one-month suspension.

The settlement agreement notes Taub was still under IDA investigation in September 2001, when he applied to move to Research Capital. The association approved his transfer on the condition that the firm keep him under close supervision. Despite this, Taub “persistently engaged in a number of activities and practices in the course of his business, which the association alleges were contrary” to IDA rules, the agreement states.

Those alleged transgressions include operating accounts for clients outside his registration area; accepting orders for individuals other than named accountholders; and failing in his “gatekeeper” role by facilitating questionable trading activity by certain clients.

Those clients are not named in the settlement agreement, but the IDA notice of hearing against Taub alleges he ran accounts for several notorious stock players while working at Brant Securities and Research Capital, including:

> Rakesh Saxena, who is wanted by Thai authorities for allegedly embezzling US$88 million from Bangkok Bank of Commerce. (He has been under house arrest in Vancouver for most of the past decade, awaiting the outcome of extradition proceedings. During this time, he has promoted many flimsy OTCBB deals that have ended badly for investors.)

> Regis Possino, a former lawyer in California who was disbarred after he was convicted of selling drugs to undercover agents. He later pleaded guilty in Los Angeles to participating in a fraudulent scheme to use overvalued stocks to inflate an insurance company’s balance sheet. (From 2001 to 2003, Possino and Saxena helped orchestrate a scheme to sell millions of dollars of virtually worthless OTCBB stocks through offshore boiler rooms to unsuspecting investors, mainly in Britain.)

> Stephen Marek, a.k.a. the Volume King, who was charged by the U.S. Securities and Exchange Commission in April 2000 with “making false and misleading statements concerning promotion of 25 micro-cap companies through the Internet.”

> Former U.S. stockbroker Rafi Khan, whom the SEC barred in May 2000 from associating with any brokerage firm for his role in the manipulation of several stocks.

> Phillippe Hababou, a bankrupt jeweller who had been charged with cashing stolen cheques in Paris but fled to the U.S. in August 1995. In June 1999, a U.S. grand jury filed an indictment alleging that he and several unnamed co-conspirators manipulated the shares of an OTCBB issue. He is now serving a three-year prison sentence in France for unrelated stock offences.

@page_break@The Research Capital settlement agreement states that, at the firm, Taub’s “overall pattern of business conduct should have raised concerns” and prompted senior management to place him under “close scrutiny and tighter control than actually occurred.”

That pattern includes a high volume of transactions in OTCBB issues, numerous offshore accounts and third-party transfers, and “artificially reflagging” accounts into different names or jurisdictions after trading in those accounts was curtailed by the firm’s compliance staff.

The settlement agreement further notes that IDA staff conducted a sales compliance review in 2002 and, in January 2003, after receiving a draft, Research Capital’s chief compliance officer advised the firm’s senior management that Taub constituted a “main risk” to the firm and his trading was “the main issue” raised by IDA staff.

In a follow-up report, IDA review staff found “many of the adverse findings” had been repeated.

The IDA noted that Walsh has no previous disciplinary history, and Research Capital has since bolstered its compliance function. IE