It was a different sort of “triple-witching hour” for Vancouver-based Union Securities Ltd. on April 18, when three regulatory agencies assessed about $1.8 million in fines against the firm and its three most senior officers, after they admitted to a host of trading infractions and other compliance breaches.

The Investment Dealers Association of Canada led the charge by ratifying a settlement in which Union agreed to pay a $1-million fine, the largest financial penalty ever assessed by the IDA’s Western region.

The settlement also permanently bars Union CEO John Thompson from acting as the “ultimate designated person” — the principal responsible to securities regulators for a firm’s conduct — at Union or any other IDA member firm.

As well, the agreement requires Union to retain accounting firm Grant Thornton LLP to “review and test” the firm’s compliance systems and policies for the next three years.

Warren Funt, IDA vice president of member regulation for Western Canada, says the sanctions “convey the IDA’s determination to ensure that Union’s past shortcomings are corrected and paid for, and that the officers and directors are motivated to run a compliant business in future.”

Immediately after the settlement was ratified, the B.C. Securities Commission announced a second agreement, requiring Thompson and his two brothers to pay an additional $625,000 in penalties and costs. John Thompson agreed to pay $200,000 plus $50,000 in costs. Rex Thompson, Union’s executive vice president and the alternative designated person, committed to pay $160,000 plus $40,000 costs. Norman Thompson, the firm’s president and former chief financial officer, will pay $145,000 plus $30,000 costs.

The BCSC settlement also calls for Union to retain an accounting firm, most likely Grant Thornton, to audit Union’s compliance and supervision practices during each of the next four years. If the accounting firm finds that Union is not compliant with IDA rules, then the Thompsons must surrender their registrations as directors or officers.

“The message is that brokerage firms, and the directors and senior officers running them, must pay attention to their compliance responsibilities and fulfil them,” says BCSC enforcement director Sasha Angus. “If they don’t, we will pursue them.”

John Thompson did not appear at the ratification hearing and his lawyer, Gary Snarch, said his client did not want to talk to reporters. The other two Thompsons could not be reached for comment.

It wasn’t over. After the BCSC released its settlement, a hearing panel formed by Toronto-based RS Market Regulation Services Ltd. , which regulates trading on Canadian stock exchanges, convened to ratify a third settlement in which Union agreed to pay an additional $150,000 to settle trading infractions.

Union was founded by the Thompsons’ father, Norman Sr., in 1963. It employs more than 325 people, including 222 registrants, in 20 branch offices across Canada and one in London, England.

The firm initially focused on Vancouver Stock Exchange issues but gradually shifted emphasis to stocks quoted on the OTC Bulletin Board in the U.S. , which became the source of many of its compliance problems.

Last summer, after a series of audits stretching back to 2000, the IDA determined that Union had developed a “culture of indifference toward compliance issues” and ordered the firm be placed under the supervision of Grant Thornton. At yearend, Grant Thornton was discharged as monitor, but the settlement negotiations continued and were formally concluded in mid-April.

The IDA settlement notes that sales compliance reviews uncovered numerous deficiencies, including inadequate supervision of client accounts and branch offices, inadequate account documentation and verification, and operation of accounts in the U.S. without being registered to do so. Many of the deficiencies were “repeat items” — ones that IDA staff had previously identified as needing attention or correction but had not been addressed by the firm.

The IDA settlement notes that IDA staff warned member firms they could not operate accounts for U.S. residents unless they were registered to do business there. Union, however, obtained a legal opinion from a U.S. lawyer that U.S. residents could operate Yukon-incorporated companies at the firm without Union being registered in the U.S.

The Yukon-incorporated clients became important business for some Union brokers. The settlement notes that three registrants derived more than half of their gross commissions from Yukon holding companies in 2002, 2003 and 2004.

“What is offensive about this is the apparent intention to circumvent our U.S. registration requirements and help their clients find loopholes,” Funt says.

@page_break@The IDA also warned member firms about adhering to U.S. short-selling rules designed to prevent “naked short-selling” — clients selling stock they do not own without having made arrangements to borrow enough shares to complete the transaction. Despite the warning, Union executed short sales of OTCBB stock without locating stock to cover the short sales, resulting in many instances in which clients were unable to deliver stock to complete the transactions.

The IDA settlement also refers to two Union brokers who had been placed under supervision but were permitted to operate client accounts without proper oversight from the firm. In two instances, the failure to supervise the brokers properly resulted in client losses.

Both sides acknowledge that the $1-million penalty would have been higher except for several mitigating factors, including the firm’s co-operation with Grant Thornton when it was installed as a monitor; the fact that Union has or will spend about $500,000 for Grant Thornton’s services; Union’s co-operation with IDA staff; and the fact that John Thompson has no prior disciplinary record.

The BCSC settlement agreement addresses Union’s failure to supervise its brokers and clients properly, particularly with respect to OTCBB business.

The BCSC notes that, from 1999 to 2001, four brokers operated U.S.-dollar accounts for 40 clients, none of whom were Canadian residents and most of whom dealt in OTCBB stock. Union admitted the four brokers “failed to learn the essential facts relative to these clients, such as their identity, creditworthiness and reputation.”

The firm also admitted that the brokers, on behalf of their clients, bought and sold OTCBB stock, often with no apparent economic purpose, and stock positions were transferred or liquidated with the shares or proceeds often directed to third parties, which should have raised concerns about the integrity of their clients.

One of the brokers, Trevor Koenig, pleaded guilty to securities fraud in connection with the manipulation of stock he had traded on behalf of U.S. promoter Edward Durante and was sentenced to 22 months in jail.

The BCSC settlement states that Union and the Thompsons had a duty as “gatekeepers” to the securities market to refuse to engage in conduct that would impugn the integrity of the capital markets: “They failed in this duty because they failed to design, establish, implement and supervise a compliance regime appropriate to the nature, scale, complexity and risks associated with Union’s business.” IE