Aliechtenstein-based bank that has been conducting “suspicious” trades in a slew of stocks quoted on the U.S. over-the-counter markets through seven Vancouver-based brokerage firms has refused to tell British Columbia securities regulators who is behind the trades.

Hypo Alpe-Adria Bank (Liech-tenstein) AG has told B.C. Securities Commission investigators it cannot reveal the beneficial owners of the accounts because of Liechtenstein banking confidentiality laws.

BCSC enforcement staff have argued that, without knowing who the beneficial owners are, the BCSC cannot effectively investigate whether they have engaged in illegal activity and that the dealers operating the accounts are unable to fulfil their obligation to know their clients.

On Aug. 30, BCSC executive director Brenda Leong issued a temporary cease-trade order against the bank. On Sept. 14, after hearing arguments from both sides, a BCSC hearing panel headed by commission vice chairman Brent Aitken extended the order until a full hearing is held in January.

The case has renewed the thorny and long-running question of whether clients of offshore institutions, based in countries in which secrecy laws prevail, should be able to deal anonymously through B.C. brokerage firms, which are obliged to follow know-your-client rules.

KYC rules, however, do not uniformly require brokers to know the identities of beneficial owners. There are exemptions for mutual funds and institutions that operate fully managed accounts, as well as for firms at which no person has greater than a 10% interest.

Regardless, investment advisors who become aware of suspicious activities in any type of account are obliged to make additional inquiries to learn who’s behind them, according to an affidavit filed by Warren Funt, vice president for Western Canada at the Investment Dealers Association of Canada in Calgary.

In this case, however, BCSC enforcement staff are not focusing on dealer obligations; they are simply asserting their authority to determine who is behind the trades.

The trading in question was conducted in Hypo Bank’s account at Vancouver-based Gateway Securities Inc. (formerly Golden Capital Securities Ltd.) in April and May.

BCSC investigator Kevin Stuart reviewed the account and discovered “suspicious trading activity” in certain stocks quoted on the OTC Bulletin Board and on “pink sheets” in the U.S.

Trading records show that Gateway traded hundreds of thousands of shares in 51 companies for Hypo Bank during the period. All but one of those companies was listed on the bulletin board or the pink sheets.

Both markets are loosely regulated trading forums and magnets for scurrilous promoters and flimsy stock deals. At any given time, there are 500 to 800 such companies with strong B.C. connections trading on those markets.

Last month, BCSC chairman Doug Hyndman announced a five-point plan to stem the creation and promotion of these deals, which are seriously damaging the reputation of the B.C. securities market.

Stuart was particularly concerned about share sales in a bulletin-board company called Compliance Systems Corp. Those sales coincided with a spam e-mail message that was sent out declaring the shares were “Ready to make a run for the top!”

That raised suspicions that someone was manipulating the share price. (The stock peaked at $1.56 a share during the period in question, but has since crashed to 1¢ a share.)

Although the company is registered in Nevada and based in Glen Cove, N.Y., Stuart notes it has four large corporate shareholders based in B.C.: President’s Executive Financial Corp., run by long-time Howe Street promoter Erwin Leim; Tangerine Communications Ltd., run by Amar Bahadoorsingh; Trident Venture Group Inc., run by Rod Jao; and Transnational Capital Corp., run by Marco Delgado. All reside in the Vancouver area.

Stuart did not comment on the other 50 companies whose shares were being traded through the Hypo Bank account, but they include Nelson Skalbania’s Planktos Corp., which is touting a plan to seed the ocean near the Galapagos Islands with iron filings to promote algae blooms and consume carbon dioxide; and Trent Jordan’s Lamperd Less Lethal Inc., which is purportedly developing “less lethal” rubber bullets for law enforcement agencies. Both Planktos and Lamperd have been ruthlessly touted by paid U.S. newsletter writers.

The poor quality of these issues did not appear to be an issue for Gateway or the six other Vancouver brokerage firms that also operated accounts for Hypo Bank. Those firms were Canaccord Capital Inc., Haywood Securities Inc., Union Securities Ltd., Research Capital Corp., Blackmont Capital Inc. and Wolverton Securities Ltd.

@page_break@Wolverton closed Hypo Bank’s account in late June after the bank refused to say who was behind the account.

BCSC enforcement staff, however, didn’t want to turn the September hearing into a question of what dealers are or are not required to do.

“This case is not about dealer obligations,” BCSC enforcement counsel Paige Leggat told the hearing panel. “It is about how Hypo Bank is frustrating the regulator’s efforts to obtain the identities of persons who may have engaged in misconduct.”

Vancouver lawyer Gordon Johnson, representing the Hypo Bank, says his client knows who the beneficial owners are and has told Liechtenstein’s financial authorities. But, by law, the bank cannot share that information with B.C. regulators.

Hypo Bank wants to be able to continue to provide services to clients whose conduct is not at issue, but the rules have to be clarified, Johnson says: “If the law of B.C. requires that every domestic investment dealer follow the full KYC procedure for every party having an interest in every account, the bank can explain that to its clients.”

However, such a rule would preclude Hypo Bank and all other institutions that are similarly bound by confidentiality laws from participating in B.C. markets, he warns.

Hypo Bank has done nothing wrong and has done everything it legally can to assist the BCSC’s investigation, Johnson says. It has frozen the accounts in question and voluntarily agreed to close any account that may become unfrozen. It has also agreed to disclose any new investment accounts it opens in B.C. and to monitor the BCSC’s “spam watch” database to prevent trading in securities listed there.

“The bank has acted in good faith throughout,” Johnson says.

Permanently banning every foreign institution that has a client coming under suspicion does not advance the BCSC’s policy objectives, Johnson argues: “A dishonest client can move from jurisdiction to jurisdiction and from investment bank to investment bank, in each case repeating the conduct that the commission regards as
objectionable.” IE