BCSC hearing hears of more problem PI clients
B.C. Securities Commission *BCSC
Tuesday October 28 2003 Street Wire
Also National Bank of Canada (The) (C-NA) Street Wire
by Brent Mudry
Although Vancouver brokerage Pacific International Securities attracted and serviced numerous controversial non-resident clients, chairman and co-founder Max Meier repeatedly testified that his compliance department was top-notch. In addition, Mr. Meier stressed that many of the dubious clients, including banner brokerage head Richard Gladstone, reputed Mafia promoter Phil Gurian, disbarred California attorney Kevin Quinn and recently jailed hedge fund manager Mark Yagalla, did little wrong at Pacific International.
Mr. Meier defended his brokerage in cross-examination Thursday in a landmark hearing by the British Columbia Securities Commission. The brokerage head was questioned by commission counsel Mark Hilford on Day 82 of the hearing, which started Oct. 7, 2002, and is scheduled to conclude June 30, 2004.
THE BACKGROUND
Pacific International was targeted by the BCSC in a broad notice of hearing released July 10, 2001, two years after the Howe Street house was hit by a series of client-driven scandals in the summer of 1999. In a nutshell, the regulator claims the brokerage attracted and serviced too many dubious non-resident clients, either unwittingly or through a deficient compliance department.
The most dramatic development came in May, 1996, 11 months after star broker Jean Claude Hauchecorne moved to Pacific International from rival brokerage Yorkton Securities. That month, Mr. Hauchecorne was confronted by reputed New York Mafia capo Phil Abramo, his underling Mr. Gurian and several other unsavoury characters in a New York hotel room over $1.7-million (U.S.) diverted from an offshore Bahamian account controlled by the Mafia pair.
THE HEARING
Mr. Hilford's cross-examination of Mr. Meier continued Thursday in the morning session. Mr. Meier told the BCSC hearing that it was not until December, 1996, when he saw a Business Week cover feature, The Mob on Wall Street, that he discovered Mr. Abramo was using the alias Louis Metzner regarding a Pacific International account. Mr. Meier was told by Mr. Hauchecorne that a magazine photo of Mr. Abramo was the man he knew as Mr. Metzner, a central figure in the New York hotel incident.
BCSC lawyer Mr. Hilford asked Mr. Meier if it concerned him even more that Mr. Abramo was not a low-level Mafia functionary but a high-ranking member.
"You have to weigh this against that he was a small client of P.I. and he did very little trading. The account by this stage was long closed and it was never an active account," replied Mr. Meier.
The brokerage head suggests that the unfortunate Mr. Hauchecorne was just an innocent victim of the account fiasco.
"It looks like it was a good possibility that he was victimized in this missing wire thing. He may have known who Metzner was, but I really doubt it," testified Mr. Meier.
Mr. Meier also strongly defended Pacific International. He told the panel the suspect wire to New York to Mr. Metzner was a wire to a bank, "which seemed to legitimize it."
The Pacific International executive also denied Mr. Hilford's assertion that finding out the truth about Mr. Abramo, including his Mafia rank, should have been a big red flag to the brokerage regarding its non-resident accounts in general.
"Whether he was a high-ranking or a low-ranking member does not show there was something wrong with our (other) 30,000 clients," Mr. Meier told the hearing.
"Does it show there was something wrong with compliance at Pacific International?" asked Mr. Hilford.
"No," replied Mr. Meier.
"The article in Business Week, regarding how most of the (trouble) stocks were on the OTC-BB (OTC Bulletin Board market), did that cause you some concern?" asked Mr. Hilford.
"It just confirmed that we had to continue to be diligent," replied Mr. Meier.
"It confirmed there were unscrupulous people on the OTC-BB?" asked the BCSC lawyer.
"Out of the millions of people, I'm sure there are some unscrupulous ones in this market," replied the brokerage head.
Mr. Meier also told the panel he was not concerned that a number of highest producers, namely Mr. Hauchecorne, Dirk Rachfall, Michael Patterson and Leigh Ivancoe, were all active in the OTC-BB market.
BCSC lawyer Mr. Hilford got angry when Mr. Meier tried to broaden the concern over OTC-BB dealing to other Vancouver brokerages, not just Pacific International.
"Were you not bothered regarding reading a front-page articlee in Business Week on the OTC-BB and your firm was heavily involved in this market," asked Mr. Hilford.
"As with everybody else," replied Mr. Meier.
"You frequently refer to firms other than Pacific International," responded Mr. Hilford.
While not mentioned at this moment, Mr. Meier has testified at numerous other times in previous days that many Vancouver brokerages, not just Pacific International, were active in the OTC-BB market, including servicing non-resident clients, and his brokerage's standards are now the best in the industry.
Mr. Hilford handed the witness an internal memo from Pacific International compliance head Larry McQuid to the firm's executive committee, dated Dec. 16, 1996, the same date as the Business Week feature, dealing with troubles with client identification. In the memo, Mr. McQuid noted that P.I.'s brokers were becoming more reluctant to ask clients for full account-opening documentation, including verified photo identification.
Mr. Meier told the hearing he did not see a connection between the Business Week revelation of client Mr. Abramo's false identification and his brokers' reluctance to get full identification documentation from clients.
Mr. Hilford asked if he ever considered that a client might be getting into Pacific International using an alias.
"We never thought anyone would be reluctant to give information" to deceive us, "it was just a nuisance thing for clients to produce," replied Mr. Meier.
Mr. Hilford then pointed to an Aug. 5, 1999, internal brokerage memo from Jean-Paul Bachellerie to fellow executive John Eymann, who co-founded Pacific International with Mr. Meier. In the memo, Mr. Bachellerie's review of accounts opened in recent years showed that as of July 31, 1999, there were 2,451 client accounts with missing identification or related account-opening information.
"About 500 were zero stock and zero cash accounts which were closed quickly," explained Mr. Meier. The hearing was also told that over the following weeks and months, Mr. Bachellerie quickly brought the deficiency number down to near zero, either by getting and verifying the missing information or by closing down more accounts.
"Nonetheless, as of July 31, 1999, by its own numbers, the number of deficient accounts P.I. had was 2,451," asserted Mr. Hilford.
"Yes, we readily admitted that to the VSE and the B.C. Securities Commission, that that was something we weren't completely proud of," replied Mr. Meier.
BCSC lawyer Mr. Hilford switched to a new topic when the hearing resumed after a 20-minute late-morning coffee break.
Mr. Hilford asked Mr. Meier when he first became aware of another controversial client, Richard Gladstone.
"I heard the name in the summer of '99," replied Mr. Meier.
"When did you discover he was another non-resident client?" asked Mr. Hilford.
"I learned that in the summer of '99," replied Mr. Meier.
"You also learned then that Mr. Gladstone had a regulatory history?" asked the BCSC lawyer.
"That is correct," replied the brokerage head.
"And that his regulatory history included his brokerage firm being shut down, and a $100,000 fine, and both him and his firm being barred from the NASD?" asked Mr. Hilford.
"Yes," replied Mr. Meier.
Mr. Gladstone was the repeated subject of previous testimony and numerous exhibits discussed in earlier days of the BCSC hearing, including regulatory, criminal and civil court filings, and press clippings. The panel was previously told that Mr. Gladstone and his firm Morgan Gladstone were shut down by the National Association of Securities Dealers and the Florida Division of Securities in 1990.
Other evidence showed that Mr. Gladstone suffered the misfortune in June, 2000, of being one of 120 targets facing a combined total of 11 grand jury indictments in Operation Uptick, the FBI's biggest incursion into the penny stock market. Operation Uptick, the largest stock fraud case in U.S. history, targeted alleged Mafia-linked associates, promoters, brokers and listed company principals. In the undercover operation, FBI agents infiltrated DMN Capital, a reputed mob-operated brokerage in Manhattan, and produced 1,000 hours of recordings through court-ordered bugs.
Mr. Gladstone was acquitted of securities fraud after a four-week trial and 2-1/2 days of jury deliberations.
After his acquittal, Mr. Gladstone turned the tables on the U.S. government, filing a bad-faith-prosecution and seeking payment of his legal fees and expenses. After reviewing the evidence, the trial judge dismissed this court application. "Gladstone has utterly failed in his burden to establish anything suggesting that this was not a good faith prosecution or was not instituted with reasonable cause, or was not well-grounded and was brought to embarrass the defendant," ruled Judge Owen of United States District Court for the Southern District of New York in 2001.
Meanwhile, back at the BCSC hearing Thursday, Mr. Meier faced more questions about how Pacific International dealt with Mr. Gladstone, from January, 1997, when its compliance department discovered the client's NASD baggage in a search, to the summer of 1999, when Mr. Meier was brought into the loop and informed.
"In the summer of '99, you felt you should have been made aware of that earlier?" asked BCSC lawyer Mr. Hilford.
"No, I don't believe so," replied Mr. Meier.
"In the summer of 1999, Mr. Eymann said, 'I don't want that client in this firm.' He (Mr. Gladstone) had been a client of Mr. Rachfall and Mr. Patterson before their arrest," Mr. Meier told the hearing.
(In extensive previous testimony and other evidence, the panel heard that Pacific International brokers Mr. Rachfall and Mr. Patterson were lured across the border, arrested on U.S. soil in late June, 1999, later pled guilty to charges relating to securities fraud, and have since returned home to Vancouver after serving their U.S. prison sentences. The pair were snared by another unrelated client, controversial U.S. promoter David Houge, an unindicted co-conspirator.)
Mr. Hilford then suggested to Mr. Meier that while Mr. Gladstone was finally sent away by Pacific International in 1999, he might have liked to have known about the client's regulatory history back in 1997.
"It wasn't something that Mr. McQuid was required to report to us. He did the appropriate thing, the client was under heightened supervision. There were no problems," Mr. Meier replied. The Pacific International head explained that while Mr. Gladstone had "serious sanctions" from U.S. regulators, that does not prevent such a person from having a brokerage account.
"Would you agree that Mr. Gladstone at the least did not have a good reputation?" asked Mr. Hilford.
"I think that is fair to say," replied Mr. Meier.
The questioning then shifted back to the Gurian/Abramo situation.
Mr. Hilford pointed to a second Business Week article, dated March 24, 1997, entitled, "The Mob on Wall Street: Why You Can't See It." This was a follow-up to the initial cover feature of Dec. 16, 1996.
In this second article, the BCSC lawyer pointed to the second-last paragraph, which noted that a few months after a U.S. company, SC&T International, filed a prospectus failing to mention Mr. Gurian's involvement through offshore Bahamian shells, $1.7-million (U.S.) allegedly disappeared from an account of Ubiquity, one of the shells, at a Canadian brokerage. Business Week described this as a saga-within-a-saga, as Ubiquity claimed the money was stolen by a Canadian brokerage and a penny stock promoter, Eric Wynn. Fortunately, Pacific International was not identified by name in the article.
"You concluded they were talking about your firm?" asked Mr. Hilford.
"Absolutely," replied Mr. Meier.
"Did the thought cross your mind that if your name had been mentioned it would be embarrassing?" asked the BCSC lawyer.
"I agree with you that we were happy not to have our name in it," replied the brokerage head. Mr. Meier conceded this would have damaged the reputation of Pacific International.
In further questioning, Mr. Meier disagreed with Mr. Hilford's suggestion that this would have been a good time for Pacific International to walk away from the OTC-BB market.
"Your assertion that the OTC Bulletin Board market has bad people, it could be anymore," Mr. Meier told the hearing.
Mr. Meier explained that everything came to a head in the summer of 1999, several years after the Hauchecorne scandal, when Pacific International was hit by the arrests of Mr. Rachfall and Mr. Patterson, and a series of client-related scandals in the U.S., mostly unrelated to Pacific International. In early July of 1999, Pacific International moved quickly to retain former BCSC executive director Dean Holley, who recommended a series of changes in brokerage policies and procedures to address troubles in the OTC-BB market.
"The summer of '99 is when we thought we had enough information that caused us to do what we did (hiring Mr. Holley and adopting his report). At no time earlier did we think that such dramatic measures would be necessary. If we had retained Mr. Holley 18 months earlier, he would not have come to the same conclusions that he did (in mid-1999)," Mr. Meier testified.
Mr. Hilford then moved on, pointing to a May 8, 1997, internal Pacific International memo from compliance staffer Sandra Tannis to her boss Mr. McQuid, on the general topic of due diligence relating to accounts with possible illegal distributions. Ms. Tannis specifically mentioned accounts which are selling U.S. securities and in which the accountholder has a disciplinary history.
"Do you agree that accounts trading U.S. securities with (clients with a) disciplinary histories are risky?" asked Mr. Hilford.
"I agree it would be a higher risk and would require heightened supervision," replied Mr. Meier.
Mr. Hilford read Mr. Meier a portion of the memo. "These types of accounts are not rare. . . U.S. clients with a disciplinary history like to sell stocks through accounts at Canadian brokerages," stated Ms. Tannis in her memo.
"I do not disagree with her (now), but I am surprised at what she said, I didn't know that," replied Mr. Meier.
"Did you know these type of accounts attract the attention of the SEC?" asked Mr. Hilford.
"No, I didn't know that," replied Mr. Meier.
Mr. Meier told the hearing he never saw this memo until recently.
"In hindsight, I think this is something that would have been appropriate to bring to the attention of the executive group, yes," he testified.
The hearing then shifted back to another client of Pacific International. The previous day, the panel heard that Euro Pacific Securities Services Gmbh, a German brokerage run by Wolf Wiese, had collapsed in a scandal in May, 2000. Mr. Meier previously testified that soon after December, 1992, Pacific International opened accounts for Euro Pacific and 200 to 300 of its clients. Mr. Meier earlier told the hearing that in the 1990s, Euro Pacific was the only institutional client account he had, and his assistant Eileen Ness serviced the accounts, splitting the commissions with him, until he later turned over all the accounts to her.
Mr. Hilford pointed to a 1999 Pacific International document issued by Mr. McQuid and Mr. Meier that showed that 220 of the 300 Euro Pacific accounts had not been verified regarding client identification and related account opening documentation.
"That was news to me at that time, because I had no other unverified accounts," Mr. Meier told the hearing. The Pacific International head explained that while the "vast majority" of these accounts were opened with a copy of a passport photograph, which was acceptable earlier, these did not meet the stricter standards in 1999 of Mr. Bachellerie, who stipulated that such passport copies must to notarized to avoid false documents being used.
The BCSC lawyer then pointed to another internal Pacific International document, a July, 1997, selective verification review which showed that of accounts targeted, one-quarter featured clients with a disciplinary history.
"It was 32 accounts looked at; eight came back with securities-related disciplinary history," Mr. Hilford told the hearing. The memo noted that these U.S. accountholders were generally trading U.S. pink sheets-type stocks quite actively, and the clients typically claimed to be in investment banking or consulting.
Mr. Meier testified that he did not see this compliance memo at the time.
"You would agree that this is a surprisingly high result," asked Mr. Hilford.
"I guess it depends on what the infractions or histories were. Were they minor or serious? If 25 per cent of general persons' accounts came up, it would be shocking, but (less so) if it was 25 per cent of the most active accounts," Mr. Meier testified. "I assume and I am confident that our competent compliance people would have taken the proper measures, including closing accounts or putting them under heightened supervision."
Mr. Hilford kept pressing the questioning, with mixed success.
"Without knowing the details, it would not be that shocking. It (the client's record) could be a $1,000 fine 10 years ago," Mr. Meier told the panel.
"Would you want to know why PI was attracting so many clients with a disciplinary history?" asked Mr. Hilford.
"Are you asking if only Pacific International was attracting such clients," replied Mr. Meier, who suggested this problem faced other Vancouver brokerages besides his firm.
"Would you have wondered to yourself why is Pacific International attracting so many such clients?" asked Mr. Hilford.
"Yes," replied Mr. Meier.
At this point the hearing adjourned for lunch.
After digesting the morning's testimony, the hearing continued in the afternoon.
In one follow-up question, Mr. Meier defended his brokerage's handling of the account of Mr. Gladstone, the banned former U.S. brokerage head.
"He never caused any risk to us. We closed down his account, but he never did anything wrong at Pacific International," he told the hearing.
Soon after, Mr. Hilford asked Mr. Meier about a 1997 letter from the VSE to a Pacific International compliance staffer, regarding the results of some searches conducted. The letter showed that of nine searches done for Pacific International, one-third showed regulatory histories.
"Would you agree that three of nine searches coming back with a regulatory history would be disturbing?" asked Mr. Hilford.
"That depends," replied Mr. Meier.
The next controversial client on Mr. Hilford's agenda was Kevin Quinn, a California penny stock attorney disbarred in relation to his market activities.
"I knew that at one time he was a sizeable client of Mr. Stratton's (former Pacific International broker Donald Bruce Stratton), the circumstances I cannot remember," Mr. Meier told the hearing. (In later testimony that day, Mr. Meier described Mr. Stratton as "one of our most experienced brokers" and one of the most experienced in the OTC-BB market.)
Mr. Hilford then directed the witness to a Dec. 12, 1997, fax from California attorney William Curtis to Pacific International's legal/compliance department, regarding allegedly stolen securities relating to Atlantic Enterprises.
"Pacific International had an account of Atlantic Enterprises for Mr. Quinn. This letter notes the lawyer (Mr. Quinn) was suspended regarding a felony conviction for embezzlement," Mr. Hilford stated. "The allegation is that Mr. Quinn had taken some shares from a company and these shares were sitting in an account at P.I."
"My vague recollection is that nothing came of this," Mr. Meier replied.
"Does it concern you your firm had an account for someone with a felony conviction and suspended from practicing law?" asked Mr. Hilford.
"The former, yes, regarding the embezzlement," replied Mr. Meier.
"Did it concern you that this individual put shares in P.I. that might have been stolen?" asked the BCSC lawyer.
"I think he (Mr. Quinn) had the authority to do it, but somebody later didn't like it. Stolen is a strong word," replied the brokerage head.
Mr. Meier then agreed he would have a concern regarding a client with a criminal conviction.
"Did you wonder, "Why is it that wee have so many clients with a criminal or regulatory history,'" asked Mr. Hilford.
"Not really. As I said, I was not aware of everything at the time," Mr. Meier replied.
"How about assuming you did know from Mr. McQuid?" asked Mr. Hilford.
"As a CEO, I weigh these seven cases against everything else. I've had 17 years of clean (VSE) audits," Mr. Meier told the hearing.
The final controversial client featured on Thursday was Mr. Yagalla, a once hotshot young fund manager.
Mr. Hilford pointed to a March 11, 1998, internal E-mail from senior Pacific International broker Bob Blades to compliance executive Richard Thomas, and Mr. Thomas's response the next day, both copied to a number of Pacific International executives. The memo related to the concerns of Mr. Blades regarding the behaviour of Mr. Hauchecorne and what should be done about it.
"He (Mr. Hauchecorne) may not know his clients as well as he thinks he does, e.g. a 20-year-old guy sending $500,000 cheques may be unusual, re Yagalla," stated the memo.
Mr. Meier explained the situation about Mr. Yagalla.
"Yes it is. This guy Yagalla became a tech sensation, a very young fund manager who became fabulously wealthy and lost it all again, it was real money. It was for real and he was young and he was very good until he collapsed," Mr. Meier told the hearing.
While there was little further discussion of Mr. Yagalla on Thursday, his case was covered in testimony and exhibits in previous days of the BCSC hearing.
Three things not specifically discussed on Thursday were Mr. Yagalla's regulatory and criminal troubles, and recent press clippings from the U.S.
The United States Securities and Exchange Commission launched a civil action on Oct. 17, 2000, against Mr. Yagalla, and two of his companies, Ashbury Capital Partners L.P. and Ashbury Capital Management LLC. The SEC claimed Mr. Ashbury, then 23, had raised millions of dollars in a dubious hedge fund limited partnership scheme, boasting of 80-per-cent returns over the previous nine years. The regulatory had a receiver appointed for the Ashbury companies, with a claims deadline of June 30 of this year.
In a concurrent criminal prosecution, Mr. Yagalla was arrested and charged with defrauding 110 investors of more than $50-million (U.S.). The fallen wunderkid pled guilty in December, 2001, and was sentenced to 65 months in federal prison on Valentine's Day, 2002.
The date was auspicious, as Mr. Yagalla's romantic exploits were chronicled in the U.S. press, particularly his fondness for showering Playboy Playmates with lavish gifts, trips, luxury cars and platinum credit cards. His story was featured in July, 2001, in Phillymag.com, under the title, "The Prodigy and the Playmate."
More recently, Mr. Yagalla's estate was in the news in Las Vegas this month. Last Tuesday, two days before Mr. Meier described Mr. Yagalla in the Vancouver hearing, the fallen fund star's luxury mansion was auctioned off for $1.35-million (U.S.) by the receiver. Mr. Yagalla reportedly never set foot in the plush house, which he gave to one notable girlfriend, former Playboy cover girl Sandy Bentley.
Meanwhile, back at the BCSC hearing, Mr. Meier insisted that his compliance chief Mr. McQuid did an excellent job in the client-trouble-plagued years from 1995 to 1999, and continues to do so today.
Mr. Meier says that Pacific International's compliance department is now better than ever, in the wake of the 1999 Holley report.
"Given that we handle 2,000 trades a day in various markets, we spend a fair amount of time (reviewing them all.) We now have three CAs (chartered accountants), one lawyer, several CFAs (chartered financial analysts), and professional engineers," Mr. Meier told the hearing.
"No compliance person will ever catch everything. If (mafioso) Mr. Abramo wanted today to have an account at Bank of Montreal and had an influence over it, he could find a way to do it," the Pacific International head told the hearing.
"The securities industry is a risky business, there will always be people who try to cut corners."
Mr. Meier told the hearing that even though Pacific International had an excellent compliance department prior to the scandal-ridden summer of 1999, it fully embraced the recommendations of Mr. Holley that year.
"We did it quickly, correctly and it worked out."
The hearing continues. |
