Investment dealer Echelon Wealth Partners Inc. (now known as Ventum Financial Corp.) is being sanctioned in a settlement with the Canadian Investment Regulatory Organization (CIRO) over gatekeeping failures involving suspicious trading on behalf of several foreign brokers.
A regulatory hearing panel approved a proposed settlement with Echelon (Ventum), and a registered rep that formerly worked at Echelon as managing director of electronic trading, Stephen Burns in connection with supervisory and due diligence failures involving the trading.
According to the settlement, between July 2018 and June 2022, Echelon operated accounts on behalf of four foreign broker-dealers — which engaged in over $100-million worth of trading in U.S. over-the-counter securities — without conducting proper due diligence on the identity of brokers and their clients.
“Echelon permitted the account openings and trading activity without identifying or establishing an appropriate system of controls, compliance, and supervision,” the settlement said.
It also noted that “Burns did not question the trading pattern of the foreign broker dealers who repeatedly transferred-in OTC securities of U.S. issuers, liquidated large amounts of the securities, and wired-out the proceeds of the sales.”
During the time in question, the foreign brokers sold over $100-million worth of stock, which generated $4.9 million in commissions for the firm, the settlement noted. It added that the firm didn’t adequately manage the risks associated with this activity, which hadn’t previously been a big source of business.
“Significant risks are associated with trading OTC securities,” the settlement noted, as issuers that are traded in that market face low disclosure requirements, and their securities are “generally illiquid and volatile and are frequent targets of alleged market manipulation and fraud.”
Yet, the regulator said, “despite the significant increase in OTC trading activity… Echelon did not make adequate changes to its supervisory policies and procedures to monitor the increased U.S. OTC trading activity. It failed to conduct adequate or reasonable supervision activities.”
In this case, the risky trading activity came to light as a result of a report from another (unnamed dealer), which executed Echelon’s U.S. OTC orders, and flagged “what it identified as excessive trading activity in some OTC low-priced securities as part of an ongoing review.”
And, as a result, the SRO alleged that Echelon and Burns failed to act as gatekeepers “by facilitating trading activity that threatened the integrity of the capital markets and the reputation of CIRO-regulated [dealers].”
In the settlement, Echelon and Burns admitted to failing to use due diligence in relation to the accounts and trading by the foreign broker-dealers, and failing to act as gatekeepers. The firm also admitted to failing to establish supervisory controls in connection with the brokers’ OTC trading.
To resolve the allegations, the firm agreed to disgorge $1.7 million, pay a fine of $500,000 and pay costs of $100,000, along with adopting remedial measures recommended by a compliance consultant to bolster its gatekeeping and oversight practices.
In determining the sanctions, the settlement noted that the firm stopped trading U.S. OTC securities in June 2022, the foreign brokers’ accounts were closed, and since the merger with Ventum, the firm has undergone a changeover in top management and compliance personnel.
Additionally, in October 2023, Echelon lost approximately $19.8 million when a hedge fund client, Traynor Ridge Capital, failed, and was forced into court-ordered receivership.
“The size of Echelon (and the amalgamated entity, Ventum), including the firm’s current financial resources and risk-adjusted capital, was a factor with respect to the agreed sanction,” the settlement noted. “Given these factors and the remedial measures, enforcement staff and Ventum have agreed that it is appropriate in the circumstances to reduce the amount to be disgorged to $1.7 million.”
Additionally, Burns also agreed to a fine of $100,000, and $25,000 in costs, along with a six-month suspension, as part of the settlement.