In a settlement that aims a shot across the bow of the fledgling crypto asset sector and mounts its first defence of whistleblowers, the Ontario Securities Commission (OSC) sanctioned crypto trading platform Coinsquare Ltd. and several executives.
The regulator found the firm faked its trading volume, lied about it, and retaliated against an internal whistleblower. Following a virtual hearing, an OSC hearing panel approved a settlement with Coinsquare and its executives that includes over $2.2 million in sanctions and costs, as well as industry bans.
The sanctions follow admissions that the firm violated securities rules by reporting inflated trading volume, which was generated by an internal algorithm that produced 840,000 wash trades (involving 590,000 Bitcoins), representing 90% of the platform’s reported trading activity.
The OSC also found the firm made misleading statements about the phony volume when concerns were raised by clients on Reddit, and that Coinsquare retaliated against an internal whistleblower who brought concerns about the suspect volume to senior management. The whistleblower was terminated by the company.
In settling the case, the firm admitted to engaging in market manipulation by reporting inflated trading volumes, misleading clients about the suspect volume and retaliating against a whistleblower.
CEO Cole Diamond and founder, president and CTO Virgile Rostand admitted to facilitating the firm’s breaches of Ontario securities law, while former chief compliance officer (CCO) Felix Mazer admitted to failing to fulfil his role as CCO.
Under the settlement, Diamond and Rostand both agreed to resign from the firm. Diamond paid a $1 million penalty and Rostand paid $900,000.
Coinsquare, Diamond and Rostand agreed to pay $300,000 in costs.
The two executives are also banned from registration for three years, and they are both banned from participating in the management of Coinsquare for three years.
Additionally, Diamond received a three-year director and officer (D&O) ban, and Rostand agreed to a two-year D&O ban (although there’s a carve-out in the deal that will allow them to be involved with a Coinsquare affiliate that’s not a market participant after one year).
Mazer is also banned for one year and agreed to pay $50,000 for his role in the misconduct.
“Despite several employees raising concerns about inflated trading volumes, Coinsquare not only stuck with the practice, but lied to investors about it and retaliated against a whistleblower,” said Jeff Kehoe, director of enforcement at the OSC, in a statement.
As part of the settlement, Coinsquare and its subsidiary, Coinsquare Capital Markets Ltd., which was seeking registration with the OSC and the Investment Industry Regulatory Organization of Canada (IIROC), are also required to “implement substantial corporate governance improvements” before it can continue to pursue possible registration with the OSC and IIROC.
These improvements include establishing independent boards of directors, appointing new CEOs and CCOs, creating an internal whistleblower program, and implementing policies and procedures to ensure compliance.
“This process will permit OSC and IIROC staff to assess the applications in light of all available information and then make a final determination on whether to grant or refuse registration,” the OSC said.
The settlement marks the OSC’s first enforcement case against a crypto trading platform, and it comes on the heels of the OSC’s recent investigation into failed crypto trading platform QuadrigaCX, which concluded that company was operated like a Ponzi scheme.
“Being an innovator in our capital markets is not a free pass to disregard Ontario securities law,” Kehoe said in a statement following today’s hearing.
“All market participants – including those in novel industries – must act honestly and responsibly,” he added.
The Coinsquare case is also the regulator’s first proceeding alleging a violation of anti-retaliation measures adopted as part of the OSC’s whistleblower program.
Kehoe said the case “is an important milestone, as it is the first action we have taken for a reprisal against a whistleblower since important protections for employee whistleblowers were added to Ontario securities legislation in 2016.”