Commodities dealer Barret Capital Management has been shut and slapped with fines totalling $225,000 after regulators determined that the firm illegally traded with client funds and often misrepresented the value of holdings in client accounts.
After reaching a settlement with the Investment Industry Regulatory Organization of Canada, Barret’s owners, brothers Jamie and Idan Cohen, will now be banned from the securities industry for 20 years and must each pay $50,000 in damages, on top of the $125,000 they have agreed to pay IIROC to cover its fees.
After investigating, IIROC found that from at least September 2009 to at least November 2011, Barret would enter numerous trades through the day, but would never associate these trends with corresponding clients numbers. The trades were only allocated once their net gain and loss was known, which means Barret could essentially choose who they allocated losses to.
When clients started asking questions, Barret would mislead them by inflating the value of their accounts. To do this, the firm bought ‘gut’ options, a strategy employed when you write a put and a call on an underlying security. Doing this, Barret would earn upfront premiums that they would use to show value in client accounts, but they were then exposed to changes in price.
The brothers would also provide misleading or inaccurate information about client accounts and make off book payments to clients.
IIROC now hopes to recover what’s left of client funds with the help of Laurentian Bank of Canada, who performed all of Barret’s back office duties.