Duthie gets 20-year trading ban

A former fixed-income trader blamed for the collapse of Toronto hedge fund company Phoenix Research and Trading Corp. has been hit with a 20-year trading ban.

An Ontario Securities Commission disciplinary panel described Stephen Duthie's conduct as "duplicitous" in its written decision, released yesterday.

The OSC has also punished several other former executives of Phoenix for their roles in the firm's collapse. But Mr. Duthie, 34, has received the harshest penalty. He has also been prohibited from acting as an officer or director of a publicly traded company for 20 years and ordered to pay $90,000 toward the OSC's costs.

"Duthie's conduct, if not fraudulent, was both unfair and improper," the decision says.

The panel found that Mr. Duthie improperly accumulated $3.3-billion (U.S.) in unhedged U.S. Treasury notes in the Phoenix Fixed Income Arbitrage Limited Partnership fund in 1999 and concealed his losses from management. Phoenix was forced to liquidate the fund, which suffered losses exceeding $100-million. The losses led to the collapse of the firm in 2000.

The panel also found that Mr. Duthie overstated the value of the portfolio he managed by more than $80-million as of Dec. 31, 1999, by misstating the actual price of the bonds. The mispricing led the fund to record an unrealized profit, when in fact it had lost money. By mispricing the bonds, he was able to obscure his unauthorized trading, the decision says.

"By masking his trading activity to prevent it from being uncovered, including his mispricing, Duthie's actions were intentional and he must have appreciated the consequences of what he was doing," says the decision, written by Lorne Morphy, an OSC commissioner and chairman of the panel.

Mr. Duthie, who represented himself during a hearing in April, disputed the allegations made by OSC staff and said management at Phoenix was aware of his trading activities.

Documents submitted as evidence at the hearing raise questions about why Phoenix management did not detect the risky trades sooner. All of Mr. Duthie's trades in the U.S. notes were correctly recorded as outright purchases in various internal reports at Phoenix, including the electronic accounting system and daily trade blotters, says a forensic report by Ernst & Young LLP.

Both the former chairman and former chief executive officer of Phoenix reached separate settlements with the OSC.

Former CEO Ronald Mock has been prohibited from registering with the OSC in any capacity for five years for failing to adequately supervise Mr. Duthie. Mr. Mock is now a vice-president at the Ontario Teachers Pension Plan Board, a position that does not require him to be registered with the commission.

Former chairman Mark Kassirer, now head of money manager Kassirer Asset Management Corp., paid $10,000 (Canadian) in OSC costs and agreed to have his firm's compliance processes reviewed to settle allegations that he failed to adequately monitor Phoenix's business.

As for Mr. Duthie, the trading ban applies to his professional capacity as a hedge fund manager. He will be allowed to trade for his personal account, through a broker, after five years.

The penalty was the maximum requested by OSC staff.

Mr. Duthie joined Phoenix in 1995. The native of Brockport, N.Y., began his career in 1988 at Prudential Bache Securities Inc. as a credit officer. The following year, he joined what is now known as BMO Nesbitt Burns Inc. and worked there until 1995.