Toronto-based brokerage Echelon Wealth Partners Inc. used to do very little trading in U.S. over-the-counter stocks. Then it hired Stephen Burns.
In the four years after Mr. Burns joined the investment dealer in 2018 as managing director of electronic trading, regulators say Echelon executed more than $185-million of trades in shares on the U.S. OTC market.
OTC shares are typically illiquid and receive little regulatory oversight – and have been frequent targets of stock-manipulation schemes in the past. U.S. and Canadian regulators say fraudsters often target OTC stocks for what are called pump-and-dump schemes – heavily promoting shares and driving up the price, then selling quickly before a crash.
Neither U.S. nor Canadian authorities allege that Echelon itself initiated any suspect trades. But in a recent disciplinary action launched against the dealer and Mr. Burns, the Canadian Investment Regulatory Organization (CIRO) alleges they both broke industry rules by failing to do due diligence on four customers – all foreign brokerage companies – that used accounts at the Toronto dealer to trade heavily in U.S. OTC stocks. CIRO alleges Echelon failed to properly control and supervise trading by its customers.
Those customers, and their clients, have been tied to multiple cases of securities fraud – some criminal – alleged by U.S. regulators and prosecutors. One of the four Echelon customers, Valor Capital Ltd., was controlled by Joseph Padilla, a California resident who pleaded guilty to charges of securities fraud involving his OTC trading and began to serve a 5½-year prison sentence late last year.
Echelon denies it breached any of CIRO’s regulations related to due diligence and supervision of OTC trading. In a statement of defence filed with CIRO, the company and Mr. Burns say that, “contrary to what is asserted,” Echelon had policies and procedures in place for the trades and those rules were “reviewed and enhanced repeatedly over time.” Customers’ trading patterns “did not raise any red flags that were not reasonably addressed by Echelon’s compliance department.”
While none of the U.S. cases identify Echelon by name, Echelon acknowledges that the U.S. proceedings concluded that clients of Echelon’s four foreign customers “engaged in wrongful conduct.” But by the time regulators and prosecutors announced the proceedings, Echelon said, it had “long ceased trading” in OTC stocks, arguing CIRO is making its allegations “only with the benefit of hindsight.” Now, Echelon says, CIRO wants “to retroactively impose a higher standard of conduct.”
In a written statement Echelon provided to The Globe and Mail, chief executive officer David Cusson said his company “has co-operated and has engaged constructively and transparently with CIRO on this matter” and “disputes the allegations and conclusions made by CIRO’s staff.” Echelon and Mr. Burns intend “to vigorously defend ourselves,” he said.
CIRO’s allegations have not been tested before its hearing panel, which is scheduled to begin proceedings May 29.
Echelon launched in 2010 as Euro Pacific Canada. In 2016, it tripled in size by acquiring Dundee Goodman Private Wealth, renamed itself Echelon and sold a majority stake to Miles Nadal, the former chairman and CEO of advertising holding company MDC Partners Inc.
In March, 2023, Echelon announced a merger with PI Financial, whose former owner, Gary Ng, has been charged with fraud and money laundering, fined and banned from the securities industry. The PI deal, Echelon told The Globe at the time, would make the combined company Canada’s second-largest capital markets franchise not owned by a major bank, after Canaccord Genuity Group Inc. CF-T
More recently, last November, Echelon placed a $30-million lien on the assets of hedge fund manager Traynor Ridge Capital Inc., and its deceased owner, Christopher Callahan, after the fund collapsed and Mr. Callahan died in late October, leaving Echelon and other brokers on the hook for trades that failed to execute. At the time, Echelon said its estimated losses were “significantly lower” than the lien.
CIRO says that prior to July, 2018, Echelon’s trading in OTC securities was “infrequent, occurring at the request of an existing client.” The regulator says it was under Mr. Burns that Echelon’s OTC business expanded rapidly.
From July, 2018, to June, 2022, CIRO alleges Echelon executed nearly $185-million worth of OTC trades. Nearly 60 per cent of that trading business – nearly $106-million – came from just four foreign companies, known formally as broker-dealers.
The business was heavily imbalanced: Stock sales represented nearly all of the dollar value of the OTC transactions, with few share purchases – a red flag that should have warranted further review and inquiry, CIRO alleges. Mr. Burns made $7.75-million in commissions for himself from the entire OTC business, with nearly $5-million of that coming from the four foreign customers, CIRO says.
CIRO said its enforcement staff began to investigate Echelon after an unnamed Canadian brokerage company filed a report in October, 2018, six months after Mr. Burns joined the dealer. The regulator says the unnamed company, which acted as an executing broker for Echelon’s OTC orders, reported what it identified as “excessive trading” in some OTC securities.
In its defence, Echelon says CIRO did not notify it about the 2018 report and the dealer “cannot be faulted for not addressing red flags … that were available yet hidden” from Echelon by regulators.
CIRO also alleges Echelon did not make any changes to its supervisory policies and procedures to monitor the increase in U.S. OTC activity, and allowed Mr. Burns to self-supervise.
But in its written response to CIRO, Echelon says the company had policies and procedures for trading U.S. OTC securities, established specifically for Mr. Burns, in place for the entire alleged period. Echelon says the policies and procedures were prepared “in consultation and cooperation” with Echelon’s carrying broker, Fidelity Clearing Canada ULC, and that they were “reviewed and enhanced repeatedly over time.”
Fidelity Canada spokesperson Chris Pepper told The Globe in an e-mail that Echelon’s response to CIRO is “not consistent” with Fidelity’s practices, and that broker-dealers are “responsible for their own policies and procedures and ensuring their employees adhere to them.”
“We do not sign off on their policies and procedures and are not aware that this happened in this case,” Mr. Pepper said.
The criminal and civil charges filed by the U.S. Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) against the clients of the four-broker dealers who used Echelon for trades allege market manipulation or stock fraud. They allege the defendants acquired shares in OTC companies, often participated in pumping up a stock’s prospects and then dumped the shares at inflated prices on unsuspecting investors. These market manipulations are typically called pump and dumps.
There are legitimate reasons for a stock to trade OTC: Small companies that don’t meet the requirements for listing on a U.S. stock exchange can access investor capital by trading over the counter, via broker-to-broker transactions. But lack of regulation makes those stocks targets of market manipulation, such as pump-and-dump schemes.
Of the four foreign companies that traded through Echelon, Valor Capital, Mr. Padilla’s vehicle, was the top customer, with Echelon executing $78.6-million worth of stock sales.
CIRO says some of those sales involved shares of a small U.S. company called Oncology Pharma Inc. From May 4 to June 29, 2021, Echelon sold approximately $18.5-million worth of Oncology Pharma stock for its customers, but made no purchases for them, CIRO said. Oncology Pharma’s stock traded below 50 US cents at the beginning of 2021, but traded between US$17 and US$39 during that period. A year later, at the end of June, 2022, the stock traded below US$1.50.
U.S. authorities contacted Echelon with an inquiry about trading in Oncology Pharma in September, 2020, and again on June 29, 2021. CIRO alleges an internal risk committee at Echelon took steps after the second contact to halt all trading by Valor Capital.
But Mr. Burns, CIRO alleges, successfully lobbied Echelon’s internal risk committee to resume trading for Valor Capital, within certain limits, including daily maximums for shares traded. CIRO alleges, however, that once Valor resumed trading with Echelon on July 28, 2021 – about a month after the halt – it sold more than $28.5-million worth of shares of Oncology Pharma. The trading exceeded Echelon’s new trading limits for Valor Capital on more than 40 days over an 11-month period, CIRO alleges.
In addition, CIRO alleges that over a three-year period, Echelon wired more than $90-million for Valor Capital to various banks located in St. Lucia, Nevis, Russia and Kyrgyzstan.
In actions launched last year the DOJ and the SEC said Mr. Padilla used Valor Capital to sell US$150-million worth of Oncology Pharma shares between January, 2021, and July, 2022, in one of multiple stock fraud schemes.
Mr. Padilla pled guilty to the U.S. criminal fraud charges, as well as a charge of attempting to obtain a fake Ukrainian passport, on Aug. 17, 2023. He was sentenced Nov. 1 to 5½ years in federal prison. The SEC case is continuing, so its allegations have not yet been tested in court. Robert Goldstein, a lawyer for Mr. Padilla, declined to comment for this story.
In its written response to CIRO, Echelon said it responded to the 2020 inquiry by U.S. regulators about Oncology Pharma and “further enhanced” its OTC policies and procedures in May, 2021, before resuming any trading of the stock. Echelon says that after receiving another U.S. inquiry about Oncology Pharma in June, 2021, it temporarily suspended trading and conducted “substantial due diligence” on the stock before permitting trading to resume.
Echelon says that “in some instances” of Oncology Pharma trading, its volume limits for Valor were exceeded because multiple clients were trading the same U.S. OTC securities, and not because of any violation of its internal policies.
As part of its complaint, CIRO alleges Echelon and Mr. Burns failed to make enough inquiries to realize there were connections among Valor Capital and its three other foreign broker-dealer customers: Financials Worldwide Inc., Weiser Asset Management and Blacktower Ltd.
CIRO alleges the four companies “were all interconnected, either directly through control persons or indirectly through mutual clients or commission referral agreements.” U.S. officials at the SEC and DOJ have alleged that some of those clients were engaged in stock manipulation schemes, some criminal, during the same period that Echelon was executing trades for them.
CIRO does not allege in its complaint that Echelon initiated any of the trades that underlie the U.S. cases. CIRO spokesperson Joanna Nicholson declined to comment on the matter.
And none of the U.S. actions name Echelon specifically. The DOJ and SEC allegations against Mr. Padilla make references to “Toronto” or “Canadian” brokerage companies. SEC spokesperson Cory Jarvis declined to comment on the identity of those companies.
CIRO alleges Echelon executed sales of 483,175 shares in OTC stock Lifequest World Corp. in 2019 for a U.K. corporation called Antevorta Capital Partners Ltd. CIRO alleges Antevorta sold its shares after paying for an online article promoting Lifequest.
In an April, 2022, securities fraud enforcement action, the SEC sued Antevorta and its owner-controller, Canadian-Hungarian Gyula “Julius” Csurgo, alleging they were part of stock manipulation schemes from 2013 to 2018. That same month, the DOJ indicted Mr. Csurgo and another man, who it says is nicknamed “the viper,” for running “pump and dumps” from 2015 to 2019. (The Globe could not reach Mr. Csurgo, who was arrested in April, 2022, through his lawyer.)
In its response to CIRO, Echelon notes the SEC chose not to use Antevorta’s Lifequest trades described by CIRO as part of its own case.
CIRO says another foreign broker in its Echelon allegations, Weiser Asset Management, traded on behalf of a company called Tendall Capital Markets Ltd.
The SEC, in a 2020 proceeding, said Tendall was “often used as a broker-dealer by Wintercap SA.” The regulator sued Wintercap and its owner, Roger Knox, in October, 2018, alleging their participation in a US$165-million microcap stock fraud. In January, 2020, Mr. Knox pleaded guilty to securities fraud charges, and in October, 2023, he was sentenced to three years in federal prison. (The Globe could not reach Mr. Knox through the lawyers who represented him at the time.)
Weiser’s compliance compartment, in an unsigned e-mailed response to The Globe’s questions, said Echelon has delivered global trade execution services for Weiser in more than 10 countries and the OTC trade volumes cited in the CIRO allegations represent less than 1 per cent of Echelon’s trade execution for Weiser.
Echelon and Mr. Burns “have consistently adhered” to strict know-your-customer and anti-money-laundering standards, Weiser said. “Information on underlying investors to a trade is always readily available amongst financial counter parties and the regulator.”
CIRO alleges Echelon knew another one of its customers, Financials Worldwide, was a predecessor company to Valor Capital.
In an affidavit used to support Mr. Padilla’s U.S. criminal indictment, Keith Brown, a special agent with the Federal Bureau of Investigation, said a confidential witness in the case said Mr. Padilla “directed trading” for Financials Worldwide. Mr. Brown also cited an encrypted text message sent by Mr. Padilla in April, 2015, that said “[w]e are very close to being operational for valor and fww.”
The fourth broker-dealer in CIRO’s allegations, Cayman Islands-based Blacktower Ltd., used Echelon to make trades for a U.S. investment company called Gel Direct Trust, with Mr. Burns’s knowledge, CIRO alleges. The regulator alleges that since Gel Direct was a U.S. entity, it couldn’t use Echelon directly for its trades. To solve the problem, CIRO alleges Mr. Burns suggested Gel Direct divert its trades through Blacktower first, before Echelon executed. Blacktower did not respond to an e-mail request by The Globe.
In November, 2022, the SEC sued Gel Direct and its two co-owners, claiming Gel Direct was acting as a broker without being registered. Gel Direct, the SEC alleged, used executing brokers to do more than 19,000 trades, involving more than 300 billion shares in more than 400 companies, on behalf of about 60 customers. These trades generated more than US$1.2-billion of trading proceeds and Gel Direct received more than US$12.4-million in compensation, the SEC said.
In its response to CIRO, Echelon says that the SEC’s complaint against Gel Direct came after Echelon ceased OTC trading. The SEC’s allegations, Echelon says, are “based on information unknown” to it when it was executing OTC trades.
With files from Rick Cash and Stephanie Chambers
David Milstead
Clare O’Hara