Former Phoenix trader accuses fund of deception

Management of a Toronto hedge fund company that collapsed in 2000 allegedly set out to deceive income tax authorities as well as securities regulators in Canada and the United States, a hearing was told yesterday.

Stephen Duthie, a former bond trader at Phoenix Research and Trading Corp. who is accused by staff at the Ontario Securities Commission of concealing losses from management and clients, made the allegation during the first day of an OSC hearing.

Mr. Duthie, who is representing himself, accused management of deceiving Canada Customs and Revenue Agency, staff at the OSC and the U.S. Securities and Exchange Commission.

Phoenix collapsed in January, 2000, after it lost $125-million (U.S.) on a $3.3-billion hedge fund managed by Mr. Duthie. He was fired the same month. Phoenix said at the time that the fund managed by Mr. Duthie dropped in value to $20-million from $145-million as a result of what it called "unauthorized" trades.

An OSC panel heard yesterday that Mr. Duthie left a tearful message with a secretary at the company on Jan. 6, 2000, just as the firm learned about the losses.

"I'm really sorry. I am just staying away because I can't deal with you guys any more. Everything I did was for the benefit of the firm. It just went wrong when I tried to exit the trade," Mr. Duthie said according to a transcript read out during the hearing. "I never tried to steal anything or defraud the company. I just wanted you guys to know that."

Mr. Duthie said in his opening remarks that a report prepared by Ernst & Young, which was hired by Phoenix to conduct a forensic audit to determine what happened to the fund, contains "glaring" inaccuracies because management also "deliberately attempted" to mislead the firm.

He also disputed allegations made by OSC staff that his trading breached the firm's guidelines and pointed the finger of blame at Ronald Mock, Phoenix's former chief executive officer.

"The only trades that violated the guidelines were currency trades entered into by Mock," he told the panel.

Mr. Mock, now a vice-president of the Ontario Teachers Pension Plan Board, has been prohibited from registering with the OSC in any capacity for five years as part of a settlement agreement reached last week with the OSC.

He was accused of improper supervision and record-keeping at Phoenix.

OSC staff lawyer Tracy Pratt said in her opening remarks that Mr. Duthie's trading exposed the fund to massive market risk. "By acting in flagrant disregard of the [fund's]trading parameters, he failed to act in the best interests of his clients," she said.

Mr. Duthie took over management of the fixed-income fund in 1998. He was supposed to run the fund according to a low-risk bond strategy, according to OSC staff allegations. Instead, he allegedly began buying bonds without any hedging strategy.

On Jan. 4, 2000, the Bank of New York told Phoenix that it had a $50-million overdraft on the bond fund. Phoenix dissolved the fund to mitigate the losses and called in the OSC.

Former Phoenix chairman Mark Kassirer, who appeared as an OSC witness yesterday, said that in late 1999, Mr. Duthie was getting anxious about his compensation for the year. "Duthie was quite anxious that he got his fair share," Mr. Kassirer said. Traders "get fidgety as it gets closer to bonus time."

He added that managers typically received a bonus of around 7 per cent of the profit they made on their funds. In 1998, Mr. Duthie earned a salary of around $100,000 and a bonus of nearly $300,000.

Mr. Kassirer said that he met with Mr. Duthie in late 1999 to discuss his bonus for the year and told him it would be about $1-million.

Mr. Kassirer, head of money manager Kassirer Asset Management Corp., also reached a settlement with the OSC last year. He paid $10,000 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.

Mr. Duthie said in his opening remarks that he does not understand how Phoenix management could assert that the firm was risk-averse when its return on investments climbed to 14 per cent in 1999 from 5.6 per cent in 1996.

The hearing continues.