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Sasha Jacob, president and CEO of Jacob Securities, says the firm had a plan in place “for an immediate capital injection,” including “a firm term sheet,” before the Investment Industry Regulatory Organization of Canada announced it had suspended its membership in December.Moe Doiron/The Globe and Mail

The final months of life for Jacob Securities Inc. were marred by capital deficiencies, compliance violations, a senior executive's abrupt exit and employees being locked out of the office, according to documents released Tuesday.

Amid the pandemonium, the Toronto-based broker dealer was still trying to raise money for a new fund, say documents from the Investment Industry Regulatory Organization of Canada (IIROC). On Dec. 18, IIROC announced it had suspended Jacob Securities' membership, which effectively put the dealer out of business.

"We disagree with both the characterizations and the outcome of the report, and we are weighing our options," Sasha Jacob, founder and chief executive officer of Jacob Securities, said in an interview.

According to the report from the IIROC hearing panel, Jacob Securities had been on the regulator's radar as far back as May, 2013, when it was flagged for "low risk-adjusted capital." IIROC-registered dealers must maintain a minimum amount of capital. If levels drop below minimum values, the regulator has the right to suspend the firm's membership. Red flags also went up in 2013 about the firm's liquidity and lack of profitability. Over time, IIROC also cited the firm for compliance violations including insufficient supervision of trading.

By November, 2015, the firm was unable to correct its capital deficiency, IIROC said. As recently as Nov. 10, Jacob was raising money from investors to start a new marijuana fund. IIROC said the fund was set up "without requisite registration approvals." The regulator also said Jacob named an auditor for the new fund, but that auditor then alleged that it had "not been engaged for the offering." The "risk of imminent harm" to investors eventually forced IIROC's hand.

Mr. Jacob said the firm had a plan in place "for an immediate capital injection," including "a firm term sheet."

"Were it not for the suspension, we would have closed that financing," he said.

He said the capital he had raised would have been more than enough to go above the minimum regulated requirement.

On the laundry list of compliance citations, he said: "We did present to IIROC a concrete plan to institute new compliance measures."

"We take those matters in compliance issues quite seriously."

In December, 2015, before its IIROC membership was suspended, Jacob Securities notified the regulator that its chief financial officer was resigning. Later, the company's chief compliance officer advised IIROC that employees were "locked out of its business premises due to its failure to pay rent of approximately $110,000." IIROC says that following the lockout, "apparently, unsupervised trading continued by JSI's registered representatives through their mobile phones and by meeting with clients in the lobby of the building."

At its peak, Jacob Securities employed 30 people in sales, trading and equity analysis.

The industry has been under a relentless assault in the aftermath of the crash in commodity prices that has left many small brokers whose revenue is dependent on the sector vulnerable. Increasing industrywide costs have also hit the independents hard, as they don't have the economies of scale of the larger bank-owned dealers.

Toward the tail end of last year, two other broker dealers went out of business.

Octagon Capital Corp. was declared bankrupt in December and the Canadian Investor Protection Fund (CIFP) had to step in and bail out a roughly $5-million shortfall to investors.

That same month, Salman Partners Inc., founded by industry veteran Terry Salman, voluntarily ended its IIROC membership after a 22-year run. The Vancouver-based brokerage is currently in the process of winding up its operations.