|Streetwire: Art Smolensky |
by Brent Mudry
The British Columbia Securities Commission is determined to prosecute Global Securities founder and chairman Art Smolensky for alleged insider trading and stock manipulation, the most serious personal charges levied against the head of a Howe Street brokerage in almost two decades, even though Mr. Smolensky was already fined $125,000 and suspended for 30 days in a consent settlement with the former Canadian Venture Exchange a year and a half ago in the same case.
This smacks of double jeopardy and cannot be tolerated, according to Mr. Smolensky's lawyer, Howard Shapray, the hired advocate for many deep pocketed but misunderstood Howe Street players.
"This is unprecedented," says Mr. Shapray. The lawyer points out that while the BCSC prosecuted former Pacific International Securities broker Jean Claude Hauchecorne after the former Vancouver Stock Exchange banned him for serving several Mafia associates through offshore accounts, Mr. Hauchecorne, unlike Mr. Smolensky, was already out of the industry when the BCSC got its mitts on him.
Although double jeopardy, in which a defendant cannot be tried twice for the same offence, is only legally recognized in criminal cases, Mr. Shapray suggests there is no reason the concept should not apply in disciplinary proceedings. Mr. Shapray has his work cut out for him on this defence, as he believes the issue has never been raised before, or at least not successfully so.
In a nutshell, the BCSC claims, like the CDNX before, that Mr. Smolensky engaged in insider trading and stock manipulation on Aug. 14, 1997, when he knocked down the share price of Trooper Technologies through heavy selling from Global accounts, just before a major private placement financing in which he participated.
Aside from the BCSC's landmark Pacific International Securities hearing, set to start Oct. 7, the Smolensky prosecution is expected to be the hardest-fought case in recent Howe Street regulatory history. The BCSC wants to effectively remove Mr. Smolensky from the industry, stripping his trading rights, suspending or restricting his registration and denying him the benefit of a number of standard trading exemptions.
(Mr. Smolensky remains chairman of Global, which he founded in 1988, but securities lawyer Doug Garrod, a former listings vice-president of the former Vancouver Stock Exchange, took over the reigns as president of the brokerage on Oct. 1, 1999.)
The last time a significant Howe Street brokerage head was targeted by regulators was in the early 1980s, when Ann Mark's Bond Street International Securities was shut down for shorting its house issues. A much smaller and embryonic brokerage, First Vancouver Securities, closed down soon after official allegations surfaced in the United States in late 1988 that its principals were cronies of Ferdinand Marcos, the ousted kleptocratic Philippines president.
There is no parallel to either of these past cases, however, as Global itself is not a target in the Smolensky case and the brokerage faces no regulatory jeopardy itself.
The Smolensky case dates back more than five years, amid heavy trading in shares of Stan Lis's Trooper Technologies, since renamed Stream Technologies, in mid-August, 1997, just before details of a major private placement financing were released.
While Howe Street brokerages and clients for time immemorial have whacked down stock prices to get favourable low prices for private placements or cross trades, Vancouver regulators evidently felt the Trooper case was too egregious and blatant to ignore.
On Aug. 14, 1997, Trooper shares fell from $1.43 to $1.05 on all-time record volume of 609,100 shares, with 88 per cent of the selling volume coming from accounts, mainly from a handful of offshore Cayman Islands accounts, over which Mr. Smolensky had trading authority: Cayman Islands Securities, Hua Hwa Enterprise Ltd. and Lacasse Cecille Investments Ltd. Mr. Smolensky confirms he had a beneficial interest in only one these accounts, a 7.5-per-cent ownership stake in Cayman Islands Securities.
In the last half hour of trading, Trooper shares fell from $1.20 to $1.05, pounded down by Global clients selling 368,000 shares, 60 per cent of the day's total volume. In the last five minutes, Global accounts sold 206,000 shares, 34 per cent of the day's total volume, and three seconds before the close, Mr. Smolensky entered an order to sell 50,000 shares.
Several hours after the close, Trooper announced an $8.4-million financing of 10 million units at 84 cents, with the financing price based on the allowable 20-per-cent discount from the closing market price.
This financing had two parts: 1.73 million units subscribed for by Global clients, including Skana Holdings, Mr. Smolensky's long-time personal holding company, and 8.26 million units to a European institutional investor, East Europe Development Fund Ltd., and its fund manager. In the Global portion, Skana and Hua Hwa each bought 125,000 units, while Cayman Island Securities bought 408,000 units.
The next day, Trooper shares rebounded sharply, opening at $1.40 and closing at $2.10, double the previous day's close. The VSE's listings committee red-flagged the market activity, rejected the 84-cent price on the Global portion of the private placement, and replaced it with a $1.35 financing price, based on the average price for the previous 10 days.
After mulling over the case for several years, the VSE launched a disciplinary case against Mr. Smolensky, and issued an amended notice of hearing on March 8, 2000. Although regulators from Wall Street to Howe Street, including the VSE and its successors the Canadian Venture Exchange and TSX Venture Exchange have been demanding greater disclosure from listed companies for years, the CDNX's own prosecution of Mr. Smolensky was a closely kept secret until Stockwatch revealed the case in January, 2001. On the heels of this and other secret prosecutions revealed by Stockwatch, the former CDNX scrambled to revise its own disclosure policy.
The weeks building up to the CDNX hearing featured a heated disclosure battle, in which the exchange abruptly backed down, on the steps of the Court of Appeal for British Columbia, on its demand for Mr. Smolensky to show his defence hand. Mr. Smolensky switched lawyers, from Mark Skwarok to Mr. Shapray on the eve of the hearing after settlement negotiations broke down. A behind-closed-doors settlement was finally reached by Mr. Shapray and exchange counsel. In April, 2001, Mr. Smolensky was fined $115,000, levied $10,000 in investigative costs and given a 30-day suspension.
Now, almost a year and a half later, the BCSC has launched its own prosecution of Mr. Smolensky and Mr. Shapray is plenty steamed and full of his customary bombast.
For starters, Mr. Shapray claims the admissions he negotiated for Mr. Smolensky in the CDNX settlement were made for the purpose of that proceeding only, and should not be used as general admissions by the BCSC.
In a much stronger attack, Mr. Shapray claims the BCSC "screwed it up" in its Sept. 11 notice of hearing against Mr. Smolensky by mistakenly noting that in the April 5, 2001, CDNX settlement, Mr. Smolensky admitted "he had been aware of the proposed timing and price of the Private Placement during the trading."
Mr. Shapray distinguishes the two parts of the Trooper financing, and claims Mr. Smolensky only knew about the 1.7 million unit Global portion, not the 8.3 million unit European portion during trading hours on that fateful day in August five years ago.
"I made commission staff aware (in writing) on Aug. 28 that their allegations of admissions were incorrectly stated," Mr. Shapray told Stockwatch. "They ignored the points that I had raised. They proceeded in spite of the points that I raised." Mr. Shapray suggests he will demand the BCSC issue an amended notice of hearing to correct of clarify this point and distribute it to all parties who received the Sept. 11 notice, complete with an explanation of the change. (This might be something of a precedent itself.)
Mr. Shapray also argues that if the BCSC had any objections to the terms or severity of the CDNX settlement, it should have stood up within provisions of the 30-day period subsequent and argue its case then.
Another key point of Mr. Shapray's argument is "the abusive nature of the delay" of the BCSC in launching its prosecution of his client Mr. Smolensky. "The five-year delay is unforgiveable in my view."
The cornerstone of the defence is likely to be double jeopardy. "This principle of justice goes back to the Magna Carta," says the lawyer.
On the actual facts of the case, the Trooper trading, Mr. Shapray argues that Mr. Smolensky did absolutely nothing wrong. "We take the position that Art was acting on the instructions of clients, and he was not doing anything improper. They were client trades in which Art was not interested." Mr. Shapray points out that Mr. Smolensky had just a minority ownership in Cayman Island Securities, and the only account in which he had full beneficial ownership was Skana.
With both sides so far apart and the stakes so high, the BCSC's prosecution of Mr. Smolensky promises many fireworks to come.