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Non-Tech : Auric Goldfinger's Short List

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To: Francois Goelo who wrote (10156)9/22/2004 3:49:16 PM
From: StockDung   of 19419
 
IDA target Corrigan hears testimony about rocket stock

2004-09-22 13:49 ET - Street Wire

Also Street Wire (U-LMGR) Light Management Group Inc

by Stockwatch Business Reporter

The Investment Dealers Association hearing into the matter of Thomson Kernaghan & Co.'s former branch manager, Douglas Corrigan, continued on Sept. 17. Mr. Corrigan's lawyer, Ian Donaldson, expressed dismay when the IDA brought up the promotion of an Ontario-based OTC-BB company named Light Management Inc. Mr. Corrigan's former junior, Steven Rodney Jeske, allegedly opened many accounts that traded in Light Management, which shot from $2.38 on Feb. 22, 2000, to $17.50 on March 2, 2000, then collapsed as quickly as it rose. (All figures are in U.S. dollars.) The company currently trades at three cents per share. According to the IDA, past chairman of Light Management Barrington L. Simon referred Ontario clients to Mr. Jeske, whom the IDA alleges Mr. Corrigan failed to supervise.

IDA lawyer Paul Smith was part way into the Light Management matter, in his examination of Wesley Chan, IDA investigator, when Mr. Corrigan's lawyer objected to the direction of the questions. Mr. Smith had not told the defence lawyer that he would venture into the Light Management matter. The line of questioning stopped before the details of the class-action allegations against the Jeske clients worked up any steam.

The Corrigan matter

The IDA alleges that while branch manager of the Thomson Kernaghan & Co. Ltd. office in Vancouver, between May, 1999, and July, 2001, Mr. Corrigan failed to adequately supervise Mr. Jeske, allowing him to open hundreds of client accounts without being properly registered. As well, Mr. Corrigan allegedly failed to document his own daily reviews of 10 other brokers' trades, as required by the IDA's policies.

The IDA and the B.C. Securities Commission had visited Thomson Kernaghan in early 2000, curious about OTC-BB trading in Vancouver brokerages, which in some cases had surpassed Canadian trading. Earlier, the delivery of some OTC-BB company shares had failed at two unnamed Vancouver firms, and the regulatory agencies hoped to figure out what was going on. IDA investigator Stuart Bartley and a colleague from the BCSC interviewed Mr. Corrigan in April, 2000.

As a result of the interview, Mr. Bartley told the panel on the hearing's first day, he realized there was no direct daily supervision at the branch level, and so initiated a sales compliance review. During the review, the IDA found no evidence that Mr. Corrigan conducted daily reviews, Mr. Bartley explained.

Day two of the Corrigan hearing

The IDA hearing resumed with Mr. Donaldson continuing in his cross-examination of Mr. Bartley. Last day, Mr. Donaldson asked Mr. Bartley to bring in supporting documentation for the sales compliance review. Mr. Bartley said he found some information, but not all. The joint BCSC/IDA look into OTC-BB trading, which had brought the IDA to Thomson Kernaghan & Co. Ltd. in early 2000, was nowhere to be found.

Mr. Bartley also told panel members Stephen Gill, Don Teatro and R.G. Merritt that he could not locate any IDA documentation prior to Nov. 6, 2001, regarding IDA policy for brokers who were working out of their jurisdiction. The November, 2001, date is when the IDA implemented a policy stating that brokers needed to be registered in any province where they had clients, not just in their home province. The witness admitted that during the time that Mr. Jeske serviced clients in Ontario, which the IDA claims was another example of Mr. Corrigan's lack of supervision on the Thomson Kernaghan branch manager's part, there was no specific IDA policy on the matter. Mr. Bartley said that, prior to November, 2001, the IDA relied on the B.C. Securities Act for out-of-jurisdiction matters.

Mr. Donaldson wanted to know about the Thomson Kernaghan broker policy manual. A copy of the manual turned up in the Thomson Kernaghan office during the sales compliance review, but nothing on file indicated that Mr. Corrigan had read the manual. Mr. Teatro asked if the current policy of having all sales managers and registered representatives affirm they had read the manual was in place when Mr. Corrigan was branch manager. Mr. Bartley replied that it was.

Before allowing Mr. Bartley to leave, the IDA's lawyer, Mr. Smith, in re-examination, had him verify that part of the Thomson Kernaghan policy manual, found at the Vancouver branch, which Mr. Corrigan may or may not have read, stated that the branch managers must verify that they have reviewed the day's trades by initialling the report, and noting any action taken. Thomson Kernaghan's policy outlined exactly the sort of proof of supervision that the IDA wanted, and was unable to find in Mr. Corrigan's case, Mr. Bartley told the hearing.

Mr. Bartley added that according to one of his colleague's reports, which he read, Mr. Corrigan did not review the daily trades at the branch. With that, his testimony wrapped up.

Investigator Chan

After lunch, the hearing met Wesley Chan, formerly a tax investigator, but now an investigator with the enforcement branch of the IDA.

He started working on the Jeske file in 2001, after the BCSC referred the file to the IDA. The IDA later assigned Mr. Chan to the Corrigan file. Mr. Smith asked Mr. Chan to tell the panel part of what he looked at in the Corrigan investigation.

Mr. Chan told said he examined Mr. Corrigan's Thomson Kernaghan termination notice, which is filed whenever a broker leaves any firm. The IDA investigator started to talk about the negative comments on the notice, from which an investigation may stem, but Mr. Donaldson objected to the negative comments being aired before the panel. Mr. Gill agreed, saying that the comments may be prejudicial against Mr. Corrigan.

Regarding Mr. Corrigan's former junior, Mr. Jeske, Mr. Chan said that one of the main problems with Mr. Jeske's clients' trading was the focus on Light Management. Many of Mr. Jeske's clients, who traded in Light Management, lived in Ontario. The Ontario Securities Commission had forwarded its concerns in the Light Management matter to the IDA. Mr. Jeske managed those accounts as a full-service broker, a registered representative, when in fact he was only registered as an investment representative.

Of the 228 client accounts the IDA could document, Mr. Jeske signed each as the broker with no other registered representative listed. One hundred twenty-one clients were residents of Quebec, Ontario, Alberta and Manitoba, provinces where Mr. Jeske was not registered. Mr. Smith had five binders of account documentation that he wanted to enter as evidence. Panel chair Mr. Gill asked Mr. Donaldson if there were any pre-emptive objections; Mr. Donaldson answered in the negative. Of the 228 Jeske accounts, Mr. Corrigan's signature as branch manager appeared on 219 of the new-client forms.

Mr. Chan flipped to the list of 121 out-of-province clients. Of those, Mr. Jeske met with 18 face-to-face, but he never met with the other 103 clients.

Light Management Group

One of Mr. Jeske's clients was Omega Financial Services, a company owned in part by Mr. Simon, president of Light Management. While Mr. Simon himself did not have an account with Mr. Jeske, his wife Elaine did. Mr. Simon signed all the forms for Omega Financial. Mr. Chan explained that Mr. Simon referred many clients in Ontario to Mr. Jeske, and that those clients traded almost exclusively in Light Management shares.

Mr. Donaldson objected to the line of questioning, wondering about the relevance of Light Management to the allegations against Mr. Corrigan. Mr. Smith replied that Mr. Simon was a de facto client of Mr. Jeske, and he referred clients who traded almost exclusively in Light Management shares. The trading patterns caused a spike in the share price, up to $17.50. With proper supervision, Mr. Smith said, this pattern would have been flagged.

Mr. Donaldson stood firm in his objection. The IDA never told Mr. Donaldson that the Light Management accounts were relevant to the allegations against his client. He should have been told before the hearing, and not have the allegations sprung in the middle of a witness's testimony. If Mr. Smith's position was that the Light Management trading pattern was relevant, then Mr. Donaldson said he would ask to adjourn immediately to consider his position. He had always thought that the case against Mr. Corrigan's alleged lack of supervision on Mr. Jeske centred on the signatures on the out-of-province client forms, not the Light Management trading.

Mr. Smith replied that both the Light Management trading and the Ontario clients related to Mr. Corrigan's lack of supervision of Mr. Jeske. Mr. Chan's evidence was putting flesh on the bones, so to speak, of who directed the accounts and what those accounts were doing. The evidence was to demonstrate the consequences of not having a registered representative in charge of the accounts. The Light Management clients acted in concert, Mr. Smith claimed, only using the accounts to trade in Light Management shares.

Shaking his head, Mr. Donaldson said that was not what had been pleaded at all. The panel took a five-minute break to discuss, then Mr. Gill said that very early on, Mr. Corrigan had admitted that he did not conduct daily reviews of Mr. Jeske's trades, that they were done at the Toronto head office. Any further evidence on the point was just icing on the cake. Ruling the matter redundant, Mr. Gill upheld the objection and told Mr. Smith to get on with his case.

A curious stock

In addition to not being any part of the hearing's pleadings, there was no evidence at the hearing that Light Management or its principals had anything to do with Mr. Corrigan's alleged shortcomings as a branch manager. As well, there are no allegations or evidence that Mr. Corrigan was or is connected to Light. Still, the hearing was told that the IDA's original visit to Thomson Kernaghan was to learn more about OTC-BB trading in Vancouver, and indeed they do seem to have run into an interesting little number. Some of the brief history below is from company filings; some is in a class-action lawsuit, which is still pending.

Former shareholder Robert Sible initiated the class-action lawsuit against the alleged account referrer, Mr. Simon, and the company on June 24, 2002. He claimed that he and others bought Light Management shares at hyped-up prices -- he does not say through whom -- relying on false information released by Mr. Simon and the other defendants.

The class-action suit also named Donald Iwacha, then a director; Eve Sigfrid, the chief financial officer; Greg Amur, Ms. Sigfrid's successor; James E. Slayton, the first auditor; and Feldman Sherb & Co. PC, the second auditor. Mr. Slayton was the subject of two SEC investigations in 2002 over allegations that he signed "materially false" financial statements for California Software Products Inc. and Freedom Surf Inc., companies unrelated to Light Management.

The complaint centred on the rapid rise of the share price in early 2000. The company issued a press release on Feb. 22, 2000, detailing the plan to acquire patents from a Russian vendor. The complaint claims that as a result of the news, the shares jumped $4.56 to close at $6.88. In the ensuing weeks, the share price rose as high as $17.50.

The optimism was short-lived. On April 14, 2000, Light Management filed its 1999 financials, in which the company finally told its investors that a $75-million financing with DJL Capital Corp., described on July 1, 1999, had stalled, and that discussions with DJL Capital were over. Before that, there was no indication that the financing, which was supposed to have started in August, 1999, and set for completion by the spring of 2000, had not progressed as planned. The complaint states that the company should have known the financing was doomed to fail by August 1999, because Light Management had not received any money by that point.

The release of the financials coincided with the shares dropping from $5.16 on April 13 to $3.875 on April 14. The 1999 annual report was then twice restated, and the quarterlies for the first, second and third quarters of 2000 were restated once each, as was the 2000 annual report. The complaint alleges that the restatements were an attempt to hide escalating costs and to create a false impression that the business model was developing successfully. The complaint gave an example that the company overstated its net income for fiscal 1999 by 500 per cent. The class-action lawsuit also alleged that while Light Management told its shareholders that the Russian patent litigation had been resolved, it neglected to mention the related $851,159 legal bill.

The complaint directly accused Mr. Simon, who owned 38 per cent of Omega Financial, of selling a bundle of Light Management stock during the period while the stock's price was artificially inflated. Omega sold around 2,706,762 shares for approximately $5,095,000, the complaint explains, adding that Mr. Simon, as part owner of Omega, therefore profited to the tune of $1.94-million. The complaint seeks a declaration that the defendants broke U.S. securities laws, as well as damages against the defendants.

Other Light Management developments

The second auditor, Feldman Sherb, successfully applied to have the case against it dismissed. In a December, 2003, decision, U.S. District Judge Richard Owen wrote that while Feldman Sherb could have been more thorough in its audits during the three months it acted for Light Management, the auditor's conduct was not "highly unreasonable" to the point where a class-action lawsuit was in order.

Neither the SEC or the OSC have initiated proceedings against Mr. Simon or Light Management. Mr. Jeske's settlement agreement with the IDA, reported in Stockwatch on July 29, 2004, makes no mention of either Light Management's trading or the company itself, so while interesting, it appears to not have been an issue there either.

The Corrigan hearing will resume on Oct. 20, and will most likely require a fourth day, set for Oct. 28.
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