Decisions

CHINAMAX INTERNATIONAL INVESTMENT LTD., et. al. [Decision]

BCSECCOM #:
Document Type:
Decision
Published Date:
1997-04-04
Effective Date:
1997-03-25
Details:


COR#97/062

IN THE MATTER OF THE SECURITIES ACT
S.B.C. 1985, c. 83

AND

IN THE MATTER OF CHINAMAX INTERNATIONAL INVESTMENT LTD. (A
HONG KONG COMPANY), CHINAMAX INTERNATIONAL INVESTMENT LTD.
(A BRITISH COLUMBIA COMPANY), GOLDMAN STANLEY CONSULTANTS INC.,
TOP RANK INVESTMENT (INTERNATIONAL) LTD., TOP RANK (MACAU)
INVESTMENT CO. LTD., PEREGRINE FINANCE LTD. (AN ALBERTA COMPANY)

AND

IN THE MATTER OF ANDY CHAN (A.K.A. WING LEUNG CHAN,
YING-LEUNG CHAN AND YING LEUNG CHAN), ERIC SIU FUNG KO,
KIT WAI CHEUNG (A.K.A. JOHNNY KIT WAI CHEUNG AND
JOHNNY KIT-WAI CHEUNG), PHILIP Y. HO, WILLIAM KEE YIU LO,
CHARLIE CHI KIN NG, MAU CHUNG NG, JOSEPH YAN-LAP CHAN,
SIMON GERVAISE WILLIAM POSTLES, ALBERT DAN SIEGA AND
TROY TISSERAND AND WAI MING WONG (A.K.A. WENDY WONG)



HEARING




PANEL:JOYCE C. MAYKUT, Q.C.VICE CHAIR
PETER A. MANSON, Q.C.MEMBER
DAVID HOOPER, F.C.AMEMBER*

*David Hooper, F.C.A. resigned as a Member of the Commission on January 4, 1997.

DATES:JULY 22, 23, 24, 29, AUGUST 2 AND September 27, 1996
APPEARING:CATHARINE ESSONFOR COMMISSION STAFF
PATRICK SULLIVAN
DECISION OF THE COMMISSION

TABLE OF CONTENTS
Page No.
1.INTRODUCTION3
2. BACKGROUND5
2.1 Overview5
2.2 The Forex Contracts and the Operation of Goldman Stanley’s Business8
2.2.1 Marketing8
2.2.2 Operations10
2.2.3 The Role of Chan, Wong, Lo, Ho and Siega from November 1994 to July 199514
2.3 The Peregrine Alberta Operation17
3. ANALYSIS AND FINDINGS20
3.1 Are the forex contracts securities?20
3.2 Were the respondents, with the exception of Wong, trading in securities contrary to
sections 20(1)(a) and 42 of the Act?
21
3.2.1 Goldman Stanley22
3.2.2 Chinamax HK, Chinamax BC, Peregrine Alberta and Chan25
3.2.3 Siega, Ho and Lo26
3.3 Was Siega advising with respect to securities contrary to section 20(1)(c) of the Act?27
3.4. Did Chan, Wong and Peregrine Alberta participate in a fraudulent scheme relating to securities contrary to section 41.1 of the Act?29
4. DECISION30
Chan, Goldman Stanley, Chinamax HK, Chinamax BC and Peregrine Alberta30
Wong31
Ho and Lo31
Siega32



1. INTRODUCTION

This is a hearing under sections 144 and 144.1 of the Securities Act, S.B.C. 1985, c. 83. It concerns allegations set out in notices of hearing issued by the Executive Director on November 8, 1995 and on January 3, 1996. The notices were amended and consolidated on April 22, 1996.

In the notice of hearing dated November 8, 1995 Commission staff alleged that from May 1994 to July 1995, Chinamax International Investment Ltd. (Chinamax HK), Chinamax International Investment Ltd. (Chinamax BC), Goldman Stanley Consultants Inc. (Goldman Stanley), Top Rank Investment (International) Ltd. (Top Rank International), and Top Rank (Macau) Investment Co. Ltd. (Top Rank Macau), Andy Chan (a.k.a. Wing Leung Chan, Ying-Leung Chan and Ying Leung Chan), Eric Siu Fung Ko, Shu-Sing To (a.k.a. Tony Tao), Kit Wai Cheung (a.k.a. Johnny Kit Wai Cheung and Johnny Kit-Wai Cheung), Philip Y. Ho, William Kee Yiu Lo, Charlie Chi Kin Ng, Mau Chung Ng and Joseph Yan-Lap Chan traded in securities, without registration and without an exemption from registration, contrary to section 20 of the Act, and that each of them distributed these securities to members of the public in British Columbia without filing, and obtaining a receipt for, a prospectus and without an exemption from the requirement to file a prospectus, contrary to section 42 of the Act. The securities, described as forex contracts, were foreign exchange contracts purporting to represent the purchase or sale on margin of certain foreign currencies and precious metals.

On July 11, 1995, Commission staff had directed Goldman Stanley to close the forex contract trading business that had been operating out of its offices in British Columbia and to advise its employees and clients in writing of this direction. Notices to employees and clients, which were signed by Andy Chan, were posted in Goldman Stanley’s offices stating that all trading in forex contracts would cease at 12 noon Thursday July 13, 1995. In a letter dated July 14, 1995, counsel for Goldman Stanley confirmed that Goldman Stanley had ceased trading forex contracts as of noon on July 13, 1995.

In the notice of hearing dated January 3, 1996, Commission staff alleged that after Goldman Stanley advised that it had ceased trading forex contracts, Chan with Simon Gervaise William Postles, Albert Dan Siega, and Troy Tisserand, continued to offer to members of the public in British Columbia the opportunity to trade forex contracts purportedly with Peregrine Finance Limited/Peregrine Futures Hong Kong Limited, without registration and without an exemption from registration, contrary to section 20 of the Act, and that each of them distributed forex contracts to members of the public in British Columbia without filing, and obtaining a receipt for, a prospectus and without an exemption from the requirement to file a prospectus, contrary to section 42 of the Act. Temporary orders under section 144(1) directing compliance with sections 20 and 42 of the Act and cease trading the forex contracts accompanied the January 3 notice.

On January 18, 1996 the Commission ordered under section 144(3) of the Act that the temporary orders be extended until a hearing is held and a decision rendered and that the two notices be consolidated. A consolidated amended notice of hearing dated April 22, 1996, added Wai Ming Wong (a.k.a. Wendy Wong) as a respondent and added further allegations regarding the conduct of Postles, Siega and Tisserand.

Postles, Charlie Ng, Eric Ko, Tisserand, Joseph Yan-Lap Chan, Kit Wai Cheung, Mau Chung Ng, Top Rank International and Top Rank Macau entered into settlement agreements with the Executive Director. See [1996] 34 BCSC Weekly Summary 24.

The hearing proceeded against Goldman Stanley, Chinamax HK, Chinamax BC, Andy Chan, Peregrine Alberta, Albert Siega, William Lo, Philip Ho and Wendy Wong (collectively the respondents).

Based on the evidence relating to service we determined that each of the respondents received notice of the hearing in accordance with section 156 of the Act. None of the respondents appeared at the hearing, with the exception of Ho who attended only to testify.

Chan had been interviewed by Commission staff on September 28 and October 12, 1995. Chan was also interviewed with respect to this matter by the Hong Kong Futures and Securities Commission on February 9, 1996. Lo was interviewed by Commission staff on October 2, 1995. Siega was interviewed by a member of the RCMP on December 12, 1995. The transcripts from each of these interviews were introduced into evidence.

In summary, the allegations for our consideration are that:

1. each of the respondents, except for Wong, traded in securities, namely forex contracts, without registration and without an exemption from registration, contrary to section 20(1)(a) of the Act, and that each of them distributed these securities without filing and obtaining a receipt for a prospectus and without an exemption from the requirement to file a prospectus, contrary to section 42 of the Act;

2. Albert Siega acted as an adviser and portfolio manager with respect to trades in the forex contracts without being registered contrary to section 20(1)(c) of the Act; and

3. each of Chan, Wong and Peregrine Alberta participated in a transaction or scheme relating to a trade or acquisition of a security, namely a forex contract, when they knew or ought to have known that the transaction or scheme perpetrated a fraud on residents of British Columbia contrary to section 41.1 of the Act.

The allegations cover three periods:

1. from May 1994 until November 1994, when Goldman Stanley, controlled by Eric Ko and an associate, acted as agent for certain forex dealers in the sale of forex contracts to the public in British Columbia;

2. from November 1994, when Chan took control of Goldman Stanley and continued its forex contract trading business, until July 1995 when Commission staff directed Goldman Stanley to shut down its forex contract trading business; and

3. from July 1995, when Siega, Postles and Tisserand under the direction of Chan continued to trade forex contracts, purportedly as agent for the Hong Kong based Peregrine group of companies, to the public in British Columbia until January 3, 1996, when the temporary order was issued cease trading the forex contracts.


2. BACKGROUND

2.1 Overview

Goldman Stanley was incorporated under the Company Act R.S.B.C. 1979, c. 59 in February 1993. Shortly thereafter, Eric Ko and a business associate set up Goldman Stanley’s forex contract trading business in Vancouver. Ko and his associate had been involved in a similar forex contract trading business in Vancouver conducted under the name of AA Management Services Inc. Initially the principals of Goldman Stanley traded only for themselves, however sometime after May 1994, Goldman Stanley began acting as agent for certain foreign forex dealers, including Top Rank International or Top Rank Macau and Peregrine Brokerage Inc., in offering to buy and sell their forex contracts to the public in British Columbia.

Top Rank International was incorporated in Hong Kong and was not registered to carry on business in British Columbia. Top Rank International was a foreign exchange currency dealer that operated out of Hong Kong until approximately October 1994. It then moved its operations to Macau and conducted business through Top Rank Macau. Top Rank Macau was incorporated in Macau and was not registered to carry on business in British Columbia. Neither company was registered to trade forex contracts in Hong Kong as required by Hong Kong law. They are referred to hereafter as Top Rank.

Peregrine Brokerage Inc. (Peregrine Hong Kong), Peregrine Finance Limited and Peregrine Futures Hong Kong Limited were part of the Peregrine Group, a substantial and well established group of companies in the financial services business in Hong Kong specializing in global corporate finance, and stock and foreign exchange brokerage. Its 1994 Annual Report disclosed that the Peregrine Group had 31 offices and 1300 employees throughout the world and assets in 1994 of HK $13.8 billion. Peregrine Hong Kong was a member of the American National Association of Securities Dealers Inc.

In November 1994, Ko and his associate sold control of Goldman Stanley to Andy Chan who became a director and the president of Goldman Stanley. Thereafter Chan took over as operations manager from Ko and became the directing mind and boss of Goldman Stanley. Although Ko stayed on as a director of Goldman Stanley until he was replaced by Charlie Ng in May 1995, neither Ko nor Ng exercised any director’s duties while Chan was in charge. After Chan arrived, Goldman Stanley also began to act as agent for Chinamax HK in offering to buy and sell its forex contracts to members of the public in British Columbia.

Chinamax HK was incorporated in Hong Kong on November 26, 1992, and is not registered to carry on business in British Columbia. Chan was a director and the controlling shareholder of Chinamax HK. Tony To was a director of record and a shareholder in Chinamax HK. Chinamax HK was not registered to trade forex contracts as required by Hong Kong law. Goldman Stanley falsely held out that Chinamax HK was one of the leading forex firms in mainland China with branches, offices or affiliated companies in Mainland China and Hong Kong. At all material times, Chan concealed from employees, account executives and clients of Goldman Stanley the fact that he controlled Chinamax HK.

Chinamax BC was incorporated under the Company Act on January 20, 1995 with Chan as its sole director. Chan opened bank accounts in the name of Chinamax BC to facilitate the transfer of funds to Chinamax HK.

Philip Ho and William Lo were vice presidents of Goldman Stanley and in charge of marketing and staff training. Under their and Chan’s direction, Goldman Stanley advertised for and contracted with account executives, who would solicit clients and advise them on trading forex contracts or trade forex contracts on their behalf.

Siega, Postles and Tisserand were account executives who solicited and advised clients and traded in forex contracts on behalf of clients through the facilities provided by Goldman Stanley until Ju1y 1995.

In June 1995, this Commission issued decisions in the matters of AA Management Ltd. and Yuen Chow International Group, BCSC Weekly Summary [1995] 22 BCSC Weekly Summary 6 and 26, respectively, in which the Commission concluded that trading in forex contracts constituted trading in securities and therefore required registration. On July 11, 1995, following the release of these decisions, Commission staff directed Goldman Stanley to shut down its operations by July 13, 1995. Counsel for Goldman Stanley confirmed to Commission staff on July 14, 1995, that Goldman Stanley had ceased trading all forex contracts with members of the public by noon on July 13, 1995. Counsel for Goldman Stanley also confirmed that Goldman Stanley had given written notice to all of its account executives to cease trading all forex contracts with members of the public.

However, shortly after Goldman Stanley purportedly shut its doors to the public, Chan met with several ex-Goldman Stanley account executives including, Siega, Postles and Tisserand, and offered them the opportunity to continue to work with him in the forex contract trading business. Wong, a receptionist at Goldman Stanley and the girlfriend of Chan, translated for Chan at this meeting and all subsequent meetings Chan had with these account executives. Chan represented to them that he had arranged a “special deal” with Peregrine Hong Kong whereby they could trade forex contracts of Peregrine Hong Kong with a reduced margin deposit. Siega, Postles and Tisserand took Chan up on his offer.

However, Siega, Postles and Tisserand were unaware that in late August 1995, Wong had acquired a numbered company in Alberta and had it renamed, Peregrine Finance Limited (Peregrine Alberta). She also opened a bank account in Edmonton for Peregrine Alberta. Chan led Siega, Postles and Tisserand to believe that clients’ trades in forex contracts were now being brokered through Peregrine Hong Kong. They were not, nor was there any evidence to suggest they were brokered through any other dealer. Instead client funds, which Chan represented were going to Peregrine Hong Kong, were simply deposited into the account of Peregrine Alberta and subsequently withdrawn by Chan and Wong for their own use.

Peregrine Alberta was incorporated in the Province of Alberta and was not registered to carry on business in British Columbia. Peregrine Alberta was unrelated to the Hong Kong group of Peregrine companies. Prior to December 1, 1995, Wong was the sole shareholder and director of record of Peregrine Alberta. On or about December 1, 1995, Chan replaced Wong as the sole shareholder and director of record of Peregrine Alberta.

By November 18, 1995 Postles, Siega and Tisserand had realized that Peregrine Hong Kong had not opened any accounts for their clients. The three immediately stopped trading and attempted to get client funds back from Chan. They were unsuccessful and Chan and Wong disappeared shortly thereafter.

None of the corporate respondents is a reporting issuer under the Act. None of the respondents, except Lo and Siega, has ever been registered in any capacity under the Act. Lo was registered as a securities salesman from September 29, 1995 to December 19, 1995. Siega was registered as a securities salesman with Continental Futures Inc. from March 28, 1994 to February 3, 1995.

2.2 The Forex Contracts and the Operation of Goldman Stanley’s Business

Although there were significant changes in the way Chan managed and directed Goldman Stanley’s affairs when he acquired control in November 1994, Goldman Stanley’s forex contract trading business remained relatively constant from the public’s perspective. Accordingly the description of the forex contracts and Goldman Stanley’s forex contract trading business in this section covers the period from May 1994 to July 1995, when Commission staff directed Goldman Stanley to shut down.

Goldman Stanley’s forex contract trading business was segregated into two functions - marketing and operations. Goldman Stanley’s office was set up to accommodate this separation of functions.

The marketing function was conducted in a public area furnished with desks and computer terminals, which continuously displayed currency price quotations provided by the Knight-Ridder news service. Account executives and clients worked in this area.

The operations function was carried out in the “fishbowl”, an area inaccessible to account executives and clients. The fishbowl was connected to the public area by a window through which account executives and clients would place orders to trade forex contracts. The fishbowl was equipped with computers and telephones and was controlled by the operations manager. Only the operations manager and employees working in the fishbowl were able to contact the dealers with whom the forex contracts were actually traded.

2.2.1 Marketing

The marketing function consisted of the recruiting of clients and account executives who were interested in trading forex contracts for themselves or on behalf of others. Goldman Stanley recruited account executives on university campuses and by ads in newspapers. Virtually everyone interviewed was hired. In many cases, new employees were young, recent university graduates who were looking for their first career jobs. In some cases, new account executives had no business experience or education, nor did Goldman Stanley require any. Inexperienced account executives were given approximately three weeks of basic training. No training was given to account executives with any degree of experience.

Until new recruits opened a client account, they marketed Goldman Stanley's services. New recruits were paid a minimal salary for the first three months, at which point they were expected to have opened client accounts.

Once new recruits opened a client account they would enter into an independent contractor agreement with Goldman Stanley and become an account executive. While the independent contractor agreement purported to rent them office facilities and services and stated that Goldman Stanley had no involvement in the way account executives operated their business, the practice was otherwise. Goldman Stanley dictated dress code, working hours, paid expenses associated with public seminars, reviewed material sent to clients and provided account executives with Goldman Stanley business cards and promotional brochures.

Account managers conducted trading and recruited clients but had the additional responsibility of supervising account executives and entry level marketing salesmen. Account managers were required to understand and explain to clients and account executives how the forex contract trading business was conducted at Goldman Stanley and how to access market information and world news from various sources. They also explained the operation and background of the dealers and taught new recruits how to sell the services of Goldman Stanley. Account managers distributed promotional brochures, placed advertisements in newspapers and held public seminars to solicit business for Goldman Stanley.

The Goldman Stanley brochures that were circulated after Chan took over Goldman Stanley were intended to leave the impression that the financial integrity of its forex contract trading business was well established and substantial. One brochure called “The Investors Guide To The Foreign Exchange Spot Market” stated that “Goldman Stanley is a core group of successful financial consultants, serving informed investors in the Global Foreign Exchange Market. Through a global network linked by state-of-the-art technology Goldman Stanley provides access to the largest most profitable investment vehicle available today.” It went on to hold out that Goldman Stanley could provide clients with access to four of the largest and most prominent brokerage and financial services organizations in the Asia-Pacific region: Wardley James Capel Ltd., Peregrine Hong Kong, Top Rank and Chinamax HK. Peregrine Hong Kong was described as a publicly owned investment house specializing in global corporate finance, and stock and foreign exchange brokerage and a prominent member of the National Association of Securities Dealers Inc. Chinamax HK was described as “one of the largest foreign exchange dealers in Hong Kong". This was false. When Chan took over Goldman Stanley, Chan encouraged account executives and clients to open trading accounts with Chinamax HK. Thereafter trading with Top Rank dropped off. Goldman Stanley did not provide any financial information about any of the dealers and in fact, there was little information available about Chinamax HK other than what appeared in the brochures.

One Goldman Stanley brochure also provided a brief description of the spot foreign exchange market, margin trading, risk management, market analysis, trading examples and account specifics. It also listed numerous benefits of investing in the forex market including: “professional management, individually tailored investment strategies, effective risk management techniques, margin trading, increased profit potential through leverage (100 x’s) and 100 per cent liquidity - there is always a buyer or seller available.” The final section in the brochure described to clients why they should invest through Goldman Stanley by stating , in part, that “Our specially trained Financial Consultants [account executives] can help provide the knowledge, information, and access you need to successfully invest in the Foreign Exchange Spot Market. Each Goldman Stanley currency specialist has dedicated all of their trading activities to spot currencies alone. This level of specialization provides Goldman Stanley’s customers with the experience that can only be gained by years of dedicated specialization and training.”

Goldman Stanley did not have a manual outlining its business practices, although there was a one page directive regarding certain requirements such as filling out documents clearly and wearing proper business attire. The operations staff provided account executives with the Goldman Stanley brochure and a two page document which set out answers to the most commonly asked questions.

2.2.2 Operations

Although the brochure stated that the forex dealers required clients to deposit minimum margin funds of US $10,000 to open an account after Chan took over Goldman Stanley, account executives were told that Top Rank and Chinamax HK would accept U.S. $5,000 as the minimum margin deposit. Because of this substantially lower margin, virtually all clients chose Top Rank or Chinamax HK as their dealer.

When clients wanted to trade forex contracts through Goldman Stanley, they would fill out either a Top Rank or Chinamax HK client agreement. The operations manager forwarded the agreement to the appropriate dealer who in turn would send a fully executed agreement back to Goldman Stanley's offices for delivery to the client. While their terms were not exactly the same, the Top Rank and Chinamax HK client agreements were in all material respects the same.

Under the client agreements the dealer agreed to establish a trading account for the client for the purchase and sale of various currencies against the US Dollar. The client agreed to have the dealer act as broker for all transactions traded for the client’s account. The client was required to make a minimum margin deposit which then allowed the client to speculate in a currency on a highly leveraged basis. The dealers were entitled to take the opposite position to a client transaction or to act as agent and arrange for the opposite position to be taken by a third party. In the event the client failed to settle the order within a prescribed time (see below), the dealer charged the client interest on a daily basis on the credit extended to cover the balance owing on the order. The dealer reserved the right to liquidate the orders in a client’s account without prior notice if the client’s margin deposit fell short of the minimum margin deposit. The client acknowledged and accepted the risk that it could be difficult or impossible to liquidate an order, except through the dealer by taking the opposite position. If the loss on liquidation exceeded the amount of margin on deposit, the client would be obligated to pay the deficiency to the dealer. The client also agreed to pay any commissions, expenses and the interest charges levied by the dealer. The dealer however was not obliged to pay any interest on client margin deposits. The agreement provided that, with appropriate notice, clients could take delivery of orders placed. The client agreement also included a form which could be used to grant discretionary trading authority. Finally, the client acknowledged that he understood the risks and opportunities inherent in these kinds of transactions and agreed that no request had been made to, or reliance placed on, the dealer or its agents to advise on the merits of entering into the purchase or sale of currencies or maintaining open positions.

Once an account was opened and the margin deposited, a client could, for an investment of US $1,000 for a day trade, or US $2,000 to keep the position open overnight, (the prescribed time) buy a contract for a foreign currency worth approximately US $100,000. When a client or account executive wanted to execute a trade, the person working in the operations room would be asked for a quote on the particular currency. The operations room employee would then make a telephone call to either Top Rank or Chinamax HK to obtain the quote and would advise the client of both the buy and sell price of that currency. After the client submitted an order to the operations room, staff in the operations room would place the order by telephone to the appropriate dealer.

British Columbia and Hong Kong telephone records confirm that from April to October 1994, there were 825 telephone calls made from Goldman Stanley to Top Rank in Hong Kong. Once Chan arrived at Goldman Stanley and added Chinamax as a dealer, the number of calls to Top Rank diminished substantially. Between November, 1994 and August 1995, there were a total of 68 calls for Top Rank. The telephone records also confirm that calls made from Goldman Stanley purportedly for the purpose of placing orders with Chinamax HK were made to telephone numbers in Hong Kong that belonged to subscribers other than Chinamax HK. The majority of calls to Hong Kong from Goldman Stanley’s offices were made to Ng Hoi Fung (2,075 calls) and to Fei Yie Stationary Company (141 calls). Ng Hoi Fung was a friend of Chan’s who had no apparent connection to Chinamax HK. Fei Yie Stationary Company was owned by Chan’s brother and sister in law. What actually occurred regarding the placing of forex contract trades with Chinamax HK is dealt with in section 2.2.3 below entitled, The Role of Chan, Wong Lo, Ho and Siega from November 1994 to July 1995.

There was always a spread between the price at which the currency was offered to the clients by the dealer and the price from the Knight-Ridder quote. Generally the spread was about 10 points for each buy and each sell transaction or 20 points for a completed buy and sell transaction. The forex contracts did not trade on any exchange. There was no way of liquidating an order for a forex contract acquired through Goldman Stanley with Top Rank or Chinamax HK except by placing an offsetting order through Goldman Stanley with the respective dealer. The amount of money represented by each point varied depending on the exchange rate applicable to the foreign exchange being traded. The client was also exposed to currency fluctuations on that amount.

The risks in trading forex contracts were substantial. In addition to currency exchange risk and costs, clients faced paying Goldman Stanley an additional spread of 10 points for each buy and each sell transaction, a commission of US $80 on each completed buy and sell transaction and interest charges to trade on margin. Every trade resulted in an offsetting trade because there was no other way of disposing of an order for a forex contract. Although theagreement stated that clients could take delivery of the foreign currency by paying the full value of the currency, none did. Similarly as every client traded on margin, every client was charged interest on the portion of the forex contract that was not covered by the deposit. In other words, where a client on an investment of US $1,000 for a day trade placed an order to buy a contract for a foreign currency worth approximately US $100,000, the client paid interest on the “borrowed” US $99,000.

Account executives testified that forex contract trading was very risky and clients could lose money more quickly doing that than trading futures or stocks. Indeed, the evidence confirmed that many clients who traded forex contracts through Goldman Stanley’s facilities suffered substantial losses, frequently on a daily basis. To make a profit, the client or account executive would first have to make up the US $80 commission, the point spread and the interest charges.

For the most part account executives traded on behalf of clients using the discretionary trading authority granted in the Top Rank or Chinamax HK customer agreements. Nobody at Goldman Stanley supervised the trading done on behalf of clients nor did Goldman Stanley require account executives to be familiar with a client's circumstances before executing trades on his or her behalf.

Goldman Stanley provided account executives or clients with daily account statements issued by the dealers. Initially Goldman Stanley kept copies of the account statements for a month. However when Chan took control this practice was discontinued. No account statements were produced by Goldman Stanley in response to Commission staff’s demand for documents. Copies of some account statements were obtained by Commission staff from Goldman Stanley clients. Ho testified that Goldman Stanley had computer records concerning accounts from which it could generate documents such as margin call notices. Again, no such account records were produced in response to Commission staff’s demand for documents. Ko testified that there was no record showing whether a client or an account executive had told the operations staff to make the trade although buy and sell slips were kept in a box. However, Chan told Commission staff that buy and sell slips were not kept and, again, no buy and sell slips were produced in response to Commission staff’s demand.

Goldman Stanley kept monthly bank statements but advised Commission staff that it did not keep other banking documents such as cancelled cheques, deposit slips, withdrawal slips or evidence of wire transfers. Banking records indicate that in operating its forex business, Goldman Stanley had five bank accounts at the Royal Bank in Vancouver - an administrative account for expenses, an account from which it received funds from Top Rank to repay client's margin funds or profits, an account from which it received funds from Top Rank to pay commissions, an account from which it received funds from Chinamax HK to repay client's margin funds or profits and an account from which it received funds from Chinamax HK to pay commissions. In addition to these accounts, Chinamax BC operated two additional accounts. One at the Royal Bank and the other at the Hong Kong Bank of Canada in Vancouver. Client funds destined for Chinamax HK were deposited into either of these last two accounts. Account executives were not aware of Chinamax BC and believed that all client funds went directly to Chinamax HK. The operations manager had signing authority for all bank accounts and control over all client funds. Despite the multiplicity of accounts there was no evidence that Goldman Stanley kept clients’ money separately in trust for its clients.

The banking records revealed that all of the funds that were submitted to the Chinamax BC Royal Bank account during the period March 6, 1995 to August 2, 1995, (approximately $112,000) were transferred to Chinamax HK’s account at the Hang Seng Bank in Hong Kong and Chinamax HK’s account at the Dao Heng Bank in Honk Kong. At least $60,000 had been specifically identified as deposits from clients or account executives from Goldman Stanley that had been transferred to the Hang Seng Bank account.

Banking records also revealed that Chan opened the Chinamax BC Hong Kong Bank account on February 3, 1995. A total of US $70,000, of which at least US $30,000 could be traced to clients who traded through Goldman Stanley, was deposited into the account before it was closed on March 30, 1995. Banking documents indicate that funds transferred from Chinamax BC to Chinamax HK’s account at the Dao Heng Bank in Honk Kong were removed in one case by a cheque signed by Chan with no payee and in the other by a cheque signed by Chan where the payee was Chan's brother.

According to a director of Top Rank, Top Rank received US $628,809.87 from clients who traded with Top Rank through Goldman Stanley from 1994 to August 1995.

2.2.3 The Role of Chan, Wong, Lo, Ho and Siega from November 1994 to July 1995

Chan acquired control of Goldman Stanley and succeeded Ko as operations manager in November 1994. Although Ko stayed on as a director and managed some of the administration, including bookkeeping and account statements, from then on Chan directed Goldman Stanley’s business and affairs. Chan had sole authority over client funds and the various banks accounts. During his tenure, Chan stated to several account executives that Goldman Stanley was seeking registration under the Act. Although Goldman Stanley made some initial inquiries through its counsel about registration, no application was ever made to the Commission.

Once Chan took control, Goldman Stanley began to act as agent for Chinamax HK in trading forex contracts with members of the public. Once this occurred, trading with Top Rank diminished substantially and Chan encouraged account executives to trade with Chinamax HK.

Chan gave Commission staff and the Hong Kong regulators different accounts of his role in Chinamax. In his interview with Commission staff, Chan acknowledged that he had controlled Goldman Stanley since November 1994, but stated that he had no knowledge of the operations of Chinamax HK. He said Chinamax HK was run by Tony To in Hong Kong. In his interview with the Hong Kong Futures and Securities Commission, Chan described his role in Chinamax HK differently. In that interview, the contents of which Chan confirmed as true, Chan stated, in part, as follows:
      Chinamax [HK] was set up in around 1993. Its shareholders include To Shu-shing, i.e. Tony To, and me. I am the president of this company. As to To, he is just a nominal director . In fact, all the decisions on the operations of Chinamax were made by me.
      ...
      I went to Canada for immigration in mid-November 1994. I know 2 friends in Canada called Eric Ko and Daniel Kwan. They were running a business of forex trading. Their company was called Goldman Stanley....I agreed and bought Goldman Stanley.
      ...
      After I had gone to Canada, I set up a company called Chinamax International Investment Ltd. in Canada and Goldman Stanley referred some Canadian clients to trade in forex through this Canada Chinamax. We also told the clients that Canada Chinamax was a subsidiary of Hong Kong Chinamax. Therefore the clients knew that they were trading forex through a Hong Kong company. Because of tax arrangement and in order to escape from the regulation of the Securities Commission of British Columbia, I remitted clients’ forex trading margin to the bank account of Hong Kong Chinamax. It seemed to be Dao Heng Bank. Afterwards, I would phone my younger brother telling him to pay attention to the bank account whether remittance had been received. If remittance was received, I asked him to withdraw the money using my cheques which had been signed by me in advance and remit to my personal bank account in Canada, the bank account of Canada Chinamax or the account of Goldman Stanley. As to remitting money from Canada Chinamax, I asked Eric Ko to handle this for me. As to the trading list of clients of Chinamax, it was printed by a PC at my address in Canada...and then faxed to Goldman Stanley and then to the clients. But before faxing it, I or my staff members would change the number of the fax machine to the fax number of Fei Yat Stationary Company in Hong Kong. By doing so, the clients would think that the fax were sent from Hong Kong and they were doing trades with a Hong Kong company when they received the fax.
      ...
      As to the address of Hong Kong Chinamax printed on [Chinamax’ client agreement] it was Ben who borrowed from a friend in Hong Kong. Each month, I would pay Ben C$200 for lending the address. As to the telephone number and fax number printed on that page, they were the numbers of Fei Yat Stationary Company...I asked my younger brother to lend the telephone number and fax number of his shop to me.
      ...
      [To place forex contract orders, the people at Goldman Stanley] made calls to my home in Canada. There was a staff member answering the phone and receiving orders. After the staff member had received an order, he would place the order with other forex companies,. e.g. Top Rank (Macau), E & R Investment Co. in Canada and AA Management Co. Because (sic) Goldman Stanley had some marketing staff who didn’t know that most of the operations of Chinamax were carried out at my home. Neither did I want them to know. All in all, I did so because I wanted others to think that they were doing forex trading with an overseas company instead of a local company in Canada. Then I didn’t need to pay tax to the Canadian Government.

Despite Chan’s statement above, there was no evidence to show that orders for forex contracts with Chinamax HK were placed with any forex company, including Top Rank (Macau), E & R Investment Co. in Canada and AA Management Co. Indeed, it appears that as most clients lost money on every transaction, Chan did little more than take the clients funds, pay the account executives and other business expenses and use the rest of the money for his own purposes. Because of the lack of documentation it is not clear what happened to the clients’ accounts with Chinamax HK when Goldman Stanley was closed at the direction of Commission staff in July 1995. Postles had two clients who had accounts with Chinamax HK that were transferred to the Peregrine Alberta operation.

At that time of Commission staff’s direction to Goldman Stanley to shut down its operations, counsel for Goldman Stanley described to Commission staff that the service it provided to its customers consisted of “telecommunication and office services". This representation was in direct contradiction to the representations made in Goldman Stanley’s own brochure as described earlier. Counsel for Goldman Stanley also represented to Commission staff that Goldman Stanley had no knowledge of Chinamax HK's activities, that no client margin funds were held in British Columbia and that clients were instructed to send funds directly to Chinamax HK in Hong Kong. All of these representations communicated to Commission staff through Goldman Stanley’s counsel were false.

Wong was Chan’s girlfriend and a receptionist at Goldman Stanley until it closed its doors. She acted as translator in all of Chan’s discussions with non-Chinese speaking account executives and clients.

Lo was the vice president and in charge of marketing up until the time he left Goldman Stanley in March 1995. He took instructions from Chan. Lo approved materials used for advertising, including the Goldman Stanley brochure. Lo also was in charge of hiring, training and managing new recruits and account executives. He explained to them how the market worked and assisted them in finding information. If there was a problem, account executives would talk to Lo and occasionally Chan would take over trading if the client was dissatisfied with an account executive. Lo was paid $3,000 per month. Lo did not trade forex contracts for his own account or for clients. When Lo left Goldman Stanley he took and completed the Canadian Securities Course. He subsequently became a registrant for a three month period.

Ho was an account executive in Goldman Stanley’s Vancouver office prior to assuming Lo’s position as vice president in March 1995. Ho was responsible for managing the newly opened Richmond office and Goldman Stanley’s Chinese speaking market, which included hiring, training and managing Chinese speaking recruits and account executives. Ho was paid $1,500 a month. Ho taught salesman to sell the services of the company and, to inspire confidence, he described the background and operations of the dealers. Ho told people what hours to work, told people that they had to watch the market and understand it, and he told two permanent employees that if they wanted to keep their jobs they should abide by Chan's dress code.

Lo and Chan held weekly meetings for account executives in the Vancouver office to discuss internal company matters. Similar internal meetings for Chinese speaking account executives were held by Ho. Both Ho and Lo ran public seminars to solicit business and distributed various informational brochures in English and Chinese describing Goldman Stanley’s forex contract trading business.

According to Ho, Chan had represented that Chinamax HK was a big company affiliated with the Bank of China. Ho said a friend went to Hong Kong to check out the legitimacy of the dealers Stanley Goldman was representing. The friend went to Chinamax HK’s offices in Hong Kong and found that they were in a residential area and not like real offices. The friend subsequently decided to trade with Top Rank. After this, Ho was suspicious of Chinamax HK because none of Chan’s representations could be supported. Despite his scepticism Ho made no other inquiries other than with Chan who simply asked Ho to trust him. Although Ho said he did not, he nonetheless stayed on at Goldman Stanley knowing accounts were still being opened with Chinamax HK. Ho testified that he only traded for his own account with Top Rank, albeit in the name of his sister’s husband.

Siega was in Goldman Stanley’s offices on a frequent basis during this period but did not do any trading of forex contracts on his own behalf or on behalf of clients. However, while still in the Goldman Stanley offices Siega engaged in a fax marketing campaign to acquire new clients. The clients he acquired as a result of this campaign were taken with him to the Peregrine Alberta operation.

2.3 The Peregrine Alberta Operation

This section covers the period from July 1995, when Commission staff directed Goldman Stanley to shut down its operations, to January 3, 1996, when the temporary order was issued cease trading the forex contracts. During this period Siega, Postles and Tisserand under the direction of Chan continued to trade forex contracts, purportedly as agent for the Hong Kong based Peregrine group of companies, to the public in British Columbia.

A few days after Commission staff directed Goldman Stanley to close its operations, Chan had a meeting with several Goldman Stanley account executives, including Postles, Tisserand and Siega. Wong attended and translated for Chan at this and all subsequent meetings. At the initial meeting Chan said Goldman Stanley was having difficulty in obtaining registration with the Commission because it did not have audited records. Chan indicated that he was considering incorporating a new company which would have an easier time becoming registered. Chan told them that Top Rank was tainted by its association with Goldman Stanley and therefore, future forex dealings would be through Peregrine Hong Kong. Although Peregrine Hong Kong normally required higher margin deposits, Chan said that he had negotiated a “special deal” with Peregrine.

The account executives were deceived by Chan to believe that the “Peregrine” Chan spoke of was one of the established Peregrine group of securities and forex trading companies in Hong Kong, described in Goldman Stanley’s brochure. Indeed, at that time Chan provided the account executives with Peregrine group company documents, including original blank agreements and signature cards, in the name of Peregrine Finance Limited and Peregrine Futures Hong Kong Limited.

Chan arranged for the group of account executives re-locate to different offices in downtown Vancouver and for the Knight-Ridder system, which had been in Goldman Stanley's offices, to be moved to Tisserand’s home. Chan explained that he did not want to put the system in the downtown office as this might attract attention from the Securities Commission. An ex-employee of Goldman Stanley rigged up a computer system to allow Postles and Siega to access the Knight-Ridder information from Tisserand's home.

Postles, Siega and Tisserand gave to Chan completed client agreements from their clients together with margin deposits, on the understanding that Chan would send the agreements and money to Peregrine Hong Kong where trading accounts for the clients would be opened. These account executives made trades by calling a number given to them by Chan. While the account executive was on hold, the person on the other end of the line would purportedly call Peregrine Hong Kong for currency quotes. Money for orders was delivered to Chan. Postles, Siega and Tisserand received copies of statements for their clients, via Chan, every three days. The information showed that the account statements were from “Peregrine Finance HK fax # 85228450211”. The prefix for Hong Kong is “852”.

Postles, Siega and Tisserand received commissions in cash from Chan or Wong. Tisserand testified that Wong took money out of Chan’s wallet to pay him his commission. The cash payments apparently caused some concern and Chan, who was questioned on the practice, said he would arrange for commissions be paid by Peregrine cheques, but this never happened.

Each of Postles, Siega and Tisserand placed orders for trades on behalf of their clients from August through the fall of 1995. Siega opened accounts and placed orders for forex contracts on behalf of four clients. He provided their money to Chan and received the clients’ account statements. With the exception of one account, he had and exercised discretionary trading authority over each account. Between 6 and 14 trades were made in each of the four accounts. Siega received approximately $4,500 in commissions.

In November 1995, Postles noticed on a Peregrine statement that a trade had been recorded to the wrong client. He drew this fact to the attention of Chan. Chan replied that Peregrine Hong Kong would not make changes to an account after 24 hours had passed. Postles subsequently contacted Peregrine Hong Kong directly. He was advised by them that they had no accounts for his clients, that they no longer traded foreign exchange contracts, that the account numbers on the client’s statements were not Peregrine Group numbers, and that they did no business in British Columbia. The Peregrine Group claimed no knowledge of Chan's activities in Vancouver stated that it believed the Peregrine account statements were forgeries. This information was confirmed by Peregrine Hong Kong’s legal counsel in a letter to Postles dated November 18, 1995.

No accounts had been opened with Peregrine Hong Kong nor had it received any client funds from any of the account executives who had agreed to continue trading under Chan’s direction.

Instead, documents confirm that Wong acquired a numbered company in Alberta, changed its name to “Peregrine Finance Limited” and became its sole director and shareholder on August 31, 1995. On September 20, 1995 she opened a bank account, in the name of Peregrine Finance Limited, at the Canadian Imperial Bank of Commerce on Jasper Avenue in Edmonton, Alberta. She was the sole signing officer on this account.

On September 20, 1995 US$52,000 was deposited into the Alberta bank account. US$47,000 of this deposit was identified as deposits from clients purportedly for trading forex contracts through Peregrine Hong Kong. On September 22, 1995, US$40,000 of this money was withdrawn in the form of two money orders payable to Benny Lee Ltd., a foreign exchange company in Vancouver. In exchange for the US$40,000 Benny Lee Ltd. gave Wong CDN$10,000 cash and issued a cheque in the amount of CDN$43,840 payable to Chan. The cheque for CDN$43,840 was deposited into Chan’s bank account on September 22, 1995, CDN$18,000 was paid by cheque to Goldman Stanley and CDN$22,700 was withdrawn in cash from Chan’s account.

On October 27, 1996 US $10,000 in client funds was deposited into the Peregrine Alberta account. The US$10,000 was withdrawn by the purchase of a bank draft payable to Benny Lee Ltd. in the amount of US$10,000. In exchange for the US$10,000 Benny Lee gave Wong cash CDN$3,530 and issued a cheque in the amount of CDN$10,000 payable to Chan. The CDN$10,000 cheque was deposited to Chan’s bank account on October 30, 1995. This money was all withdrawn by November 6, 1995; $5,000 in cash, $1,843 paid to Insurance Corporation of B.C. and the remainder to various individuals.

It is clear that none of the funds destined for Peregrine Hong Kong went to Peregrine Hong Kong as expected by the clients. No client funds were actually used for trading forex contracts with any forex dealer. The evidence confirms that some of the client funds deposited into Peregrine Alberta’s bank account were taken by Chan and Wong for their personal benefit. None of the clients of Siega, Postles or Tisserand, whose “Peregrine Hong Kong” account statements as of November 18, 1995 showed an equity position, received any money back from Chan or Peregrine Alberta.

3. ANALYSIS AND FINDINGS

Our analysis and findings are focused on the following issues:

1. whether the forex contracts are securities within the meaning of section 1(1) of the Act;

2. whether each of the respondents, with the exception of Wong, was trading in securities contrary to sections 20(1)(a) and 42 of the Act;

3. whether Siega acted as an advisor and portfolio manager with respect to trades in the forex contracts without being registered, contrary to section 20(1)(c) of the Act; and

4. whether each of Chan, Wong and Peregrine Alberta participated in a transaction or scheme relating to a trade or acquisition of a security when they knew or ought to have known that the transaction or scheme perpetrated a fraud on residents of British Columbia contrary to section 41.1 of the Act.

3.1 Are the forex contracts securities?

Commission staff alleged that the forex contracts offered by the respondents, other than Wong, are securities. These include the forex contracts offered to the public through the facilities of Goldman Stanley as well as those offered to the public during the Peregrine Alberta operation.

In our view, these forex contracts are virtually indistinguishable from those the Commission found to be securities in Yuen Chow (supra) and AA Management (supra). This is not surprising as some of the individuals who were involved in setting up the forex trading business for AA Management had also set up Goldman Stanley’s forex trading business.
      In Yuen Chow the Commission stated at page 12;
      In our view it is more appropriate to examine the forex contracts using the broader approach suggested by the Court in Pacific Coin.

      The forex contracts offered to the public by Hang Lung involved the investment of money for the purpose of speculating in foreign currencies. The intention of any client opening a contract would be to earn a profit, not to take delivery of the currency.

      By investing as little as U.S. $1,000 or $2,000 for a margin deposit, a client would be exposed to the fluctuations in value of about U.S. $100,000 worth of a foreign currency. Small movements in the price of the currency would result in a substantial profit or loss in relation to the initial investment. Any client with an open contract is at the risk of losses that could far exceed the initial investment.

      In our view, it is legislative policy, as expressed in the broad definition of security in the Act, to replace the harshness of caveat emptor in transactions involving risky and intangible investments of this type. We find that the forex contracts offered by Hang Lung are investment contracts and therefore securities as defined in section 1(1) of the Act.

On the basis of the reasoning in Yuen Chow and AA Management, we find that the forex contracts offered for purchase and sale to the public in this case are investment contracts and therefore securities as defined in section 1(1) of the Act.

3.2 Were the respondents, with the exception of Wong, trading in securities contrary to sections 20(1)(a) and 42 of the Act?

Commission staff alleged that each of the respondents, with the exception of Wong, traded in securities contrary to section 20 of the Act and distributed securities contrary to section 42 of the Act.

Section 20(1)(a) of the Act provides that “no person shall trade in a security unless he is registered as a dealer, or a salesman, partner, director or officer of a registered dealer and is acting on behalf of that dealer...”.

Trade is defined in section 1(1) of the Act to include:
        (a) a disposition of a security for valuable consideration whether the terms of payment be on margin, instalment or otherwise, but does not include a purchase of a security or a transfer, pledge, mortgage or other encumbrance of a security for the purpose of giving collateral for a debt,
        ...
        (c) the receipt by a registrant of an order to buy or sell a security,
        (e) any act, advertisement, solicitation, conduct or negotiation directly or indirectly in furtherance of any of the activities specified in paragraphs (a) to (d).

Registrant is defined in section 1(1) of the Act as “a person registered or required to be registered under this Act or the regulations”.

The significance of requiring persons in the business of trading and advising in securities to be registered under the Act is a fundamental part of the regulatory scheme to protect investors from fraudulent, abusive and unfair practices. As the Commission stated in The Matter of Aatra Resources Ltd. [1994] 37 BCSC Weekly Summary at page 4:
      A registrant holds a special position in the securities market and regulatory system. Subject to certain exemptions, trading in securities can only be done by or through a registered dealer. A registered salesman of a dealer is required to meet educational requirements and to conduct business in accordance with regulatory standards. The purpose of the registration requirement in the Act has been described as follows by the Supreme Court of Canada in Gregory & Co. v. Quebec Securities Commission, [1961] S.C.R. 584, where Fauteux J. observed at p. 588:
          The paramount object of the Act is to ensure that persons who, in the province, carry on the business of trading in securities or acting as investment counsel, shall be honest and of good repute and, in this way, to protect the public, in the province or elsewhere, from being defrauded as a result of certain activities ...

3.2.1 Goldman Stanley

During the period from May 1994 to July 1995 Goldman Stanley operated a facility at which members of the public could become clients of Chinamax HK and Top Rank and trade forex contracts on margin. Goldman Stanley recruited, trained and paid commissions to account executives who traded on behalf of clients. Goldman Stanley provided clients with customer agreements, received orders to trade and transmitted them to Chinamax HK and Top Rank. Goldman Stanley provided documentation and information to members of the public relating to the business of these dealers and the client's investments with them. It advertised and held seminars to attract new clients. Goldman Stanley maintained records on behalf of the dealers and received funds from clients on behalf of the dealers. Goldman Stanley also retained commission funds for its services.

Contrary to the assertions made by Goldman Stanley through its counsel in July 1995, Goldman Stanley was not merely providing “telecommunication and office services". Indeed, Goldman Stanley held itself out in its own brochures as being a “a core group of successful financial consultants, serving informed investors in the Global Foreign Exchange Market... [and providing] access to the largest most profitable investment vehicle available today.” The brochures also represented that Goldman Stanley provided professional management, individually tailored investment strategies given by specially trained and experienced account executives, effective risk management techniques and 100 per cent liquidity - there is always a buyer or seller available.” While these representations were false and misleading, Goldman Stanley was clearly in the business of trading securities in the form of the forex contracts for valuable consideration with payments on margin. It received orders to buy and sell securities. It also engaged in advertising, soliciting and other acts in furtherance of this business.

Goldman Stanley was, therefore, trading in securities and was required to be registered under section 20(1)(a) of the Act. It was not so registered and it had not received an exemption from registration and accordingly we find Goldman Stanley was trading in securities in contravention of section 20(1)(a) of the Act.

Because it was required to be registered under the Act, Goldman Stanley was a registrant. It was, therefore, required to comply with requirements of Part 4 of the Securities Regulation B.C. Reg. 270/86(now Part 4 of the Securities Rules B.C. Reg. 479/95), including the following:

1. A registrant is required to keep:
  • records that clearly and competently record all of its business and financial affairs in the Province;
  • trading blotters containing an itemized daily record of, among other things, all purchases and sales of securities, all receipts and disbursements of cash, and the account for which each transaction was effected;
  • ledger accounts or other records showing each cash and margin account of each client, all purchases and sales of securities for the account and all other debits and credits for the account;
  • a securities record showing for each security all long and short positions carried for the registrant's account or the account of clients and the name or designation of the account in which each position is carried;
  • a record of each order and any instructions given or received for the purchase or sale of securities, whether executed or not, showing for each order or instruction, its term or conditions, any modification or cancellation of it, the account to which it relates, the time of entry and the time of execution and the price at which it was executed;
  • a copy of the confirmation of each purchase and sale of securities; and
  • a record of accounts showing the name and address of the beneficial owner of the account, written authorization or ratification where trading instructions are accepted from an individual other than the client and an executed margin agreement;
2. registrant is required to keep client funds received by it in trust;
3. registrant is required to establish prudent business procedures and to record those procedures in writing;
4. registrant shall designate a partner, director or manager to be responsible for approving the opening of new accounts and supervising the trading made for or to a client; and
5. registrant shall file its financial statements with the Commission within 90 days of the financial year end.

Goldman Stanley did not meet any of these requirements despite how it held itself out in its own brochures.

Goldman Stanley’s record keeping was almost non-existent, consisting of its bank statements and accounting records for its administrative expenses only and, perhaps the trade tickets. It did not keep client funds in trust. It had no procedures manual and did not approve new accounts. Nobody supervised the trading done by or on behalf of the clients. Goldman Stanley did not follow the “know your client rule” nor did its account executives. It did not file financial statements with the Commission. In addition, Goldman Stanley contracted with individuals to sell and advise in the sale of securities who had not taken nor successfully completed the courses required of salespersons and advisers under the Regulation.

The purpose of particularizing the obligations Goldman Stanley has as a registrant, is to re-emphasize the significance and necessity of ensuring strict compliance with the registration requirements of the Act and Rules and the prejudicial consequences to investors when the registrant fails to meet those requirements.

3.2.2 Chinamax HK, Chinamax BC, Peregrine Alberta and Chan

Chinamax HK was held out by Chan to be a Hong Kong based forex dealer and he arranged for clients and account executives at Goldman Stanley to open accounts and trade forex contracts with it. Chinamax HK entered into contracts with residents of British Columbia to trade in forex contracts. Chinamax HK purportedly received clients' orders to execute forex trades and it provided account statements to clients. Chinamax HK received margin funds from clients. Chinamax HK paid commissions to Goldman Stanley and its account executives. Chinamax HK received orders to buy and sell securities in the form of the forex contracts for valuable consideration with payments on margin. It also engaged in other acts in furtherance of this business.

Chinamax BC’s sole purpose appears to have been to open a local bank account for the deposit of client margin funds for a subsequent transfer to Chinamax HK. To this extent, it acted in furtherance of the trades in securities by Goldman Stanley and Chinamax HK.

From November 1994, Chan controlled the operations of Goldman Stanley, Chinamax HK and Chinamax BC, including all bank accounts and client funds. Chan personally participated in and authorized Goldman Stanley's trading activities. Indeed during this period, there was no documentation and very little evidence, other than Chan’s statement, to show that Chinamax HK’s operations were any different from Peregrine Alberta’s operations.

Chan was also the directing mind of Peregrine Alberta and the forex contract trading which continued after Goldman Stanley shut its doors. Chan recruited ex-Goldman Stanley account executives who in turn recruited clients and traded on their behalf. He represented to them to have made arrangements with Peregrine Hong Kong to act as a dealer and provided the account executives with documents from the Peregrine Group. He paid the account executives the commissions purportedly on the behalf of Peregrine Hong Kong. However, some of the margin funds provided by the clients as margin deposits for forex contracts were paid into the bank account of Peregrine Alberta and, eventually, to Chan and Wong. Peregrine Alberta received the funds clients had given for orders to buy and sell forex contracts with Peregrine Hong Kong. Peregrine Alberta was central to the forex contract business Chan spearheaded after Goldman Stanley closed its doors.

We find that Chinamax HK, Chinamax BC and Peregrine Alberta were in the business of trading securities in the form of forex contracts and engaged in acts in furtherance of that business. Therefore, they were trading in securities and were required to be registered under section 20(1)(a) of the Act. They were not so registered and they had not received an exemption from registration. Accordingly we find that each of Chinamax HK, Chinamax BC and Peregrine Alberta was trading in securities in contravention of section 20(1)(a) of the Act.

As a director and the controlling mind of each of Goldman Stanley, Chinamax HK, Chinamax BC and Peregrine Alberta, Chan was also engaged in the same activities as these companies and was also trading in securities. He was not registered under the Act and no exemption from registration was available for this trading. Accordingly, we find that Chan was trading in securities in contravention of section 20(1)(a) of the Act.

3.2.3 Siega, Ho and Lo

Although Siega did not actively trade forex contracts on behalf of clients before the Goldman Stanley offices were directed to be closed by Commission staff, he used the offices to engage in a fax marketing campaign to acquire clients. From August 1995, Siega arranged for four clients to open accounts, placed orders for forex contracts on their behalf and provided their margin funds to Chan. There was some trading in each client's account. He recommended specific trades to his clients, had discretionary trading authority over the accounts and received commissions for these activities. Siega was clearly trading in securities. He had previously been registered and therefore should have been aware of the registration requirement. He was not, however, registered under the Act during the fall of 1995 nor did he have an exemption from registration.

Lo and Ho were vice presidents of Goldman Stanley and in charge of marketing. Both recruited account executives, interviewed them and trained them. Both held weekly internal meetings for account executives. Both provided information about Goldman Stanley and the dealers to account executives and clients. Lo authorized brochures advertising Goldman Stanley’s services. The brochures were used by Ho and Lo to solicit clients to trade in forex contracts through Goldman Stanley. Lo did not trade forex contracts for his own account nor did he trade for clients. Ho traded forex contracts for his own account.

The activities of Lo, Ho and Siega constitute trading or acts in furtherance of trading forex contracts through the facilities of Goldman Stanley. We find that each of Lo, Ho and Siega actively participated in the forex contract trading business and therefore each was trading in securities. Accordingly, we find that each of Lo, Ho and Siega was required to be registered under section 20(1)(a) and since none of them was registered and no exemption from registration was available for this trading, each of Lo, Ho and Siega was trading in securities in contravention of section 20(1)(a) of the Act.

Because each of Chinamax HK, Chinamax BC, Peregrine Alberta, Chan, Siega, Ho and Lo was required to be registered under the Act, each was a registrant. They were, therefore, also required to comply with requirements of Part 4 of the Securities Regulation and failed to so do.

Section 42(1) of the Act provides that unless exempted under this Act or the regulations, a person shall not distribute a security unless a preliminary prospectus and a prospectus respecting that security have been filed with, and receipts obtained for them from the Executive Director.

Distribution is defined in section 1 of the Act to include, where used in relation to trading in securities, a trade in a security of an issuer that has not been previously issued.

Given that no prospectus was filed under section 42 of the Act and no exemption from section 42 was available, and that the forex contracts were previously unissued securities when they were traded to clients, it follows that each of Goldman Stanley, Chinamax HK Chinamax BC, Peregrine Alberta, Chan, Siega, Ho and Lo also contravened section 42 of the Act.


3.3 Was Siega advising with respect to securities contrary to section 20(1)(c) of the Act?

Commission staff also alleged that Siega acted as an adviser and portfolio manager with respect to trades in securities without registration and without an exemption from the registration requirements, contrary to section 20(1)(c) of the Act.

Section 20(1)(c) of the Act provides that no person shall act as an adviser unless he is registered in accordance with the Rules.

Section 8 of the Rules provide that a person registered as an adviser must be classified in one or more of the following categories: portfolio manager, investment counsel or securities adviser.

Under section 1 of the Act “adviser” means a person engaging in, or holding himself out as engaging in, the business of advising another with respect to investment in or the purchase or sale of securities. Under section 1 of the Act "portfolio manager" means an adviser who manages the investment portfolio of clients through discretionary trading authority granted by one or more clients.

The Commission has had the opportunity to consider the issue of what constitutes advising within the meaning of the Act in several recent decisions. In The Matter of theAtlantic Trust Management Group et al., [1995] 14 BCSC Weekly Summary 54, which was appliedin both Yuen Chow (supra) and in AA Management (supra), we stated at page 73:
      A person who recommends an investment in an issuer or the purchase or sale of an issuer’s securities, or who distributes or offers an opinion on the investment merits of an issuer or an issuer’s securities, is advising in securities. If a person advising in securities is distributing or offering the advice in a manner that reflects a business purpose, the person is required to be registered under the Act.

We are of the view that Siega was clearly engaging in the business of advising others with respect to investment in the forex contracts. Siega recommended specific trades to his clients and had discretionary trading authority over at least three accounts. Except in the case of one account, Siega decided what trades were appropriate. We find that Siega was required to be registered as an adviser in the portfolio manager category under section 20(1)(c) of the Act and, since he was not registered and as no exemption from registration was available for him to act as an adviser, he contravened section 20(1)(c) of the Act.

Although not alleged in the notice of hearing, we are also of the view that Goldman Stanley was clearly engaged in the business of advising others with respect to investments in the forex contracts and ought to be registered under the Act. Investment advice was provided by account managers and account executives to clients. Account executives were paid commissions by Goldman Stanley and exercised discretion over trading in client accounts. Indeed, Goldman Stanley held itself out in its own brochure as being in the business of advising. Chan, as the directing mind behind Goldman Stanley, was also in the business of advising. Ho and Lo also engaged in conduct that facilitated that advising business and, with Goldman Stanley and Chan, ought to have been registered under the Act.

Although not alleged in the notice of hearing, Goldman Stanley’s promotional brochures contained numerous misrepresentations regarding the business and affairs of Goldman Stanley and Chinamax HK, the nature of forex trading and the role of account executives.

3.4 Did Chan, Wong and Peregrine Alberta participate in a fraudulent scheme relating to securities contrary to section 41.1 of the Act?

In our view the evidence clearly demonstrates that Chan, Wong and Peregrine Alberta participated in a scheme that perpetrated a fraud relating to trading in securities when they knew or ought to have known that the scheme perpetrated a fraud on residents of British Columbia contrary to section 41.1 of the Act.

We have already found that Chan and Peregrine Alberta traded in securities in the form of forex contracts in contravention of sections 20 and 42 of the Act.

Chan’s behavior in the Peregrine operation bears all the hallmarks of a fraudulent scheme. He deliberately deceived regulators and attempted to avoid their scrutiny before and after Goldman Stanley shut down. He took steps to ensure his activities were difficult to detect. He kept virtually no client or company records for any of Goldman Stanley, Chinamax HK , Chinamax BC or Peregrine Alberta. After Goldman Stanley shut down, he arranged for Postles Siega and Tisserand to use different offices and for the Knight-Ridder service to be moved to Tisserand's home to avoid detection by the Commission. He recruited ex-Goldman Stanley account executives and their clients by lying to them about the arrangements he made with Peregrine Hong Kong. Chan provided the account executives with documents from Peregrine Hong Kong to deceive them into believing they would be trading forex contracts with a legitimate and well established forex dealer. By usurping the good reputation of Peregrine Hong Kong, Chan lured the account executives and their clients into giving him money. Their money went to Peregrine Alberta. No accounts were opened nor was any trading done with Peregrine Hong Kong for the clients. Instead, Chan falsified account statements to show that clients were trading with Peregrine Hong Kong. Chan did not use the clients’ funds to trade forex contracts with Peregrine Hong Kong or any other forex dealer. Instead he and Wong converted most of those funds for their own benefit.

Peregrine Alberta played a critical role in the fraud Chan perpetrated on members of the public in British Columbia. Wong facilitated that activity. As Chan’s translator, particularly at the meetings with Postles, Siega and Tisserand, Wong must have been aware that any continued trading in forex contracts after the Goldman Stanley closure would have been in contravention of the direction of Commission staff. She was the one who acquired the numbered company and had its name changed to Peregrine Alberta so it would be identified with that of Peregrine Hong Kong. She was the one who opened the Peregrine Alberta bank account into which client margin funds were deposited. She was the one who removed the client margin funds from the account and arranged for them to be paid to Chan and herself. While the extent of her understanding of the significance of her actions is not certain because she chose not to tell us, in our view Wong knew that her conduct in assisting Chan through Peregrine Alberta was, at a minimum, in contravention of the securities legislation because of the previous order of Commission staff.

We therefore find that Wong, Chan and Peregrine Alberta participated in a scheme relating to a trade of a security when they knew or ought to have known that the scheme perpetrated a fraud on residents of British Columbia contrary to section 41.1 of the Act.

Although not alleged, in our view there was ample evidence before us to have concluded that Chan began his fraudulent conduct much earlier. In our view, Chan through Chinamax HK and Chinamax BC also participated in a scheme relating to a trade of a security when he knew or ought to have known that the scheme perpetrated a fraud on residents of British Columbia contrary to section 41.1 of the Act.

4. DECISION

Chan, Goldman Stanley, Chinamax HK, Chinamax BC and Peregrine Alberta

Goldman Stanley, Chinamax HK, Chinamax BC and Peregrine Alberta were all controlled by Chan and were used simply as extensions of Chan's activities. All contravened the most fundamental requirements of the Act at the hand of Chan. We found that each of Chan, Goldman Stanley, Chinamax HK, Chinamax BC and Peregrine Alberta breached sections 20 and 42 of the Act. We also found that Chan and Peregrine contravened section 41.1 of the Act. In our view Chan’s fraudulent conduct in the Peregrine operation was merely a continuation of a pattern of dishonest conduct that began when he took control of Goldman Stanley and introduced Chinamax HK as the dealer of choice.

Throughout his tenure as the boss, he controlled all the information and the operations so that the true nature of affairs was difficult to discover. He created the impression that the financial integrity of Goldman Stanley’s forex contract trading business was well established and substantial when it was not. He failed to keep records. He ensured that Goldman Stanley did not pursue registration. He failed to disclose his ownership of Chinamax HK and Chinamax BC. He represented Chinamax HK as an established and legitimate forex dealer when it was not. He went to considerable lengths to create the illusion of legitimate activity when there was none. He baldly stated that Chinamax HK actually brokered forex contracts with other forex dealers yet failed to produce any documentation to substantiate his statement. However, telephone and banking records confirm that trading activity was not being carried out as it had been represented to the clients by Chan and those who represented him. Through his counsel he misrepresented the nature of Goldman Stanley’s and Chinamax’s business to Commission staff. He decided to continue to trade forex contracts in the face of Commission staff’s direction not to when Goldman Stanley was shut down, and he enticed others to do the same. Chan was Chinamax HK, Chinamax BC and Peregrine Alberta. In our view, Chan probably operated the “Chinamax operation” no differently than he operated the Peregrine operation.

His conduct throughout was deliberate and fraudulent. In our view, his testimony to the Hong Kong Futures and Securities Commission and to Commission staff revealed him as a liar and fraud artist. It is clear he had no compunctions in deceiving individuals and government agencies so as to benefit himself. His complete contempt for the regulatory regime and the public it strives to protect merits a severe sanction to deter not only him but others inclined to conduct themselves in such fashion.

Wong

Wong was Chan's translator, assistant and girlfriend and attended meetings at which Chan discussed the trading on behalf of clients with the account managers while at Goldman Stanley. We found that like the others who chose to continue doing business with Chan after the regulators shut down Goldman Stanley, she knew, or ought to have known, that doing so was a deliberate contravention of the securities legislation. Yet she too chose to stay with Chan and assist him in his continued business. She made the arrangements for establishing Peregrine Alberta, deposited clients' funds into its account and took active steps to have money in that account paid out to Chan and herself. Although we found that she contravened section 41.1 of the Act, the evidence suggests that Chan was the mastermind of the fraudulent scheme. Wong may have simply followed his directions. Nonetheless, she must be held accountable for her conduct and in our view, it is in the public interest to prohibit her from participating in the capital markets for a considerable period of time.

Ho and Lo

Lo and Ho were vice-presidents of Goldman Stanley and participated in the management of its forex trading business. Ho also traded on his own behalf. As a consequence, we found that each of Ho and Lo contravened sections 20(1)(a) and 42 of the Act. In light of the importance of the registration and prospectus requirements and the fact that the regulatory system can only function if those who are in positions of responsibility take steps to ensure that they and those whom they recruit comply with their regulatory obligations, Ho and Lo must accordingly be held to account for their failure to meet their regulatory responsibilities. Nonetheless, we find that there were differences between Lo and Ho that merit consideration in making administrative orders in the public interest. Lo left

Goldman Stanley in March 1995 to take the Canadian Securities Course and eventually became registered under the Act. Ho on the other hand continued with Goldman Stanley under Chan’s direction after his suspicions had been aroused regarding the legitimacy of Chinamax HK and the trustworthiness of Chan. Lo did not do any forex trading whereas Ho traded forex contracts for his own account.

Siega

Siega had been a registrant with a securities dealer and had taken the Canadian Futures examination before coming to Goldman Stanley. He knew, or ought to have known, that one had to be registered under the Act to trade forex contracts on behalf of clients. He was in the offices of Goldman Stanley at the time it was ordered to be shut down by Commission staff. He was aware that Chan was continuing to run a clandestine forex contract trading business in direct contravention of Commission staff’s direction. He agreed to work under Chan in this clandestine business. He actively solicited clients and once he got them he advised them on trading and in most cases traded on their behalf. We found that in so doing, he contravened sections 20(1)(a) and (c) and section 42 of the Act. As a consequence, his clients suffered significant financial losses. As a past registrant, he ought to have known better. Siega’s conduct shows a flagrant disregard for the regulatory regime and the public it strives to protect and he too must be held to account.

We consider it necessary to protect the public from the activities of each of the respondents for substantial periods of time given their deliberate disregard of British Columbia’s regulatory requirements. Accordingly, we order as follows:

1. under section 144(1)(c) of the Act, that Goldman Stanley, Chinamax HK, Chinamax BC and Peregrine Alberta be prohibited permanently from using the exemptions described in sections 30 to 32, 55, 58, 80 and 81 of the Act;

2. under section 144(1)(c) of the Act, that the exemptions described in sections 30 to 32, 55, 58, 80 and 81 of the Act do not apply to the following respondents for the period of time specified opposite the respondent’s name:



        Andy Chan30 years from the date of this order;
        Wendy Wong10 years from the date of this order;
        Albert Siega 10 years from the date of this order;
        Philip Ho 3 years from the date of this order
        William Lo1 year from the date of this order;

3. under section 144(1)(d) of the Act that each of the individual respondents is prohibited from becoming or acting as a director or officer of an issuer for the period of time specified opposite his or her name:


        Andy Chan
30 years from the date of this order;
        Wendy Wong
10 years from the date of this order;
        Albert Siega
10 years from the date of this order;
        Philip Ho
3 years from the date of this order;
        William Lo
1 year from the date of this order;

4. under section 144.1 of the Act, that Chan pay forthwith an administrative penalty of $100,000, that each of Siega and Wong pay forthwith an administrative penalty of $5,000, that Ho pay forthwith an administrative penalty of $3,000 and that Lo pay forthwith an administrative penalty of $1,000; and

5. under section 154.2 of the Act, that each of the respondents pay costs of or related to the hearing in an amount to be determined following submissions from the parties.


DATED at Vancouver, British Columbia, on March 25, 1997.

FOR THE COMMISSION







Joyce C. Maykut, Q.C.Peter A. Manson, Q.C.
Vice ChairMember