R.S.O. 1990, c. S.5, AS AMENDED
IN THE MATTER OF
KOMAN INFO-LINK INC., KOMAN INVESTMENT INC. a.k.a. KOMAN INVESTMENT INC. (B.V.I.),SIMON KO AND JOSE CASTANEDA
RE: KOMAN INFO-LINK INC., KOMAN INVESTMENT INC.
a.k.a. KOMAN INVESTMENT INC. (B.V.I.),SIMON KO
1. On the 10th day of September, 1998, the Ontario Securities Commission (the"Commission") ordered, pursuant to clause 2 of the subsection 127(1) of theSecurities Act, R.S.O. 1990, c. S.5, as amended (the "Act"), that all trading insecurities by Koman Info-Link Inc. ("Koman"), Koman Investment Inc. a.k.a. KomanInvestment Inc. (B.V.I.) ("Koman Investment Inc."), Simon Ko ("Ko"), John Ping SumLam ("Lam") and Jose Castaneda ("Castaneda") cease for a period of fifteen daysfrom the date of the order (the "Temporary Order").
2. On the 22nd day of September, 1998, the Commission ordered pursuant tosubsection 127(7) of the Act that the Temporary Order be extended against allrespondents until the hearing is concluded and that the hearing be adjourned sinedie.
3. By Notice of Return of Hearing dated May 31, 2000 in respect of Koman, KomanInvestment Inc., Ko and Castaneda (the "Notice of Hearing"), the Commissionannounced that it proposed to hold a hearing to consider whether, pursuant tosections 127 and 127.1 of the Act, in the opinion of the Commission, it is in thepublic interest for the Commission:
(a) to make an order under clause 2 of subsection 127(1) of the Act that tradingin securities by the respondents cease permanently or for such other periodas specified by the Commission;
(b) to make an order under subsection 127(3) of the Act that any exemptions inOntario securities law do not apply to the respondents;
(c) to make an order that Ko resign his position as the sole officer and directorof Koman;
(d) to make an order that Ko is prohibited from becoming or acting as a directoror officer of any issuer;
(e) to make an order that the respondents or any of them be reprimanded;
(f) to make an order that the respondents, or any of them, pay the costs ofStaff's investigation in relation to the matter subject to this proceeding;
(g) to make an order that the respondents, or any of them, pay the costs of theproceeding incurred by or on behalf of the Commission; and/or
(h) to make such other order as the Commission considers appropriate.
II JOINT SETTLEMENT RECOMMENDATION
4. Staff of the Commission ("Staff") agree to recommend settlement of the proceedingsinitiated in respect of the respondents, Koman, Koman Investment Inc. and Ko, bythe Notice of Hearing in accordance with the terms and conditions set out below.Koman, Koman Investment Inc. and Ko agree to the settlement on the basis of thefacts agreed to as hereinafter provided and each of Koman, Koman Investment Inc.and Ko consent to the making of an Order in the form attached as Schedule "A" onthe basis of the facts set out below.
5. This settlement agreement, including the attached Schedule "A" (collectively, the"Settlement Agreement"), will be released to the public only if and when thesettlement is approved by the Commission.
III STATEMENT OF FACTS
6. Staff and the Respondents, Koman, Koman Investment Inc. and Ko, agree with thefacts set out in this Part III.
7. Koman is a corporation incorporated on May 17, 1996 pursuant to the laws ofOntario, and carried on business in an office located in Toronto, Ontario fromapproximately August, 1996 to approximately September 11, 1998. During thematerial times, Koman held itself out as an affiliate of Koman Investment Inc.During the material times, Koman Investment Inc. was a corporation incorporatedon May 23, 1996 pursuant to the laws of the British Virgin Islands. During thematerial times, Ko was the sole officer and director of Koman.
8. During the material times, Koman employed Lam as Koman's business manager,and as a trader or Account Executive for Koman clients (hereinafter referred to asclients or investors).
9. During the material times, Koman employed Castaneda as a trader or AccountExecutive for Koman.
10. As Account Executives, Castaneda and Lam had full discretionary trading authorityover certain clients' accounts. Some of Koman's clients appointed Castaneda andLam as Account Executives pursuant to agreements entered into between theclients and Koman Investment Inc. (referred to below in paragraph 15(a)).
11. During the material times, Koman, Koman Investment Inc. and Ko were notregistered to trade in securities pursuant to section 25(1) of the Securities Act,R.S.O. 1990, c. S.5 amended (the "Act"). During the material times, Koman andKoman Investment Inc. were not reporting issuers under the Act. Castaneda wasnot registered to trade in the securities offered by Koman to Koman's investors.
Appointment of KPMG Inc. as Receiver of Koman's Property
12. On May 18, 2000, KPMG Inc. ("KPMG") was appointed receiver of all of theproperty (the "Property") held in the name of Koman pursuant to an application bythe Commission under section 129 of the Act for an Order of the Superior Court ofJustice. The Order provides, among other things, that the Receiver is authorizedand empowered to defend administrative hearings as may in its judgment benecessary for the proper protection of the Property, and settlement of any suchproceeding.
Koman/Koman Investment Inc. Operations
13. Beginning in or about August, 1996, Koman and Koman Investment Inc. establishedwhat purported to be a foreign currency trading operation in Toronto, Ontario.Koman and Koman Investment Inc. solicited funds from investors residing in Ontariofor the purpose of providing investors with the opportunity to purchase or sellforeign exchange contracts (the "Forex Contracts") in any one of six foreigncurrencies or gold bullion on margin. All trades were carried out for speculativepurposes. The Forex Contracts had no maturity dates and investors did not takedelivery of any currency.
14. Koman also purchased and sold securities listed on the Hong Kong StockExchange on behalf of investors, and in this capacity, acted as a dealer as definedin section 1(1) of the Act.
15. In summary, Koman's operations included the following:
(a) providing Koman clients with forms of agreements (the "Agreements") toenter into with Koman Investment Inc. and overseeing the signing of theseAgreements in respect of the Forex Contracts and securities listed on theHong Kong Stock Exchange;
(b) placing advertisements in newspapers for the solicitation of individuals toinvest funds with Koman for the purpose of purchasing and selling ForexContracts;
(c) providing seminars to investors regarding various aspects of trading in ForexContracts;
(d) accepting funds from investors in the form of cash, bank drafts and chequesfor the purpose of trading in Forex Contracts and securities listed on theHong Kong Stock Exchange;
(e) opening and operating bank accounts in the name of Koman for the depositof funds received from investors and for disbursement of funds for variouspurposes described below; and
(f) recruiting persons to act as Account Executives for some investors, with fulltrading authority over investors' accounts, and arranging for AccountExecutives to act in this capacity on behalf of certain investors. SuchAccount Executives were appointed by Koman clients pursuant to theAgreements referred to in paragraph 15(a).
Foreign Currency Trading Operation
16. To open an account, investors were required to first deposit a minimum of $5,000(USD) into an account held by Koman. Koman required that the client commit oneto two percent of the cost of the Forex Contract (depending on the time of the dayor night the trade was made) from the client's investment account as a marginpayment. The portion of the cost of the investment not provided by the client wasrepresented to be loaned to the client by Koman. Koman charged the client intereston the outstanding balance.
17. Koman represented to investors that client funds deposited with it were used toacquire investments in any one of six foreign currencies offered in units equivalentto approximately $100,000 (USD), as well as gold bullion. Forex Contracts werenot purchased in each investor's name. Koman purchased and sold the ForexContracts through an account held in Koman's name with Topworth InvestmentsInc. located in Macau.
18. A commission in the amount of $80 (USD) was charged by Koman for eachcompleted transaction which consisted of a purchase and sale of a Forex Contract.
19. Salespersons employed by Koman, or Account Executives receiving commissionsfrom Koman, were expected to solicit funds from their own contacts for the purposeof opening an account for a client with Koman.
20. As stated above, certain investors appointed a "trading agent" referred to as an"Account Executive" with full discretion to trade on behalf of the client pursuant tothe Agreements referred to in paragraph. 15(a). The Account Executive haddiscretion over the size, denomination and number of Forex Contracts transactedon behalf of the client. An Account Executive also had discretion to close out hisor her client's position in a given foreign currency at any time, thereby crystallizinga gain (less interest and Koman's commission) or incurring a loss. Crystallizedlosses (plus Koman's commission and interest) were debited from the funds ondeposit in the client's account. Crystallized gains were credited to the client'saccount with interest, if applicable.
21. Lam and Castaneda were each appointed as an Account Executive for some of theclients of Koman, and exercised complete discretionary trading authority forinvestors in respect of the Forex Contracts. Such Account Executives wereappointed by Koman clients pursuant to the Agreements referred to in paragraph15(a).
22. Some of Koman's clients suffered significant trading losses through trading in ForexContracts, whether trading on their own behalf through Koman, or through theauthorization of Account Executives to trade in Forex Contracts on their behalf.
23. In particular, a Koman investor, W.F., provided funds in the amount of $242,327.31(USD) to Koman to trade in Forex Contracts between approximately February, 1997and July, 1997. During the material times, Castaneda and Lam were appointed byW.F. to act as Account Executives in respect of W.F.'s accounts with Koman.During the material times, Koman debited W.F.'s accounts for a total of $83,584.00(USD) for commissions and $56,119.75 (USD) for interest charges. By March, 1998,W.F. had suffered a net loss of $242,182.65 (USD).
24. Investor, M.A., provided funds in the amount of approximately $100,000.00 (CDN)to Koman to trade in Forex Contracts during the period from approximately lateNovember, 1996 to May, 1997. During the material times, Castaneda and Lamwere appointed by M.A. to act as Account Executives in respect of M.A.'s accounts.By October, 1997, M.A. was advised that there were no further funds remaining inher accounts with Koman. M.A. had withdrawn some funds previously. However,M.A. suffered net losses in the amount of $60,000.00 to $70,000.00 (CDN).
Koman's Hong Kong Stock Department
25. Koman also formed a Hong Kong Stock Department ("HKSD") for the purpose oftrading securities listed on the Hong Kong Stock Exchange on behalf of investors(the "HKSD Investors").
26. To open an account, the HKSD Investors were required to deposit $5,000 (USD)for a non-margin account or $15,000 (USD) for a margin account. The HKSDInvestor was required to maintain a minimum balance of $5,000 (USD) at all timesif the investor wished to trade in securities.
27. The HKSD Investors could trade securities on their own account through Koman orappoint an Account Executive to trade in securities through Koman on the investors'behalf.
28. Koman had an omnibus margin account in its name for the purpose of tradingsecurities on behalf of investors, and trades were transacted through AMMBSecurities (H.K.) Limited ("AMMB") located in Hong Kong.
Funds Received From Investors
29. Koman accepted a total of approximately $1.1 million (USD) and $1.8 million (CAD)from approximately 151 investors for the purpose of trading in Forex Contracts.
30. Koman accepted from approximately 23 investors a total of approximately $136,000(USD), $4,450,000 (HKD) and $593,000 (CAD) for the purpose of trading in thesecurities listed on the Hong Kong Stock Exchange.
31. Koman accepted funds from investors in the form of cash, bank drafts and chequesfor the purpose of purchasing the Forex Contracts and securities listed on the HongKong Stock Exchange. The cash payments received from investors were notdeposited in Koman's bank accounts.
Koman Bank Accounts/Co-Mingling of Funds
32. During the material times, Koman did not maintain a trust account to receive andexpend funds received from investors. Funds received from investors in the formof bank drafts and cheques for the purpose of purchasing the Forex Contracts weredeposited in Koman's bank account(s) and co-mingled with funds received frominvestors for the purpose of purchasing securities listed on the Hong Kong StockExchange. Koman also paid certain business or other expenses from theseaccounts.
33. In particular, funds were deposited to and disbursed from the two Koman bankaccounts denominated in Canadian dollars as follows: (i) Koman received fundsin Canadian dollars from investors and Ko; and (ii) Koman disbursed money fromthese accounts to investors, Ko, Koman's Account Executives and employees,brokerage firms (such as AMMB and Topworth), and to persons or companies forpurposes which Koman and Ko have represented to Staff are related to Koman'sbusiness expenses. Koman and Ko have represented to Staff that funds weredisbursed to pay for travel to China for the purpose of exploring propertydevelopment opportunities for Koman and to recruit new clients to trade in ForexContracts and securities listed on the Hong Kong Stock Exchange.
34. Funds were deposited to and disbursed from two Koman U.S. dollar accounts asfollows: (i) Koman received funds in American dollars from investors and brokeragefirms (such as AMMB and Topworth); and (ii) Koman disbursed money from theseaccounts to investors, Ko, Koman Account Executives and employees, brokeragefirms (such as AMMB and Topworth in the form of margin payments), and topersons or companies for purposes which Koman and Ko have represented to Staffare related to Koman's business expenses.
Koman Record Keeping
35. Koman did not maintain books and records in accordance with requirementscontained in Ontario securities law, and in particular, in accordance with therequirements contained in section 113 of the Regulation to the Act. During thematerial times, Koman did not implement appropriate internal controls to ensurethat funds received from investors for investment purposes were not co-mingledwith funds used for the payment of Koman's business or other expenses. Further,Koman did not maintain proper books and records in accordance with therequirements contained in Ontario securities law for the purpose of determining theuse by Koman of all funds accepted from investors.
CONDUCT CONTRARY TO THE PUBLIC INTEREST
36. In conducting the activities described above:
(a) Koman and Koman Investment Inc. distributed securities, namely the ForexContracts, without filing and obtaining a receipt for a prospectus and withoutan exemption from the requirement to file a prospectus contrary to section53 of the Act;
(b) Koman, Koman Investment Inc. and Ko each traded in securities, namely theForex Contracts, without registration and without an exemption from theregistration requirements contrary to section 25 of the Act;
(c) Koman traded in securities as a dealer, namely the securities listed on theHong Kong Stock Exchange, without registration and without an exemptionfrom the registration requirements contrary to section 25 of the Act;
(d) Koman acted as portfolio manager and/or as an advisor with respect totrading in the Forex Contracts on behalf of certain investors withoutregistration or an exemption from the registration requirements contrary tosection 25 of the Act;
(e) Koman failed to maintain books and records in accordance withrequirements contained in Ontario securities law, and in particular inaccordance with the requirements contained in section 113 of the Regulationto the Act. During the material times, Koman did not implement appropriateinternal controls to ensure that funds received from investors for investmentpurposes were not co-mingled with funds used for the payment of Koman'sbusiness or other expenses. Further, Koman did not maintain proper booksand records in accordance with the requirements contained in Ontariosecurities law for the purpose of determining the use by Koman of all fundsaccepted from investors.
(f) In allowing Koman to engage in the conduct described above, Ko acted ina manner contrary to the public interest.
37. The conduct of Koman and Koman Investment Inc. described in paragraphs 36(a)to 36(e) was contrary to the public interest.
IV POSITION OF KOMAN, KOMAN INVESTMENT INC. AND KO
38. Koman's position as provided to Staff is described below.
39. The Agreement referred to in paragraph 15(a) contained terms and references todeal with the following:
- identification of the client including arrangement of a client account number
- an acknowledgment that the client understands the terms and conditions ofthe agreement
- an election to allow the client to designate an account executive if the clientso desires
- an election by the client of the fashion by which the client wished to receiveinformation about the client's account
40. Koman has represented to Staff that Koman purchased Forex Contracts on behalfof clients. In addition, Koman purchased Forex Contracts for its own account. Insome instances, while a Forex Contract was open, interest may have accrued to thebenefit of the investor, in which case it was credited to the client's account.
V TERMS OF SETTLEMENT
41. Koman, Koman Investment Inc. and Ko agree to the following terms of settlement:
(a) pursuant to clause 2 of subsection 127(1) of the Act, Koman, KomanInvestment Inc. and Ko will cease trading in securities permanently;
(b) pursuant to clause 6 of subsection 127(1) of the Act, Koman, KomanInvestment Inc. and Ko will be reprimanded by the Commission;
(c) pursuant to clause 7 of subsection 127(1) of the Act, Ko is required to resignhis position as the sole director and officer of Koman effective the date of theOrder of the Commission approving the proposed settlement agreementherein; and
(d) pursuant to clause 8 of subsection 127(1) of the Act, Ko is prohibited frombecoming or acting as a director or officer of any issuer for a period of 15years effective the date of the Order of the Commission approving theproposed settlement agreement herein, save and except any position Komay hold as an officer with an issuer either employed by the issuer oroffering services to the issuer in his sole capacity as an individual providingarchitectural services, which services are solely related to building designand construction contract administration.
VI STAFF COMMITMENT
42. If this Settlement Agreement is approved by the Commission, Staff will not initiateany complaint to the Commission or request the Commission to hold a hearing orissue any order in respect of any conduct or alleged conduct of Koman, KomanInvestment Inc. or Ko in relation to the facts set out in Part III of this SettlementAgreement. If this settlement is approved by the Commission, Staff will not initiateany other proceeding under the Act against Koman, Koman Investment Inc. and Koin relation to the facts set out in Part III of this Settlement Agreement.
VII PROCEDURE FOR APPROVAL OF SETTLEMENT
43. The approval of the settlement as set out in the Settlement Agreement shall besought at a public hearing before the Commission scheduled for such date as isagreed to by Staff and Koman, Koman Investment Inc. and Ko in accordance withthe procedures described herein and such further procedures as may be agreedupon between Staff and Koman, Koman Investment Inc. and Ko.
44. If this Settlement Agreement is approved by the Commission, it will constitute theentirety of the evidence to be submitted respecting Koman, Koman Investment Inc.and Ko in this matter and Koman, Koman Investment Inc. and Ko each agree towaive any right to a full hearing and appeal of this matter under the Act.
45. If this Settlement Agreement is approved by the Commission, the parties to thisSettlement Agreement will not make any statement that is inconsistent with thisSettlement Agreement.
46. If, for any reason whatsoever, this settlement is not approved by the Commission,or the Order set forth in Schedule "A" is not made by the Commission:
(a) each of Staff and the Respondents, Koman, Koman Investment Inc. and Ko,will be entitled to proceed to a hearing of the allegations in the Notice ofHearing and related Statement of Allegations unaffected by the SettlementAgreement or the settlement negotiations;
(b) the terms of the Settlement Agreement will not be raised in any otherproceeding or disclosed to any person except with the written consent ofStaff and the Respondents, Koman, Koman Investment Inc. and Ko, or asmay be otherwise required by law; and
(c) the Respondents, Koman, Koman Investment Inc. and Ko, further agree thateach will not raise in any proceeding the Settlement Agreement or thenegotiation or process of approval thereof as a basis for any attack on theCommission's jurisdiction, alleged bias, appearance of bias, allegedunfairness or any other challenge that may otherwise be available.
47. If, prior to the approval of this Settlement Agreement by the Commission, there arenew facts or issues of substantial concern, in the view of Staff, regarding the factsset out in Part III of this Settlement Agreement, Staff will be at liberty to withdrawfrom this Settlement Agreement. Notice of such intention will be provided toKoman, Koman Investment Inc. and Ko in writing. In the event of such notice beinggiven, the provisions of paragraph 46 in this part will apply as if this SettlementAgreement had not been approved in accordance with the procedures set outherein.
VIII DISCLOSURE OF SETTLEMENT AGREEMENT
48. Counsel for Staff or counsel for the respondents may refer to any part or all of thisSettlement Agreement in the course of the hearing convened to consider thisagreement. Otherwise, this Settlement Agreement and its terms will be treated asconfidential by all parties to the Settlement Agreement until approved by theCommission, and forever if, for any reason whatsoever this settlement is notapproved by the Commission.
49. Any obligation as to confidentiality shall terminate upon the approval of thisSettlement Agreement by the Commission.
IX EXECUTION OF SETTLEMENT AGREEMENT
50. This Settlement Agreement may be signed in one or more counterparts whichtogether shall constitute a binding agreement and a facsimile copy of any signatureshall be as effective as an original signature.
DATED this 1st day of June, 2000.
SIGNED IN THE PRESENCE OF:Koman Info. Link Inc.
Per: "Simon Ko"
Koman Investment Inc. a.k.a.
Koman Investment Inc. (B.V.I.)
Per: "Janet Ko"
Staff of the Ontario Securities Commission
Manager, Case Assessment
Consent of KPMG Inc., Receiver of the property of Koman Info-Link Inc. ("Koman")
KPMG Inc. consents to the signing of this Settlement Agreement by Simon Ko on behalfof Koman, in his capacity as the sole officer and director of Koman, for the sole purposeof settlement of the proceeding commenced against Koman and other respondents byNotice of Hearing dated September 10, 1998 and continued by Notice of Return of Hearingdated May 31, 2000 pursuant to sections 127 and 127.1 of the Act. KPMG Inc. does notadmit or deny the facts set out in Part III of the Settlement Agreement.
KPMG Inc.Per: " Blair F. Davidson"
SIGNED IN THE PRESENCE OF:
"Elaine Ko" "Simon Ko"