IN THE MATTER OF THE SECURITIES ACT,
R.S.O. 1990, c. S.5, as amended
IN THE MATTER OF
SETTLEMENT AGREEMENT BETWEEN STAFF OF THE ONTARIO
SECURITIES COMMISSION AND MARK KASSIRER
1. By Notice of Hearing, the Ontario Securities Commission (the "Commission") will convene a hearing to consider the approval of this proposed settlement between Staff of the Commission ("Staff") and the respondent Mark Kassirer ("Kassirer") including the making of an Order pursuant to subsection 127(1) and section 127.1 of the Securities Act, R.S.O. 1990, c. S.5 (the "Act").
II. JOINT SETTLEMENT RECOMMENDATION
2. Staff agrees to recommend settlement of an intended proceeding respecting Kassirer in accordance with the terms and conditions described below. Kassirer consents to the making of an Order against him in the form attached as Schedule "A" based on the facts set out in Part III of this Settlement Agreement.
III. STATEMENT OF FACTS
3. Solely for the purposes of this proceeding, and of any other proceeding commenced by a securities regulatory agency, Staff and Kassirer agree with the facts set out in paragraphs 4 through 34.
Phoenix Research and Trading Corporation
4. Phoenix Research and Trading Corporation ("Phoenix Canada") is a company incorporated pursuant to the laws of Ontario. During the material time, Phoenix Canada was registered with the Commission as an investment counsel and portfolio manager pursuant to the Act. Phoenix Canada's registration was voluntarily suspended in May 2000 due to its difficulties in filing audited financial statements and maintaining insurance.
5. Pursuant to a services agreement with Phoenix Research and Trading (Bermuda) Limited ("Phoenix Bermuda"), Phoenix Canada provided investment advisory and portfolio management services to several entities including the Phoenix Fixed Income Arbitrage Limited Partnership ("PFIA LP"), the Phoenix Equity Arbitrage Limited Partnership ("PEA LP"), Phoenix Fixed Income Arbitrage Fund Limited, Phoenix Fund Limited, Phoenix Equity Arbitrage Fund Limited and Phoenix Alternative Strategies Fund Limited.
6. Unitholders invested in Phoenix Fund Limited, Phoenix Fixed Income Arbitrage Fund Limited and Phoenix Alternative Strategies Fund Limited (collectively, the "Feeder Funds"). The Feeder Funds (and other investors) invested in units of PFIA LP and PEA LP. The Phoenix Hedge Fund Limited Partnership, a TSE-listed hedge fund, also held units of PFIA LP and PEA LP.
7. Kassirer was the Chair of Phoenix Canada. During the material time, Kassirer mistakenly believed that he was registered with the Commission as an investment counsel and portfolio manager pursuant to the Act. Currently, Kassirer is the sole registered officer of Kassirer Asset Management Corporation ("KAMC"). KAMC is registered with the Commission as an investment counsel and portfolio manager pursuant to the Act.
8. Ronald Mock ("Mock") was the CEO and President of Phoenix Canada. During the material time, Mock was registered with the Commission as an investment counsel and portfolio manager pursuant to the Act. Mock also was the company's registered supervisory procedures officer.
9. Blair Taylor ("Taylor") is a chartered accountant. From July 1997 to October 1999, Taylor was Phoenix Canada's Director of Operations and Finance. In November 1999, he was appointed the CFO. Taylor never was a registered officer of Phoenix Canada.
10. During the material time, Stephen Duthie ("Duthie") was a senior fixed income trader with Phoenix Canada. Duthie has never been registered with the Commission in any capacity.
PFIA LP's Long Position in U.S. Treasury Notes
11. PFIA LP was a hedge fund. Its investment objective was to maximize returns by pursuing professionally-managed fixed income market neutral and arbitrage investment trading strategies. Such trading strategies are designed to reduce exposure to market direction. PFIA LP held investments in U.S. dollars, Canadian dollars and Euros.
12. From the Fall of 1998 through early January 2000, Duthie was responsible for PFIA LP's U.S. dollar portfolio. In the course of trading such portfolio, Duthie exercised discretion as to the specific fixed income securities he bought and sold on behalf of PFIA LP.
13. As of January 4, 2000, PFIA LP held a $3.3 billion U.S. long position in 6% U.S. treasury notes due August 15, 2009 (the "UST Notes"). The UST Notes represented PFIA LP's entire U.S. dollar portfolio. The UST Notes had been financed by repurchase agreements ("repos"). The UST Notes were not hedged. Such Notes were contrary to the investment guidelines and restrictions of PFIA LP.
14. The Bank of New York informed Phoenix Canada on January 4, 2000 that the latter was in a significant overdraft position (in excess of $50 million U.S.) The UST Notes caused the overdraft position. As a result, Phoenix Canada was forced to liquidate all of PFIA LP's assets. A loss to PFIA LP of over $120 million was sustained due to the UST Notes.
15. On January 5, 2000, Phoenix Canada contacted Staff and informed it of the problem with the UST Notes. Phoenix Canada promptly retained a forensic accounting firm to prepare a report respecting the UST Notes.
The Management of Phoenix Canada
16. Phoenix Canada's fixed income arbitrage business was headed by Mock. In connection with such business, Mock managed the Operations Group, comprising the CFO (Taylor), the Operations Manager and the Settlement Clerk. The fixed income traders, including Duthie, reported to Mock. The Research and Risk Manager and Systems Support also reported to Mock (the former only as it related to Phoenix Canada's fixed income arbitrage activity).
17. Kassirer managed Phoenix Canada's equity arbitrage business. No one involved in Phoenix Canada's fixed income arbitrage business reported directly to Kassirer.
18. Taylor was the Director of Operations and Finance and then the CFO of Phoenix Canada. He was the most senior person in the Operations Group. Taylor's duties included the direct supervision of the Operations Manager and the Settlement Clerk.
PFIA LP's U.S. Dollar Portfolio
19. Phoenix Canada management informs Staff that, between January 1999 and early January 2000, Duthie was authorized to engage in a low risk, matched book trading strategy of repos and open reverse repurchase agreements ("open reverse repos") in U.S. treasury benchmark issues. Duthie did not engage, however, in such a trading strategy. Rather, he accumulated unhedged long bond positions.
20. Management relied only on Duthie's representations that the UST Notes (and other long bonds reported during the material time) were open reverse repos (the "purported open reverse repos").
21. Within one day of being informed by the Bank of New York that PFIA LP was in a significant overdraft position, Phoenix Canada discerned that the UST Notes were long bonds and not the purported open reverse repos.
22. The purported open reverse repo transactions fell outside the scope of controls and procedures then in place at Phoenix Canada. Phoenix Canada failed to:
(i) establish, implement and monitor appropriate alternative controls and procedures respecting the purported open reverse repo transactions;
As a result of these failures, the true nature of the UST Notes was not detected by management.
23. Phoenix Canada's method of capturing Duthie's trades in the purported open reverse repos was inappropriate and unreliable. Phoenix Canada's computer trading system ("Alydia") was not designed to record open repos or open reverse repos. Thus, all trades by Duthie in the purported open reverse repos were entered into the (long) bond module of Alydia. Phoenix Canada then made two manual adjustments based solely on Duthie's representations. This method of recording the purported open reverse repos was fundamentally flawed.
24. Phoenix Canada prepared, on a daily basis, a value at risk ("VAR") report. The information used to create the VAR report was pulled from the information inputted to Alydia. Phoenix Canada adjusted the VAR report program so that the purported open reverse repos (entered as long bonds) were treated as short term long bonds (which they were not) and their risk assessed accordingly. This adjustment was inaccurate and based solely on Duthie's representations as to the existence of the purported open reverse repos and the length of time such repos would be held.
25. Further, Phoenix Canada relied exclusively on Duthie to assign a "price" to the purported open reverse repos (entered as long bonds) to adjust the net income. The "price" assigned to the purported open reverse repos was unsubstantiated and unreliable.
26. Phoenix Canada failed to:
(i) maintain any record of the original trades of the purported open reverse repos;
As a result of these failures, the true nature of the UST Notes remained undetected by Phoenix Canada.
27. Moreover, Phoenix Canada failed to segregate duties by:
(i) relying solely on the representations of Duthie to allocate PFIA LP's U.S. bond inventory between long bonds and open reverse repos;
As a result of these failures, the true nature of the UST Notes remained undetected by Phoenix Canada.
28. Phoenix Canada reported incorrect information respecting the purported open reverse repos to the Bank of Bermuda, Phoenix Bermuda and the beneficial owners of PFIA LP. Phoenix Canada consistently reported the purported open reverse repos as long bonds.
29. Further, the accumulation of the UST Notes contravened PFIA LP's investment objectives and restrictions and thus, the Notes were not a suitable investment for PFIA LP.
30. Kassirer failed to supervise adequately and provide oversight of Phoenix Canada's conduct respecting the UST Notes, the purported open reverse repos and Duthie's activities.
31. As the Chair, Kassirer failed to monitor adequately the overall business of Phoenix Canada, including its risk controls. Among other things, Kassirer did not make appropriate and adequate inquires of other Phoenix Canada management and staff respecting the VAR report and the adjustments made to that report to reflect Duthie's activities.
32. By the end of 1999, PFIA LP's U.S. dollar portfolio was invested entirely in the purported open reverse repos. Given the concentration in, and the size and significance of, Duthie's portfolio, Kassirer failed to make sufficient efforts to understand the true nature of Duthie's activities.
33. Kassirer's conduct as described in paragraphs 30 through 32 was contrary to the public interest.
34. Kassirer co-operated with Staff in its investigation concerning the UST Notes.
IV. TERMS OF SETTLEMENT
(i) The making of an Order:
(ii) Kassirer will make a payment by certified cheque to the Commission in the amount of $10,000 respecting the costs of the Commission's investigation.
V. STAFF COMMITMENT
36. If this settlement is approved by the Commission, Staff will not initiate any other proceeding under the Act against Kassirer respecting the facts set out in Part III of this Settlement Agreement.
VI. APPROVAL OF SETTLEMENT
37. Approval of the settlement set out in this Settlement Agreement shall be sought at the public hearing of the Commission scheduled for June 17, 2002, or such other date as may be agreed to by Staff and Kassirer (the "Settlement Hearing"). Kassirer shall attend the Settlement Hearing in person.
38. Counsel for Staff or for Kassirer may refer to any part, or all, of this Settlement Agreement at the Settlement Hearing. Staff and Kassirer agree that this Settlement Agreement will constitute the entirety of the evidence to be submitted at the Settlement Hearing.
39. If this settlement is approved by the Commission, Kassirer agrees to waive his rights to a full hearing, judicial review or appeal of the matter under the Act.
40. Staff and Kassirer agree that if this settlement is approved by the Commission, they will not make any public statement inconsistent with this Settlement Agreement.
41. If, for any reason whatsoever, this settlement is not approved by the Commission, or an order in the form attached as Schedule "A" is not made by the Commission;
(i) this Settlement Agreement and its terms, including all discussions and negotiations between Staff and Kassirer leading up to its presentation at the Settlement Hearing, shall be without prejudice to Staff and Kassirer;
VII. DISCLOSURE OF SETTLEMENT AGREEMENT
42. Except as permitted under paragraph 38 above, this Settlement Agreement and its terms will be treated as confidential by Staff and Kassirer until approved by the Commission, and forever if, for any reason whatsoever, this settlement is not approved by the Commission, except with the written consent of Staff and Kassirer, or as may be required by law.
43. Any obligations of confidentiality shall terminate upon approval of this settlement by the Commission.
VIII. EXECUTION OF SETTLEMENT AGREEMENT
44. This Settlement Agreement may be signed in one or more counterparts which together shall constitute a binding agreement.
45. A facsimile copy of any signature shall be as effective as an original signature.
|DATED this 14 day of June, 2002
|DATED this 13 day of June, 2002
|STAFF OF THE
ONTARIO SECURITIES COMMISSION