Brokerage firm Canaccord Genuity Corp. violated securities rules by failing to meet its gatekeeper obligations when it ignored red flags and executed trades in U.S. over-the-counter (OTC) penny stocks for certain accounts, according to a settlement with the Canadian Investment Regulatory Organization (CIRO).
A hearing panel of the self-regulatory organization approved a settlement with Canaccord — which saw the firm agree to pay a $600,000 fine, $2.2 million in disgorgement, and $50,000 in costs — after it admitted to violating the SRO’s rules between May 2021 and September 2023, in connection with trading in accounts that it opened for Crito Capital LLP, a U.K.-based firm.
According to the settlement, Crito acted as an introducing broker and clearing agent for another entity, GEL Direct Trust — which faced enforcement action from the U.S. Securities and Exchange Commission (SEC) in November 2022, amid allegations that it was trading U.S. penny stocks without registration.
“Despite these allegations, Canaccord continued to execute trades on behalf of Crito LLP,” the settlement noted — adding that it continued to trade for the accounts for almost a year, until September 2023, when it stopped accepting orders from the firm, and ultimately terminated the client relationship.
During that time, the Crito accounts at Canaccord “executed trades for more than 3.8 billion shares of 118 issuers… These trades generated more than $573 million in proceeds for Crito LLP,” the settlement noted.
In August 2024, the GEL defendants settled the allegations against them in the U.S.
Without admitting or denying the allegations, they consented to final judgments that included penny stock bans and almost US$950,000 in penalties.
In its case against Canaccord, CIRO alleged that the firm failed to identify, or adequately address, certain red flags when it first opened the Crito accounts, and when it traded for those accounts.
“A number of these red flags were or ought to have been identified at the time the Crito accounts were opened and should have been properly addressed. Others arose at various times while the Crito accounts traded at Canaccord and either were not identified or were not properly addressed,” it said.
According to the settlement, a couple of traders did have concerns about the accounts, but they didn’t raise all of their concerns with compliance personnel at the firm, and the compliance staffers didn’t make adequate inquiries into the red flags that were identified.
As a result, “Canaccord failed to act as a gatekeeper in the opening of the Crito accounts, the facilitation of the trading in the Crito accounts, and in failing to appropriately take into account its policies and procedures relevant to the accounts and activity,” the settlement said.
The settlement also noted that, since terminating the accounts, Canaccord has “voluntarily and proactively undertaken extensive remediation efforts to ensure that its employees and compliance personnel understand and comply with their obligations as gatekeepers and has implemented policies and procedures to ensure ongoing compliance with these obligations by Canaccord” — including enhanced training and the adoption of advanced oversight tools.