IN THE MATTER OF THE SECURITIES ACT
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
STATEMENT OF ALLEGATIONS OF STAFF OF THE ONTARIO SECURITIES COMMISSION
Staff of the Ontario Securities Commission ("Staff") make the following allegations:
1. Koman Info-Link Inc. ("Koman") is a corporation incorporated on May 17, 1996 pursuantto the laws of Ontario, and carried on business in an office located in Toronto, Ontario fromapproximately August, 1996 to approximately September 11, 1998. During the materialtimes, Koman held itself out as an affiliate of Koman Investment Inc. a.k.a. KomanInvestment Inc. (B.V.I.) ("Koman Investment Inc."). During the material times, KomanInvestment Inc. was a corporation incorporated on May 23, 1996 pursuant to the laws of theBritish Virgin Islands. During the material times, Simo Ko ("Ko") was the sole officer anddirector of Koman.
2. During the material times, Koman employed Jose Castaneda ("Castaneda") as a trader orAccount Executive for Koman clients (hereafter referred to as clients or investors).
3. As an Account Executive, Castaneda had full discretionary trading authority over certainclients' accounts. Some of Koman's clients appointed Castaneda as Account Executivepursuant to agreements entered into between the clients and Koman Investment Inc. (referredto below in paragraph 7(a)).
4. During the material times, Koman, Koman Investment Inc. and Ko were not registered totrade in securities pursuant to section 25(1) of the Securities Act, R.S.O. 1990, c. S.5amended (the "Act"). Koman and Koman Investment Inc. were reporting issuers under theAct. Castaneda has been registered, at various times, to trade in securities under section 26of the Act as a registered salesperson for the sale of scholarships only. Castaneda was notregistered to trade in the securities offered by Koman to Koman's investors.
Koman/Koman Investment Inc. Operations
5. Beginning in or about August, 1996, Koman and Koman Investment Inc. established whatpurported to be a foreign currency trading operation in Toronto, Ontario. Koman and KomanInvestment Inc. solicited funds from investors residing in Ontario for the purpose of providinginvestors with the opportunity to purchase or sell foreign exchange contracts (the "ForexContracts") in any one of six foreign currencies or gold bullion on margin. All trades werecarried out for speculative purposes. The Forex Contracts had no maturity dates andinvestors did not take delivery of any currency.
6. Koman also purchased and sold securities listed on the Hong Kong Stock Exchange on behalfof investors, and in this capacity, acted as a dealer as defined in section 1(1) of the Act.
7. In summary, Koman's operations included the following:
(a) providing Koman clients with forms of agreements (the "Agreements") to enter intowith Koman Investment Inc. and overseeing the signing of these Agreements inrespect of the Forex Contracts and securities listed on the Hong Kong StockExchange;
(b) placing advertisements in newspapers for the solicitation of individuals to invest fundswith Koman for the purpose of purchasing and selling Forex Contracts;
(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 cheques for thepurpose of trading in Forex Contracts and securities listed on the Hong Kong StockExchange;
(e) opening and operating bank accounts in the name of Koman for the deposit of fundsreceived from investors and for disbursement of funds for various purposes describedbelow; and
(f) recruiting persons to act as Account Executives for some investors, with full tradingauthority over investors' accounts, and arranging for Account Executives to act in thiscapacity on behalf of certain investors.
Foreign Currency Trading Operation
8. To open an account, investors were required to first deposit a minimum of $5,000 (USD) intoan account held by Koman. Koman required that the client commit one to two percent of thecost of the Forex Contract (depending on the time of the day or night the trade was made)from the client's investment account as a margin payment. The portion of the cost of theinvestment not provided by the client was represented to be loaned to the client by Koman.Koman charged the client interest on the outstanding balance.
9. Koman represented to investors that client funds deposited with it were used to acquireinvestments in any one of six foreign currencies offered in units equivalent to approximately$100,000 (USD), as well as gold bullion. Forex Contracts were not purchased in eachinvestor's name. Koman purchased and sold the Forex Contracts through an account held inKoman's name with Topworth Investments Inc. located in Macau.
10. A commission in the amount of $80 (USD) was charged by Koman for each completedtransaction which consisted of a purchase and sale of a Forex Contract.
11. Salespersons employed by Koman, or Account Executives receiving commissions fromKoman, were expected to solicit funds from their own contacts for the purpose of openingan account for a client with Koman.
12. As stated above, certain investors appointed a "trading agent" referred to as an "AccountExecutive" with full discretion to trade on behalf of the client pursuant to the Agreementsreferred to in paragraph 7(a). The Account Executive had discretion over the size,denomination and number of Forex Contracts transacted on behalf of the client. An AccountExecutive also had discretion to close out his or her client's position in a given foreigncurrency at any time, thereby crystallizing a gain (less interest and Koman's commission) orincurring a loss. Crystallized losses (plus Koman's commission and interest) were debitedfrom the funds on deposit in the client's account. Crystallized gains were credited to theclient's account with interest, if applicable.
13. Castaneda was appointed as an Account Executive for some of the clients of Koman, andexercised complete discretionary trading authority for investors in respect of the ForexContracts.
14. Some of Koman's clients suffered significant trading losses through trading in ForexContracts, whether trading on their own behalf through Koman, or through the authorizationof Account Executives to trade in Forex Contracts on their behalf.
15. 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, 1997 and July, 1997.During the material times, Castaneda was appointed by W.F. to act as one of the AccountExecutives in respect of W.F.'s accounts with Koman. During the material times, Komandebited 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).
16. Investor, M.A., provided funds in the amount of approximately $100,000.00 (CDN) toKoman to trade in Forex Contracts during the period from approximately late November,1996 to May, 1997. During the material times, Castaneda was appointed by M.A. to act asone of the Account Executives in respect of M.A.'s accounts. By October, 1997, M.A. wasadvised that there were no further funds remaining in her accounts with Koman. M.A. hadwithdrawn 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
17. Koman also formed a Hong Kong Sock Department ("HKSD") for the purpose of tradingsecurities listed on the Hong Kong Stock Exchange on behalf of investors (the "HKSDInvestors").
18. 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 HKSD Investor was requiredto maintain a minimum balance of $5,000 (USD) at all times if the investor wished to tradein securities.
19. The HKSD Investors could trade securities on their own account through Koman or appointan Account Executive to trade in securities through Koman on the investors' behalf.
20. Koman had an omnibus margin account in its name for the purpose of trading securities onbehalf of investors, and trades were transacted through AMMB Securities (H.K.) Limited("AMMB") located in Hong Kong.
Funds Received From Investors
21. Koman accepted a total of approximately $1.1 million (USD) and $1.8 million (CAD) fromapproximately 151 investors for the purpose of trading in Forex Contracts.
22. 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 the securities listed onthe Hong Kong Stock Exchange.
23. Koman accepted funds from investors in the form of cash, bank drafts and cheques for thepurpose of purchasing the Forex Contracts and securities listed on the Hong Kong StockExchange. The cash payments received from investors were not deposited in Koman's bankaccounts.
Koman Bank Accounts/Co-Mingling of Funds
24. During the material times, Koman did not maintain a trust account to receive and expendfunds received from investors. Funds received from investors in the form of bank drafts andcheques for the purpose of purchasing the Forex Contracts were deposited in Koman's bankaccount(s) and co-mingled with funds received from investors for the purpose of purchasingsecurities listed on the Hong Kong Stock Exchange. Koman also paid certain business orother expenses from these accounts.
25. In particular, funds were deposited to and disbursed from the two Koman bank accountsdenominated in Canadian dollars as follows: (i) Koman received funds in Canadian dollarsfrom investors and Ko; and (ii) Koman disbursed money from these accounts to investors,Ko, Koman's Account Executives and employees and brokerage firms (such as AMMB andTopworth).
26. Funds were deposited to and disbursed from two Koman U.S. dollar accounts as follows: (i)Koman received funds in American dollars from investors and brokerage firms (such asAMMB and Topworth); and (ii) Koman disbursed money from these accounts to investors,Ko, Koman Account Executives and employees, and to brokerage firms (such as AMMB andTopworth in the form of margin payments).
Koman Record Keeping
27. Koman did not maintain books and records in accordance with requirements contained inOntario securities law, and in particular, in accordance with the requirements contained insection 113 of the Regulation to the Act. During the material times, Koman did notimplement appropriate internal controls to ensure that funds received from investors forinvestment purposes were not co-mingled with funds used for the payment of Koman'sbusiness or other expenses. Further, Koman did not maintain proper books and records inaccordance with the requirements contained in Ontario securities law for the purpose ofdetermining the use by Koman of all funds accepted from investors.
CONDUCT CONTRARY TO THE PUBLIC INTEREST
28. 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 without anexemption from the requirement to file a prospectus contrary to section 53 of the Act;
(b) the Respondents, Koman, Koman Investment Inc., Ko and Castaneda each traded insecurities, namely the Forex Contracts, without registration and without an exemptionfrom the registration requirements contrary to section 25 of the Act;
(c) Koman traded in securities as a dealer, namely the securities listed on the Hong KongStock Exchange, without registration and without an exemption from the registrationrequirements contrary to section 25 of the Act;
(d) Koman acted as portfolio manager and/or as an advisor with respect to trading in theForex Contracts on behalf of certain investors without registration or an exemptionfrom the registration requirements contrary to section 25 of the Act;
(e) Koman failed to 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 ensure thatfunds received from investors for investment purposes were not co-mingled withfunds used for the payment of Koman's business or other expenses. Further, Komandid not maintain proper books and records in accordance with the requirementscontained in Ontario securities law for the purpose of determining the use by Komanof all funds accepted from investors.
(f) In allowing Koman to engage in the conduct described above, Ko acted in a mannercontrary to the public interest.
29. The conduct of Koman and Koman Investment Inc. described above was contrary to thepublic interest.
30. Such additional allegations as counsel may advise and the Commission may permit.
DATED at Toronto this 31st day of May, 2000.