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Sunday, December 5, 2021

OSC reprimands hedge fund "adviser"


Date: Tuesday, June 3, 2003

The Ontario Securities Commission on Monday released its decision regarding improper trading in a hedge fund by Stephen Duthie, a fixed income trader at Phoenix Research and Trading Corp. Phoenix provided investment advisory and portfolio management services to, among other entities, the Phoenix Fixed Income Arbitrage Limited Partnership ("PFIA LP"). The OSC hearing panel found that, commencing in late 1998 and throughout 1999, Duthie traded in various U.S. benchmark treasuries for the account of PFIA LP. By early January 2000, he had accumulated a US$3.3 billion long position in 6% U.S. treasuries. His trading in these positions was directional and unhedged and contrary to PFIA LPís investment parameters. The panel found that unitholders received inaccurate information concerning the value of their investments as a result of Duthieís mispricing. PFIA LP incurred a loss in excess of US$100 million by virtue of Duthie's improper trading activity. The panel held that Duthie's trading breached his obligations to his client, PFIA LP. Further, although Duthie asserted that he was not an "adviser" within the meaning of the Securities Act, the panel disagreed. It held that Duthie was engaged in registrable activity and ought to have been registered. Duthie has never been registered with the OSC. The panel said that " as an arbitrage trader, Duthie had discretion to buy and sell, and in exercising that discretion he was, in effect, advising his client as to an appropriate investment with a mandate to carry out that advice. Duthie was therefore required to be registered as an adviser." The panel held that, through mispricing and the use of contingency collateral, "Duthie was able to obscure his unauthorized trading from being uncovered". It concluded that Duthie's conduct was "duplicitous" and "if not fraudulent, was both unfair and improper". The commission reprimanded Duthie, ordering that:trading in any securities by Duthie cease for 20 years; he resign any position he holds as a director or officer of a reporting issuer; he is prohibited from becoming or acting as a director or officer of any issuer for 20 years; and he pay costs in the amount of $90,000. The Commissionís decision is available on the Commissionís website, www.osc.gov.on.ca.