Coinsquare co-founders Cole Diamond (CEO) and Virgile Rostand (president) have agreed to step down from the crypto-trading startup as well as pay “administrative penalties” as part of an agreement with the Ontario Securities Commission (OSC), which found the company had engaged in market manipulation contrary to the Ontario Securities Act.
Coinsquare is required to find replacements for its CEO and CCO within 90 days.
In a hearing that took place today, the OSC commissioner approved a settlement reached between the OSC staff, Coinsquare, and its executives: Diamond, Rostand, and Felix Mazer, former Coinsquare chief compliance officer (CCO). As part of the settlement, Coinsquare admitted to engaging in market manipulation through the reporting of inflated trading volumes.
The OSC said Diamond and Rostand admitted to authorizing the inflated trading volumes, and Diamond admitted to taking reprisal against an internal whistleblower, who reportedly raised multiple concerns about the practice. As part of the agreement, the executives were also required to pay “administrative penalties” to the OSC, with Diamond paying $1 million and Rostand $900,000. The company’s co-founders were also required to pay an additional $50,000. Mazer, who was accused of failing to fulfill the duties of his “critical” role as CCO, agreed to pay $50,000. Coinsquare, as a company, is also required to pay $200,000.
Coinsquare has been ordered to obtain new management, notably CEO and CCO, and seek compliance with the Investment Industry Regulatory Organization of Canada (IIROC) and other regulations, as well as create an independent board of directors, an independent whistleblower program, and implement processes to ensure its platform aligns with securities laws moving forward.
A statement provided to BetaKit by a spokesperson for Coinsquare read, “Coinsquare recognizes the important role of oversight and regulation in fostering a secure and trustworthy cryptocurrency trading environment in Canada. That’s why we cooperated with the OSC to reach a settlement regarding past practices in order to prioritize registration and marketplace status as an Alternative Trading System.”
The hearing took place less than a week after the OSC released a Statement of Allegations on July 16, noting that it was bringing a proceeding against Coinsquare and the company’s executives.
The OSC alleged that Coinsquare had misled clients and engaged in market manipulation through the reporting of inflated trading volumes, which the regulator alleged was authorized by Diamond and Rostand.
The proceedings from the OSC followed reporting from Vice in June alleging Coinsquare engaged in “wash trading,” a term used for automatically buying and selling currency between accounts it controlled. The OSC alleged that Coinsquare inflated its trading volumes by reporting “wash” trades, which represented more than 90 percent of its reported trading volume between July 2018 and December 2019.
— OSC News (@OSC_News) July 21, 2020
In a statement provided to BetaKit last week, Coinsquare said it takes “full responsibility” and planned to “fully cooperate with the OSC on all regulatory matters.”
The crypto trading startup also noted that it had been working closely with the OSC to reach a settlement “and secure a path forward for the company” as it goes through the process to obtain registration and marketplace status as an Alternative Trading System.
Once Coinsquare completes the terms agreed to in the settlement, the startup has been approved to re-submit applications for registering as an investment dealer and trading marketplace operator through the OSC, as well as seek partnership with IIROC.
OSC staff stated during the hearing, the settlement with Coinsquare sends a “strong message” that “deceptive” conduct within crypto and securities trading will not be tolerated in Ontario. The regulator staff also noted that companies that disregard similar securities regulations in the future can expect to see “more significant” sanctions.
The OSC staff called the settlement fair, noting that there were factors in favour of Coinsquare. Notably, said the OSC, the startup cooperated with the investigation; operated in an emerging industry during the time it engaged in wash trading, with leaders that did not have experience operating such an exchange prior; and has since implemented an automated platform that should prevent such practices going forward.
Coinsquare also informed the OSC it had previously received legal advice that the assets traded on its platform were not securities and therefore not subject to Ontario securities laws.
“In this emerging space, Coinsquare’s actions were guided by legal advice that the trading of crypto assets on the Coinsquare Platform was not subject to Ontario securities law. We recognize this advice was wrong,” the Coinsquare spokesperson said in the statement to BetaKit.
“Coinsquare has always put clients, employees and shareholders first and we will continue to do so as we work to pave the way for the industry in Canada,” the spokesperson added.
Internal documents obtained by Vice reportedly show that several Coinsquare employees were “uncomfortable with the practice” of wash trading, despite guidance from Diamond. An email obtained by Vice reportedly states, “the decision to continue wash trading was final by Cole,” and notes that senior staff asked employees to staff using the term wash trading in internal correspondence out of fear of creating a paper trail.
“Despite several employees raising concerns about inflated trading volumes, Coinsquare not only stuck with the practice, but lied to investors about it and retaliated against a whistleblower,” said Jeff Kehoe, director of the enforcement branch at the OSC. “Being an innovator in our capital markets is not a free pass to disregard Ontario securities law. All market participants – including those in novel industries – must act honestly and responsibly.”
Along with the penalties the three executives paid, they were prohibited from holding executive or directorial roles with Coinsquare or other similar “market participant[s]” that would fall under securities regulations: Diamond for three years, Rostand two years, with Mazer for one year, respectively. Those orders came with a number of stipulations outlined in the settlement documents.
Coinsquare is not permitted to allow Diamond or Rostand to hold officer or director roles for three years and, as part of the agreement, Coinsquare is required to find replacements for its CEO and CCO within 90 days.
The allegations and investigation from the OSC also follow recent revelations that personal data of thousands of Coinsquare users had been breached last year. In June, Coinsquare stated that the number of Coinsquare users affected last year was limited to four and it was not aware of the full extent of the breach.
However, in a subsequent conversation with Diamond, the CEO told BetaKit Coinsquare had indications over a year ago that thousands of its customer’s personal data had been breached. Coinsquare reportedly notified law enforcement and the Office of the Privacy Commissioner of Canada of the breach both in 2019 and again this year when Vice revealed that it was larger than originally stated.
Image source Coinsquare via Glassdoor