CIRO details suspended firm’s capital troubles

After failing to shore up its capital position, Toronto-based investment dealer Gravitas Securities Inc. was suspended by the Canadian Investment Regulatory Organization (CIRO).

Earlier this month, following a hearing, CIRO issued an order suspending Gravitas and ordering it to facilitate the transfer of its clients’ accounts to other dealers.

The self-regulatory organization has now issued a hearing panel’s reasons for ordering the suspension. The panel detailed repeated capital deficiencies, starting with the firm’s financial filing for January that included a $354,000 shortfall and grew to an estimated $636,000 by early March.

According to an affidavit from Nancy Catton, manager of financial and operation compliance with CIRO, the firm’s capital deficiency was “the result of holding non-marginable private securities” in its inventory and “failing to appropriately manage the firm’s risk adjusted capital by selling those securities.”

Due to the capital troubles, various restrictions were placed on the firm. Gravitas was required to obtain CIRO’s approval for activities such as further depleting its capital or making payments to the firm’s shareholders or affiliates. Gravitas is also restricted from hiring new reps, opening new accounts or adding branches.

In early March, the firm reported continued capital shortfalls ranging between $88,000 and $769,000, although it did manage a positive capital reading on March 17.

In April, Gravitas told regulators that it was in discussions with another firm about possibly transferring its clients and advisors to the other dealer and winding down the business.

There was also a plan to remedy the deficiency by selling private equity shares, the SRO noted.

However, the firm continued to report capital shortfalls from April 10 to May 18, with daily deficiencies ranging from $59,000 to $481,000.

As of May 29, Gravitas remained capital deficient, the SRO said.

“No transactions with another [dealer] had been completed and no further funds from an anticipated sale of private company shares had been received,” it said.

Additionally, the firm failed to file its audited financial statements for the year ending Dec. 31.

The capital shortfalls and the failure to file its audited financials raised “serious concerns” for CIRO, which suspended its membership.

Gravitas did not oppose the order and said clients have been advised that they can transfer their accounts to a new dealer.

“In our view, in the circumstances before us, there is no alternative but to make the order requested,” the panel said.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.