ASC finds oil rig worker a stock manipulator

2013-03-19 13:48 ET - Street Wire

Also Street Wire (C-MNM) Magellan Minerals Ltd

by Mike Caswell

The Alberta Securities Commission has found David De Gouveia, a Calgary oil rig worker and active Stockhouse poster, guilty of market manipulation. The ASC says that Mr. De Gouveia carried out dozens of trades in Vancouver's Magellan Minerals Ltd., with the purpose being to create an artificially high price for the company. Among other things, he executed high-closing trades on the last day of several consecutive months.

The findings come four months after the ASC held a five-day hearing against Mr. De Gouveia. The regulator contended that he traded Magellan "very energetically" in late 2008 and early 2009, during his one-week breaks from oil rig work. He executed large numbers of small trades, with most of the trades resulting in upticks and many in high closes.

During the hearing Mr. De Gouveia attempted to portray himself as an amateur trader and "naive bumbler," but a three-member ASC panel found that he was "simply too good at what he did for that to make sense." The evidence showed that of his trades, 72 per cent were upticks and many were executed at the high price for the day. Moreover, his trading made no economic sense, and he in fact lost money.

The ASC also said that Mr. De Gouveia actively commented on Magellan on Stockhouse during the trading. Using the alias "coffintrader," he drew a substantial following as he wrote at least one formal-looking article on the company and authored many posts. In reality, he knew little about mining, the panel found.

The ASC's decision

The findings are contained in a decision that the ASC announced on Friday, March 15. The decision describes how Mr. De Gouveia, 32, became a "corporate advisor" to Magellan in November, 2008. At the time he had been trading for a few years, and had called the company's chief executive officer, Alan Carter, a few times to ask about the stock.

Mr. Carter, who was a witness at the hearing, testified that he was impressed during those phone calls by Mr. De Gouveia's knowledge. He gleaned from the Stockhouse website that Mr. De Gouveia was an active contributor with a large following. After several months of discussions, the company hired him as an adviser in November, 2008, with his compensation being an option to buy 200,000 shares at 23 cents. (Mr. De Gouveia later exercised the option, and earned $122,000 selling the stock, the ruling states.)

Mr. De Gouveia's job at Magellan was to disseminate information "to as many people as possible." According to the ruling, he published many favourable commentaries about the company on Stockhouse, and represented to Mr. Carter that he had his own company called Gouveia Capital Corp. In one e-mail, he referred to "our current analysis on markets and the addition of a majorly undervalued gold junior [Magellan] in Brazil which has had great success."

Despite his appearance of mining expertise, Mr. De Gouveia's work was a facade, the ruling states. During the hearing, he testified that he knew little or nothing about mining, and said that the article he wrote about Magellan was cobbled together from the work of others. There was no such thing as Gouveia Capital Corp.

The panel also heard evidence that Magellan had not hired Mr. De Gouveia to perform any market-making or to trade the stock. Brokerage records indicated, however, that he started actively trading the company around the time he was hired in late 2008, through an on-line account he had at CIBC. The evidence showed him "very energetically" placing orders, mostly of just one boardlot.

On the days he traded, 72 per cent of his buy orders were upticks, or trades that made the stock rise, the panel heard. He also high-closed the stock 10 times during the period, with the resulting increases in the price ranging from one cent to 14 cents, according to the evidence.

His trading, as described in the ruling, eventually drew the attention of CIBC's compliance department. A reviewer was concerned about the high number of orders he had placed in Magellan and the patterns of his trading. An internal e-mail, which the decision quotes, stated that he was consistently selling low and buying higher in the same day. "We felt this could be an attempt to manipulate the stock price to benefit another, unknown account ... or to give the false impression of trading activity in [Magellan]," the e-mail stated.

CIBC eventually closed his account over those concerns, after which he opened an account at Questrade to continue his trading, the ruling states. CIBC passed its information to the Investment Industry Regulatory Organization of Canada, which examined the trading and notified the ASC.

During the hearing, Mr. De Gouveia attempted to portray his trades as amateur mistakes. He testified that he knew little about the markets and had no improper motives. He also said he had no formal postsecondary education, and had only become interested in trading stocks because of conversations with fellow oil rig workers.

The ASC, however, found that he was simply too smart to have been a "naive bumbler" who had entered some odd trades. According to the decision, Mr. De Gouveia was obviously bright, energetic and a quick learner. He maintained a facade to Mr. Carter that he knew the mining business well. Moreover, when CIBC discharged him as a client he should have realized that his trading behaviour was of some concern, the panel says.

The ASC has not yet levied any penalties on Mr. De Gouveia. The regulator will hold a second hearing to determine any sanctions.

Magellan Minerals, which was not accused of any wrongdoing, traded between 11 cents and 90 cents during the period the ASC complained of. The stock was last at 15.5 cents.