A Toronto investment firm used clients’ money to make unauthorized trades, then produced fake account statements to cover up tens of thousands of dollars in losses when clients demanded answers, according to accusations from an investment regulator.

The accusations against Barret Capital Management Inc. were made in an affidavit from the Investment Industry Regulatory Organization of Canada. The affidavit was revealed as part of a rare IIROC “expedited hearing.” IIROC is seeking to suspend Barret’s membership.

The affidavit, by IIROC investigator Vito Pedone, alleged Barret has 162 clients, more than half of whom live in Israel. The total scope of the alleged losses wasn’t detailed in the affidavit.

Barret lawyer Darryl Mann called the proposed sanctions a “death penalty,” and asked for a delay so he could prepare a proper defence. The three-member panel granted his request, ruling that the full hearing would be delayed until Feb. 13. Until then, Barret is barred from trading in the futures and options markets, while any trades in physical gold or silver will need to be approved by a monitor from Laurentian Bank Securities.

During a break in proceedings, Mann wouldn’t say whether Barret’s clients would see any or all of their money returned.

“There’s no issue. That’s between Barret and their clients,” Mann said.

He vowed his client will fight the allegations.

“The Cohens have no prior disciplinary record with any regulator, and Barret has no prior disciplinary record,” said Mann.

IIROC staff lawyer Susan Kushneryk told the three-member panel that the unusual proceeding was warranted because of the “imminent” danger to clients if Barret was allowed to keep trading.

“I admit that this is an extraordinary remedy, but these are extraordinary circumstances. This is not a case of messy records. This was deliberate, manipulative conduct,” alleged Kushneryk.

IIROC was tipped off by suspicious “carrying brokers,” firms which provided back office services, including executing the trades.

The affidavit paints a portrait of investors shocked to learn most of their money was gone.

One investigator, according to the affidavit, told a client his money was wiped out entirely.

“I guess it would surprise you to know that your account not only lost the $10,000, but there’s a balance owing on the account of $21,000?” the investigator Doug Cope said. The stunned client responded “Holy f---, no I didn’t know that at all.”

Among the allegations, which have not been proven, detailed in the affidavit:

One client, who invested $50,000 with the company in June 2008, saw his account’s value fall to $2,646.43 within a year. Barret officials, including CEO and founder Jamie Cohen, later allegedly repeatedly assured him his money was still there, claiming he had soy bean futures investments worth $21,000, wheat futures worth $12,000 and a Swiss franc option worth $13,000.

Barret regularly used client funds to make its own trades, then decided at the end of each day which accounts to put the money into.

• One of the carrying brokers who grew suspicious of Barret was MF Global, the company run by former New Jersey governor John Corzine which filed for bankruptcy last year. Barret founder Jamie Cohen worked at MF Global for more than four years.

Another client gave Barret $10,000 with assurances it would be invested in gold and silver bullion. Instead, alleges IIROC, the money was invested in the futures and options market, and was all lost.

Barret kept trying to make trades from one client’s account even after it was completely depleted of funds.

All the evidence, argued Kushneryk, came from Barret’s own records, including company emails and account statements. According to an IIROC investigation, Laurentian Bank Securities, which performed “back office” functions including trade clearance, had $300,000 in a Barret-linked account.

The panel was also told that Oron Sternhill, who’s serving a 15-year ban from the securities industry after being sanctioned by the Ontario Securities Commission in 2000, would regularly visit Barret offices. According to the affidavit, Sternhill was receiving “undisclosed” compensation from Barret.

Mann acknowledged the visits, and said Sternhill was a “godfather” to Jamie Cohen, Barret’s founder and CEO. Cohen was on hand for Tuesday’s hearing.

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“The families have known each other for a long time,” said Mann.

Sternhill was sanctioned by the OSC after Gordon Daly, a company he worked for, sold penny stocks to clients for highly inflated prices.

The agreed statement of facts in the OSC case revealed that Gordon Daly earned $31 million in revenue from the trading in 13 companies where it controlled trading. Investigators were only able to recover $25,000.