IIROC Enforcement Proceedings
Re Toll Cross Securities Inc.
A Settlement Agreement was approved relating to a contravention of Dealer Member Rule 3400 (Research Restrictions and Disclosure Requirements) and specifically the requirement that any research reports issued by Members state information regarding it or its analyst's relationship to the issuer that is the subject of the report. Rule 3400 further provides that those involved in the preparation of a research report cannot trade in any securities issued by the subject of the report for a period of 30 days prior and 5 days after the release of the report (the "Research Quiet Period").
The Respondent admitted that an analyst employed by the Respondent traded in securities, which were the subject of a research report, on their own behalf and on behalf of others within the Research Quiet Period and, furthermore, traded contrary to the recommendations in the report.
The Respondent further admitted it failed to supervise its employees and failed to ensure that the research reports disclosed potential conflicts of interest.
The Hearing Panel approved a fine of $15,000 and costs to Staff in the amount of $5,000.
Re Moldovan & Holmes
The Panel released its decision in this matter following a hearing comprised of an Agreed Statement of Facts and 3 witnesses, being former clients of the Respondents who provided, in essence, victim impact statements.
The Panel found that the harm to clients/witnesses exceeded their financial losses (those intending on retiring now were working full time again, plans to pay for children's education abandoned and depression diagnosed). The Panel further derived that their settlements with the dealer comprised only partial compensation of their losses.
The Respondents were registered representatives, neither of whom were employed in the industry at the time of the hearing. They had operated an investment program known at the "Strategy". The Strategy involved clients investing in TBills and other low risk securities and then writing uncovered puts and calls on major indices. Profits were derived from premiums received from the sale of options that expired unexercised.
According to the Agreed Statements of Facts, 25 accounts (as opposed to individuals) had complained to IIROC about the conduct of the Respondents. These accounts represented $8.8 million in assets as at July 31, 2008. The Agreed Statement of Facts focused on the 2008 period only and the losses arising in the summer and fall of that year, in the context of a global economic crisis.
It was agreed that the Respondents were required to purchase protective puts and options that would have the effect of limiting losses suffered by clients in volatile markets, which they did not do. The Agreed Statement of Facts also stipulated that the Respondents' failure to do so would have been clear from the clients' review of their monthly statements.
It was also agreed that the Respondents did not understand the complexities and risks associated with the strategy.
IIROC Staff had recommended a 24 month suspension which was rejected by the Panel who imposed a 3 year suspension on the rationale that should the Respondents choose to become employed again in their registered capacity, they would be required to requalify and successfully complete all exams in the same manner as a nonindustry participant.
A fine of $100,000.00 was imposed.
Highlights From 2014 IIROC Enforcement Report
IIROC's second Annual Enforcement Report was released last month. IIROC's area of focus, from an enforcement perspective in 2013 were as per below:
Seniors and Suitability
Cases involving seniors and suitability-related issues account for more than one-third of all IIROC disciplinary cases. As in past years, suitability complaints comprise the most common complaints received by IIROC through the public and ComSet and opened by case assessment. The Report emphasizes that in reviewing suitability related issues, supervision is an issue.
The Report highlights three cases last year where Registrants were suspended for failing to understand or appreciate the risk tolerance of exchange traded fund products (ETFs) – Frederic Lavoie (Disciplinary Hearing, Quebec), Steven Frank Carinci (Settlement, Ontario) and Derek George Laidlaw Axford (Settlement, Ontario).
In two of the cases, Lavoie and Carinci, IIROC found that the advisors failed to conduct adequate research on the products prior to advising the purchases to their clients. The Report noted that in both cases, the advisors failed to read the products' prospectuses and did insufficient independent research. In Axford, the advisor stated that he did not believe that certain inverse ETFs were speculative. They were described in the prospectus as being medium- high risk investments.
Direct Market Access
IIROC conducted several trade supervision cases regarding DMA clients.
MFDA Enforcement Proceedings
Re Durotoye, File No. 201328
A Settlement Agreement was approved relating to the use of partially completed or whited-out signed forms to process trades for 3 clients. Adeolu Durotoye also admitted to approving the use of 30 blank or partially completed KYC forms in his role as Branch Manager. There were no client complaints as a result of his conduct.
Durotoye was suspended from acting as a Branch Manager for a period of 6 months and agreed to pay a global fine and costs award of $5,000.
Unsuitable Leveraged Investments
Re Gragasin, File No. 201249
At a hearing on the merits, Gragasin and MFDA Staff submitted an Agreed Statement of Facts whereby Gragasin admitted to preparing and submitting account and loan applications forms which he knew contained false or misleading information. He further admitted to failing to fully explain the risks associated with leveraged investments to clients and failing to ensure that a leveraging strategy was suitable for his clients.
Gragasin was suspended from acting as a mutual fund salesperson for a period of 3 years and ordered to pay a fine of $30,000 and costs of $5,000.
Re Young and Andrews, File No. 201324
Two settlement agreements were approved relating to offbook transactions. Young, a branch manager, admitted that he was engaged in business dealings which involved recommending, referring or facilitating the sale of investments not disclosed to or approved by the dealer and without disclosing his personal interest in the investments.
Young was permanently prohibited from acting as a mutual fund sales person and agreed to a fine of $7,500 and costs of $5,000.
Andrews, who was newer to the industry and with whom Young often shared a joint advisor code and referral fees, agreed to a fine of $5,000 and a 3 year suspension.
Disbursement of Settlement Funds
Carom v. Bre-X Minerals Ltd, 2014 ONSC 2507
On April 23, 2014, Perell J., of the Ontario Superior Court, released his reasons on a series of motions and cross-motions in the Bre-X class action proceedings.
The issue facing Perell J. was how to dispense the money from the Settlement [for more background on these motions and the Settlement, click here] as the amount of Settlement funds available was less than the amount required to facilitate distribution and that distribution would therefore be impracticable. Class counsel proposed a cy-pres distribution whereby the funds would be given to a charitable institution related to either the class members or issues in the action. Class counsel proposed donating the money to the Access to Justice Fund operated by the Law Foundation of Ontario ("LFO") which would then distribute the funds to various organizations.
In a surprising decision, Perell J. disagreed with class counsel's recommendation and instead consented to one class member's proposal that the funds be given to the University of Ottawa where the class member was a member of the faculty. He noted that class counsel has an obligation to consider the wishes of individual class members in requesting a cy-pres award and that in the present case, the Telfer School at the University of Ottawa was the only specific recipient put forward. Accordingly, Perell J., noting that class counsel did not suggest that the University of Ottawa was an unworthy candidate, determined that as it reflected the wishes of one of the class members, the funds should be distributed accordingly.
Other Court Proceedings
Motions for Summary Judgment Motion for Breach of Limitation Periods
Johnson v. Studley, 2014 ONSC 1732
In Johnson v. Studley, the Ontario Superior Court considered two related summary judgment motions brought by the defendants, John Studley ("Studley") and Armstrong & Quaile Associates ("Armstrong") which sought to dismiss two related actions as statue-barred.
The plaintiffs were clients of Studley. In 2001, they borrowed $150,000 and invested the monies in Olympus United Corp. ("Olympus"). They commenced a claim in January 2013 and argued that they only discovered that they had a potential claim when they learned that Studley no longer acted for them and had been sued by other Olympus investors. Perell J. found that a limitation period starts where a plaintiff learns that they have suffered from mistaken advice, as opposed to when a plaintiff learns of the likely success of a claim. Accordingly, the summary judgment motions were granted and both actions were dismissed as statue-barred.
OSC Publishes Draft 2014-2015 Statement of Priorities: An Enforcement Perspective
With respect to enforcement, the OSC indicated that it would continue to pursue more fraud cases before the courts where a jail sentence is available. In addition, the OSC reaffirmed its commitment and pledged to focus its resources on the Joint Serious Offences Team ("JSOT"), which was formed in conjunction with various law enforcement agencies.
With respect to compliance, the report also suggests that the OSC would select registrants for compliance reviews that are likely to have compliance issues, are new registrants or are in a specific topic or industry that is of particular concern.
Insider Trading (based on rumours)
A joint settlement recommendation was approved by the Commission whereby it was agreed that between May 30, 2011 and June 15, 2011, the Respondent was made aware of rumours within Bridgewater Systems Corp. ("Bridgewater") that constituted information of a material nature that was not generally disclosed and from which he deduced that Bridgewater was an imminent takeover bid. This information was inadvertently provided by an employee of Bridgewater whom the Respondent knew, or ought to reasonably have known, was in a special relationship with Bridgewater.
He purchased shares of Bridgewater based on the information and sold them immediately after its acquisition became public.
He had never purchased shares of Bridgewater before. He had never been a registrant. He did not consider whether the rumours within Bridgewater constituted information of a material fact or change which was not generally disclosed, nor did he consider whether his transactions would be a breach of securities law.
He believed the undisclosed information was likely to be true, and did his own research on Bridgewater, using publically available information.
He was required to disgorge his profits of $23,000.00 and pay fines and costs of $5,000.00 each. A 3 year suspension on trading was imposed.
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