Canada: Securities Litigation Snapshot - January 2015

IIROC

IIROC ENFORCEMENT

Not so much "Know Your Client" as "Ignore Your Client"

Re Matthews 2014 IIROC 56, 2015 IIROC 02

Following a contested hearing on the merits, on January 5, 2015, IIROC fined Grant Patrick Matthews (the "Respondent") $200,000, plus costs of $20,000 and imposed a 5 year prohibition on registration. This was as a result of suitability infractions in respect of 4 clients from January 2009 to May 2012, discretionary trading in respect of 2 of those clients and excessive trading (churning) in respect of 3 of those clients, each over a shorter period.

In its disciplinary decision released December 8, 2014, the Panel set out its view of the "due diligence steps" undertaken by a registrant to "know the client" and "know the product". It held, in part, that once an improper recommendation has been made, it does not matter whether or how the registrant discloses the material negative factors or whether the client claims to understand and accept the risks in the investment. Acknowledgement of the risk does not convert an unsuitable investment into a suitable one.

The Panel found that the Respondent knew his clients' essential facts but ignored them.

All clients in question were (semi) retired.

The full text of the disciplinary decision can be read here, and of the penalty decision here.

Fines Imposed for Inappropriate DSC charges

Re Darrigo 2015 IIROC 03

Following an uncontested hearing on the merits, on January 23, 2015, IIROC fined Paul Christopher Darrigo (the "Respondent") $60,000 representing a disgorgement of commissions of $50,000 plus an additional fine of $10,000 due to his improper sales of mutual funds with deferred sales charges.

In a decision released last fall, the Respondent was found to have solicited buys and sells of mutual funds on a deferred sales charge basis to the detriment of his (elderly) clients. He repeatedly sold mutual funds and then repurchased similar funds, subjecting his clients to redemption fees while generating commissions for himself. At times the mutual funds were held for less than a year. These transactions generated in excess of $60,000 in commissions for the Respondent.

The Respondent was also found to have borrowed from 2 clients, which resulted in a fine of $55,000, representing disgorgement of loan proceeds of $45,000, plus an additional fine of $10,000.

The Respondent was fined to 12 months of strict supervision and ordered to pay costs of $65,000.

A full text of the disciplinary decision can be read here and of the penalty decision here.

Unsuitability for Physician of Leveraged ETFs.

Re Milot 2014 IIROC 55

In December 2014, IIROC released a settlement agreement with Paul Milot (the "Respondent"). The settlement arose from one complaint by a 48 year old physician with investment objectives of 60% to 90% growth and 20% high risk. She earned $65,000 to $85,000 per year with net holdings of approximately $220,000. She suffered losses of $92,526, mostly due to the purchase and holding of leveraged ETFs and the decline in a security named Prometic Life Sciences Inc. ("Prometic"). Prometic was a penny stocking comprising approximately 20% of her account.

The Respondent admitted to not understanding how leveraging affects an ETF or that the product was high risk.

Staff and the Respondent accepted the following terms of settlement:

  1. an aggregate fine in the amount of $20,000;
  2. six (6) months of close supervision;
  3. successful completion of the Conduct and Practices Handbook Course within one (1) year following the decision to be rendered in the matter of this settlement agreement;
  4. costs in the amount of $2,500.

The full text of the settlement agreement can be accessed here.

IIROC PUBLICATIONS

Revised Sanction Guidelines

IIROC Notice 15-0008

On January 13, 2015 IIROC released its Revised Sanction Guidelines ("Guidelines") effective February 2, 2015. The Guidelines consolidate and replace all previous versions of both the Dealer Member Disciplinary Sanction Guidelines and the UMIR Disciplinary Sanction Guidelines into one set of Guidelines.

In addition to the Guidelines, IIROC published three companion Policy Statements ("Staff Policy Statements") which purport to provide stakeholders with guidance regarding the Staff's approach to the issues of registration suspensions and permanent bars, the consequences of internal discipline by a Dealer Member, and credit for cooperation.

Of note are the summary of public comments and IIROC's responses at Appendix E of IIROC Notice 15-0008 found here some highlights from which are as follows:

  1. warning letters are not part of a Respondent's disciplinary record. The Guidelines do not intend to broaden the definition of disciplinary record to include warning letters;
  2. whether a registrant has committed one violation that impacts several different accounts or multiple violations in one account will be considered an aggravating factor;
  3. suspensions should not be restricted solely to circumstances where there is serious misconduct. IIROC staff does not agree that suspensions are becoming commonplace or imposed in unwarranted circumstances;
  4. where conduct is egregious, a firm's size should not be an important consideration in serving to reduce a sanction to a point where specific and general deterrence is negatively impacted;
  5. internally imposed discipline does not necessarily eliminate the need for formal discipline by IIROC.

The Revised Sanction Guidelines can be found here, while the Staff Policy Statements can be found here.

Announcement of CSA approval and IIROC implementation of 2015 and 2016 IIROC CRM2 Amendments

On January 19, 2015, IIROC announced approval by the CSA of IIROC's 2015 and 2016 CRM2 amendments. The list of amendments begins on page 3 of IIROC Notice No. 15-0013 found here. A summary of the nature and purpose of the amendments begins on page 5 of the same notice.

Release of Annual Consolidated Compliance Report

On January 27, 2015, IIROC released its annual consolidated compliance report. Its contents are highly varied and include discussion of:

  • IIROC Priorities for 2015 with respect to Financial, Operational, Trading and Business Conduct Compliance;
  • Results of reviews and surveys regarding enhanced suitability;
  • 2014 Significant Deficiencies;

A full copy of the IIROC Notice No. 15-0021 is found here.

Guidance on Underwriting Due Diligence

IIROC Notice 14-0299

On December 18, 2014, IIROC published its long anticipated Guidance Respecting Underwriting Due Diligence ("Guidance"). The new Guidance has been in force since its publication.

To the extent that you have not as yet had an opportunity to review, highlights from its Guidance, which is described as neither a minimum nor maximum standard, nor a modification of legal obligations, are set out below. With recognition that not all items may be relevant or appropriate in each case, according to IIROC, each dealer should:

  1. have written policies and procedures including supervision reflecting what constitutes reasonable due diligence. This is a contextual determination for each underwriting and the result of the exercise of professional judgment;
  2. have a due diligence plan that reflects the context of the offering and the level of due diligence that is reasonable to the circumstances;
  3. hold due diligence Q&A sessions at appropriate points during the offering process as an opportunity for syndicate members to ask detailed questions of the issuer's management, auditors and counsel;
  4. perform sufficient business due diligence to understand the business of the issuer. Professional judgement is to be exercised in determining what material facts should be independently verified. Examples of 'red flags" about an issuer are provided in the Guidance;
  5. understand the boundary between business and legal due diligence. Matters to be reviewed by underwriters are not to be delegated to counsel, who should be supervised;
  6. appreciate that the extent of reliance on experts and other third parties is a contextual determination;
  7. not unduly rely on the lead underwriter. Each syndicate member should satisfy itself that the lead underwriter performed the kind of due diligence the syndicate member would have performed on its own behalf;
  8. document the due diligence process to demonstrate compliance;
  9. ensure, through effective supervision and compliance, that its execution of the prospectus certificate signifies that the dealer has participated in the due diligence through appropriate personnel and process.

Some further details are provided in respect of each of the very general guiding principles described above. Summary of common practices and suggestions are found at Appendix A and matters to be considered in creating a due diligence plan are found at Appendix B.

The full text of the Guidance can be accessed here.

MFDA

MFDA ENFORCEMENT PROCEEDINGS

Settlement Agreements Regarding Unsuitable Leveraged Investment Strategies:

Re Lloyd A. Snyder, File No. 201330

On December 8, 2014, the MFDA released notice of its approval of a settlement agreement in circumstances where Lloyd Snyder (the "Respondent") admitted that he failed to ensure that the leveraged investment recommendations that he implemented in the accounts of at least 15 clients were suitable. The time period in question spanned 2003 through to early 2009. The leveraged investment strategies were the "Smith-Snyder Manoeuver"; and the "Forced Savings Program". These strategies involved clients borrowing monies to purchase return of capital mutual funds structured to pay monthly proceeds to investors, which proceeds declined due to market conditions. They were therefore insufficient to allow the strategies to perform in a manner the Respondent had represented to clients they would.

The Respondent was subject to a 10 year prohibition from conducting securities related business, a fine of $50,000 and costs in the amount of $50,000. In the event that the Respondent did not pay the fine or the costs, he would be subject to permanent ban without further notice.

A full text of the settlement agreement can be read here.

Settlement Agreements Regarding Falsifying Documents

Know Your Client Forms

Re Donald Cameron Welsh, File No. 201366

On December 8, 2014, the MFDA released notice of its approval of a settlement agreement in circumstances where Donald Cameron Welsh (the "Respondent") admitted that he falsified the initials of 12 clients on a total of 12 Know Your Client Forms and made changes to the forms, contrary to MFDA Rule 2.1.1. The time period in question spanned December 2009 to November 2012. The Respondent paid approximately $15,000.00 to the Member to compensate them for the additional supervision he required after the matter was discovered.

The Respondent was subject to a fine in the amount of $7,500 and costs of $2,500.

A full text of the settlement agreement can be read here.

Trade Forms

Re Lachman Hassaram Balani, File No. 201402

On January 15, 2015, the MFDA released notice of its approval of a settlement agreement in circumstances where Lachman Hassaram Balani (the "Respondent") admitted that, between March 2010 and February 2013, he obtained and maintained approximately 89 account and trade forms in 23 client accounts which were signed by clients when the forms were blank or only partially complete, and used the forms to process transactions in client accounts, contrary to MFDA Rule 2.1.1.

The Respondent was subject to a fine in the amount of $10,000 and costs in the amount of $2,500 in accordance with a timeline, which, if breached, would result in immediate suspension until such time as the amounts are paid.

A text of the reasons for decision can be read here, and the settlement agreement can be read here.

COURT PROCEEDINGS

Documents produced to Regulator Pursuant to Statutory Assurances of Confidentiality ordered Producible in Litigation:

Société financière Manuvie c. D'Alessandro, 2014 QCCA 2332

In a decision released on December 19, 2014, the Québec Court of Appeal ("Court") affirmed a lower Court's decision requiring, the appellant to produce in a class action, confidential documents that it had exchanged with the Office of the Superintendent of Financial Institutions ("OFSI") pursuant to the Supervisory Information (Insurance Companies) Regulations (SOR/2001-56) ("Supervisory Regulations") despite strict statutory prohibitions on disclosure.

The Court held that while the Supervisory Regulations were enacted to limit the communication of information provided to OFSI pursuant to its provisions, they did not amount to an absolute prohibition on disclosure in litigation. The documents were found to be relevant and producible. The Court did however state that a confidentiality agreement between the parties could prevent confidential documents from being viewed by the wider public.

These findings may have a direct impact on how confidential documents provided to regulators at large are treated in the context of litigation.

A copy of the original French decision can be found here.

Directors & Officers: Shareholders Remain Restricted in Breach of Fiduciary Duty Claims

Shon v. Argo Mezzanine Financing No.3 Ltd., 2014 BCSC 2117

This decision confirms that, contrary to the rule in certain U.S. jurisdictions, shareholders will only rarely be able to make a fiduciary breach claim directly against an officer or director of a corporation. To do so, they must establish not only an independent relationship with the defendant but also a loss that was separate from any loss suffered by the corporation (and hence all other shareholders). Shareholders may, however, be able to bring oppression actions against specific directors for unfairly prejudicing their interests. (The plaintiff did not appear to do so in this case, for reasons that are not immediately apparent.)

The plaintiff, Ms. Shon, invested $0.5 million in a real estate project in Vancouver. Mr. Hong solicited investment in respect of this project, and was president of Argo Mezzanine Financing No. 3 Ltd. ("Argo No. 3"), a privately held company, and the entity holding the interest in the underlying lands on which the project would be located.

According to Ms. Shon, Mr. Hong caused a mortgage of the underlying lands to be granted to a related entity and then falsely represented to the Argo No. 3 investors that the project would fail if they did not return their shares and provide further investment funds to Mr. Hong. Ms. Shon brought a claim against Mr. Hong alleging, among other things, negligent misrepresentation. Directors generally owe a duty of care to the corporation, not directly to individual shareholders (who may instead bring an oppression action against a director that disregards their interests).

The Court affirmed that, in certain circumstances and particularly in closely-held corporations, directors may owe fiduciary duties directly to shareholders. In order for a shareholder to make out such a claim, he or she must establish that the director had a relationship with the shareholder that was independent of the director's duties to the corporation; the loss suffered must similarly be independent of any losses suffered by the corporation.

The Court found that the losses claimed were suffered by all shareholders of Argo No. 3, and not simply Ms. Shon. As a result, Ms. Shon could not claim any losses that were independent of the losses of Argo No. 3.

A full text of the decision can be found here.

Providing Alberta Securities Commission Investigation Materials SEC does not violate the Charter

Beaudette v. Alberta Securities Commission, 2015 ABQB 57

On January 22, 2015, the Alberta Court of Queen's Bench determined in Beaudette v Alberta (Securities Commission), 2015 ABQB 57, that providing information gathered by the Alberta Securities Commission ("ASC") during the course of their investigation to foreign agencies does not violate the Canadian Charter of Rights and Freedoms (the "Charter").

A key fact in this case is that Beaudette had yet to be charged with an offence, and even if he was to be charged, no threat of serious harm to Beaudette (i.e. through the use of the death penalty in the U.S.) would be imminent. The Court in this case did suggest that its analysis may be different if the potential harm to the applicant may have been greater.

The applicant in this matter, Scott Beaudette, was served with a summons from the ASC requiring him to produce materials and attend an interview as part of an ongoing ASC investigation. Mr. Beaudette refused to attend the interview based on his belief that the materials he was required to provide and the interview transcript would be provided to the United States Securities and Exchange Commission ("SEC"), who could then possibly forward those materials on to the U.S. Department of Justice, who could potentially pursue criminal charges against him using the investigation materials as evidence.

The Court concluded that, while there was at least some possibility that Mr. Beaudette could be prosecuted in the U.S., what evidence may be used against him in those proceedings is strictly a matter of American criminal procedure, and within the exclusive authority of that country.

In relying on principles set down by the Supreme Court of Canada in previous decisions, the Court determined that it must strike a balance between an individual's right to privacy and the state's legitimate interest in obtaining and sharing information, and the particular fact that in securities regulation, the reasonable expectation to privacy in such a heavily regulated industry is low.

A full text of the decision can be found here.

About BLG

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions