Canada: Brokers´ Report - Recent IDA Cases

Last Updated: March 27 2008
Article by Carole J. Brown

Most Read Contributor in Canada, September 2016

IDA - The By-Laws Of The Investment Dealers Association Of Canada And Andy Hyon Chul Kim

On November 13, 2007, the IDA Ontario District Council released its decision with regard to Andy Hyon Chul Kim who, in contravention of the IDA Bylaws, engaged in business conduct or practice unbecoming by investing in a private placement without disclosing his occupation, misrepresenting his residency, failing to advise his employer, the Member Dealer, of his private placements, and failing to disclose to his employer his outside business activities as a Board Member of a publically-traded company.

At the relevant times, Mr. Kim was employed with CIBC World Markets in Mississauga and lived in Oakville. However, in order to subscribe to a private placement that was only available to residents of Alberta and British Columbia, he stated his residence to be Vernon, B.C on the application for the private placement. In addition, he did not disclose this subscription to his employer as he felt approval would be denied. Further, he opened a joint account with his spouse at Boulder Investment Partners to deposit these shares, stated his occupation on the New Account Information Form to be "self employed consultant in the oil and gas industry," and responded that he was not an employee of a securities dealer or trader. Finally, on a number of occasions before and after these events, he stated to his employer that he was not engaged in outside business activity. Upon learning of his clandestine activities, CIBC terminated his employment.

For these misrepresentations, the IDA, in disciplinary hearings, sought a sanction of a six month suspension, a fine of $45,000, re-writing the CPH exam, six months strict supervision post-suspension, and costs of $30,000. Mr. Kim requested a fine of $10,000, $15,000 costs, no suspension, no requirement to rewrite the CPH exam, and no period of strict supervision. In his arguments, he emphasised that no clients of his or the firms with which he dealt were harmed by the transactions.

The IDA Ontario District Council found that his actions were deceitful and went to the "fundamental foundation of trust between a registered representative and his employer". Though no harm actually occurred, the Council wanted to communicate to others that there are consequences to these actions. They determined the appropriate sanction to be a fine of $25,000 and costs of $15,000. They also stated that, had Mr. Kim not been terminated by CIBC, a suspension would have been appropriate, but found that this termination was equivalent to a suspension. They found the two years strict supervision imposed by his new employer was appropriate, and ordered no further supervision. Costs were set at $15,000 as much of the Association's time was spent investigating other allegations that were not pursued and Mr. Kim participated fully in the investigation.

IDA - The By-Laws Of The Investment Dealers Association Of Canada And Chak Ng

On December 20, 2007, a hearing panel of the IDA rendered its decision on penalty in the case of Chak Ng, who was found guilty of business conduct unbecoming or detrimental to the public interest and to the integrity of trading and the capital markets, in accepting trade orders for various client accounts which facilitated a stock manipulation.The Panel found Mr. Ng was grossly negligent in fulfilling his obligation to Know Your Client. Although unwitting, Mr. Ng's failure to fulfill his gatekeeper responsibilities and to know his clients facilitated a sophisticated large-scale quot;pump and dump" stock manipulation (whereby the value of a stock is artificially inflated permitting the perpetrators of the scheme to sell their shares at the inflated value). The Panel found that "a stock manipulation cannot occur without the participation of a registered representative to provide brokerage services."

The Panel, in its decision on the merits, defined the duties imposed on a registered representative by the "Know Your Client" rule more broadly than ensuring suitability of investments for a particular client, holding that it also imposed a duty on a registered representative to act as a gatekeeper for the broader public interest. Registrants must know and understand the capital market, securities laws, their clients and their clients' investment objectives and financial circumstances. They must apply this knowledge and understanding to ensure that every purchase or sale of a security that they participate in for a client is in accordance with the law, suitable for the client and, in the absence of a valid discretionary authority, specifically authorized by the client. All of this is designed to protect the particular client and, as well, serves a broader purpose, namely the ability to spot suspicious or unusual circumstances that could have an effect on the integrity of trading and the capital markets.

The Panel, in finding that Mr. Ng was neglectful of his "Know Your Client" duties, considered a number of factors which, in the circumstances, should have put him on enquiry. The Panel highlighted specific conduct and circumstances which widely diverged from the conduct expected of a prudent registered representative in fulfilling his obligation to know his client and in ensuring that all transactions were within good business practice. These included the following:

  • the near-simultaneous opening of a number of accounts from apparently related parties, who all submitted only unsolicited orders and who requested their trades to be shown "in the market";
  • the fact that when the first account was opened, the account holder advised Mr. Ng that more accounts would be opened by other investors, that bid orders would be placed and were to be shown as "in the market";
  • the acceptance of third party cheques from the same company for deposit into and payment on several of these client accounts, contrary to the rules of the Member Dealer and without making any enquiry as to who the actual client was (account holder or cheque depositor);
  • the fact that Mr Ng was told on more than one occasion who would be on the other side of a trade before it was posted in the market;
  • the fact that Mr. Ng did not meet all of the clients for whom he opened accounts;
  • accepting trade instructions from a person introduced as the "partner" of the account holder, without knowing or being provided with that individual's full identity and without having a written trade authorization executed;
  • the learning that certain account holders had been untruthful with respect to their client application forms;
  • the fact that during that period of time, there was a substantial increase in the volume and price of the stock purchased by the clients.

In finding Mr. Ng grossly negligent, the Panel found that "While it may be that no one of [his actions], individually, would constitute gross negligence, we think that their cumulative effect is overwhelming." In determining the penalty for this negligence, the Panel observed that the primary purpose of sanctions is prevention rather than punishment, and examined two forms of deterrence. While underlining the gravity and seriousness of Mr. Ng's misconduct, the Panel was of the view that the consequences to Mr. Ng were already sufficient enough that he would not be likely to offend again. He had been terminated from his former position, was under high supervision at his new position, and had spoken at seminars regarding his cautionary tale.In terms of general deterrence, the panel determined the sanction must include a suspension due to the damage that market manipulation "can do to the investing public and to the apparent integrity of the investment industry", and imposed a one year suspension as well as a fine of $40,000. Although IDA counsel requested costs in the amount of $80,000, the panel set costs at $25,000, stating that "they should not ... be so great that they could intimidate a person from exercising the right to an impartial hearing of the complaint filed against him/her."

Paul Taylor, articled student-at-law in the Ottawa offices of Borden Ladner Gervais LLP assisted Carole J. Brown with this article

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