INVESTMENT DEALERS ASSOCIATION

Transcription

1 INVESTMENT DEALERS ASSOCIATION IN THE MATTER OF: THE BY-LAWS OF THE INVESTMENT DEALERS ASSOCIATION OF CANADA AND KYLE KAI KEE WONG SETTLEMENT AGREEMENT I. INTRODUCTION 1. The Enforcement Department Staff ( Staff ) of the Investment Dealers Association of Canada ( the Association ) has conducted an investigation ( the Investigation ) into the conduct of Kyle Kai Kee Wong ( the Respondent ). 2. The Investigation discloses matters for which the Respondent may be disciplined by a hearing panel appointed pursuant to Association By-law 20 Part 10 ( the Hearing Panel ). II. JOINT SETTLEMENT RECOMMENDATION 3. Staff and the Respondent consent and agree to the settlement of these matters by way of this settlement agreement ( the Settlement Agreement ) in accordance with By-laws to 20.40, inclusive and Rule 15 of the Association Rules of Practice and Procedure. 4. The Settlement Agreement is subject to acceptance by the Hearing Panel. 5. The Settlement Agreement shall become effective and binding upon the Respondent and Staff as of the date of its acceptance by the Hearing Panel. 6. The Settlement Agreement will be presented to the Hearing Panel at a hearing ( the Settlement Hearing ) for approval. Following the conclusion of the Settlement Hearing, the Hearing Panel may either accept or reject the Settlement Agreement. 1

2 7. If the Hearing Panel accepts the Settlement Agreement, the Respondent waives his right under the Association By-laws and any applicable legislation to a disciplinary hearing, review or appeal. 8. If the Hearing Panel rejects the Settlement Agreement, Staff and the Respondent may enter into another settlement agreement; or Staff may proceed to a disciplinary hearing in relation to the matters disclosed in the Investigation. 9. The Settlement Agreement will become available to the public upon its acceptance by the Hearing Panel. 10. Staff and the Respondent agree that if the Hearing Panel accepts the Settlement Agreement, they, or anyone on their behalf, will not make any public statements inconsistent with the Settlement Agreement. 11. Staff and the Respondent jointly recommend that the Hearing Panel accept the Settlement Agreement. III. STATEMENT OF FACTS (i) Acknowledgment 12. Staff and the Respondent agree with the facts set out in this Section III and acknowledge that the terms of the settlement contained in this Settlement Agreement are based upon those specific facts. (ii) Factual Background The Respondent 13. The matters set out in these Particulars relate to the period from February 2001 through October 2003 (the Relevant Period ). C&L 14. The Respondent entered the securities industry as a Registered Representative ( RR ) with HSBC Securities (Canada) Inc. ( HSBC ) in 1998 and was an RR at a Richmond Branch of HSBC during the Relevant Period. 15. C&L were a married couple who immigrated to Canada from China in October L had minimal experience in securities markets. C s experience was from purchasing Treasury Bills of the Chinese Government and fixed deposits when she was living in China. 2

3 16. A staff member at the HSBC Bank introduced C&L to the Respondent on May 28, The next day they met with the Respondent at his office and C&L opened a Joint Cash Account at HSBC (the C&L Account ). The NCAF for the C&L Account was completed by the Respondent and signed by C&L and the Respondent and the Respondent remained the RR responsible for the account throughout the Relevant Period. 17. The NCAF for the C&L Account recorded the Investment objectives for the account as 100% Income and recorded the Risk Factors as 50% Medium Risk, 50% High Risk notwithstanding the fact that C&L wanted capital preservation. 18. Contrary to the information recorded on the NCAF C&L s actual investment goal was capital preservation. They did not want any stock investments because they worried about volatility. They advised the Respondent that they had a total of $300,000 (US$) in a bank account but they did not say they were investing that amount. Their plan was to invest $100,000 (US$). 19. C&L were not fluent in English. All communications between C&L and the Respondent were in Mandarin. 20. At their meeting the Respondent recommended C&L purchase a Government of Argentina Bond (an Argentina Bond ). The Respondent advised that an Argentina Bond was low risk because if Argentina ran into financial difficulty, the World Bank as well as the United States of America ( USA ) would back them up. The Respondent did not advise C&L of any negative aspects of an Argentina Bond. 21. On or about May 31, ,000 units of an Argentina Bond maturing on December 20, 2003 with a coupon rate of 8.375% (the 2003 Bond ) was purchased in the C&L Account at per unit for a total purchase price of $93, (US$). 22. The Respondent did not, at any time prior to opening the C&L Account or purchasing the 2003 Bond, ask C&L how much risk they were willing to assume in their account. 23. Bond Ratings by Moody's and Standard & Poor's are as follows: Moody s S & P Investment Grade Ratings Aaa Aa A Baa AAA AA A BBB Below Investment Grade ( Junk Bond ) Ba B Caa Ca BB B CCC CC 3

4 In Default * Note: there may be sublevels within each rating: 1,2,3 +, - C C D 24. According to Moody s, bonds which are rated B1 generally lack characteristics of a desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. (Detailed definitions of all Moody s Bond ratings are set out in Schedule A) 25. According to Standard and Poor s, a bond rated BB- is regarded as having significant speculative characteristics. It faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to the obligor's inadequate capacity to meet its financial commitment on the obligation. (Detailed definitions of all Standard and Poor s Bond ratings are set out in Schedule B) 26. When the 2003 Bond was purchased in the C&L Account it was rated B1 by Moody s and BB- by Standard and Poor s. Its yield to maturity was approximately 12%. At the same time the yield to maturity on a General Motors Acceptance Corporation bond rated A2 by Moody s and A by Standard and Poor s and maturing at approximately the same time was 5.2%. 27. The 2003 Bond was subsequently downgraded by Standard & Poor s to lower ratings on the dates as follows: S&P rating downgraded to Date B- July 12, 2001 CCC+ October CC October 30, 2001 D November 19, The 2003 Bond decreased significantly in value shortly after it was purchased in the C&L Account. Details of the price decline are as follows: Price of Bond Date May 31, 2001 (date of purchase) June 30, July 31, August 31, September 30, October 31, November 30, December 31,

5 29. As a result of the unsuitable recommendations to purchase the 2003 Bond C&L incurred a loss of over $59,000 (US$) in the C&L Account. K 30. K was a non Canadian resident who resided in Taiwan. K was born in 1927 and throughout the Relevant Period was retired. He opened a US$ / CDN$ Cash account at HSBC (the K Account ) in July 2000 and appointed his daughter R, who lived in Richmond, full power of attorney. 31. R had originally, in or about 1999, opened a bank account at HSBC Bank on behalf of K and was later referred to the Respondent by an employee of HSBC Bank. 32. The NCAF for the K Account recorded the Investment objectives for the account as 80% Income, 20% Growth and recorded the Risk Factors as 80% Low Risk and 20% Medium Risk. K s actual objectives for the account was to generate a stable return without risking any loss of principal. 33. The NCAF for the K Account was completed by the Respondent and sent to Taiwan for K to sign. K could not read or write English. The Respondent remained the RR responsible for the K Account throughout the Relevant Period. 34. K never dealt with HSBC Bank or the Respondent directly. K had no experience in securities. 35. R first met the Respondent in or about May The Respondent suggested R purchase two bonds in the K Account: an Argentina Bond and a Toronto Dominion Bank Bond ( TD Bond ). 36. When R asked if there was any problem with an Argentina Bond, the Respondent indicated the bond was very safe because if the Government of Argentina was ever in trouble, the International Monetary Fund ( IMF ) would, as it did in the case of Russia, bail the country out. 37. On June 8, 2001 R deposited funds to the previously inactive K Account. That same day $99,100 (US$) worth of a TD Bond was purchased in the K Account along with 100,000 units of the 2003 Bond at per unit for a total purchase price of $94, (US$). 38. After the 2003 Bond was purchased in the K Account, the Respondent asked R, on or about, June 14, 2001 to sign an Update to Client Account Agreement Form (the NCAF Update ). Although the Respondent did not give her an explanation about what it was or why it was necessary, R signed the NCAF Update. The 5

6 NCAF Update changed the investment objectives for the K Account to 100% Income and the Risk Factors to 50% High Risk, 50% Medium Risk. 39. When the 2003 Bond was purchased in the K Account it was rated B1/BB- and its yield to maturity was approximately 12%. At the same time the yield to maturity on a General Motors Acceptance Corporation bond rated A2/A and maturing at approximately the same time was 5.2%. 40. As a result of the unsuitable recommendations to purchase the 2003 Bond K incurred a loss of over $36,000 (US$) in the K Account. V H&M 41. MV, born in 1938 and KV, born in 1940 (the Vs ) emigrated from India to Canada in In or around 1998 they opened a joint US$ /CDN$ cash account at HSBC (the V Account ) after being referred by HSBC Bank. 42. The Respondent became the Vs investment advisor, in or about 2001 after their previous advisor left the firm and remained the RR responsible for the V Account throughout the Relevant Period. 43. The Respondent did not complete the existing NCAF for the V Account and did not, upon assuming the account, update the existing NCAF. The existing NCAF for the V Account indicated their account objectives were 100% Growth and the Risk Factors were 100% High Risk but the Vs did not see the investment objectives or Risk Factors before signing the NCAF. The Vs actual investment objectives for the V Account was capital preservation and income. They could not afford to take any risks with their money. 44. When he assumed the V Account the Respondent advised that given their age, they should not invest in risky products. 45. On February 14, 2001 when they had some extra money to invest, the Respondent recommended the Vs purchase the 2003 Bond. The Respondent did not discuss the bond s rating or the risks involved with the bond. 46. On February 15, ,000 units of the 2003 Bond at per unit for a total purchase price of $15,800 (US$). 47. As a result of the unsuitable recommendations to purchase the 2003 Bond the Vs incurred a loss of over $5,000 (US$) in the V Account. 48. H, born in 1915, and M, born in 1927, were a retired married couple who depended on the income generated from their investments to pay for their living expenses. They lived in Richmond, British Columbia. 6

7 49. H&M had a joint US$ / CDN$ cash account at HSBC (the H&M Account ). The Respondent became their investment advisor, in or about 2001 after their previous advisor at left the firm and remained the RR responsible for the H&M Account throughout the Relevant Period. 50. When the Respondent took over their Account H&M advised him that their investment objective was capital preservation and that they wanted to invest conservatively. As long as their capital was safe, they did not mind receiving a lower interest. 51. In, or about June 2001 the Respondent recommended H&M purchase an Argentina bond because the rate of return was high. The Respondent did not suggest any other bonds. The Respondent did not discuss any risks associated with an Argentina Bond. 52. On June 11, 2001, 136,000 units of an Argentina Bond maturing on October 9, 2006 with a coupon rate of 11% (the 2006Bond ) was purchased in the H&M Account at per unit for a total purchase price of $130, (US$). 53. When it was purchased the 2006 Bond was rated B by Standard and Poor s. It was subsequently downgraded to lower ratings on the dates as follows: S&P rating downgraded to Date B- July 12, 2001 CCC+ October CC October 30, 2001 D November 19, The 2006 Bond decreased significantly in value shortly after it was purchased in the H&M Account. Details of the price decline are as follows: Price of Bond Date June 11, 2001 (date of purchase) June 30, July 31, August 31, September 30, October 31, November 30, December 31, Neither H nor M could read English and they went to the Respondent s office on a monthly basis because they had difficulties understanding their monthly account statements. They communicated with the Respondent in Mandarin. 7

8 56. In October 2001, H&M received their only interest payment on the 2006 Bond. On or about November 19, 2001 it went into default. 57. When the bond stopped paying interest, M went to the Respondent s office and verbally complained to the Respondent and told him they did not have enough money to pay for their living expenses. 58. To compensate them for the 2006 Bond defaulting on its interest payments, the Respondent, over a 17-month period, made 4 personal payments to H&M without the knowledge of HSBC as follows: Date Amount April 8, 2002 $1,000 October 11, 2002 $1,200 April 24, 2003 $1,000 October 8, 2003 $1, As a result of the unsuitable recommendations to purchase the 2006 Bond H&M incurred a loss of over $68,000 (US$) in the H&M Account. After the Relevant Period 60. The Respondent s employment at HSBC was terminated in August The Respondent was subsequently employed as an RR at RBC Dominion Securities from October 2004 until January He has not been employed by a Member firm since that time. Mitigating Factor 61. HSBC compensated the four clients for their losses in separate settlements. HSBC paid a total of approximately $168,000 to the four clients. The Respondent has paid HSBC approximately $105,000 of this amount. Association Staff have therefore concluded that in relation to Count 1, a suspension and a larger fine, which might otherwise have been required, is not required in this case. IV. CONTRAVENTIONS Count The Respondent admits that from February 2001 through June 2001, he recommended and processed purchases of Government of Argentina bonds, in the accounts of 4 clients; namely, C&L, H&M, K and V without first using due diligence to ensure that the recommendation was suitable for those clients based on their financial situation, investment knowledge, investment objectives and risk 8

9 tolerance contrary to Association Regulation (q) [then (d)] and Association By-Law Count The Respondent admits that on four separate occasions between April 1, 2002 and October 15, 2003, he, without the knowledge or approval of his Member firm, personally compensated his clients H&M for the default of the interest payments on the clients Argentina Bond by making 4 separate payments totalling $4,200 and thereby acted contrary to Association By-law VI. TERMS OF SETTLEMENT 64. The Respondent agrees to the following terms of settlement: Penalty Count 1 i) the Respondent shall pay a fine of $25,000 (twenty-five thousand dollars); Penalty Count 2 ii) the Respondent shall pay an additional fine of $15,000 (fifteen thousand dollars) for a total fine of $40,000 (forty-thousand dollars); iii) the Respondent shall be prohibited from acting in any registered capacity for a period of two (2) years from the effective date of this Settlement Agreement; Conditions of Re-approval iv) the Respondent s re-approval in any registered capacity shall be subject to the condition that he successfully complete a 1 year period of close supervision by his Member firm; v) the Respondent s re-approval in any registered capacity shall be subject to the condition that he re-write and pass the examination based on the Conduct & Practices Handbook Course; and vi) the Respondent s re-approval in any registered capacity shall be subject to the condition that the fine and costs set out in herein are paid in full. Costs vii) The Respondent shall pay $5,000 (five thousand dollars) towards the Association s investigation and prosecution costs in this matter. 65. Unless otherwise stated, any monetary penalties and costs imposed upon the Respondent are payable immediately upon the effective date of the Settlement Agreement. 9

10 66. Unless otherwise stated, any suspensions, bars, expulsions, restrictions or other terms of the Settlement Agreement shall commence on the effective date of the Settlement Agreement. AGREED TO by the Respondent at Singapore, this 27 th day of July, Florence Fam Witness Kyle Wong Kyle Wong AGREED TO by Staff at the City of Vancouver in the Province of British Columbia, this 27 th day of July, Amy Hothi Amy Hothi, Witness Paul Smith Paul Smith Enforcement Counsel on behalf of Staff of the Investment Dealers Association of Canada ACCEPTED by the Hearing Panel this day of, Per: R. John Rogers, Panel Chair Per: Patrick Lecky, Panel Member Per: Ward McMahon, Panel Member 10

11 Schedule A (page 1 of 2) Moody s Bond Ratings and Definitions Aaa Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edged." Interest payments are protected by a large or an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Aa Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risk appear somewhat larger than the Aaa securities. A Bonds which are rated A possess many favorable investment attributes and are considered as upper-medium-grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment some time in the future. Baa Bonds which are rated Baa are considered as medium-grade obligations (i.e., they are neither highly protected not poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Ba Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well-assured. Often the protection of interest and principal payments may be very moderate, and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. B Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments of maintenance of other terms of the contract over any long period of time may be small. 11

12 Schedule A (page 2 of 2) Moody s Bond Ratings and Definitions Caa Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest. Ca Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings. C Bonds which are rated C are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. 123 A Moody rating may have digits following the letters, for example "A2" or "Aa3". The digits in the Moody ratings are in fact sub-levels within each grade, with "1" being the highest and "3" the lowest. 12

13 Schedule B (page 1 of 2) Standard and Poor s Bond Ratings and Definitions AAA An obligation rated 'AAA' has the highest rating assigned by Standard & Poor's. The obligor's capacity to meet its financial commitment on the obligation is extremely strong. AA An obligation rated 'AA' differs from the highest rated obligations only in small degree. The obligor's capacity to meet its financial commitment on the obligation is very strong. A An obligation rated 'A' is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rated categories. However, the obligor's capacity to meet its financial commitment on the obligation is still strong. BBB An obligation rated 'BBB' exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation. Obligations rated 'BB', 'B', 'CCC', 'CC', and 'C' are regarded as having significant speculative characteristics. 'BB' indicates the least degree of speculation and 'C' the highest. While such obligations will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse conditions. BB An obligation rated 'BB' is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to the obligor's inadequate capacity to meet its financial commitment on the obligation. B An obligation rated 'B' is more vulnerable to nonpayment than obligations rated 'BB', but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitment on the obligation. 13

14 Schedule B (page 2 of 2) Standard and Poor s Bond Ratings and Definitions CCC An obligation rated 'CCC' is currently vulnerable to nonpayment, and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation. CC An obligation rated 'CC' is currently highly vulnerable to nonpayment. C A subordinated debt or preferred stock obligation rated 'C' is CURRENTLY HIGHLY VULNERABLE to nonpayment. The 'C' rating may be used to cover a situation where a bankruptcy petition has been filed or similar action taken, but payments on this obligation are being continued. A 'C' also will be assigned to a preferred stock issue in arrears on dividends or sinking fund payments, but that is currently paying. D An obligation rated 'D' is in payment default. The 'D' rating category is used when payments on an obligation are not made on the date due even if the applicable grace period has not expired, unless Standard & Poor's believes that such payments will be made during such grace period. The 'D' rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized. Plus (+) or minus(-) The ratings from 'AA' to 'CCC' may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories. 14