IN THE MATTER OF THE UNIVERSAL MARKET INTEGRITY RULES AND IN THE MATTER OF GLEN GROSSMITH OFFER OF SETTLEMENT

Transcription

1 Settlement Agreement July 18, IN THE MATTER OF THE UNIVERSAL MARKET INTEGRITY RULES AND IN THE MATTER OF GLEN GROSSMITH OFFER OF SETTLEMENT A. INTRODUCTION Market Regulation Services Inc. ( RS ) has conducted an investigation (the Investigation ) into the conduct of Glen Grossmith ( Grossmith ). The Investigation has disclosed matters for which RS seeks certain sanctions against Grossmith pursuant to Rule 10.5 of the Universal Market Integrity Rules ( UMIR ). If this Offer of Settlement is accepted by Grossmith, the resulting settlement agreement (the Settlement Agreement ), which has been negotiated in accordance with Part 3 of UMIR Policy 10.8, is conditional upon the approval by a hearing panel (the Hearing Panel ) of the Hearing Committee appointed under Part 10 of UMIR Policy 10.8.

2 Grossmith agrees to waive all rights under UMIR to a hearing or to an appeal or review if the Settlement Agreement is approved by the Hearing Panel. RS and Grossmith jointly recommend that the Hearing Panel accept this Settlement Agreement. B. AGREEMENT AS TO REQUIREMENTS CONTRAVENED It is agreed that the following Requirements have been contravened by Grossmith: (a) (b) In the period February 4-9, 2005, you engaged in conduct inconsistent with just and equitable principles of trade, contrary to Universal Market Integrity Rules ("UMIR") 2.1(1)(a), for which you are liable pursuant to UMIR 10.4(1)(a). On February 4, 2005, you engaged in conduct which resulted in UBS Securities Canada Inc. contravening UMIR 10.11(1), for which you are liable pursuant to UMIR 10.3(4). C. ADMITTED FACTS RS relies upon the admitted facts which are set out in the Statement of Allegations attached as Appendix A to this Settlement Agreement. D. DISPOSITION For the contraventions in paragraph 6 above, Grossmith and RS have agreed upon the following disposition: (a) A fine of $75, payable by Grossmith to RS; 2

3 (b) Suspension of access to marketplaces regulated by RS for 3 months commencing upon the execution of this Settlement Agreement by Grossmith; (c) Strict supervision for 6 months after completion of the suspension referred to in (b) above; and, (d) Costs of $25, payable to RS. If this Settlement Agreement is accepted by a Hearing Panel, Grossmith agrees to pay the amount referred to in paragraph 8 within 30 days of such acceptance. E. PROCEDURES FOR ACCEPTANCE OF OFFER OF SETTLEMENT AND APPROVAL OF SETTLEMENT AGREEMENT Grossmith shall have until 5:00 p.m. July 5, 2005 to accept the Offer of Settlement and serve an executed copy thereof on RS. This Settlement Agreement shall be presented to a Hearing Panel at a public hearing (the Approval Hearing ) held for the purpose of approving the Settlement Agreement, in accordance with the procedures described in UMIR Policy 10.8 in addition to any other procedures as may be agreed upon between the parties. Grossmith acknowledges that RS shall notify the public and media of the Approval Hearing in such manner and by such media as RS sees fit. Pursuant to Part 3.4 of UMIR Policy 10.8, the Hearing Panel may accept or reject this Settlement Agreement. In the event the Settlement Agreement is accepted by a Hearing Panel, the matter becomes final, there can be no appeal or review of the matter, the disposition of the matter agreed upon in this Settlement Agreement will be included in the permanent record of RS in respect of Grossmith, and RS will publish a 3

4 summary of the Requirements contravened, the facts, and the disposition agreed upon in the Settlement Agreement. In the event the Hearing Panel rejects the Settlement Agreement, RS may proceed with a hearing of the matter before a differently constituted Hearing Panel pursuant to Part 3.7 of UMIR Policy 10.8 and this Settlement Agreement may not be referred to without the consent of both parties. F. OTHER MATTERS Grossmith agrees that, in the event he fails to comply with any of the terms of the Settlement Agreement, RS may enforce this settlement in any manner it deems appropriate and may, without limiting the generality of the foregoing, suspend Grossmith s access to marketplaces regulated by RS until RS determines that Grossmith is in full compliance with all terms of the Settlement Agreement. Grossmith agrees that neither he, nor anyone on his behalf, will make a public statement inconsistent with this Settlement Agreement. IN WITNESS WHEREOF the parties have signed this Settlement Agreement as of the dates noted below. DATED at Toronto on the 5th day of July, C. Stevenson Witness Signature Glen Grossmith Glen Grossmith 4

5 C. Stevenson Name of Witness 144 Front St. W., Toronto Address of Witness DATED at Toronto, Ontario on the 5 th day of July, Per: Rosemary Chan Rosemary Chan Vice President Market Policy & General Counsel Market Regulation Services Inc. This foregoing Settlement Agreement is hereby accepted this 18 th day of July, 2005, by the following hearing panel constituted to review the terms thereof: Per: Murray A. Clemens Panel Chair Per: D. Lawson Per: Guenther W. Kleberg Panel Member Panel Member 5

6 APPENDIX "A" THE MATTER OF THE UNIVERSAL MARKET INTEGRITY RULES AND IN THE MATTER OF GLEN GROSSMITH STATEMENT OF ALLEGATIONS I. REQUIREMENTS CONTRAVENED 1. Glen Grossmith ( Grossmith ) agrees that he contravened Universal Market Integrity Rules ("UMIR") 2.1(1)(a) for which he is liable pursuant to UMIR 10.4(1)(a), and that he engaged in conduct which resulted in UBS Securities Canada Inc. ( UBS Securities Canada ) contravening UMIR 10.11(1), for which he is liable pursuant to UMIR 10.3(4). 2. The text of the relevant Requirements is set out at Schedule "A". II. THE FACTS RELIED UPON A. Overview 3. On February 10, 2005, UBS Securities Canada advised RS that it, and its US affiliate, UBS Securities LLC ( UBS LLC ), were conducting an internal review of the actions taken by two UBS Securities Canada employees and one UBS LLC employee on February 4, Grossmith and Zoltan Horcsok ( Horcsok ) were the Canadian employees involved. Mark Webb ( Webb ), a trader employed at UBS LLC, was the U.S. based employee involved. Horcsok was Grossmith s supervisor.

7 2. 5. RS s investigation disclosed that on February 4, 2005, Webb used Horcsok and Grossmith to assist him in what they later learned was Webb s lie to the compliance department of UBS LLC concerning his principal trading in Phelps Dodge Corporation ( PD.N ), a stock traded on the New York Stock Exchange. 6. On that day, Webb received an order to buy 120,000 shares of PD.N from an US client. After filling 6,000 shares of the order, the client cancelled the outstanding order and moved it to another dealer for completion. Webb became angry and he immediately bought 10,000 shares of PD.N as principal. When the client complained to UBS LLC, resulting in Webb being questioned by the UBS LLC compliance department, he lied and stated that the 10,000 shares were purchased for a Canadian client. 7. Webb then contacted Horcsok and without disclosing the facts set out in paragraph 6, Webb asked Horcsok whether he had any tickets which had been stamped at 2:15 that day. In a subsequent telephone call Webb told Horcsok that he needed a buyer for 10,000 PD.N. Horcsok related Webb s requests to Grossmith and Grossmith found a Canadian purchaser for the shares. 8. With Horcsok s knowledge, Grossmith then altered an existing trade ticket for another Canadian client s purchase of a TSX listed security to substantiate Webb s lie. 9. Subsequently, with Grossmith s knowledge, Horcsok destroyed the altered trade ticket. 10. Grossmith, with Horcsok s knowledge, created a false and misleading Chat communication to Webb and made false statements to a UBS LLC employee. 11. Horcsok was not forthcoming about all of the circumstances of his and Grossmith s involvement in this matter when he spoke with by the President of UBS Securities Canada on the evening of February 4, That conversation focused on the issue of business continuity in Webb s absence.

8 Horcsok and Grossmith were questioned together once by UBS Securities Canada on February 7, They were individually questioned once by UBS LLC compliance personnel on February 8, At these interviews, Grossmith and Horcsok did not disclose all of the circumstances described herein. On February 9, 2005, when UBS LLC requested another interview of Grossmith, Horcsok asked to speak to UBS LLC Compliance. At this time, he disclosed all of the circumstances relating to his and Grossmith s and Trader s A involvement in the matter to UBS Securities Canada and UBS LLC compliance, who participated in the meeting via teleconference. 13. Grossmith s conduct described in paragraph 8 above resulted in UBS Securities Canada contravening UMIR 10.1(1) relating to its audit trail requirements, for which Grossmith is liable pursuant to UMIR 10.3(4). 14. Grossmith s conduct in improperly assisting Webb and not being forthcoming with UBS LLC and UBS Securities Canada compliance, described in paragraphs 10 and 12 above, constitutes conduct inconsistent with just and equitable principles of trade, contrary to UMIR 2.1(1)(a), for which he is liable pursuant to UMIR 10.4(1)(a). Relevant Personnel Grossmith 15. Grossmith has been employed in the securities industry since In 2000, he became employed with the predecessor of UBS Securities Canada as a sales trader. As of February 2005, he was Executive Director, Equity Sales Trading. 17. In 2000, Grossmith was fined $35,000 by the Toronto Stock Exchange ( TSX ) and suspended for one month for several high-closing trades he executed while employed at another investment dealer for the account of Royal Capital Management.

9 In 1995, Grossmith was fined $2,500 by the TSX for opening trading in one of his stock of responsibility later than the time fixed by the TSX. 19. On February 22, 2005, Grossmith was dismissed by UBS Securities Canada because of the seriousness with which it viewed the circumstances set out herein. Horcsok 20. Horcsok has been employed in the securities industry since He has been employed with UBS Securities Canada and its predecessor companies since As of February 2005, he was the Executive Director, Head of Sales Trading. In this capacity, Horcsok supervised 10 sales traders in the Toronto office, and 2 sales traders in the Montreal office, of UBS Securities Canada. 22. As of February 2005, Horcsok had directly supervised Grossmith and the other trader involved in this matter (the Trader A ) for at least 12 months. 23. On February 22, 2005, Horcsok was dismissed by UBS Securities Canada because of the seriousness with which it viewed the circumstances set out herein. Webb 24. As of February 2005, Webb was employed as a trader for UBS LLC. 25. As of July 28, 2004, Webb became the Head of Facilitation Trading for Canadian securities at UBS Securities Canada. He held that position at the time of the events in issue. Webb worked on the Canadian desk of UBS LLC s Stamford, Connecticut office and he reported directly to the CEO of UBS Securities Canada. Webb was responsible for trading in interlisted Canadian equity securities and select US stocks, including Phelps Dodge. 26. On February 22, 2005, Webb was dismissed from UBS LLC.

10 5. The Events of February 4, Between 9:41 a.m. and 9:54 a.m., Trader A received a series of orders via to purchase shares of Cameco Corporation ( CCO ) totaling 35,000 shares for the account of Client X. CCO is a TSX listed security. The type of communication used by the client is known at UBS Securities Canada as a Chat. 28. At 9:43 a.m., a trade ticket was time stamped by Trader A for the purchase of the 35,000 shares of CCO ( the Client X ticket ). 29. Between 9:55:59 a.m. and 9:59:51 a.m., Trader A bought 5,000 CCO through 4 trades for Client X. The market moved away from the limit prices set by Client X and no additional shares were bought. 30. At 2:17:06 p.m., Webb, working on the Stamford, Connecticut desk of UBS LLC, received a buy order for 120,000 Phelps Dodge shares ( PD.N ), which trades on the New York Stock Exchange, from a U.S. client. At 2:18:54 p.m., after Webb filled 6,000 shares of the U.S. client s order, the U.S. client cancelled the order and moved it to another U.S. dealer for completion. 31. As retaliation for the client moving the order, Webb bought 10,000 PD.N shares as principal between 2:20:06 p.m. and 2:24:23 p.m. 32. Shortly after these principal trades were conducted by Webb, the U.S. client contacted UBS LLC s compliance department and complained about Webb s purchase of PD.N. Webb was questioned and advised his supervisors that the 10,000 PD.N had been bought for a Canadian client, pursuant to an order received earlier that day. This explanation was untrue. 33. At 2:34:08 p.m., Webb called Horcsok in Toronto. Horcsok s telephone line is tape recorded. Horcsok was asked to call Webb back at an internal number for the Stamford office. Webb told Horcsok, I need your help with something badly right away.

11 Seconds later, Horcsok returned Webb s call and Webb asked not taped, right?. When Horcsok replied that the call was taped, Webb said so phone me somewhere else. Horcsok agreed. 35. At 2:44:39 p.m., Webb called Horcsok again. The following comments were made: Webb: I need to talk to you somewhere off here. Horcsok: Okay, just give me the number where I can reach you. Webb: I don t know where you can reach me, you gotta run though because it s got to be quick. Horcsok: Okay, what number did I give before? Webb: Do you have any tickets stamped like 2:15? 36. Some time following the 2:44:39 p.m. telephone conversation, Horcsok called and spoke to Webb on a non-taped line in a conference room at UBS Securities Canada. According to Horcsok, Webb said: you need to find a buyer for 10,000 Phelps Dodge. I may have a problem. and you ve got to be quick. Horcsok told Webb he would see what he could do. 37. Horcsok then approached Grossmith and advised him that Webb needed to find a Canadian buyer for 10,000 PD.N shares. Horcsok advised Grossmith there was an urgency in Webb s tone when he made the request. Grossmith was not aware at the time of the other details set out in paragraphs above. 38. Subsequently, Grossmith contacted Canadian Client Y to solicit a purchase by Client Y of 10,000 shares of PD.N. Client Y agreed to buy the shares. 39. Horcsok then spoke to approximately twelve UBS Securities Canada traders, including Trader A, at their respective trading desks in an attempt to find a

12 7. paper buy trade ticket stamped around 2:15 p.m. He told the traders that Webb is in trouble. 40. Because UBS Securities Canada generally uses electronic trading tickets generated by its OASIS trade system, there were very few paper trade tickets being used that day. 41. Eventually, after reviewing the few paper tickets that were in use, Horcsok asked Trader A for the Client X ticket which was stamped at 9:43 a.m.. Trader A advises that he felt obliged to provide the ticket to Horcsok as he was Trader A s supervisor. 42. Horcsok provided the Client X ticket to Grossmith, who, with Horcsok s knowledge, altered the ticket by crossing out the symbol CCO and writing in PD for PD.N and by changing the client information from Client X to Client Y. This ticket will now be called the altered Client X Ticket and remained time stamped at 9:43 a.m. 43. Between 2:54:10 p.m. and 2:57:08 p.m., Grossmith sent a Chat to Webb containing fabricated information that Webb s purchase of the 10,000 shares as principal was to fill a Canadian client order received by him earlier that day. 44. The Chat included a reference to Client Y as purchaser and stated that Grossmith had given the order to Webb at 9:43 a.m. that morning and that Grossmith was still waiting to be provided with the fill (9:43 a.m. being the time stamp on the original Client X ticket). 45. At 2:56:34 p.m., Horcsok spoke with Webb on Horcsok s taped telephone line. The following comments were made during the conversation: Webb: So we re all set, right? Horcsok: Yeah. Webb: Who is it, who is the customer?

13 8. Horcsok: Check your Chat. Webb: I didn t check it. Who Chatted me? Horcsok: Grossmith Webb: I just closed it. I just need to know the name. Horcsok: Client Y Webb: Okay, perfect. Horcsok: Make a copy of this again, please. Webb: What s that? Horcsok: Keep a copy of this again. Webb: Are you going to send me a copy of the ticket? Horcsok: Umm, I guess, I need to, huh. Webb: Hold on one second. (Webb talking to someone in the background) Do you want me to get a copy of the ticket? Do you want a copy of the ticket? (to Horcsok) No, bye 46. At 2:57:29 p.m. Grossmith prepared an OASIS trade ticket showing the following: Buy 10,000 PD.N for Client Y. Instructions: In line with volume, not held, unsolicited. The order, in fact, had been solicited. 47. The fill of information for the10,000 shares bought by Client Y was attached to the Oasis ticket in the Stamford Office. The fill matched the volumes and prices of shares bought by Webb as principal between 2:20:06 p.m. and 2:24:23 p.m.

14 In addition, at 2:59 p.m. Grossmith added a Trader Note on the OASIS ticket for client Y s purchase to correspond with the altered Client X ticket which stated that the paper trade ticket should have been for shares of PD not CCO. The Trader Note perpetuated the false story that Webb had been provided a Canadian client order to purchase 10,000 shares of PD.N earlier that morning. 49. At 3:00:31 p.m., Grossmith called Webb but reached another employee in the Stamford office of UBS LLC. In an effort to continue the charade, Grossmith told this employee that he had sent Webb a ticket earlier that morning for the purchase of PD.N. 50. At 3:06:11 p.m., Grossmith again contacted the Stamford office and spoke to the same employee. Grossmith made another statement to the effect that he had been waiting all day for Webb to fill out the ticket for the purchase of 10,000 of PD.N. 51. At 3:12:57 p.m., Client Y gave Grossmith an order to sell the 10,000 shares PD.N which it had agreed to purchase less than an hour prior. By then, the market price of PD.N had moved higher. 52. At 3:16.39 p.m., Grossmith prepared an OASIS ticket for Client Y s sale of the 10,000 shares of PD.N showing the following information: sell 10,000 PD for Client Y. Instructions: In line with volume, not held, unsolicited. 53. Grossmith inputted the OASIS trade ticket into the system and sent it to the Stamford office for execution. However, it was not filled because UBS LLC was concerned about placing any more orders for PD.N. This concern was not expressly relayed to Horcsok or Grossmith. 54. Eventually, Client Y had to give the sell order to another investment dealer who was able to sell the shares at a profit of approximately US$5,

15 Sometime between 3:00 p.m. and 3:30 p.m., Horcsok, to Grossmith s knowledge, destroyed the altered Client X ticket. 56. At 3:31 p.m., Grossmith changed the Trader Note entry in the OASIS system from posit ticket PD instead of CCO to posit ticket PD.. By this time, the altered Client X ticket had been destroyed. This entry was intended to reflect that the altered Client X ticket was no longer going to be used to substantiate the PD.N trade because it had been destroyed. This change was made after an attempt to delete the entire Trader Note which Grossmith had entered earlier. However, the system would not delete the original note. 57. As stated in paragraph 12 above, Grossmith and Horcsok were questioned further about these events on February 7 and 8, 2005 by UBS LLC and UBS Securities Canada compliance. However, in those interviews, Horcsok and Grossmith were not forthcoming about all of the circumstances of February 4, Finally at a meeting on February 9, 2005 which was convened at Horcsok s request after UBS LLC compliance had sought to interview Grossmith again, Horcsok provided UBS Securities Canada and UBS LLC with the complete details concerning the events of February 4, 2005 and his and Grossmith s and Trader A s involvement on that day. 58. On February 22, 2005, after an internal investigation by UBS LLC and UBS Securities Canada, both Horcsok and Grossmith were terminated by UBS Securities Canada on the basis of the circumstances set out above. 59. To date, neither Grossmith nor Horcsok have been paid their 2004 bonuses by UBS Securities Canada. 60. No Canadian client was harmed and Grossmith has received no financial benefit.

16 11. III. CONCLUSION 61. In summary, Grossmith s conduct described in paragraphs 38, 42, 46, and 56 resulted in UBS Securities Canada contravening UMIR 10.11(1) relating to its audit trail requirements, for which he is liable pursuant to UMIR 10.3(4). 62. Grossmith s conduct described in paragraphs 43, 44, 49, 50 and 57 constitutes conduct inconsistent with just and equitable principles of trade contrary to UMIR 2.1(1)(a), for which he is liable pursuant to UMIR 10.1(1)(a). July 5, 2005 Market Regulation Services Inc. Suite 900, Box King Street West Toronto, Ontario M5H 1J8 Investigations and Enforcement Telephone: Facsimile: TO: Glen Grossmith c/o Mr. Colin Stevenson Stevensons 144 Front Street West Suite 400 Toronto, Ontario M5J 2L7 Telephone: (416) Facsimile: (416)

17 SCHEDULE A Page 1 of 2 Excerpts from the Universal Market Integrity Rules 1.0 Just and Equitable Principles (1) A Participant shall transact business openly and fairly and in accordance with just and equitable principles of trade when: (a) (b) trading on a marketplace; or trading or otherwise dealing in securities which are eligible to be traded on a marketplace Extension of Responsibility (4) Any officer or employee of a Participant or Access Person or any individual holding a similar position with a Participant or Access Person who engages in conduct that results in the Participant or Access Person contravening a Requirement may be found liable by the Market Regulator for the conduct and be subject to any penalty or remedy as if such person was the Participant or Access Person Extension of Restrictions (1) A related entity of a Participant and a director, officer, partner or employee of the Participant or a related entity of the Participant shall: (a) comply with the provisions of these Rules and any Policies with respect to just and equitable principles of trade, manipulative and deceptive method of trading, short sales and frontrunning as if references to Participant in Rules 2.1, 2.2, 3.1 and 4.1 included reference to such person; and Audit Trail Requirements (1) Order and Trade Record - In addition to any information required to be recorded by a Participant in accordance with Part 11 of the Trading Rules, a Participant shall: (a) immediately following the receipt or origination of an order, record: (i) (ii) (iii) all order designations required by clause (b) of subsection (1) of Rule 6.2, the identifier of any investment adviser or registered representative receiving the order, and any information respecting the special terms attaching to the order required by subsection (2) of Rule 6.2, if applicable; (b) immediately following the entry of an order to trade on a marketplace, add to the record :

18 SCHEDULE A Page 2 of 2 (i) (ii) the identifier of the Participant through which any trade would be cleared and settled, the identifier assigned to the marketplace on which the order is entered; and (c) immediately following the variation or correction of an order, add to the record any information required by clause (a) which has been changed...