IN THE MATTER OF THE UNIVERSAL MARKET INTEGRITY RULES AND IN THE MATTER OF CIBC WORLD MARKETS INC. SCOTT MORTIMER AND CARL IRIZAWA

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1 Settlement Agreement December 21, Certain sections of this Settlement Agreement are redacted for privacy purposes. All redactions were approved by the RS Hearing Panel that approved this Settlement Agreement on December 21, IN THE MATTER OF THE UNIVERSAL MARKET INTEGRITY RULES AND IN THE MATTER OF CIBC WORLD MARKETS INC. SCOTT MORTIMER AND CARL IRIZAWA OFFER OF SETTLEMENT A. INTRODUCTION 1. Market Regulation Services Inc. ( RS ) has conducted an investigation (the Investigation ) into the conduct of CIBC World Markets Inc. ( CIBC WM ), Scott Mortimer ( Mortimer ) and Carl Irizawa ( Irizawa ). 2. The Investigation has disclosed matters for which RS seeks certain sanctions against CIBC WM, Mortimer and Irizawa pursuant to Rule 10.5 of the Universal Market Integrity Rules ( UMIR ). 3. If this Offer of Settlement is accepted by CIBC WM, Mortimer and Irizawa, the resulting settlement agreement (the Settlement Agreement ), which has been

2 2 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 CIBC WM, Mortimer and Irizawa agree to waive all rights under UMIR and the Requirements to a hearing or to an appeal or review if the Settlement Agreement is approved by the Hearing Panel. 5. RS and CIBC WM, Mortimer and Irizawa jointly recommend that the Hearing Panel accept this Settlement Agreement. B. AGREEMENT AS TO REQUIREMENTS CONTRAVENED 6. (a) CIBC WM agrees that the following Requirements have been contravened: (i) In March 2002, CIBC WM failed to comply with its trading supervision obligations, contrary to Section 2-401(5) of the Rules of the Toronto Stock Exchange; and, (ii) In the period April to December 2002, CIBC WM failed to comply with its trading supervision obligations, contrary to Universal Market Integrity Rule 7.1(1) and Policy 7.1. (b) Mortimer agrees that the following Requirements have been contravened: (i) In March 2002, Mortimer engaged in conduct inconsistent with just and equitable principle of trade, contrary to Rule 7-106(1)(b) of the Rules of the Toronto Stock Exchange; and,

3 3 (ii) In the period April to December, 2002, Mortimer engaged in conduct inconsistent with just and equitable principles of trade, contrary to Universal Market Integrity Rule 2.1(1). (c) Irizawa agrees that the following Requirements have been contravened: (i) In March 2002, Irizawa engaged in conduct inconsistent with just and equitable principle of trade, contrary to Rule 7-106(1)(b) of the Rules of the Toronto Stock Exchange; and, (ii) In the period April to December, 2002, Irizawa engaged in conduct inconsistent with just and equitable principles of trade, contrary to Universal Market Integrity Rule 2.1(1). C. ADMITTED FACTS 7. 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 8. For the contraventions in paragraph 6(a) above, CIBC WM and RS have agreed upon the following: (a) A fine of $700,000 payable by CIBC WM to RS; (b) Costs of $92,500 payable by CIBC WM to RS; and, (c) CIBC has agreed to implement the various measures set out in paragraphs 71, 72, 83, 84 and 96 of the attached Statement of Allegations and to provide RS with a written report confirming such implementation by June 30, 2005.

4 4 9. For the contraventions in paragraph 6(b) above, Mortimer and RS have agreed upon the following: (a) A fine of $50,000 payable by Mortimer to RS; and, (b) Costs of $15,000 payable by Mortimer to RS. 10. For the contraventions in paragraph 6(c) above, Irizawa and RS have agreed upon disposition as follows: (a) A fine of $20,000 payable by Irizawa to RS; and, (b) Costs of $7,500 payable by Irizawa to RS. 11. If this Settlement Agreement is accepted by a Hearing Panel, CIBC WM, Mortimer and Irizawa, as the case may be, agree to pay the amounts referred to in paragraphs 8, 9 and 10 within 30 days of such acceptance. E. PROCEDURES FOR ACCEPTANCE OF OFFER OF SETTLEMENT AND APPROVAL OF SETTLEMENT AGREEMENT 12. CIBC WM, Mortimer and Irizawa shall have until 5 p.m. on Friday, December 10, 2004 from the date of service hereof to accept the Offer of Settlement and serve an executed copy thereof on RS. 13. This Settlement Agreement shall be presented to a Hearing Panel at an expedited 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. CIBC WM, Mortimer and Irizawa acknowledge that RS shall notify the public and media of the Approval Hearing in such manner and by such media as RS sees fit.

5 5 14. Pursuant to Part 3.4 of UMIR Policy 10.8, the Hearing Panel may accept or reject this Settlement Agreement. 15. 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 CIBC WM, Mortimer and Irizawa, and RS will publish a summary of the Requirements contravened, the facts, and the disposition agreed upon in the Settlement Agreement. 16. 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 17. CIBC WM, Mortimer and Irizawa agree that, in the event CIBC WM, Mortimer and Irizawa fail 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 CIBC WM, Mortimer and Irizawa s access to the Exchange and other marketplaces regulated by RS until RS determines that CIBC WM, Mortimer and Irizawa are in full compliance with all terms of the Settlement Agreement. 18. CIBC WM, Mortimer and Irizawa agree that neither it, nor anyone on its behalf, will make a public statement inconsistent with this Settlement Agreement.

6 6 IN WITNESS WHEREOF the parties have signed this Settlement Agreement as of the dates noted below. DATED at Toronto on the 10th day of December, R. Mecredy-Williams Witness Signature CIBC World Markets Inc. CIBC World Markets Inc. Robin Mecredy-Williams Name of Witness 1231 Yonge St Toronto Address of Witness DATED at Newmarket on the 10th day of December, P. Mortimer Witness Signature Scott Mortimer Scott Mortimer P. Mortimer Name of Witness 1455 Hwy #9, Newmarket Address of Witness DATED at Thornhill on the 10th day of December, Witness Signature Carl Irizawa Carl Irizawa Name of Witness Address of Witness

7 DATED at Toronto, Ontario on the 10 th day of December, Per: Maureen Jensen Maureen Jensen Vice President Market Regulation, Eastern Region Market Regulation Services Inc. This foregoing Settlement Agreement is hereby accepted this 21 st 2004, by the following hearing panel constituted to review the terms thereof: day of December, Per: Hon. Robert F. Reid Panel Chair Per: G. Peter Nares Per: Leo Ciccone Panel Member Panel Member

8 IN THE MATTER OF THE UNIVERSAL MARKET INTEGRITY RULES AND IN THE MATTER OF CIBC WORLD MARKETS INC., SCOTT MORTIMER AND CARL IRIZAWA OFFER OF SETTLEMENT Market Regulation Services Inc. Suite 900, Box King Street West Toronto, Ontario M5H 1J8 Jane P. Ratchford Chief Counsel, Eastern Region Investigations and Enforcement Telephone: Facsimile:

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10 10 IN THE MATTER OF THE UNIVERSAL MARKET INTEGRITY RULES AND IN THE MATTER OF CIBC WORLD MARKETS INC., SCOTT MORTIMER AND CARL IRIZAWA STATEMENT OF ALLEGATIONS I. REQUIREMENTS CONTRAVENED 1. It is agreed that: (i) (ii) (iii) Rule 2-401(5) of the Rules of the Toronto Stock Exchange (the Exchange ) and Rule 7.1(1) of the Universal Market Integrity Rules ( UMIR ) have been contravened by CIBC World Markets Inc. ( CIBC WM ); Rule 7-106(1)(b) of the Rules of the Exchange and Rule 2.1(1) of UMIR have been contravened by Scott Mortimer ( Mortimer ); and, Rule 7-106(1)(b)of the Rules of the Exchange and Rule 2.1(1) of UMIR have been contravened by Carl Irizawa ( Irizawa ). 2. The text of the relevant Requirements is found at Schedule A. II. THE FACTS RELIED UPON A. Overview 3. RS alleges that in 2002, a group of related clients with accounts at CIBC WM engaged in suspicious trading in certain stocks and warrants listed on the TSX

11 11 and the TSX Venture Exchanges, which in all circumstances set out below, had the appearance of manipulative and deceptive trading. 4. The trading was carried out through numerous accounts held by the client group, including retail accounts and individual RRSP accounts and Direct Market Access ( DMA ) trading accounts at CIBC Investor Services Inc. ( CIBC ISI ), CIBC WM and another, unrelated investment dealer ( Investment Dealer X ). 5. Generally speaking, the mechanics of the suspect trading were as follows: (i) (ii) (iii) (iv) (v) a large opening cross in an illiquid derivative security was conducted between the account of Company XY (defined below) and the individual accounts of Client X or Y or Company X (defined below), at CIBC WM; RS alleges that the price of the security was then manipulated up or down in Company XY s DMA trading accounts at CIBC ISI or CIBC WM, or by Company XY s DMA account at Investment Dealer X, which had the effect of moving the market (the set up trades ); the security was then crossed back between the accounts of X, Y or Company X and the Company XY account at CIBC WM; the crosses always resulted in a loss in the Company XY and a corresponding profit in the accounts of Client X, Y, including their RRSP accounts, or Company X; and, generally, the crosses and set up trades occurred on the same day or over the course of several days. 6. Company XY was permitted to engage in DMA trading through a Belzberg terminal located at its premises. The DMA trading was initially carried out through a CIBC ISI account during the first half of 2002 and then through a CIBC WM account, internally designated as an institutional trading account, during the second half of 2002.

12 12 7. Mortimer was the investment advisor at CIBC WM for all the CIBC WM client accounts in question and had overall responsibility for the entry of orders in these client accounts. Crosses over $1 million were approved by the branch manager or assistant branch manager. 8. The crosses were manually entered by Mortimer s sales assistant, Irizawa and others, with Mortimer s knowledge and approval. 9. There are 16 sets of crosses in issue. As stated above, all of the set-up trades in between the crosses were carried out through DMA trading. None of the set up trades between the crosses were executed by CIBC WM employees. Rather they were executed directly by the clients through DMA trading. For five of the crosses, set up DMA trades occurred in the CIBC ISI account. For two of the crosses, the set up trades occurred in the CIBC WM account. The set-up trades for 9 sets of crosses were conducted through DMA trading at Investment Dealer X. 10. There were red flags generated by the crosses that were indicative of suspicious trading which CIBC WM and its employees should have recognized when they either entered the crosses, and/or, daily reviewed the trading. 11. The red flags should have caused CIBC WM and its employees to further question the trading, which through reasonable diligence, would have led them to uncover the suspicious set-up trades in the DMA trading accounts at CIBC WM and CIBC ISI and that they were being carried out by Company XY. 12. With respect to the set-up trades through Investment Dealer X, because Mortimer, Irizawa, the branch manager and assistant branch manager were aware that Company XY had an account at Investment Dealer X, reasonable diligence should have caused them to identify these set-up trades and caused them to question the clients as to whether it was Company XY s account conducting the trading there. 13. After RS initiated this investigation, but before RS initiated these proceedings, CIBC WM and CIBC ISI terminated their relationships with the client group.

13 13 Accordingly, all trading by the client group has stopped in the accounts at CIBC WM, CIBC ISI and by DMA. 14. In all of the circumstances set out below, Mortimer and Irizawa did not fulfill their gatekeeper responsibility to the marketplaces affected and CIBC WM did not fulfill its trading supervision obligations in relation to the client accounts. B. The Client Accounts Mr. X 15. Mr. X was employed in the investment industry as an investment advisor between the mid 1980 s and early 2000, and was an active pro trader during this time. xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxx 16. Mr. X is a highly sophisticated and knowledgeable individual with a high net worth who, through Company XY, executed voluminous trading to carry out highly complex hedging and arbitrage strategies. 17. In 2002, Mr. X held a retail margin account and two RRSP retail accounts at CIBC WM. Mr. Y 18. Mr. Y was previously employed in the securities industry as a trader. xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx 19. Mr. Y is a highly sophisticated and knowledgeable individual with a high net worth who, through Company XY, executed voluminous trading to carry out highly complex hedging and arbitrage strategies. 20. In 2002, Mr. Y had a RRSP retail account at CIBC WM. Company X 21. Company X is solely owned by Mr. X.

14 In 2002, Company X held a retail account at CIBC WM. Company XY 23. In 2002, Company XY was jointly owned by Messrs. X and Y. 24. Beginning in 2001, based upon, among other things, the sophistication, knowledge and experience of Mr. X and his net worth, Company XY was permitted to trade through DMA by the use of a Belzberg terminal located at the premises of Company XY. 25. In the first half of 2002, Company XY carried out DMA trading through two accounts at CIBC ISI. In July 2002, these accounts became dormant. 26. In the latter half of 2002, Company XY carried out its DMA trading through an account at CIBC WM that was designated for internal purposes as institutional trading. 27. Company XY carried out extremely high volume trading every month during 2002 to further various complex and highly sophisticated trading strategies, such as hedging and arbitrage. For example, hundreds of trades were carried out in the CIBC WM DMA account and the monthly account statements for Company XY typically ran into hundreds of pages. 28. Concurrent with the suspect trading, Company XY also carried out legitimate complex arbitrage and hedging strategies in the same and related securities. CIBC WM 29. CIBC WM is a registered investment dealer with offices across Canada. CIBC WM s head office is located in Toronto, Ontario. 30. CIBC ISI has a discount brokerage division, CIBC Investor s Edge, that is exempt from client suitability requirements. 31. In 2002, CIBC WM, through Mortimer, Irizawa, the branch manager and assistant manager, described below, was aware of the ownership structure of Company XY and that, for the first half of 2002, Company XY was DMA trading through

15 15 CIBC ISI accounts. In addition, all four of these named employees were aware that Company XY had an account at Investment Dealer X. Mortimer 32. Mortimer has been registered since He has been employed with CIBC WM and its predecessor companies since In 2002, he worked at the York Mills sub-branch of CIBC WM. The sub-branch was managed by the branch manager who was located at the 200 King Street West branch office. 33. In 2002, Mortimer was the only investment advisor at the York Mills sub-branch with clients. 34. xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx 35. The client group s accounts at CIBC WM were Mortimer s largest and contributed to about 40% of his overall income. 36. As the investment advisor for the clients CIBC WM accounts, Mortimer had the overall responsibility for trades conducted in them. Irizawa 37. Irizawa worked in the investment industry between 1985 and 1988 as a Senior Re-org Clerk at several investment dealers. From 1991 to present, he has worked as a sales assistant at CIBC WM. 38. xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxx. 39. In 2002, Irizawa worked as a sales assistant to Mortimer at the York Mills sub-branch. His main responsibility was entering orders and handling accounts held by the client group at CIBC WM, reviewing executed trades the following

16 16 day, dealing with margin issues, responding to compliance queries about these accounts and carrying out re-org activity for the client group. 40. In order to carry out the required re-org activity, CIBC WM granted access to Irizawa to see account position and trading activity in Company XY s DMA trading account at CIBC ISI and CIBC WM. Therefore Irizawa managed all the re-org activity for the client group s accounts, including the DMA trading, at both CIBC ISI and CIBC WM. Branch Manager (the BM ) 41. The BM has worked in the securities industry since the early 1980 s in various capacities, including as an investment advisor and as assistant branch manager. In 1994, he became the branch manager at the 200 King Street West branch of CIBC WM with the responsibility of managing the York Mills sub-branch. 42. In 2002, the BM was a non-producing branch manager. Since 1997, he had delegated the day-to-day reviewing of trading at the York Mills sub-branch to the assistant BM. As part of his responsibilities to supervise the York Mills subbranch, the BM would discuss the previous day s trading activity that the assistant BM had escalated to him, would review the Monthly Activity Reports for these clients, would respond to inquiries raised by compliance and would escalate branch inquiries to compliance. Assistant Branch Manager (the assistant BM ) 43. The assistant BM has been employed in the investment industry since Since 2000, she had been the assistant BM at the 200 King Street West branch of CIBC WM. In 2002, she was the assistant BM responsible for the York Mills sub-branch. 44. As part of her responsibilities in supervising the York Mills sub-branch, the assistant BM carried out the day-to-day review of the previous day s trades for the client accounts (except the DMA trading), escalated to the BM for discussion with him issues concerning the previous day s trading, reviewed the Monthly

17 17 Activity Reports, responded to inquiries raised by Compliance and escalated branch inquiries to Compliance. C. Knowledge of CIBC WM and Its Employees about the Trading 45. The suspect trading did not take place in isolation. At the same time, Client XY was also trading in large volumes and in legitimate and complex hedging strategies in the same or related securities. For example, hundreds of trades were carried out each month in Company XY s DMA account and CIBC WM monthly account statements for Company XY typically ran into hundreds of pages. This made it more difficult for Head Office Compliance to see and recognize the red flags and accordingly, the suspect nature of the clients trading. The Employees 46. The crosses were manually entered by Mortimer s staff, including Irizawa, in the CIBC WM client group retail accounts. The crosses were then manually entered on the TSX or TSXV through CIBC WM s Special Handling Desk and reviewed by the BM or assistant BM on at least two occasions daily. 47. The first opportunity to review a cross was within five minutes of the cross order entry by CIBC WM s Special Handling Desk. Either the BM or assistant BM was required to authorize the cross, if over $1 million, when an approval request was transmitted to their computer terminals. 48. The second opportunity was the following morning when the assistant BM reviewed the Daily Commission Detail Report of the previous day s trades. 49. On a daily basis, the assistant BM, Mortimer and Irizawa reviewed the Daily Commission Detail Report for the previous day s trading. The Daily Commission Detail Reports did not include CIBC ISI trading nor any trades marked as institutional, such as the DMA trading through CIBC WM. Accordingly, the Report included the crosses but not the set-up trades. 50. Although the employees knew that Company XY had DMA trading account at CIBC ISI and at CIBC WM, none could see the totality of the clients trading on the Daily Commission Detail Report because of how the firm had organized the

18 18 DMA trading. This was because none of the DMA accounts appeared on The Daily Commission Reports. Irizawa was able to see transactions in the DMA accounts at CIBC ISI and CIBC WM through ADP for administrative purposes. Mortimer did not have access to the DMA accounts at CIBC ISI and had access to the CIBC WM DMA accounts only through ADP, and only after July Head Office Compliance 51. On a daily basis, head office reviewed all trades entered the previous day, including the crosses and the set up trades, conducted through CIBC WM. 52. In 2002, although CIBC WM and CIBC ISI shared a common bookkeeping system and Compliance had access to account information for the other firm, separate compliance reviews were conducted for each legal entity. At that time, CIBC WM had no policy or procedure in place for joint compliance reviews of the two dealers. 53. Further, although CIBC WM had a policy for its employees to follow concerning manipulative or deceptive client trading, its procedures at that time to carry out those policies were focused more on criteria outlined in Investment Dealers Association of Canada Policy No. 2 and Regulation 1300 and not on red flags. D. The Trading 54. As set out above in paragraph 5, the suspect trading followed the same pattern. All the crosses occurred in the retail accounts at CIBC WM and all the set-up trades occurred in the DMA trading accounts at CIBC WM, CIBC ISI or Investment Dealer X. 55. The following chart shows the certain crosses conducted at CIBC WM where the DMA account used at either CIBC ISI or CIBC WM to execute the set up trades. The bolded dates signify crosses executed after the set up trades. Particulars of these trades are set out in Table A below:

19 19 # Crossed issues Cross trade date Set up DMA trade 1 Allbanc Split Corp (ABK.PR.A) 2 Newmont Mining Wt (NMC.WT) March 5, 2002 March 6, 2002 April 17, 2002 April 18, CIBC ISI CIBC ISI CIBC ISI 3 Newmont Mining Wt (NMC.WT) April 19, 2002 CIBC ISI 4 Telco Split (TSC) April 24, 2002 CIBC ISI 5 Newmont Mining Corp Canada warrants (YNT.WT.B) May 14, 2002 May 21, 2002 May 22, Scotia Split July 22, 2002 July 25, G.WT.U Nov 28, 2002 Dec 2, 2002 Dec 13, 2002 CIBC ISI - CIBC ISI CIBC WM - CIBC WM CIBC WM 56. In addition, the following chart shows additional crosses conducted at CIBC WM where Company XY s DMA account at Investment Dealer X was used to execute the set up trades. The bolded dates signify crosses executed after the set up trades. Particulars of these trades are set out in Table B below: # Crossed Issues Cross trade date Set up firm 8 G.WT Sept 30, 2002 Dealer X CIBC WM 9 Goldcorp Inc. warrant April 26, 2002 Dealer X CDN $ (G.WT) 10 Goldcorp Inc. warrant US $ (G.WT.U) July 29, 2002 July 30, 2002 Dealer X Dealer X 11 G.WT July 31, 2002 August 2, G.WT August 26, 2002 August 27, G.WT.U August 27, 2002 August 30, 2002 Dealer X Dealer X Dealer X

20 20 Sep 3, G.WT.U Oct 9, 2002 Oct 10, G.WT Nov 20, 2002 Nov 25, G.WT.U Nov 20, 2002 Nov 25, 2002 Dealer X Dealer X Dealer X Dealer X Dealer X Dealer X 57. The red flags generated by the suspect crosses that were indicative of manipulative and deceptive trading are set out in more detail in Schedule B. These red flags include: (i) (ii) (iii) (iv) (v) (vi) (vii) the client carried out crosses and reverse crosses on the same day or soon thereafter; the reverse cross was carried out at a significant price difference than the opening cross, often as much as several dollars; there was a consistent pattern from the crosses which benefited the individual client group Company XY lost money and other accounts of Client X, Y and Company X, earned a corresponding profit; the crosses occurred in highly illiquid derivative securities; the volume of trading in the crosses was 100 times or more the normal trading volumes for these shares or warrants; the crosses accounted for almost 100% of the total daily trading volume in the securities; RS Market Surveillance in Vancouver questioned the assistant investment advisor about certain crosses in YNT.WT.B in May 2002 and rejected one cross; (viii) CIBC WM s Special Handling Desk refused to accept a cross order in YWT.WT.B in May 2002; and,

21 21 (ix) Mr. X s and Mr. Y s RRSP accounts had grown significantly xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx, which growth was completely out of proportion to normal market returns in In light of all of the foregoing circumstances, further review and investigation was warranted by CIBC WM, Mortimer and Irizawa in respect of the clients trading, specifically, reviewing the market activity between the crosses, seriously questioning the clients about the trading, and where warranted, reporting issues of concern to supervisory personnel. Hereafter, all of these red flags will be referred to as the Red Flags. E. Failings by Mortimer and Irizawa 59. Mortimer had the overall gatekeeper responsibility for all orders entered on behalf of his clients, through CIBC WM, including the crosses. 60. Mortimer was aware of the crosses as they were entered and he reviewed them the following day. 61. Irizawa entered the crosses and reviewed them the following day. As such, he also had a gatekeeper responsibility. 62. Neither Mortimer nor Irizawa had any responsibility for the DMA trading through CIBC WM or ISI. Mortimer and Irizawa were advised by CIBC Compliance that Compliance, and not Mortimer and Irizawa, had compliance obligations for the DMA accounts. 63. Based upon the way the firm had organized this client s DMA trading, Mortimer and Irizawa did not see the clients trading at CIBC WM or CIBC ISI on the Daily Commission Detail Reports. Mortimer had no access to the CIBC ISI DMA account at any time. 64. The firm s procedures at that time also did not adequately focus employees on how to review for possible deceptive and manipulative client trading.

22 Because CIBC WM took the unique step of granting Irizawa access to the DMA trading at CIBC ISI and CIBC WM, the firm created greater supervisory responsibility for Mortimer and Irizawa without providing corresponding supporting procedures and compliance infrastructure. 66. Nevertheless, Mortimer and Irizawa failed to fulfill their respective gatekeeper responsibilities by failing to recognize the Red Flags upon entry of the crosses and upon review of the crosses the day after they were conducted. Although Mortimer and Irizawa ensured that the crosses were effected within the context of the market, the Red Flags ought to have caused Mortimer and Irizawa to further scrutinize the clients trading and a) to review market activity surrounding the crosses; b) question their client about that market activity; and (c), where circumstances warranted, to report issues of concern to supervisory personnel. 67. Mortimer and Irizawa had the computer capability to view trade data for the TSX and TSXV showing every trade by buying broker, selling broker and price. 68. By failing to recognize the Red Flags, Mortimer and Irizawa did not take further steps to review the circumstances of how the price of the securities had moved between the initial and closing crosses, including reviewing the available market trading data. 69. A review of this trading data for the specific stocks and warrants in question on the days of the crosses and the days intervening, where applicable, would have disclosed the set-up trades by Client XY through its CIBC WM and CIBC ISI DMA accounts, listed in Table A. 70. It would also have disclosed the set-up trades through Investment Dealer X, listed in Table B, where Mortimer and Irizawa knew Client XY had an account. This should have at least caused Mortimer and Irizawa to ask Client XY if it was responsible for such trading. RS acknowledges that in relation to these trades, the answers from the client may not have disclosed the alleged manipulation, but the trading data should have been reviewed and the questions asked. Mortimer and Irizawa did neither.

23 CIBC WM has agreed to take or has taken the following measures to ensure full compliance by Mortimer with his responsibilities in the future: (i) strict supervision for one year which will include: a) all orders including any crosses, both buy and sell, must be approved by the branch manager before entry; b) no transactions will be accepted in any account until the full and correct documentation is on file; c) any client account generating $1, or more per month in commission must be reviewed by the branch manager; d) any transfer of securities between clients (i.e. journal entries) must be authorized by the client and reviewed and approved by the branch manager; (ii) (iii) (iv) compulsory training of new firm policies and procedures regarding manipulative or deceptive trading; file Strict Supervision Report with RS for one year confirming that adherence to all UMIR Rules; extensive training through additional courses: a) Trader Training Course successfully written within 6 months; b) Conduct and Practices Handbook successfully written within 3 months; (v) no future supervision of clients with DMA trading. 72. CIBC WM has agreed to take or has taken the following measures to ensure full compliance by Irizawa with his responsibilities in the future: (i) strict supervision for one year which would include: a) all orders including any crosses, both buy and sell, must be approved by the branch manager before entry; b) no transactions will be accepted in any account until the full and correct documentation is on file; c) any client account generating $1,500,00 or more per month in commission must be reviewed by the branch manager;

24 24 d) any transfer of securities between clients (i.e. journal entries) must be authorized by the client and reviewed and approved by the branch manager; (ii) (iii) (iv) compulsory training of new firm policies and procedures regarding deceptive and manipulative trading; file Strict Supervision Report with RS for one year confirming that adherence to all UMIR Rules; extensive training through additional courses: a) Trader training course successfully written within 6 months; b) Conduct and Practices Handbook successfully written within 3 months; (v) no future supervision of clients with DMA trading. F. Failings by CIBC WM The Branch 73. The BM had overall supervisory responsibility for trading at the York Mills sub-branch. 74. The branch was responsible, on a daily basis, for reviewing the previous day s trading for all non-dma trading by the clients through CIBC WM. The daily reviews were conducted by the assistant BM under the direction of the BM. 75. The assistant BM reviewed the Daily Commission Detail Report for these accounts. 76. The BM and assistant BM were aware that Company XY had DMA trading, however, such trading was not on the Daily Commission Detail Report and therefore neither could see the totality of the clients trades. 77. The assistant BM escalated to the BM for review, discussion and action issues noted in the trading such as compliance with short, margin and cross rules. 78. The assistant BM and the BM also noted the consistent losses to Company XY s account and the corresponding profits in the accounts on the other side of the crosses.

25 The assistant BM and the BM discussed the profit and loss pattern and questioned the IA who in turn questioned the client. The client advised that the crosses were being carried out for tax purposes. No further enquiry was sought or received by any of the employees. The actions of the BM and assistant BM in this regard were not sufficient to fulfill their respective supervisory responsibilities in all the circumstances of this case. 80. Based upon the way the firm had organized this client s DMA trading and the way it organized compliance reviews, CIBC Compliance and branch management did not see the totality of the clients trading at CIBC WM and CIBC ISI which would have assisted in revealing its suspect nature. 81. Because the firm s procedures at that time did not adequately direct its managers on how to review and look for potential deceptive and manipulative client trading, branch management did not recognize all the Red Flags they could have seen and accordingly failed to adequately pursue further enquiries with respect to them. 82. Because CIBC WM took the unique step of permitting Company XY s DMA trading to be carried out in a retail CIBC WM account, the firm created greater supervisory responsibility for branch management without providing corresponding supporting procedures and compliance infrastructure. 83. CIBC WM has agreed to take or has taken the following measures to ensure full compliance by the BM with his supervisory responsibilities in the future: (i) (ii) training in new firm policies and procedures regarding manipulative and deceptive trading; extensive training through additional courses: a) Trader Training Course successfully written within 6 months; b) Branch Managers Exam successfully written within 3 months; c) Partners, Officers and Directors course successfully written within 3 months. (iii) no future supervision over DMA trading.

26 CIBC WM has agreed to take or has taken the following measures to ensure full compliance by the assistant BM with her supervisory responsibilities in the future: (i) (ii) training of new firm policies and procedures regarding deceptive and manipulative trading; extensive training through additional courses: a) Trader Training Course successfully written within 6 months; b) Branch Managers Exam successfully written within 3 months; c) Partners, Officers and Directors course successfully written within 3 months (iii) no future supervision over DMA trading. CIBC WM 85. CIBC WM is responsible for ensuring that it adequately supervises all trading, including DMA trading. In light of all the circumstances as set out herein, CIBC WM failed to do so in this case. 86. On a daily basis, CIBC WM Head Office reviewed all trades entered the previous day by Company XY through DMA at CIBC WM and those manually entered for Company XY s CIBC WM s account (i.e. the crosses). 87. Head Office also reviewed trading through CIBC WM in the accounts of Mr. X, Mr. Y, their families and Company X, on a daily basis. 88. Effective post-trade review is one of the ways a Participant fulfills its supervisory responsibilities under Rule 2-401(5) of the Exchange and Rule 7.1(1) and Policy 7.1 of UMIR. 89. Although CIBC WM conducted the post-trade review noted above, the policies and procedures employed were not adequate in that they did not focus on the potentially manipulative or deceptive nature of the client trading. 90. CIBC WM failed to recognize the Red Flags and as a result, failed to make adequate inquiries which focused on the suspicious nature of the trading.

27 The post-trade compliance reviews conducted by CIBC WM focused on credit related issues and compliance with short, margin and cross rules. 92. At the time, CIBC WM structured its compliance procedures such that separate compliance reviews were conducted by CIBC WM and CIBC ISI. 93. However, technology exists for the account information to be shared. 94. At the time, CIBC WM managed Client XY s DMA trading through retail brokerage accounts. 95. All of the foregoing establishes a failure by CIBC WM to fulfill its supervisory responsibilities, contrary to Rule 2-401(5) of the Rules of the Exchange and UMIR 7.1(1) and Policy CIBC WM has agreed to take or has taken the following measures to ensure full compliance with its supervisory responsibilities in the future: (i) (ii) (iii) (iv) (v) (vi) (vii) DMA trading will occur in the institutional Prime Brokerage branch; supervision of trading, including DMA trading, will be better resourced, with better tools and training to recognize and act upon red flags generated by potentially deceptive and manipulative trading; supervision of trading in related accounts will be coordinated at the Compliance level; Branch supervision of related accounts will be coordinated; client services necessary for DMA trading, such as re-org activity, will be only carried out by Prime Brokerage branch manager or his/her designate; policies and procedures will be enhanced across the firm to enable employees to recognize and act upon red flags generated by potentially deceptive and manipulative trading; new procedures will include an escalation process when red flags are recognized; (viii) training of new procedures will be mandatory for branch management, investment advisors, compliance officers, special handling and trading desks; and

28 28 (ix) access to market trading data will be provided to perform more detailed and extensive reviews for specific kinds of complex activity and for activity occurring over several days. III. CONCLUSION 97. It is alleged by RS that in 2002, the clients in question were engaged in suspicious trading in certain stocks and warrants listed on the TSX and the TSX Venture Exchanges, which in all the circumstances described above, had the appearance of manipulative and deceptive trading. Such trading is harmful to the integrity of these marketplaces. 98. By failing to recognize the Red Flags, Mortimer and Irizawa failed to fulfill their gatekeeper responsibilities and CIBC WM failed to fulfill its supervisory responsibilities, to the marketplaces affected, contrary to the Rules of the Exchange and UMIR. December 10, 2004 Market Regulation Services Inc. Suite 900, Box King Street West Toronto, Ontario M5H 1J8 Investigations and Enforcement Telephone: Facsimile: Mr. Michael Penny Torys LLP Suite Wellington Street W Box 270, TD Centre Toronto, Ontario M5K 1N2 Telephone: Facsimile:

29 29 Excerpts from the Rules of the Toronto Stock Exchange Rule Supervision of Trading (5) A Participating Organization shall ensure that its employees, directors and officers and, if applicable, partners comply with Exchange Requirements. Rule Powers and Remedies (1) Where a person under the jurisdiction of the Exchange has: (b) engaged in any conduct, business or affairs that is unbecoming, inconsistent with just and equitable principles of trade or detrimental to the interests of Exchange or the public; the Board or a committee of the Board may impose any one or more of the penalties or remedies described in Rule 7-106(2) against the person. Excerpts from the Universal Market Integrity Rules PART 2 MANIPULATIVE OR DECEPTIVE METHOD OF TRADING 2.1 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. PART 7 TRADING IN A MARKETPLACE 7.1 Trading Supervision Obligations (1) Each Participant shall adopt written policies and procedures to be followed by directors, officers, partners and employees of the Participant that are adequate, taking into account the business and affairs of the Participant, to ensure compliance with these Rules and each Policy.

30 30 THE TRADES IN ISSUE 1. Allbanc Split Corp (ABK.PR.A) - March 5 and 6, TSX March 5, 2002 Trade CIBC: At 9:53:58, the opening cross of 200,000 shares at $25.40 within an independent market quote. Company X bought and Company XY sold. Comments The cross accounted for 96.8% of the daily volume of 206,641 shares. March 6, 2002 Trades CIBC ISI: Between 12:53:13 and 13:28:19, Company XY purchased 4,300 shares. Both purchases cleared out the entire offering size and increased the market quote from $25.70/$25.99 to $26.00/$ CIBC: At 13:41:03 and 13:59:40, two closing crosses totalling 200,000 shares at $26.25, the high of the day. Company XY bought and Company X sold. The March 6 closing cross of 200,000 shares could not have been executed at $26.25 without the CIBC ISI purchases by Company XY. Red flags Company X earned a profit of $170,000 and Company XY sustained a loss of $170,000. The profit and loss occurred within two trading days. The March 6 closing cross was executed on the high of the day. The average daily volume for ABK.PR.A in January was 11,148 and for February 4,046 shares. On March 5, the cross of 200,000 accounted for

31 % of the daily volume of 206,641. The March 6 crosses of 200,000 shares accounted for 96.8% of the daily volume of 206,614 shares. Mr. X and Mr. Y made the investment decisions for the accounts. 2. Newmont Mining Wt (NMC.WT) April 17 and 18, TSX April 17, 2002 Trades CIBC ISI: Between 9:39:43 and 11:28:42, Company XY bought 30,000 NMC.WT through 5 trades. All 5 purchases cleared out the entire offer size and moved the market quote from $8.76/$9.50 to $8.81/$0.00. CIBC: At 15:01:05 and 15:01:36, opening crosses totalling 200,000 at $9.01, a $0.49 downtick and the low of the day. Mr. X s margin account bought and Company XY sold. The cross was executed within an independent market quote. CIBC: At 15:40:00, Company XY bought 10,000 shares at $9.50, a $0.49 uptick. Comments The opening crosses through CIBC of 200,000 represented 83.3% of the daily volume of 240,000. April 18, 2002 Trades CIBC ISI: At 9:43:32 and 10:53:27, Company XY bought 1,200 warrants through two purchases, both on upticks. The initial purchase of 1,000 at $10.10, a $0.60 uptick, cleared out the entire offer size and moved the market quote from $9.75/$10.10 to $9.75/$10.25.

32 32 CIBC: The closing cross of 200,000 at $11.75, a $1.40 uptick, and the high of the day, was executed within the independent market quote. Company XY bought and Mr. X s RRSP sold. Red flags Mr. X s RRSP made a profit of $548,000 and Company XY sustained a loss of $548,000 over the two days. The profit and loss occurred over 2 trading days. The pattern of Mr. X and Company X making money and Company XY losing money continued. The opening cross was executed on the low of the day. The closing trade was executed on the high of the day. The average daily volume for NMC.WT in February was 1,884 and for March 4,530. The April 17 opening cross of 200,000 NMC.WT represented 83.38% of the daily volume. The April 18 closing cross of 200,000 NMC.WT represented 99.1% of the daily volume. Mr. X and Mr. Y made the investment decisions for the accounts. 3. Newmont Mining Wt (NMC.WT) April 19, TSX Trades CIBC: At 9:42:43, the opening cross of 200,000 at $11.20 was executed within the independent market quote at the high trading price of the day. Company XY bought and Mr. X s margin account sold. CIBC ISI: At 15:10:59, Company XY sold 500 warrants at $9.75. This sale cleared out the entire bid size and reduced the market quote from $9.75/$10.50 to $9.25/$ CIBC: At 15:29:56, the closing cross of 200,000 at $9.30. Mr. X s margin account bought and the Company XY account sold. The closing cross could not have been executed at $9.30 without the sale by Company XY through CIBC ISI.

33 33 Red flags Mr. X s margin account earned a profit of $380,000 and Company XY sustained a loss of $380,000. The pattern of Mr. X and Company X making money and Company XY losing money continued. The profit and loss occurred on one trading day. This was the second set of opening and closing crosses in NMC.WT within a three day period. The total profit on the crosses to Mr. X s RRSP and margin account was $928,000, with the loss to the Company XY account being approximately the same. The average daily volume for NMC.WT in February was 1,884 and for March was 4,530. The opening and closing crosses of 200,000 accounted for about 99% of the daily volume of 400,800. The opening cross was executed on the high of the day. The closing cross was executed at the low of the day. Mr. X and Mr. Y made the investment decisions for the accounts. 4. Telco Split (TSC) April 24, TSX Trades CIBC: At 10:02:37 and 10:02:56, the opening crosses of 150,000 at $9.15, within the independent market quote at the low trading price of the day. Mr. Y bought and Company XY sold. CIBC ISI: Between 10:06:45 and 14:45:32, Company XY bought 4,500 shares through 6 trades. Five of the purchases cleared out the entire offer size and were made on upticks. The purchases contributed to increasing the market quote from $9.60/$9.75 to $9.96/$ CIBC: At 14:46.59, a closing cross of 150,000 shares at $11.00, the high trading price of the day. Company XY bought and Mr. Y sold. Without the repeated upticked purchases by Company XY at CIBC ISI, the closing cross could not have been executed at $11.00.

34 34 Red flags Mr. Y s RRSP earned a profit of $277,250 and Company XY lost $277,750. The profit and loss occurred on one trading day. The pattern of Company XY losing money and an associated account, Mr. Y, making money continued. The opening cross was executed at the low of the day and the closing cross at the high of the day. The average daily volume for TSC in February was 1,001 and in March it was 2,534. The opening and closing crosses represented 97.5% of the daily volume of 307,650. Mr. X and Mr. Y made the investment decisions for the accounts. 5. Newmont Mining Corp. Canada warrants (YNT.WT.B) - May 14, 21-23, 2002 TSX VN YNT.WT.B warrants traded on the TSX Venture Exchange. The warrants were exercisable into Newmont Mining Corporation shares (NMC) traded on the TSX. May 14, 2002 Trades CIBC: At 10:02:53, an opening cross of 50,000 at $29.50 within an independent market quote. The cross was executed on the high of the day on a $2.50 uptick. Company XY bought and Mr. X s margin account sold. CIBC ISI: At 13:02:57 and 14:15:06, two sales by Company XY totalling 1,200 shares were executed on downticks totalling $4.50. Both sales cleared out the entire bid size and reduced the market quote from $27.00/$30.00 to $24.00/$ CIBC: At 14:28:18, an order to cross 50,000 at $22.50 was entered. The order froze in the market and was rejected by RS s Vancouver Market Surveillance.

35 35 CIBC: At 15:18:35, the closing cross of 50,000 at $24.01, a $0.99 downtick and the low of the day. Mr. X s RRSP bought and Company XY sold. The closing cross could not have been executed at $24.01 without the two sales by the Company XY account at CIBC ISI. Both sales cleared out the bids and move the market quote down. Red flags The profit to Mr. X s RRSP was $274,500, and the loss to Company XY was $274,500. The profit and loss occurred on the same trade day. There was a pattern of Mr. X and Company X earning profits and Company XY losing money through cross transactions. The opening cross was executed on the high of the day. The closing cross was executed at the low of the day. Irizawa was contacted by RS s Vancouver Market Surveillance questioning the propriety of the crosses. Mr. X and Company XY s crosses totalling 100,000 accounted for 97.8% of the daily volume of 102,200. Mr. X and Mr. Y made the investment decisions for the accounts. May 21, 2002 Trades CIBC: At 13:01:59 and 13:03:52, Irizawa entered two opening crosses of 1,600 and 100,000 YNT.WT.B at $25.10, a $0.90 downtick. Mr. X s RRSP bought and Company XY sold. Investment Dealer X: At 15:08:33, Company XY bought 500 YNT.WT.B at $29.00, a $3.90 uptick. The purchase cleared out the offer side and increased the market quote from $26.55/$29 to $26.55/$30.00.

36 36 CIBC: Irizawa attempted to enter a closing cross of 101,600 YNT.WT.B at $32.00 with 5 minutes left in the trading day. The CIBC Special Handling desk trader refused the order and it was not entered into the market. Red flags The CIBC trader refused to accept a cross order from Irizawa for 101,600 at $ Irizawa had had a previous cross order rejected by RS s Market Surveillance on May 14, Mr. X and Company XY s cross of 101,600 accounted for 98.5% of the daily volume of 103,100. The profit and loss occurred over 1 trading day. May 22, 2002 Trades 9:18 a.m.: RS s Vancouver Market Surveillance advised Irizawa that RS would be questioning his YNT.WT.B crosses. CIBC ISI: Between 9:55:36 and 10:09:19, Company XY bought 11,000 through five trades. The market quote moved from $30.05/$35:00 to $26.60/$ CIBC: At 10:57:08, another account, also handled by Mortimer, entered an order to buy 400 YNT.WT.B at $ The order cleared out the offer side and the market quote changed from $26.60/$30.00 to $26.60/$ CIBC: At 11:25:38, another trader employed by Mortimer bid for 5,000 YNT.WT.B at $32.00 for the Company XY account. The seller, Mr. X s RRSP account, entered the order at 10:20:06. Both sides of the market quote of $26.60/$32.00 reflected orders placed by the Company XY account. CIBC: At 11:52:18, the trader entered a bid of 10,000 at $32.00 for the Company XY account. Mr. X s RRSP account had entered a sell order at

37 37 11:41:35. Both sides of the market quote of $26.60/$32.00 reflected orders placed by the Company XY account. The majority of the 86,600 shares remaining in Mr. X s RRSP account were sold through Investment Dealer X for the Company XY account from May 23 through 29. Red flags Mr. X made a profit of between $6.90 and $7.40 per share over two days on the 15,000 YNT.WT.B sold. The pattern of Mr. X and Company X making money and Company XY losing money continued. A different trader employed by Mortimer, entered the orders after RS Market Surveillance spoke to Irizawa. 6. Scotia Split (SSC) July 22-25, TSX July 22, 2002 Trade CIBC: At 16:49:48 an opening cross of 20,000 at $71.50, within an independent market quote. Mr. X s margin account bought and Company XY sold. July 25, 2002 Trades CIBC: Between 10:02:55 and 10:11:00, Company XY bought 1,200 at $ The two trades cleared out the entire offer size and increased the market quote from $68.50/$72.50 to $72.00/$ CIBC: At 11:05:08, the closing cross of 20,000 at $74.30, the high of the day. Company XY bought and Mr. X s margin account sold.