July 28, IN THE MATTER OF THE UNIVERSAL MARKET INTEGRITY RULES AND IN THE MATTER OF

Transcription

1 Settlement Agreement July 28, IN THE MATTER OF THE UNIVERSAL MARKET INTEGRITY RULES AND IN THE MATTER OF IAN MACDONALD, EDWARD BOYD, PETER DENNIS AND DAVID SINGH OFFER OF SETTLEMENT A. INTRODUCTION Market Regulation Services Inc. ( RS ) has conducted an investigation (the Investigation ) into the conduct of Ian Macdonald ( Macdonald ), Edward Boyd ( Boyd ), Peter Dennis ( Dennis ) and David Singh ( Singh ) (hereinafter referred to collectively as the Respondents ). The Investigation has disclosed matters for which RS seeks certain sanctions against the Respondents pursuant to Rule 10.5 of the Universal Market Integrity Rules ( UMIR ). If this Offer of Settlement is accepted by the Respondents, 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 2 The Respondents agree 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 the Respondents 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 the Respondents: On August 11, 2004, the Respondents effected trades in shares of Royal Bank of Canada and Bank of Montreal in the Market On Close Facility of the Toronto Stock Exchange which involved no change of beneficial or economic ownership, which constitutes a manipulative and deceptive method of trading, contrary to UMIR Rules 2.2(1) and 2.2(2)(b), for which they are liable pursuant to UMIR 10.4(1)(a). 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, Macdonald and RS have agreed upon the following disposition: (a) A fine of $90, payable by Macdonald to RS; and, (b) Costs of $35, payable to RS.

3 3 For the contraventions in paragraph 6 above, Boyd and RS have agreed upon the following disposition: (c) A fine of $60, payable by Boyd to RS; and, (d) Costs of $20, payable to RS. For the contraventions in paragraph 6 above, Singh and RS have agreed upon the following disposition: (e) A fine of $60, payable by Singh to RS; and, (f) Costs of $20, payable to RS. For the contraventions in paragraph 6 above, Dennis and RS have agreed upon the following disposition: (g) A fine of $20, payable by Dennis to RS; and, (h) Costs of $7, payable to RS. If this Settlement Agreement is accepted by a Hearing Panel, MacDonald, Boyd, Dennis and Singh, as the case may be, agree to pay the amounts referred to in paragraphs 8, 9, 10 and 11 within 30 days of such acceptance. E. PROCEDURES FOR ACCEPTANCE OF OFFER OF SETTLEMENT AND APPROVAL OF SETTLEMENT AGREEMENT 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

4 4 addition to any other procedures as may be agreed upon between the parties. The Respondents acknowledge 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 the Respondents, and RS will publish a 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 RS and the Respondents. F. OTHER MATTERS The Respondents agree that, in the event the Respondents 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 the Respondents access to marketplaces regulated by RS until RS determines that the Respondents are in full compliance with all terms of the Settlement Agreement.

5 5 The Respondents agrees that neither them, nor anyone on their behalf, will make a public statement inconsistent with this Settlement Agreement. This Settlement Agreement may be signed in counterpart. IN WITNESS WHEREOF the parties have signed this Settlement Agreement as of the dates noted below. DATED at Vancouver on the 26th day of July, Glen Hancock Witness Signature Ian Macdonald Ian Macdonald Glen Hancock Name of Witness 4707 Cannery Place, Delta, BC Address of Witness DATED at Toronto on the 26th day of July, D. Hausman Witness Signature E. Boyd Edward Boyd David Hausman Name of Witness Suite 4200, TD Bank Tower, 66 Wellington Street W. Address of Witness DATED at Montreal, QC on the 26th day of July, B. Kalushny Witness Signature Peter Dennis Peter Dennis Billy Kalushny Name of Witness

6 6 Address of Witness DATED at Toronto on the 26th day of July, D. Hausman Witness Signature David Singh David Singh Dave Hausman Name of Witness Suite 4200, TD Bank Tower, 66 Wellington Street W. Address of Witness DATED at Toronto, Ontario on the 25 th day of July, Per: M. Jensen Maureen Jensen Vice President Market Regulation, Eastern Region Market Regulation Services Inc. This foregoing Settlement Agreement is hereby accepted this 28 th day of July, 2005, by the following hearing panel constituted to review the terms thereof: Per: Lloyd W. Houlden Panel Chair Per: Dusty Graham Per: Hillery J. Lloyd Panel Member Panel Member

7 APPENDIX "A" IN THE MATTER OF THE UNIVERSAL MARKET INTEGRITY RULES AND IN THE MATTER OF IAN MACDONALD, EDWARD BOYD, PETER DENNIS AND DAVID SINGH (Hereinafter referred to as the Respondents ) STATEMENT OF ALLEGATIONS I. REQUIREMENTS CONTRAVENED 1. The Respondents agree that they contravened Universal Market Integrity Rules ("UMIR") 2.2(1) and 2.2(2)(b), for which they are liable pursuant to UMIR 10.4(1)(a). 2. The text of the relevant Requirements is set out at Schedule "A". II. THE FACTS RELIED UPON A. General Overview 3. The RBC Dominion Securities Inc. ( RBC DS ) employees involved in this transaction were: Ian Macdonald ( Macdonald ), Edward Boyd ( Boyd ), David Singh ( Singh ) and Peter Dennis ( Dennis ). 4. The Market-on-Close Facility ( MOC Facility ) of the Toronto Stock Exchange ( TSX ) permits the entry of market orders to trade at the closing price ( Market MOC Order ) from 7:00 to 15:40. At 15:40, the TSX calculates and broadcasts the order imbalance for each of the securities participating in the MOC Facility

8 2. indicating whether the imbalance is on the buy or sell side and size of the imbalance. 5. After 15:40, only limit orders on the opposite side of the market as the imbalance ( Limit MOC Order ) may be entered into the MOC Facility. The MOC Facility is blind as there is no transparency with respect to particular orders entered as market MOC orders or limit MOC orders. 6. A Market MOC Order entered prior to 15:40 may not be amended or cancelled at any time after 15:40 and any Limit MOC Order entered prior to 16:00 may not be amended or cancelled at any time after 16:00. The purpose of this is to protect the integrity of the published imbalances upon which market participants rely to make investment decisions between 3:40 and 4:00 p.m. 7. Entry by a Participant of a limit MOC Order to off-set a market MOC Order entered by that Participant constitutes a wash trade. As stated by RS in a Market Integrity Notice dated August 26, 2004, it is unacceptable for a Participant to undertake a wash trade, directly or indirectly, even in circumstances where the Participant is trying to correct an existing market MOC Order or to limit its liability due to an existing MOC Order. This Notice further stated that it was RS s position that such conduct may constitute a manipulative and deceptive method of trading, within the meaning of UMIR 2.2(2)(b). 8. On August 11, 2004, RBC DS and a Canadian chartered bank ( Bank A ) agreed to execute trades in the shares of Royal Bank of Canada ( RY ) and Bank of Montreal ( BMO ) to establish hedges to over the counter SWAP trades. Both RBC DS and Dealer Y, who acted as agent for Bank A, were to enter the market orders into the MOC Facility on the TSX so that the RY and BMO shares in the transaction received their respective closing price levels on opposite sides of the market.

9 3. 9. Boyd entered the RBC DS market MOC orders for RY and BMO at 12:20:53 and 12:21:13, respectively. The orders were entered for RBC DS inventory accounts. 10. Dealer Y failed to enter the Bank A s side of the BMO trade into the MOC Facility prior to 15:40 because it attached an improper marker when attempting to input the BMO order. Dealer Y entered the Bank A s side of the RY market MOC order but then cancelled the RY order prior to 15:40 because Dealer Y incorrectly thought that RBC DS had not entered its side of the trade into the MOC Facility, because Dealer Y was unaware that the MOC Facility was blind. 11. At 15:40 on August 11, 2004, large MOC Facility imbalances were broadcast on RY and BMO as a result of the entry of the RBC DS orders in the MOC Facility and Dealer Y s failure to enter the agreed upon market orders for RY and BMO shares into the MOC Facility. 12. After the MOC imbalances were broadcast, Dealer Y responded by entering limit orders into the MOC Facility for RY and BMO shares. 13. After discussions amongst the Respondents concerning how they could limit RBC DS s potential liability caused by Dealer Y s errors, Singh instructed Bank A to have Dealer Y cancel the limit orders for the RY and BMO shares which Bank A told the Respondents had been entered into the MOC Facility by Dealer Y for Bank A. 14. Boyd and Dennis then entered offsetting limit MOC orders for RBC DS inventory accounts in the shares of RY and BMO into the MOC Facility. 15. The Respondents knew the MOC Facility allocation mechanism increased the probability that MOC imbalance orders would trade against MOC limit orders in time priority, causing wash trades, since unintentional crosses always trade first.

10 Just after 16:00, a substantial part of RBC DS s limit MOC orders were traded against RBC DS s market MOC orders entered earlier that day. When executed, these offsetting orders caused the RY and BMO shares to be wash traded through unintentional crosses. 17. The Respondents knew when the limit MOC orders in RY and BMO shares were entered into the MOC Facility that any ensuing unintentional crosses would increase the likelihood of trades involving no change of beneficial ownership. 18. None of the Respondents contacted RS for direction after learning of the MOC imbalances and why they had occurred. The Respondents knew that it was not possible for the MOC market orders to be cancelled, which is why they considered, but then did not call the TSX, about cancellation. Dennis and Macdonald discussed putting in offsetting orders for Bank A through Bank A s RBC DS account. Consideration was again given to calling the TSX prior to entering the offsetting orders. Macdonald and Dennis decided not to call. The Respondents entered the offsetting orders to limit the potential liability created by the MOC Imbalance. RBC DS Personnel 19. Macdonald is a Managing Director, Canadian Equity Derivatives at RBC DS. He was the most senior individual at RBC DS involved in the impugned trading which is detailed herein and he was responsible for overseeing it. 20. Boyd is a Vice-President, Canadian Equity Derivatives and a trader at RBC DS. 21. Singh is a Director, Canadian Equity Derivatives and a sales trader at RBC DS. 22. Dennis is a Senior Equity and Derivatives trader at RBC DS.

11 5. The Transactions in Question 23. On the morning of August 11, 2004, RBC DS and Bank A agreed to execute the following transactions: (a) RBC DS was to enter market MOC Facility orders to buy 344,500 shares of BMO and sell 265,000 shares of RY; (b) Bank A (through Dealer Y) was to enter market MOC Facility orders to sell 344,500 shares of BMO and buy 265,000 shares of RY. 24. As stated above, at RBC DS, the transactions were overseen by Macdonald. Macdonald was aware of the ongoing actions taken by Singh, Boyd and Dennis which are detailed herein. 25. At 12:20:53, Boyd entered a day market order to sell 265,000 shares of RY using the IN (inventory) marker and the MOC Facility. The order was entered for an inventory account in the name of Boyd. 26. At 12:21:13, Boyd entered a day market order to buy 344,500 shares of BMO using the IN marker and the MOC Facility. The order was entered for an inventory account in the name of Boyd. 27. At 15:21:22, Dealer Y entered a day market order to buy 265,000 shares of RY using the CL (client) market and the MOC Facility. RBC DS could not confirm that this order had been placed because the MOC facility is blind. 28. Dealer Y time stamped a ticket for an order to sell 344,500 BMO shares at 15:17. The client shown on the ticket was non-canadian. Because Dealer Y had attached a non-resident marker to the order, it was not accepted into the MOC Facility. Dealer Y made several unsuccessful attempts to enter this order.

12 At no time prior to 15:40 on August 15, 2004 did Bank A or Dealer Y inform RBC DS that there were any problems respecting the placing of the counterparty orders. 30. Market orders are blind in the MOC Facility Order Book prior to 15:40. At 15:37:56, Dealer Y cancelled its order to purchase the 265,000 shares of RY when the Dealer Y traders did not see the expected RBC DS MOC market order in RY shares, and assumed it had not been entered. The traders at Dealer Y were unaware of the blind nature of the MOC Facility market orders for Book prior to 15: As a result of the failure of Dealer Y to enter the offsetting orders to the orders entered by RBC DS, the following MOC Facility imbalances (the MOC Imbalance ) were broadcast at 15:40: (a) (b) RY Sell 288,300 MOC; and, BMO Buy 328,800 MOC. 32. Following the broadcast, Singh called Bank A to enquire about the entry of Bank A s side of the arrangement. Discussion ensued between the Respondents and Bank A pursuant to which the Respondents learned that the MOC Imbalance had been caused, or contributed to, by Dealer Y s failure to enter the offsetting orders. 33. Upon learning that Dealer Y had not entered the offsetting orders, following numerous discussions after the broadcast of the imbalance, the Respondents concluded with only a few minutes remaining in the trading day that, based on the express provisions of TSX Rule governing trading on the MOC Facility, the TSX could not cancel the orders so the Respondents did not contact either the TSX or RS and pursued other means of addressing the potential liability accruing to RBC DS resulting from the imbalance.

13 At 15:47:48, Dealer Y entered a day limit order to buy 265,000 shares of RY at $64.80 using the CL marker and the MOC Facility. The market at the time was $60.66/$ At 15:51:51, Dealer Y entered a day limit order to sell 328,800 shares of BMO at $49.27 using the CL marker and the MOC Facility. The market at this time was $53.63/$ These orders were entered by Dealer Y in an attempt to fulfill its side of the agreement with Bank A and to offset the MOC imbalance created by their previously failed attempts to enter the MOC orders. 37. However, the Respondents were unable to confirm that these orders had been properly entered and were concerned that the entry of these orders by Dealer Y would not sufficiently limit the potential liability created by the MOC Imbalance. 38. After discussion among the Respondents, Singh instructed Bank A to have Dealer Y cancel their orders which Bank A told them had been entered so that Dennis and Boyd could enter limit MOC orders in RY and BMO. The Respondents knew because of the allocation mechanism of the MOC Facility, this would increase the probability that these limit orders would be wash traded by way of unintentional crosses with RBC DS s original market orders entered at 12:20:53 and 12:21:13, respectively. 39. At 15:57:01, Dealer Y s 15:51:51 order to sell BMO shares was cancelled at Singh s request. Likewise, Dealer Y s order for RY shares entered at 15:47:48 was cancelled at 15:57: At 15:56:36, Dennis entered a day limit order to buy 265,000 shares of RY at $62.00 using the NC ( non-client ) marker and the MOC Facility. The market at this time was $60.63/$ This order was cancelled at 15:58.37 as Macdonald felt the price was too high and wanted to limit any potential of establishing a disorderly closing price for RY. Although the order was marked

14 8. non-client because Dennis Kasten Chase terminal defaulted to non-client, it was entered for a RBC DS inventory account. 41. As set out above, in accordance with Macdonald s instructions, at 15:58:46, Dennis entered a day limit order to buy 265,000 shares of RY at $61.00 into the MOC Facility. The market at this time was $60.63/$ The order was also entered for a RBC DS inventory account, although it defaulted to nonclient. 42. At 15:59:45, Boyd entered a day limit order to sell 328,000 shares of BMO at $52.50 using an IN marker and the MOC Facility. The market at this time was $53.44/$ This order was also entered for RBC DS inventory account. 43. At 16:05:00, the limit MOC order entered by Boyd to sell 328,000 shares of BMO at 15:59:45 crossed with RBC DS s market MOC order to buy 344,500 shares of BMO entered at 12:21:13. The cross price was $ At 16:05:01, 264,700 shares of RBC DS s MOC limit order to buy 265,000 shares of RY entered at 15:58:46 by Dennis crossed with RBC DS s MOC market order to sell 265,000 shares of RY entered at 12:20:53. The cross price was $ The orders entered in RY and BMO at 15:58:46 and 15:59:45, caused unintentional crosses between inventory accounts at RBC DS. There was no change of beneficial ownership, resulting in wash trades. 46. The wash trades were effected to limit RBC DS s potential liability created by the MOC Imbalance. 47. Before entering the offsetting orders in RY and BMO into the MOC Facility at 15:58:46 and 15:59:45 respectively, Macdonald questioned Dennis as to whether they should contact the TSX. Macdonald stated: You don t think we should try the Exchange. Dennis replied: No, no, I would just offset it. Subsequently, the offsetting orders were entered by Dennis and Boyd.

15 RBC DS was left long 16,000 BMO shares after the wash trades. Boyd and Macdonald discussed whether the shares should be sold. They decided not to so. 49. After the close of the market at 16:00, RS contacted Boyd after detecting what appeared to be wash trades in RY and BMO in the MOC Facility. Boyd subsequently confirmed to RS that the trades were the result of an error by another dealer. RS subsequently cancelled the trades. 50. In a telephone conversation among RS, Macdonald and another RBC DS employee on August 12, 2004, Macdonald confirmed to RS that the trades were conducted to mitigate the liability of RBC DS caused by the MOC Imbalance, which, in turn, was a result of Dealer Y s errors. 51. The Respondents conduct avoided a potential liability to RBC DS and impacted negatively on the market integrity of the MOC Facility. Their conduct had a direct impact on market participants who traded on the basis of the MOC Imbalance broadcast of 15:40 in the period between 15:40 and 16:00 on August 11, RS has estimated the net losses incurred by certain clients, firm inventory accounts and registered traders at various Participants in respect of the shares of BMO and RY as follows: (a) RY: $3, (b) BMO: $259, (this includes the $31, loss for RBC DS). 53. The estimated net losses of $231, were calculated by taking the difference between the sales proceeds received for the RY shares and the cost paid for the BMO shares by accounts at various firms after the MOC Imbalance was broadcast on August 11 and the opening price on August 12, 2004 for RY of $60.74 and for BMO of $52.95.

16 RBC DS has agreed to make restitution in the amount of $231, to the market participants affected by these trades within 30 days of the approval of this Settlement Agreement. III. CONCLUSION 55. The Respondents knew when Limit MOC orders in RY and BMO shares were entered into the MOC Facility that any ensuing unintentional crosses would likely result in trades with no change of beneficial ownership. This is in fact what did occur, contrary to UMIR 2.2(1) and 2.2(2)(b). 56. The Respondents effected these wash trades in the shares of RY and BMO with knowledge about the facts behind the MOC Imbalance that were not generally known in the marketplace. It was only known to the parties (the Respondents, Dealer Y and Bank A). The Respondents trading was not conducted on a level playing field of information with other market participants. 57. The Respondents agree that they should not have acted without consulting RS to mitigate potential liability. 58. The Respondents agree that they should have contacted RS for direction as soon as they learned the reason behind the MOC Imbalance. This would have allowed for the opportunity for RS to consider what course of action was in the best interests of a fair and orderly market. 59. It should also be noted that the impugned trades constitute an isolated incident resulting initially from an error of another Dealer. The Respondents did not engage in a pattern of manipulative or deceptive conduct. They admitted their error to RS upon being contacted immediately following the subject trades. 60. None of the Respondents has ever before been the subject of discipline proceedings by any securities regulator. 61. None of the Respondents benefited personally from this trading.

17 The Respondents were acting in a very compressed timeframe to address a serious problem created by another dealer s error. 63. By effecting these trades contrary to UMIR Rules 2.2(1) and 2.2(2)(b), the Respondents engaged in conduct for which they are liable pursuant to UMIR 10.4(1)(a). They failed to consider that they were putting the interests of RBC DS ahead of the best interests of a fair and orderly market. July 25, 2005 Market Regulation Services Inc. Suite 900, Box King Street West Toronto, Ontario M5H 1J8 Investigations and Enforcement Telephone: Facsimile: TO: The Respondents c/o David Hausman Fasken Martineau DuMoulin LLP TD Bank Tower Suite 4200, 66 Wellington St. W. Toronto Dominion Centre Toronto, Ontario M5K 1N6 Telephone: (416) Facsimile: (416)

18 SCHEDULE A Page 1 of 1 Excerpts from the Universal Market Integrity Rules 1.0 Manipulative or Deceptive Method of Trading (1) A Participant or Access Person shall not, directly or indirectly, use nor knowingly facilitate nor participate in the use of any manipulative or deceptive method of trading in connection with the entry of an order or orders to trade on a marketplace for the purchase or sale of any security which creates or which could reasonably be expected to create a false or misleading appearance of trading activity or an artificial price for the security or a related security. (1) Without limiting the generality of subsection (1), the following activities when undertaken on a marketplace constitute deceptive and manipulative methods of trading: ( ) effecting a trade in a security which involves no change in the beneficial or economic ownership 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..