5. Staff and the Respondent jointly recommend that the District Council accept this Settlement Agreement.

Transcription

1 BULLETIN NO. IN THE MATTER OF DISCIPLINE PURSUANT TO BY-LAW 20 OF THE INVESTMENT DEALERS ASSOCIATION OF CANADA RE: JORY CAPITAL INC. SETTLEMENT AGREEMENT I. INTRODUCTION 1. The staff ( Staff ) of the Investment Dealers Association of Canada ( the Association ) has conducted an investigation (the Investigation ) into the conduct of Jory Capital Inc. (the Respondent ). 2. The Investigation discloses matters for which the District Council of the Association ( the District Council ) believes it may penalize the Respondent by imposing discipline penalties. II. JOINT SETTLEMENT RECOMMENDATION 3. Staff and the Respondent consent and agree to the settlement of matters relating to financial compliance and compliance with Early Warning to December 31, 2003 by way of this Settlement Agreement in accordance with By-law This Settlement Agreement is subject to its acceptance, or the imposition of a lesser penalty or less onerous terms, or the imposition, with the consent of the Respondent, of a penalty or terms more onerous, by the District Council in accordance with By-law Staff and the Respondent jointly recommend that the District Council accept this Settlement Agreement. 6. If at any time prior to the acceptance of this Settlement Agreement, or the imposition of a lesser penalty or less onerous terms, or the imposition, with the consent of the Respondent, of a penalty or terms more onerous, by the District Council, there are new facts or issues of substantial concern in the view of Staff regarding the facts or issues set out in Section III of this Settlement Agreement, Staff will be entitled to withdraw this Settlement Agreement from consideration by the District Council.

2 - 2 - III. STATEMENT OF FACTS (i) Acknowledgment 7. Staff and the Respondent agree with the facts set out in this Section III and acknowledge that the terms of the settlement contained in this Settlement Agreement are based upon those specific facts. (ii) Factual Background 8. Association staff commenced the Investigation of this matter in July, 2002, as a result of ongoing monitoring of the Respondent s risk adjusted capital ( RAC ) while it was designated in Early Warning Level At all material times the Respondent was a Member of the Association, and is a Type 3 Introducing broker engaged mainly in retail brokerage services. (a) Violations of Early Warning Level 2 Restrictions 10. On May 10, 2001, the Respondent was designated in Early Warning Level 2, as defined in Association By-law 30.4, as a result of a capital deficiency which arose as a result of securities held with a custodian which did not qualify as an Acceptable External Securities Location, and in the absence of a written custodial agreement. By correspondence dated May 10, 2001, Association staff advised the Respondent it was designated in Early Warning Level 2 and was restricted from the following activities unless the prior written consent of the Association was obtained, namely: (a) Reducing the firm s capital in any manner including redemption, repurchase or cancellation of any of its shares; (b) Reducing or repaying any indebtedness which has been subordinated with the approval of the Association; (c) Directly or indirectly making any payments by way of loan, advance, bonus, dividend, repayment of capital or other distribution of assets to any director, officer, partner, shareholder, related company or affiliate; or (d) Increasing non-allowable assets, unless a prior binding commitment to do so exists, or entering into any new commitments, which would have the effect of materially increasing the non-allowable assets of the firm. 11. On May 10, 2001 the Association sent an e mail to the Respondent s Chief Financial Officer ( CFO ), David Sitarik, advising that part of the capital deficiency process is to designate the firm in Early Warning 2 until we receive a non-capital deficient MFR. As the deficiency was not corrected until May 8 th and MFR s will now be due in 10 business days, we will send you a letter after the MFR is filed stating that Jory is no longer subject to EW2 sanctions. 12. By correspondence dated May 14, 2001 the Respondent s CFO notified the Association that the capital deficiency had been rectified on May 8, 2001 and acknowledged that the

3 - 3 - Respondent would comply with the restrictions outlined in the Association s letter of May 10, 2001 until such time as the Monthly Financial Report ( MFR ) demonstrated that it was no longer designated as being capital deficient. 13. The MFR for May 2001 indicated no capital deficiency. This report was filed with the Association on June 15, The Association did not send a letter to the Respondent stating that it was no longer subject to Early Warning 2 restrictions. 14. On or about July 5, 2001 the Respondent s CFO resigned without notice. 15. The Respondent advised the Association of the resignation of its CFO on July 5, By e mail dated July 5, 2001 the Association advised the Respondent that the Association would place the Respondent in Discretionary Early Warning 2 if a replacement CFO were not found in 30 days. 16. By correspondence dated July 9, 2001 from the Association to the Respondent, Association staff advised the Respondent it would remain in Early Warning Level 2 as a result of the resignation of the Respondent s CFO. 17. On July 12, 2001, the Respondent sent a letter to Louis Piergeti, Vice-President Financial Compliance of the Association, acknowledging that the Respondent would remain in Early Warning Level 2 as per Association By-law 30.4 as a result of the departure of its CFO. The letter further acknowledged that the restrictions outlined in the Association s correspondence of May 10, 2001, as specified in paragraph 10 above, applied to the Respondent, and also acknowledged that the Respondent would comply with said restrictions. This correspondence was signed by Patrick Cooney in his capacity as President of the Respondent. 18. By correspondence dated August 10, 2001, the Respondent requested permission from the IDA to pay a bonus of $100,000 to Patrick Cooney. The Association approved the payment. 19. On August 23, 2001, at the request of the Association, the Respondent confirmed that, until a new CFO was hired, the Respondent s external audit firm (the Auditor ) would be doing the accounting for the Respondent and would be performing reviews of the MFRs. 20. On August 24, 2001, the Association advised the Respondent that while the Auditor was performing the functions relating to financial compliance, Patrick Cooney would not be designated as the CFO but that the Association would track Patrick Cooney as the Acting CFO for the internal regulatory purposes of the Association. The Respondent relied on the Auditor to complete accurate financial statements and provide accurate filings to the Association but acknowledges that it remains ultimately responsible for the accuracy of such documentation.

4 By correspondence dated November 12, 2001 the Respondent advised the Association that it had made arrangements to hire Brandie Wermie to be CFO effective December 10, Mr. Wermie had not previously worked in the industry and had no experience or training as the CFO of a brokerage firm. Mr. Wermie is a Certified Management Accountant who had worked for 10 years as controller and general manager in a family owned wholesale/retail business prior to being hired by the Respondent. 22. At the time there was no training course for CFO s of brokerage firms. Mr. Wermie was required by the Association to write and pass the Partners, Directors and Officers Examination administered by the Canadian Securities Institute (the PDO ). Mr. Wermie had also completed the In-Depth Brokers and Investment Dealers Course administered by the Canadian Institute of Chartered Accountants prior to joining the Respondent. The Association therefore required the Auditor to continue to supervise the regulatory filings of the Respondent related to financial compliance. 23. Mr. Wermie was not registered or approved to commence acting as the CFO until April 8, By letter dated January 17, 2002 the Association notified the Respondent that it was capital deficient based on the January 11, 2002 RAC calculation and that the deficiency was corrected on January 14, The letter further notified the Respondent that it was designated in Early Warning Level 2 as a result of a capital deficiency and the Early Warning restrictions placed upon the Respondent were drawn to the Respondent s attention. 25. By correspondence dated January 18, 2002 and January 24, 2002, the Respondent acknowledged it was in Early Warning Level 2, and agreed to comply with the restrictions placed upon it by the Association. The correspondence of January 18, 2002 was signed by Patrick Cooney in his capacity of CEO of the Respondent. The correspondence of January 24, 2002 was signed by both Patrick Cooney in his capacity of CEO of the Respondent, and by Brandi Wermie. 26. By letter dated October 31, 2002 the Association advised the Respondent that the Early Warning restrictions placed upon the Respondent were lifted. This was the first such specific advice following the Association s correspondence of May 10, Association By-law 30.8 provides that a Member shall remain designated as being in early warning level 1 or level 2, as the case may be, and subject to the provisions in this By-Law 30 as applicable, until the latest filed monthly financial reports of the Member demonstrate, in the opinion of the Vice-President, Financial Compliance, that the Member no longer is required to be designated as being in an early warning category and the Member has otherwise complied with this By-law 30. It is the position of the Association that a Member designated as being in Early Warning remains in Early Warning until such time as it has received a letter from the Association indicating that the early warning status has been lifted. Accordingly, the Association takes the position that

5 - 5 - the Respondent was designated in Early Warning continuously from May 10, 2001 until October 31, The Respondent paid advances to Patrick Cooney totaling $123, from May 31, 2001 to January 16, 2002, as follows: Date of payment Payee Amount May 31, 2001 Patrick Cooney $20, June 8, 2001 Patrick Cooney $5, June 12, 2001 Patrick Cooney $5, June 19, 2001 Patrick Cooney $20, June 25, 2001 Patrick Cooney $20, November 19, 2001 Patrick Cooney $10, December 3, 2001 Patrick Cooney $10, December 12, 2001 Patrick Cooney $10, December 19, 2001 Patrick Cooney $7, December 28, 2001 Patrick Cooney $6, January 16, 2002 Patrick Cooney $10, The Respondent also made the following payments. Total $123, September 5, 2001 KPMG LLP $ September 5, 2001 KPMG LLP $6, The payments referred to in paragraph 29 were in respect of accounting advice relating to accounting and tax matters arising during the period that the Respondent was being established. At the time the payments were made, the Respondent believed that the accounting fees were properly payable by the Respondent. The payments were subsequently classified by the accountants as loans to Patrick Cooney. 31. Further, between May 10, 2002 and July 8, 2002, the following sums were paid from the corporate bank account of the Respondent, to or on behalf of Patrick Cooney: Date of payment Payee Amount May 10, 2002 Toronto Dominion $25, Bank May 10, 2002 Toronto Dominion $10, Bank Deposit for Patrick Cooney May 30, 2002 Patrick Cooney $11, July 8, 2002 Patrick Cooney $20, Total $66,000.00

6 Approval to make the payments referred to in paragraphs 28, 29 and 31 above was not obtained from the Association prior to same being disbursed. 33. With respect to the payment made to Patrick Cooney on July 8, 2002, Mr. Cooney requested the Association s approval for this payment on July 4, 2002, and was advised that approval of senior management of the Association s Financial Compliance division would have to be obtained. The payment was made before Mr. Cooney received the Association s response to the request. An confirming the denial of Mr. Cooney s request was forwarded to him on July 8, Mr. Cooney did not normally correspond by e mail and did not see the until after the fact. He was not aware he had received a response at the time the payment was made. 34. The Respondent acknowledges that approval from the Association should have been sought and obtained with respect to the payments made in May and July, 2002 referred to above. 35. On August 9, 2001, the Respondent paid the sum of $20, to LEE Training & Development Inc. ( LEE ) as a deposit pursuant to a consultation agreement dated July 20, This consultation agreement involved a plan to provide a series of workshops to the Respondent, and the Respondent was to provide payment to LEE in a series of amounts over time. 36. The arrangement with Lee was subsequently amended such that only one workshop was provided by LEE in the period in which the deposit was paid. The $20, deposit was applied as payment for the one workshop conducted. 37. As the $20, paid to LEE was initially intended to be a deposit in respect of future services, it was recorded by the Respondent as a prepaid expense, thus increasing the Respondent s non-allowable assets. 38. On September 7, 2001, the Respondent paid $4, to Jim Roy Golf Shop as a deposit to reserve tickets for the 2002 PGA Golf Championship to be held in August As the deposit was for an event to be held in the future, it was recorded as a prepayment and thus increased the Respondent s non-allowable assets. The commitment made on September 7, 2001 required an additional $5, to be paid in May 2002, which payment was made. As the payments were in respect of an event to be held in the future, they were recorded as prepayments and thus increased the Respondent's non-allowable assets. 39. Association staff concluded that by making payments to the Respondent totaling $195,600 and increasing non allowable assets by $30,089.80, without receiving Association approval, the Respondent violated By-laws 30.3 and It is the Respondent s position that the payments during the time the firm was designated in Early Warning Level 2 occurred due to a misunderstanding on the part of certain

7 - 7 - officers of the Respondent regarding the rules pertaining to Early Warning Level 2. In particular: a) the officers who directed, authorized or implemented the payments referred to in paragraph 28, 29 and 31 (in particular Patrick Cooney and Brandi Wermie), were not aware that the Early Warning restrictions remained in effect after the triggering event had been addressed; b) the officers who directed, authorized or implemented the increases in nonallowable assets referred to herein did not adequately distinguish between expenses and prepaid expenses and thus did not regard the transactions referred to in paragraphs 35 and 38 as giving rise to non-allowable assets; c) With respect to a number of payments there was confusion as between the CEO and the CFO as to their respective responsibilities to ensure that payments complied with the Early Warning restrictions. (b) Capital Deficiencies 41. The Respondent s RAC calculations as of January 11, 2002 indicated that the Respondent was capital deficient by $63,118 on this date. 42. On January 17, 2002, the Respondent submitted to the Association its Joint Regulatory Financial Questionnaire and Report ( JRFQ&R ) for the month of December, The JRFQ&R indicated that the Respondent was capital deficient by $64,000 on December 31, The capital deficiencies arising on December 31, 2001 and January 11, 2002 were a result of operating losses experienced by the Respondent in November, 2001, together with an increase in the Respondent s non-allowable assets in December, These deficiencies were promptly remedied by virtue of an injection of $100,000 in subordinated debt, together with a waiver of interest accrued since January 2001, on behalf of all subordinated debt holders. On January 17, 2002 the Association confirmed to the Respondent that the capital deficiency had been corrected by January 14, On January 22, 2002 the Association asked the Auditor to perform a detailed review of the Respondent s weekly RAC position, a cursory review of the daily calculations and a review of the Respondent s monthly MFR. The Association further advised that it would have the Auditor continue to review the monthly MFR until the Association was satisfied with the experience level of Brandi Wermie. 45. On February 20, 2002, the Respondent advised the Association that on December 31, 2001, the Respondent had been capital deficient by $115,000. This deficiency was not previously known to the Respondent. It was ultimately calculated to have been $146,000. The recalculation and the resulting capital deficiency were the result of the failure of the

8 - 8 - Auditor to accrue certain expenses during the year, resulting in late year-end adjustments made to the Respondent s audited JRFQ&R. 46. On February 20, 2002, the Auditor further advised Association staff that on January 31, 2002, the Respondent had been capital deficient by $39, In part as a result of the above noted adjustments, the Respondent s JRFQ&R as at February 19, 2002 indicated that the Respondent was capital deficient by $86,752 on that date. 48. The Respondent immediately remedied the capital deficiencies by a capital injection of $250,000, emanating from one of the Respondent s shareholders. On February 21, 2002 the Association confirmed that the capital deficiency was remedied. 49. In summary, it is the position of Association staff that between December 31, 2001 and February 19, 2002, the Respondent was capital deficient on four (4) occasions, as follows: Date Capital Deficiency December 31, ,000 (adjusted) January 11, ,118 January 31, ,000 February 19, , On all occasions these deficiencies were promptly remedied upon discovery. (c) Failure to Promptly Report the Results of a Profitability Test 51. In accordance with Association By-law 17.2A, the Respondent was required to establish and maintain adequate internal controls in accordance with the internal control policy statements in Policy No Association Policy No. 3, Policy Statement 2(5)(d) required the Respondent to, at least monthly, estimate the application of the profitability tests under the early warning calculations for Level 1 and/or Level 2 of Association By-law Association Policy No. 3, Policy Statement 2(6) required senior management of the Respondent to report promptly to the Association any conditions or circumstances that were, or should have been, apparent from the actions required to be performed under Policy Statement 2 that could require the Respondent to be designated in Early Warning Level 1 or Level 2 in accordance with By-law 30 because of the application of the liquidity, capital, or profitability tests. 54. Although the By-Law required monthly estimation of the profitability tests, the Respondent s practice was to complete profitability tests daily for the previous day.

9 Daily profitability tests performed by the Respondent on November 25, 26, 28 and demonstrated that, based on the results of these profitability tests, the Association would have grounds to designate the Respondent in Early Warning Level 1 and/or early warning Level At the end of November, 2001 the Respondent expected certain additional revenue attributable to that month pursuant to a contract. It therefore had not completed its November accounting records at the time the November profitability tests were performed. The expected revenue was not, in fact, received. 57. A profitability test for the month of November 2002 was not provided to the Association until January 6, 2003 when the Respondent filed its MFR for the month of November. 58. Association staff concluded that, by failing to report the results of the late November profitability tests referred to in paragraph 55 above prior to January 6, 2003, the Respondent failed to comply with Internal Control Policy 3, Statement 2. IV. MITIGATING CIRCUMSTANCES 59. No client suffered any loss as a result of any of the events described in this Agreement. 60. Since the occurrence of the events described above, the Respondent has made the following changes: a. Has hired an experienced CFO; b. Officers do not sign any cheques payable to themselves; and c. All payments to Patrick Cooney, other than regular salary, are approved in advance by an independent shareholder who is not an employee of Jory. V. CONTRAVENTIONS 61. Between May 31, 2001 and July 8, 2002, the Respondent permitted payments totalling $195,600 to be made to Patrick Cooney without obtaining the prior written consent of the Vice-President, Financial Compliance of the Association, and did thereby contravene Association By-law 30.3(iv)(3). 62. Between August 9, 2002 and May 31, 2002, both dates inclusive, the Respondent increased its non-allowable assets by $30, without obtaining the prior written consent of the Vice-President, Financial Compliance of the Association, and did thereby contravene Association By-law 30.3(iv)(4).

10 On four occasions between December 31, 2001 and February 19, 2002, both dates inclusive, the Respondent failed to maintain its risk adjusted capital at a level greater than zero as calculated in accordance with Association Form 1, and did thereby contravene Association By-law By failing to report the results of the profitability tests which could require the Respondent to be designated in early warning Level 1 or Level 2 in accordance with Bylaw 30 promptly, the Respondent failed to establish and maintain adequate internal controls in accordance with the internal control policy statements in Policy No. 3, and did thereby contravene Association By-law 17.2A. VI. ADMISSION OF CONTRAVENTIONS AND FUTURE COMPLIANCE 65. The Respondent admits the contravention of the Statutes or Regulations thereto, By-laws, Regulations, Rulings or Policies of the Association noted in Section IV of this Settlement Agreement. In the future, the Respondent shall comply with these and all By-laws, Regulations, Rulings and Policies of the Association. VII. DISCIPLINE PENALTIES 66. The Respondent accepts the imposition of discipline penalties by the Association pursuant to this Settlement Agreement as follows: (a) (b) As a penalty for the contraventions as set out in Section V of this Settlement Agreement, a fine in the amount of $ 35, payable to the Association upon acceptance of this Agreement; In the event the Respondent fails to comply with any of these discipline penalties within the time prescribed for each Contravention set out in Section V, concurrent, a condition of continued approval that the District Council may upon application by the Senior Vice President, Member Regulation and without further notice to the Respondent suspend the approval of the Respondent until the penalties are complied with. VIII. ASSOCIATION COSTS 67. The Respondent shall pay the Association s costs of investigation in this matter in the amount of $10,000.00, payable to the Association immediately upon acceptance of this Agreement.

11 IX. EFFECTIVE DATE 68. This Settlement Agreement shall become effective and binding upon the Respondent and Staff in accordance with its terms as of the date of: (a) (b) (c) its acceptance; or the imposition of a lesser penalty or less onerous terms; or the imposition, with the consent of the Respondent, of a penalty or terms more onerous, by the District Council. X. WAIVER 69. If this Settlement Agreement becomes effective and binding, the Respondent hereby waive their right to a hearing under the Association By-laws in respect of the matters described herein and further waive any right of appeal or review which may be available under such By-laws or any applicable legislation. XI. STAFF COMMITMENT 70. If this Settlement Agreement becomes effective and binding, Staff will not proceed with disciplinary proceedings under Association By-laws in relation to the facts and matters set out in paragraph 3 and Section III of the Settlement Agreement. XII. PUBLIC NOTICE OF DISCIPLINE PENALTY 71. If this Settlement Agreement becomes effective and binding: (a) (b) the Respondent shall be deemed to have been penalized by the District Council for the purpose of giving written notice to the public thereof by publication in an Association Bulletin and by delivery of the notice to the media, the securities regulators and such other persons, organizations or corporations, as required by Association By-laws and any applicable Securities Commission requirements; and the Settlement Agreement and the Association Bulletin shall remain on file and shall be disclosed to members of the public upon request. XIII. EFFECT OF REJECTION OF SETTLEMENT AGREEMENT 72. If the District Council rejects this Settlement Agreement:

12 (a) (b) the provisions of By-laws to 20.24, inclusive, shall apply, provided that no member of the District Council rejecting this Settlement Agreement shall participate in any hearing conducted by the District Council with respect to the same matters which are the subject of the Settlement Agreement; and the negotiations relating thereto shall be without prejudice and may not be used as evidence or referred to in any hearing. AGREED TO by Staff at the City of Toronto, in the Province of Ontario, this day of July, ANDREW P. WERBOWSKI Enforcement Counsel, on behalf of Staff of the Investment Dealers Association of Canada AGREED TO by Jory Capital Inc. at the City of Winnipeg, in the Province of Manitoba, this day of July, JORY CAPITAL INC. WITNESS Per: Per:

13 ACCEPTED by the Manitoba District Council of the Investment Dealers Association of Canada, at the City of Winnipeg, in the Province of Manitoba, this day of July, INVESTMENT DEALERS ASSOCIATION OF CANADA (MANITOBA DISTRICT COUNCIL) Per: Per: Per: