INVESTMENT DEALERS ASSOCIATION SETTLEMENT AGREEMENT

Transcription

1 INVESTMENT DEALERS ASSOCIATION IN THE MATTER OF: THE BY-LAWS OF THE INVESTMENT DEALERS ASSOCIATION OF CANADA AND KENNETH RICHARD MILLER SETTLEMENT AGREEMENT I. INTRODUCTION 1. The Enforcement Department Staff ( Staff ) of the Investment Dealers Association of Canada ( the Association ) has conducted an investigation ( the Investigation ) into the conduct of Kenneth Richard Miller ( the Respondent ). 2. The Investigation discloses matters for which the Respondent may be disciplined by a hearing panel appointed pursuant to Association By-law 20 Part 10 ( the Hearing Panel ). II. JOINT SETTLEMENT RECOMMENDATION 3. Staff and the Respondent consent and agree to the settlement of these matters by way of this settlement agreement ( the Settlement Agreement ) in accordance with By-laws to 20.40, inclusive and Rule 15 of the Association Rules of Practice and Procedure. 4. The Settlement Agreement is subject to acceptance by the Hearing Panel. 5. The Settlement Agreement shall become effective and binding upon the Respondent and Staff as of the date of its acceptance by the Hearing Panel. 6. The Settlement Agreement will be presented to the Hearing Panel at a hearing ( the Settlement Hearing ) for approval. Following the conclusion of the Settlement Hearing, the Hearing Panel may either accept or reject the Settlement Agreement. 7. If the Hearing Panel accepts the Settlement Agreement, the Respondent waives his right under the Association By-laws and any applicable legislation to a disciplinary hearing, review or appeal.

2 If the Hearing Panel rejects the Settlement Agreement, Staff and the Respondent may enter into another settlement agreement; or Staff may proceed to a disciplinary hearing in relation to the matters disclosed in the Investigation. 9. The Settlement Agreement will become available to the public upon its acceptance by the Hearing Panel. 10. Staff and the Respondent agree that if the Hearing Panel accepts the Settlement Agreement, they, or anyone on their behalf, will not make any public statements inconsistent with the Settlement Agreement. 11. Staff and the Respondent jointly recommend that the Hearing Panel accept the Settlement Agreement. III. STATEMENT OF FACTS (i) Acknowledgment 12. Staff and the Respondent agree with the facts set out in this Section III and acknowledge that the terms of the settlement contained in this Settlement Agreement are based upon those specific facts. (ii) Factual Background Background 13. This Settlement Agreement relates to events that took place from September 2000 to May 31, (the Relevant Period ). 14. The Respondent first entered the securities industry in 1998 as a Registered Representative ( RR ) at the head office of Canaccord Capital Corporation ( Canaccord ) in Vancouver where he continued to be an RR throughout the Relevant Period until May 31, He has not been employed by any Member firm, since that time. DM 15. DM, a client of the Respondent, opened Canadian and US dollar cash accounts at Canaccord in 1999 and Canadian and US dollar margin accounts and an RRSP account at Canaccord in DM s accounts were numbered with each account having a different alphanumeric suffix ending to distinguish account types. 16. In the second half of the year 2000 DM authorized the purchase of 150 shares of Intel Corp. ( Intel ) and 100 shares of Nortel Networks Corp. ( Nortel ) in his US dollar cash account. These shares were transferred to DM s US dollar Margin account in November DM wished to hold these positions.

3 Throughout 2001 the price of shares of both Intel and Nortel declined significantly which resulted in DM s margin account being under margined. In March 2001, Canaccord made a margin call on DM s margin account. The Respondent, however, failed to notify DM that he was required to deposit cash into the account to bring the account back to a sufficient margin position. As a result, no money was deposited to the account and on March 14, 2001 Canaccord sold out 100 shares of Intel to make up for the account being under margined. After DM complained to the Respondent the 100 shares of Intel were repurchased on March 23, 2001 for the same price the shares were sold for. DM was charged a total of $150 commissions for both trades. 18. In April 2001 the value of shares of both Intel and Nortel shares declined further and DM s margin account again became under margined. In April 2001 Canaccord made a second margin call on DM s margin account. The Respondent, however, again failed to notify DM that he was required to deposit cash into the account to bring the account back to a sufficient margin position. As a result, no money was deposited to the account and on April 2, 2001 Canaccord sold out 100 shares of Intel to make up for the account being under margined. 19. In September 2001 the value of shares of both Intel and Nortel declined further and DM s margin account again became under margined. In September 2001 Canaccord made a third margin call on DM s margin account. The Respondent, however, again failed to notify DM that he was required to deposit cash into the account to bring the account back to a sufficient margin position. As a result, no money was deposited to the account and on September 19, 2001 Canaccord sold out 50 shares of Intel and on September 20, 2001 Canaccord sold out 100 shares of Nortel to make up for the account being under margined. 20. The Respondent also failed to contact DM in a timely manner to discuss transactions in DM s RRSP account. On or about, March 23, 2001, the Respondent purchased 3,500 shares of Gallery Resources Ltd. in DM s RRSP account at $0.17 per share for a total purchase price of $ including gross commissions of $ The Respondent did not speak with DM prior to initiating the transaction and did not have DM s authorization to initiate the transaction. 21. The New Client Application Form ( NCAF ) for DM s accounts indicated that no person other than DM had authority over the accounts and that no Canaccord employee was authorized to use discretion in handling the accounts. At no time during the Relevant Period were there any verbal or written discretionary trading agreements in place between either DM, the Respondent or Canaccord. HM 22. HM, a client of the Respondent, opened a Canadian dollar cash account at Canaccord numbered in May ( HM s Cash Account ) At that time, HM had been working for thirty years as a carpenter. 23. HM had difficulties reading mail, statements and bills because he was dyslexic. HM s financial philosophy was that he should never owe anybody money. HM believed that

4 - 4 - debts should be paid right away and he could not sleep at night if he owed somebody money. 24. The NCAF for HM s Cash Accounts indicated that no person other than HM had authority over the account and that no Canaccord employee was authorized to use discretion in handling the account. At no time during the Relevant Period were there any verbal or written discretionary trading agreements in place between HM, the Respondent or Canaccord. 25. On two separate occasions in September and October 2000 the Respondent, without authorization from HM, initiated purchases of securities in HM s Cash Account in an attempt to make a profit. The Respondent was hoping to be able to surprise HM with good news of a trading profit. Contrary to the Respondent s plan, however, the share price of the securities purchased declined significantly and the positions, which were never paid for, were sold out by Canaccord. 26. Details of the unauthorized purchases and the subsequent sell outs by Canaccord are as follows: 27. As a result of the unauthorized transactions in paragraph 26 HM incurred a loss of $1, DN Date Transaction Shares Security Gross Price/Share Commission 26-Sep-00 Buy 2,000 Sennen Res Ltd. $0.89 $ Oct-00 Buy 1,000 Cachet Entprs Corp. $1.50 $ Oct-00 Sell-out 500 Sennen Res Ltd. $0.44 Sell-out 1,500 Sennen Res Ltd. $0.42 $ Nov-00 Sell-out 200 Cachet Entprs Corp. $1.15 Sell-out 800 Cachet Entprs Corp $1.10 $ DN, a client of the Respondent opened a Canadian dollar cash account at Canaccord on April 21, DN had worked for approximately 14 years as a financial planner who sold life insurance products. 29. In the spring of 2000, when DN was a client of the Respondent, the Respondent purchased a $1,000, universal life insurance policy from DN. The Respondent soon found it difficult making the monthly payments to maintain the policy. Rather than allowing the policy to lapse which would force DN to pay back his commission on the policy sale, and jeopardize DN s top producer trip to Florida, DN offered to make the payments on the Respondent s behalf and did so, with the understanding that the Respondent would reimburse him. DN made four payments on behalf of the Respondent totaling almost $2, and loaned the Respondent an additional $ for a total of $3, On a separate unrelated occasion on or about April 3, 2001 DN loaned the Respondent $ for unspecified reasons.

5 All of the personal financial dealings between the Respondent and DN set out in paragraph 29 occurred when DN was a client of the Respondent at Canaccord and without the knowledge or approval of Canaccord. BC and TH 31. BC and TH were both clients of the Respondent who opened separate accounts at Canaccord in late BC s accounts were numbered and TH s accounts were numbered The accounts had different alphanumeric suffix endings to distinguish between account types. 32. BC was the Respondent s cousin and worked as an oil and gas contractor at a company of which TH was the President. BC and TH were both residents of Alberta. 33. The NCAF for BC s accounts and for TH s accounts indicated that no person other than the account holder had authority over the accounts and that no Canaccord employee was authorized to use discretion in handling the accounts. Notwithstanding that neither account was specifically approved and accepted as a discretionary account, the Respondent operated BC s and TH s accounts as though they were discretionary accounts and initiated and processed transactions in each client s account without consulting with his clients. The Respondent did not discuss trades in each of the accounts with his clients until after the trades were made. The Respondent believed he had a loose understanding with both BC and TH that their accounts would be operated in this manner. 34. Details of the discretionary trades in BC s accounts are as follows: BC Canadian Cash Account A-9 Date Transaction Shares Security Price/Share Gross Commission 27-Apr-01 Buy 5,200 Triax Carts III Tr TXZ.UN $25.00 $ Nov-01 Buy 2,000 Stressgen Biotech $4.41 $ Nov-01 Buy 100,000 Mandalay Resources $0.14 $ Dec-01 Buy 57,000 Franchisemaster Techs $0.21 $ Jan-02 Sell 2,000 Stressgen Biotech $5.45 $ BC Canadian Margin Long Account E-5 Date Transaction Shares Security Price/Share Gross Commission 28-Jan-02 Sell 100,000 Mandalay Resources $0.09 $88.79 BC US Cash Account B-8 Date Transaction Shares Security Price/Share Gross Commission 9-Jan-02 Buy 10,000 Biocurex Inc. $1.10 $ Jan-02 Buy 4,000 Biocurex Inc. $1.28 $ Jan-02 Buy 1,000 Biocurex Inc. $1.38 $115.00

6 As a result of the discretionary trades in paragraph 34 BC incurred a loss of $4, in his Canadian Cash and Margin accounts. BC held the shares of Biocurex in his US Cash account through the end of the Relevant Period and eventually sold them in July 2002 for 0.11 per share and incurred a further loss of approximately $25, Details of the discretionary trades in TH s accounts are as follows: TH RRSP Account S-1: Date Transaction Shares Security Price/Share Gross Commission 27-Feb-02 Buy 25,000 TNR Resources Ltd. $0.25 $ May-02 Sell 1,000 TNR Resources Ltd. $ May-02 Sell 24,000 TNR Resources Ltd. $0.20 $ As a result of the discretionary trades in paragraph 36, TH incurred a loss of $1, in his RRSP account. 38. The Respondent maintained accounts and traded in securities for BC and TH through to the end of the Relevant Period when they were both resident in Alberta. At no time during the Relevant Period was the Respondent registered in any capacity in the province of Alberta. The Alberta Securities Act requires all individuals who trade in securities in Alberta be registered with the Alberta Securities Commission. JF 39. JF, a client of the Respondent who resided in London England, opened investment accounts at Canaccord numbered in The NCAF for JF s accounts indicated that no person other than JF had authority over the accounts and that no Canaccord employee was authorized to use discretion in handling the accounts. Although JF s accounts were not specifically approved and accepted as discretionary accounts, the Respondent operated the accounts as though they were discretionary accounts and initiated and processed transactions in the accounts without consulting JF. The Respondent did not discuss trades in each of the accounts with his clients prior to the transactions being made. The Respondent believed he had a verbal agreement with JF to have full trading authority over his accounts. 41. Details of the discretionary transactions in JF s accounts and the losses incurred as a result of those transactions are as follows:

7 - 7 - Date Transaction Shares Security Total Profit / (Loss) 29-Jan-01 Buy 500 Portal Software $10, May-01 Sell 500 Portal Software $4,464 ($5,872.46) 01-Feb-01 Buy 4500 Lifesmart Systems $11, Mar-01 Sell 4500 Lifesmart Systems $14, $2, Feb-01 Buy 10,000 St. Elias Mines $4, May-01 Sell 10,000 St. Elias Mines $2, ($1,450.00) 05-Sep-01 Buy 80,000 Jaguar Int l $15, Sep-01 Sell 80,000 Jaguar Int l $16, $1, May-01 Buy 5,000 Hilton Petroleum $9, Oct-01 Sell 5,000 Hilton Petroleum $1, ($7,885.28) 08-Dec-01 Buy 10,000 Elec Manu $10, USD 29-May-01 Sell 10,000 Elec Manu $5, USD ($7,507.43) 21-Sep-01 Buy 20,000 Prime Holdings $14, USD 28-Sep-01 Sell 20,000 Prime Holdings $8, USD ($9,413.17) 02-Mar-01 Short Sell 5000 NHC Comms $19, USD 13-Mar-01 Cover Buy 5000 NHC Comms $14, USD $7, Mar-01 Buy 10,000 Netdriven Sol ns $8, Mar-01 Sell 10,000 Netdriven Sol ns $9, $1, Mar-01 Buy 5,000 Miramar Mines $6, Apr-01 Sell 5,000 Miramar Mines $6, ($155.00) 27-Mar-01 Buy 550 Emblaze Systems $4, Sep-01 Sell 550 Emblaze Systems $1, ($3,680.00) Total 22 ($22,736.26) 42. In or about April 2002 JF complained to the Respondent about the trading activity in his account. Rather than forward JF s complaint to Canaccord, the Respondent, on April 10, 2002 drafted and sent a reply by to JF. The stated in part: You have two options. 1. Contact Canaccord with your complaint, with copies to the IDA (investment dealers association) and the BCSC (british columbia securities commission). I have the addresses if you need. Be very detailed. An investigation will be done, Canaccord will repay you. I will be fired and fined, and Canaccord will sue me for the amount paid to you, as well as any legal expenses. I will have my license permanently rescinded. 2. Help me come up with a solution that satisfies you without involving the above. 43. Sometime between April 10 and April 18, 2002, the Respondent, without notifying Canaccord, attempted to settle JF s complaint by offering to personally pay him $27,000 to

8 - 8 - compensate him for the losses in his accounts. On April 18, 2002 the respondent drafted and sent an to JF. The stated in part: I have been trying to come up with $27, to wire you, personally. I can t simply have the firm reverse course without losing my job and being dragged before the investment dealers for punishment. The firm will not cover situations of this nature. Were they to find out, I would be summarily fired. I am quite literally on my own, and you are quite literally my judge, jury, and executioner. There have been many cases like this, they happen more than anyone cares to admit and in every firm in north america. It will not make any newspapers, it will end up an to compliance departments in various firms to warn against hiring me in any capacity. My only option to atone for my sins and retain my job is to make restitution personally and off the record. I know now that I will not have that done by tomorrow. I simply have placed all of my eggs in three baskets and am financially running on fumes. If you and I can not come to some sort of agreement on a personal level, you must then contact Canaccord with your complaint. They will investigate and see to it that you are paid any and all monies owed to you due to anything that I have done in violation of conducts and practices. SN I still can give you no exact date as to when I can repay you. You must do what you must do, I m sorry. I truly wish it hadn t come to this and that I could give you something definite. You have been most patient. All that I can ask, and you know I have no right to, is that you can remain patient a little longer. I am cap in hand. 44. SN, a client of the Respondent, opened Canadian dollar cash and margin accounts at Canaccord numbered in February The NCAF for SN s accounts indicated that no person other than SN had authority over the accounts and that no Canaccord employee was authorized to use discretion in handling the accounts. 46. On two separate occasions in November and December 2001 the Respondent initiated and processed transactions in SN s accounts without prior authorization from SN. The Respondent did not speak with DM prior to initiating the transactions. 47. Details of the unauthorized transactions are as follows: SN Canadian Margin Account E-7 Trade Date Settlement Date Transaction Amount Security 30-Nov-01 5-Dec-01 Buy 100,000 Mandalay Resources 4-Dec-01 5-Dec-01 Sell 100,000 Mandalay Resources SN Canadian Cash Account A-1

9 - 9 - Trade Date Settlement Date Transaction Amount Security 4-Dec-01 5-Dec-01 Buy 100,000 Mandalay Resources 18-Jan Jan-02 Sell 100,000 Mandalay Resources 48. After he learned about the transactions after reviewing his monthly statements, SN, on or about February 26, 2002, sent the Respondent an questioning the trading activity in his accounts. The Respondent Miller drafted and sent a reply to SN advising that he would have things straightened out immediately. 49. On or about March 25, 2002, Jerry Saint-Pierre ( Saint-Pierre ) a compliance officer at Canaccord became aware of the exchange between the respondent and SN and asked the Respondent for an explanation. The Respondent advised Saint-Pierre by that the problem was not with the purchase of the stock, but rather involved the sell. The Respondent explained that he had talked to the client about selling the stock to cover a debt but had sold the wrong one when, in fact, he knew the transactions were unauthorized. IV. CONTRAVENTIONS 50. The Respondent admits to the following contraventions of Association By-laws, Regulations, Rulings or Policies: i) Contravention 1 Between September 2000 and February 2002 while employed as a Registered Representative at Canaccord Capital Corporation, a Member firm, the Respondent, effected 7 unauthorized transactions in the accounts of 3 separate clients, namely; DM, HM, and SN without prior authorization from those clients and thereby acted contrary to Association By-law ii) Contravention 2 Between January 2001 and October 2001 while employed as a RR at Canaccord, a Member firm, the Respondent, failed to observe high standards of business practice by continually failing to contact his client, DM, to advise him that there were margin calls in his account and that he was required to deposit money to his account and thereby acted contrary to Association By-law iii) Contravention 3 Between January 2000 and May 2000 while employed as a RR at Canaccord, a Member firm, the Respondent engaged in personal financial dealings with DN, a client of his without advising Canaccord, and thereby acted contrary to Association By-law 29.1.

10 iv) Contravention 4 From March 1, 2002 to May 31, 2002 while employed as a RR at Canaccord, a Member firm, the Respondent maintained accounts and processed transactions in those accounts for clients TH and BC who resided in the province of Alberta when he was not registered in any capacity in Alberta and thereby acted contrary to the Alberta Securities Act and thereby acted contrary to Association By-law v) Contravention 5 Between January 1, 2001 and May 31, 2002 while employed as a RR at Canaccord, a Member firm, the Respondent, effected 34 discretionary transactions in the accounts of 3 separate clients namely; TH, BC and JF without the prior written authorization of his clients, and without the accounts being specifically approved and accepted as a discretionary account in compliance with Association regulation and thereby acted contrary to Association Regulation and Association By-law vi) Contravention 6 In or about April 2002 while employed as a RR at Canaccord, a Member firm, the Respondent failed to inform compliance or supervisory personnel at his firm of the complaint of his client JF and thereby acted contrary to Association By-law vii) Contravention 7 In or about April 2002 while employed as a RR at Canaccord, a Member firm, the Respondent attempted to personally settle a complaint of his client JF without the approval of Canaccord and thereby acted contrary to Association By-law viii) Contravention 8 In or about March 2002 while employed as a RR at Canaccord, a Member firm, the Respondent made a false statement to a compliance officer at Canaccord who made a trade related inquiry regarding transactions in the account of his client SN and thereby acted contrary to Association By-law VI. TERMS OF SETTLEMENT 51. The Respondent agrees to the following terms of settlement: Penalties i) A permanent prohibition from approval to act in any registered capacity with any Member of the Association; ii) A global fine of $80,000 (eighty thousand dollars). Costs iii) The Respondent shall pay the Association s costs of this proceeding in the amount of $20,000 (twenty thousand dollars).

11 Unless otherwise stated, any monetary penalties and costs imposed upon the Respondent are payable immediately upon the effective date of the Settlement Agreement. 53. Unless otherwise stated, any suspensions, bars, expulsions, restrictions or other terms of the Settlement Agreement shall commence on the effective date of the Settlement Agreement. AGREED TO by the Respondent at the Resort Municipality of Whistler in the Province of British Columbia, this 20 day of January, Witness Witness Ken Miller Kenneth Richard Miller AGREED TO by Staff at the City of Vancouver in the Province of British Columbia, this 21 st day of January, L. Herlin Witness Paul Smith Paul Smith Enforcement Counsel on behalf of Staff of the Investment Dealers Association of Canada ACCEPTED this 24th day of January, 2005, by the following Hearing Panel: Per: Panel Chair Per: Panel Member Per: Panel Member