IN THE MATTER OF DISCIPLINARY PROCEEDINGS INITIATED BY THE INVESTMENT DEALERS ASSOCIATION OF CANADA

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1 IN THE MATTER OF DISCIPLINARY PROCEEDINGS INITIATED BY THE INVESTMENT DEALERS ASSOCIATION OF CANADA RE: RESEARCH CAPITAL CORPORATION AND PATRICK GERALD WALSH District Council: The Honourable Robert S. Montgomery, Q.C. Mr. Norman Fraser Ms. Brigitte Geisler Appearances: Enforcement Counsel: Mr. Frederick Blair Respondents Counsel: Mr. Nigel Campbell DECISION The disciplinary hearing addresses compliance and supervisory duties of members, directors, officers and managers. The Association By-laws at the relevant period that apply to the facts are By-laws 29 and 38. It is important to set them out in full to emphasize the duties of members and senior personnel: 29.1 Members and each partner, director, officer, sales manager, branch manager, assistant or co-branch manager, registered representative, investment representative and employee of a Member (i) shall observe high standards of ethics and conduct in the transaction of their business, (ii) shall not engage in any business conduct or practice which is unbecoming or detrimental to the public interest, and (iii) shall be of such character and business repute and have such experience and training as is consistent with the standards described in clauses (i) and (ii) or as may be prescribed by the Board of Directors.

2 2 For the purposes of disciplinary proceedings pursuant to the By-laws, each Member shall be responsible for all acts and omissions of each partner, director, officer, sales manager, branch manager, assistant or co-branch manager, registered representative, investment representative and employee of a Member; and each of the foregoing individuals shall comply with all bylaws, Regulations and Policies required to be complied with by the Member. and 38.1 Every Member shall designate its Chief Executive Officer, its President, its Chief Operating Officer or its Chief Financial Officer (or such other officer designated with the equivalent supervisory and decision-making responsibility) to act as the Ultimate Designated Person (the UDP ) who shall be responsible to the applicable self-regulatory organization for the conduct of the firm and the supervision of its employees Every Member shall appoint [a] Chief Compliance Officer (the CCO ) 38.8 The CCO shall report to the board of directors (or equivalent) of the Member as necessary but at least annually on the status of compliance at the Member The board of directors (or equivalent) shall review the report of the CCO and determine what actions are necessary and ensure such actions are carried out in order to address any compliance deficiencies noted in the report The UDP shall ensure that policies and procedures are developed and implemented which adequately reflect the regulatory requirements of the Member. The Facts The Respondent Research Capital Corporation ( RCC ) became a Member of the Association under the name Research Capital Corporation on September 30, 1989, when it changed its (previously registered and approved) name from Andras Research Capital Inc.

3 3 The Respondent Patrick Gerald Walsh ( Walsh ) has been registered with and approved by the Association in a number of capacities from 1979 to the present, principally involved with RCC and its business predecessors. In particular, the Respondent Walsh has been registered for some or all of the relevant period as follows: Shareholder from 1979 to present; Director from 1981 to present; Assistant Designated Person (ADP) from March 1994 to November 2001; Ultimate Designated Person (UDP) from November 2001 to present; Chairman, President and CEO from September 1988 to July 1999; Trading Officer January 1994 to present; President and CEO from July 1999 to February 2004; and Chairman and CEO from February 2004 to present. In September 2001, with the knowledge and approval of the Respondent Walsh, T was hired by RCC to act as a Registered Representative (RR), providing advice and trading services to RCC s retail clients. To the knowledge of senior managers at RCC, T had been fined and suspended in 1997 by the Ontario Securities Commission for improper activities as a RR, and was at the time he was hired by RCC under investigation by the Association. T s employment at RCC was approved by the Association subject to a request that he be placed under close supervision by the firm. Close supervision is a regime in which an individual s activities are monitored and supervised more closely than is normal in the securities industry and monthly reports of that supervision are compiled and kept on file by the employer. In response to the Association s request, and with the knowledge of the Respondent Walsh, RCC agreed to place T under close supervision, and named the individual (T s Branch Manager in the Respondent s Toronto office) who would be responsible for the supervision. From the time of his arrival at RCC in September 2001, T persistently engaged in a number of activities and practices in the course of his business which the Association alleges were contrary to various Association By-Laws, Regulations and Policies. T s actions included particularly the following: (a) he opened accounts for and served clients outside his jurisdiction of registration; (b) he opened many accounts and accepted orders for trading in them without completing the required documentation;

4 4 (c) he accepted orders for trading in accounts from individuals other than the named account holders or persons otherwise authorized to trade in those accounts; (d) he misled RCC regarding the involvement in certain accounts of certain individuals; and (e) he failed in his gatekeeper role and facilitated questionable trading activity by certain clients. T s disciplinary history with the Ontario Securities Commission involved disciplinary offences similar in nature to those set out in the paragraph above. During the course of his employment, T s overall pattern of business conduct should have raised concerns in RCC s senior management such that his business should have been subject to closer scrutiny and tighter control than actually occurred. In particular, the nature of T s business in the name of the Respondent involved, among other features: (a) a high volume of transactions in the Over-The-Counter Bulletin Board ( OTC BB ) market; (b) frequent filings for, and trades pursuant to, exemptions under Rule 144 of the Securities Exchange Commission of the United States; (c) (d) (e) numerous offshore accounts; a large number of third-party transfers of stock; frequent trading by clients in a small number of low-priced securities; (f) the appearance of artificially re-flagging accounts into different names or jurisdictions after trading in those accounts had been prevented or limited by the Respondent s compliance department; (g) numerous transactions of apparently questionable economic purpose. Particular failures of supervision of T s activities, for which the Respondents bear responsibility, included the following: (a) failure to prevent him from opening accounts for and serving many clients in jurisdictions in which, to the Respondent s knowledge, he was not registered or approved; (b) failure to examine the totality of those activities with a view to identifying questionable or improper trading patterns, or clients of a dubious or unsavoury nature or background.

5 5 (c) failure to follow up on compliance queries or directives made to T or his assistant; (d) failure to share or circulate information among or coordinate the actions of compliance and management staff who were or should have been engaged in supervising T and his accounts; (e) failure to maintain adequate evidence of supervision by documenting inquiries made, responses received and action taken when specific concerns were identified; and (f) failure to prepare accurate or timely close supervision reports relating to his activities. Although T s activities were to be under close supervision, the Respondents failed to effectively identify, record, or curtail the misconduct described in the preceding paragraph. These failures of supervision were detrimental to the public interest, and therefore collectively constituted a violation of the Association s By-Law The terms of settlement are accepted and approved by the panel. The penalty is a global fine covering both counts in the amount of $160,000 and costs of $40,000. It is important to address the mitigating factors involved. (a) By June 2004, RCC had completed an extensive search process and hired an experienced individual as their Chief Compliance Officer. Further, subsequent to the delivery of the report of the 2004 SCR, the Respondent RCC, in consultation with the Association, retained a consulting expert in the field of sales compliance. The consultant evaluated RCC s compliance program and made detailed recommendations to RCC s Board of Directors with a view to addressing the issues identified in the SCR report. Those recommendations, as implemented by RCC, have resulted in substantial improvement in RCC s sales compliance performance. The cost of this initiative, in an amount in excess of $100,000, was borne by the respondent RCC; (b) The Respondents cooperated fully with Association Staff in their investigation of the matters giving rise to the Settlement Agreement; and (c) The Respondent Walsh has no history of previous disciplinary action by the Association.

6 6 The substantial improvement in RCC s sales compliance performance was a major factor in the panel s decision. DATED at Toronto, this 20 th day of December The Honourable Robert S. Montgomery, Q.C. Chair Mr. Norman Fraser Member Ms. Brigitte Geisler Member