IN THE MATTER OF THE VANCOUVER STOCK EXCHANGE (THE "EXCHANGE") BY_'LAW 5 - DISCIPLINE AND TIBOR FRANCIS GAJDICSt RESPONDENT

Transcription

1 IN THE MATTER OF THE VANCOUVER STOCK EXCHANGE (THE "EXCHANGE") BY_'LAW 5 - DISCIPLINE AND TIBOR FRANCIS GAJDICSt RESPONDENT HEARING PANEL G.R. SCHMITT, Q.C., Chairman ROBERT H. BLADES, Member GWEN NEWTON, Member DECISION The Hearing Panel held a hearing into the citation made against Tibor Francis Gajdics ("Gajdics") at the British Columbia International Commercial Arbitration Centre on March 2'3, 24 and 25, The Panel has carefully considered the evidence and the arguments of counsel. A copy of the citation is attached to this decision. Counsel for the Exchange were Alexander G. Henderson, Q.C. and Keith Mitchell. Counsel for Gajdics was Gregory Walsh. During his argument, Mr. Walsh quite properly drew the Panel's attention to the importance of the question of the standard of proof in this case. The Panel agrees with the view of the B.C. Securities Commission set out on pages 23 and 24 of its decision in the Aatre Resources case that a "high standard of proof on a balance of probabilities" is required for any findings against a person such as Gajdics. The Panel's decision is as follows:

2 -2- Alleqed Infractions 1 This allegation is that Gajdics operated five nominee accounts for his own personal trading. After considering the evidence, the Panel has concluded that while Mrs. Larson ("Larson") no doubt concurred in Gajdics' management of her account (no ) at Yorkton Securities Inc. ("Yorkton"), it was in reality his account and was being operated solely for his benefit. With respect to Mrs. Gajdics' account at Yorkton (No ), the Panel has concluded that while Mrs. Gajdics appears to have had some financial interest in that account, a considerable amount of the trading in the account from September i, 1989 to August 31, 1990 has to be attributed to Gajdics, as indicated, among other things, by the transactions themselves and the fact that the evidence indicates that he received substantial amounts of monies from the account, from cheques payable to his mother and deposited in his own account, as well as a cheque payable to himself for $2,200 issued by Yorkton on September 15, 1989 in response to a memo signed by Mrs. Gajdics. Mrs. Gajdics' accounts at Canadian International Securities Corporation ("CIS") and L.O.M. Western Securities Ltd. ("LOM") appear to have been largely, if not entirely, operatedby Gajdics in conjunction with the two accounts of Larson and Mrs. Gajdics at Yorkton. Although there was certainly the possibility that Mrs. Gajdics had some financial interest in these accounts, they appear to have been primarily accounts for Gajdics' benefit. The question then, on the basis of those findings, is whether, as alleged, Gajdics has acted contrary to By-Law 5.01(b) and/or Rule F2.03. Rule F.2.03(2) is clearly intended to prohibit persons such as Gajdics, an employee of Yorkton, from operating an account at another brokerage house without the knowledge and

3 -3- consent of both member firms. If Mrs. Gajdics' accounts at CIS and LOM are regarded as Gajdics' accounts, he would be in violation of F.2.03(2). However, while the Panel finds that Gajdics was trading in those accounts, or directing the trading in those accounts, no doubt with his mother's general concurrence, they were not, strictly speaking, "his accounts" and the Panel finds he was not acting in violation of Rule F By-Law 5.01(b) provides that "infraction" means: "(b) any conduct, proceeding or method of business not expressly provided for in the By-Laws, Rules or Regulations which is unbecoming or inconsistent with just and equitable principles of trade or detrimental to the interest of the Exchange or the public." By-law 5.03 provides that a person under the jurisdiction of the Exchange, such as Gajdics, is subject to penalties for infractions. In the case of Larson's account at Yorkton, the Panel has found that this was a nominee account of Gajdics. The Panel notes that The Conduct and Practices Handbook for Securities Industries Professionals issued by the Canadian Securities Institute says on page 42: "VII Has the RR a Direct or Indirect Interest in the Account other than an Interest in the Commission Charged? The nature of the representative - client relationship is an essential feature of the "Know Your Client" rule. There are specific regulations referring to an RR's interest in an account and/or association with a client. Therefore, any family or business association or any proprietary interest held in the account must be indicated here [i.e., in the answer to question 7 of the New Application Form] or at the foot of the Form and then discussed with management."

4 -4- The Panel finds that Gajdics' operation of Larson's account at Yorkton under the pretense that it was her account rather than his own was an infraction as defined by By-Law 5.01(b) being inconsistent with just and equitable principles of trade and detrimental to the interests of the Exchange and the public. The evidence on Mrs. Gajdics' accounts is not as clear and the Panel finds that the allegations with respect to those accounts have not been established. Alleqed Infractions 2 It is alleged that Gajdics received undisclosed remuneration in the form of cash or shares in a Vancouver Stock Exchange listed issuer when: (a) $i,000 was transferred from the account of Susan Flynn to Larson's account in September, 1989 (Tab 38) (b) 5,000 shares of Gold Spring were transferred from Susan Flynn's account to Larson's account in December 1989 (Tab 40) (c) 5,000 shares of Gold Spring were transferred from CRC's account at McDermid St. Lawrence Ltd. to Larson's account in December 1989 (Tab 43) (d) In February 1990 Isaac Moss paid $1,705 to Gajdics who deposited the cheque in his mother's account at Yorkton (Tab 28) and that these transactions were contrary to By-Law 5.01(b), Rule F.2.30 and Rule C.I.08. As to (a) and (b), there was no explanation by either Larson or Gajdics in their evidence as to why Mrs. Flynn would make these "gifts" to Larson or, the Panel having found that Larson's account was actually Gajdics' account, why Mrs. Flynn would make these gifts to Gajdics. The actual documents making the transfer were signed by Mr_ Flynn on behalf of Mrs. Flynn.

5 -5- As to (c), Mr, Craig Payne explained that he (as president of CRC) had transferred the shares. He says he was never paid for the shares and made the transfer to accommodate a certain Robert Barry of Yorkton whom he had known for a long time. Payne testified he understood there was some kind of a "sting operation" going on and transferring the shares would be useful to that operation. It is impossible to escape the conclusion that, however the transfer of shares was arranged, it was in fact a transfer of shares for the benefit of Gajdics. AS to (d), Mr. Moss testified that the $1,750 was payment to Gajdics for services rendered. However, it was treated as a purchase of 5,500 shares of Pacific Video from Mrs. Gajdics which were never delivered to Moss and were still in Mrs. Gajdics' Yorkton account as of August 31, The $1,750 was deposited into Mrs. Gajdics' account at Yorkton. The Panel finds the $1,750 was a payment to Gajdics as Mr. Moss testified. The reasons for treating it as a purchase of shares from Mrs. Gajdics' account are obscure, but they do not alter the fact that Mr. Moss made the payment to Mr. Gajdics. Rule F.2.30 says: "No Approved Person or Employee of the Member shall accept... directly or indirectly any remuneration, gratuity, advantage, benefit or any other consideration from any person other than the Member or its affiliates or its related companies in respect of the activities carried out by such Approved Person or Employee on behalf of the Member or its affiliates or its related companies and in connection with the sale or placement of securities on behalf of any of them." There are certainly grounds for suspecting that the payment of the $i,000 into Larson's account and the two transfers of shares were payments to Gajdics "in connection

6 -6- with the sale or placement of securities on behalf" of Yorkton but the Panel finds that there is insufficient evidence to enable it to come to that conclusion. The Panel finds that the allegation that Gajdics violated Rule F.2.30 with respect to the three transactions in question has not been proven. Likewise, the Panel finds that the allegation that the payment of $1,750 by Mr. Moss to Gajdics was a violation of Rule F.2.30 has not been proven. Further, it has not been established that these four transactions were contrary to By-Law 5.01(b). Rule C.I.08 deals with trading. It says, subject to certain exceptions, that: "No... Approved Person shall trade or participate in any trade in any listed security whether acting as principal or agent, unless the trade is made on the Floor during a trading session." The Panel finds that the transfer of shares in (b) ie. from Mrs. Flynn's account in Yorkton to Mrs. Larson's account in Yorkton (Gajdic being the Registered Representative for both accounts) amounted to an off the floor trade prohibited by Rule C.i.08 but that the transfer of shares in ic), from CRC's accounts at McDermid St. Lawrence did not, according to the evidence, amount to an off the floor trade.for Which Gajdics was responsible. Alleqed Infractions 3 This relates to various transactions in Larson's account at Yorkton (No ) and in Mrs. Gajdics' account at Yorkton (No ), the allegation being that Gajdics made undisclosed and illegal short sales through these accounts, contrary to By-Law 5.01(b), Rule C.I.38 and Rule C.I.39.

7 -7- The allegations relating to C.I.38 and C.I.39 have to be considered carefully since the Rules on short-selling changed on December i, 1989 and some of the sales in these allegations were before and some after. The post-november 30, 1989 Rules provide in C.I.37 that a Member is not to accept an order to sell a security until he has been advised whether the order is to sell long or short. In practice the registered representative, would be expected to determine if it were a short sale. Once it is determined that a sale would be a short sale then C.I.38 and c.i.39 would apply, the former Rule stating the sale would, ordinarily, have to be at a price not less than the last sale of a board lot, or on an uptick and the latter Rule stating that a short sale must be identified as such. The evidence indicates that in Larson's account at Yorkton and in Mrs. Gajdics account at Yorkton, a number of sales were made subsequent to November 30, 1989 which, to all appearances, were short but were not shown as such, contrary to Rule C.i.39 and that Gajdics must have known that these were short sales. While there is the argument that there is no evidence that Mrs. Larson or Mrs. Gajdics or Gajdics, for that matter, might not have had shares to support the sales, so they were npt "short sales", the Panel infers from the evidence that there were no such shares and that these really were short sales, not identified as such and Gajdics failed in his duty to mark the Orders for them as short sales. The Panel finds that the allegation that the sales in this allegation occurring after November 30, 1989, were made in contravention of Rule C.I.39 has been proven. The Panel finds that not having identified these short sales as such, but having stipulated the price, he was guilty of violating Rule C.I.38 insofar as those sales were made on a "down tick". Our review of the transactions indicate that in

8 -8- nearly every case where it is alleged the short sales were on a down tick this was so. Alleqed Infractions 4 These relate to trades in Mrs. Gajdics' accounts at firms other than Yorkton which were alleged to be undisclosed and illegal short sales. The Panel finds these allegations have not been proven. Alleqed Infractions 5 These allegations relate to certain written instructions given or purportedly given by Larson and Mrs. Gajdics. It is alleged that Gajdics acted contrary to By-Law 5.01 (b). As to (a), the allegation is that Larson did not in fact sign a direction to transfer 22,000 Gold Spring shares from one account to another (Tab 13). Larson testified that the "signature" appearing above her printed name in the document was not hers. Gajdics testified that he believed he had written the signature and said he would have done so at the request of his sister. Allegation (b) refers to a transfer of 8,000 shares of Gold Spring from Larson's account to one of Mrs. Gajdics' accounts (Tab 14). Once again Larson testified that it was not her signature on the document and Gajdics" evidence was that possibly he wrote her signature. As to (c), this relates to a transfer of 36,700 shares from one of Mrs. Gajdics' accounts to another (Tab 24). Mrs. Gajdics testified the signature on this document was not hers and Gajdics testified that the signature on the document was

9 -9- not his mother's or _is sister's and could very well be in his writing. As to (d), this relates to a transfer of 21,800 shares in White Knight from one of Mrs. Gajdics' accounts to another (Tab 25). The signature on this document purports to be that of Mrs. Gajdics. Mrs. Gajdics testified the signature was not hers. Gajdics' evidence was that the signature "did not look like his mother's" and he said he could have signed it but he does not recall signing it and does not recognize the signature. The Panel finds that in these four instances Gajdics did simulate the signature of his sister or his mother, as the case might be. Gajdics' position essentially is that he felt he had their authority to make the transactions and that suffices. There is no point in having systems which require directions to be in writing and signed by the person making the direction unless the registered representatives produce genuine documents. The Panel finds that by falsely simulating the signatures on the four documents mentioned Gajdics was guilty of an infraction by conduct unbecoming a Registered Representative, contrary to By-Law 5.01(b). Alleqed Infractions 6 This allegation concerns the receipt of 50,000 shares of Candol in March, Gajdics' evidence is that a client, Gary Campbell, had failed to pay a substantial account to Yorkton and Yorkton, as it was entitled to do, required Gajdics to be responsible for this unpaid account. Campbell delivered 50,000 shares of Candol as partial payment of his bad debt with Yorkton. From a legal and business point of view the shares should have been delivered to Yorkton, which would have

10 -10- disposed of the shares. Any reduction in Campbell's indebtedness would, doubtless have been credited back to Gajdics. Gajdics, however, treated the shares as being reimbursement to himself and he was quite candid in saying he did not want the shares to get into his account at Yorkton. Accordingly, he had the shares delivered to his mother's account at LOM (account ) of which the registered representative was Randy Doherty (Tab ii). Gajdics testified that the shares were sold and Mrs. Gajdics gave him a portion of the money, but he does not recall which portion he received and which portion his mother received. One allegation is that this constituted an "off the floor" trade prohibited by Rule C.I08 quoted above. After considering Rule C.I08 and Policy Statement CR04, including paragraph 3 of the latter, the Panel is of the view that the transfer of the shares would not necessarily be a prohibited off the floor transaction. However, the Panel is of the view that, as alleged, it was an infraction under By-law 5.01(b). While Gajdics had been "charged" with the client's default, the fact was that from a legal point of view, Mr. Campbell was still indebted to Yorkton and what actually happened was that Gajdics "intercepted" a partial payment. It was his duty as an employee of the company to see that the shares were used as intended to reduce the indebtedness to Yorkton and not for his private benefit. The Panel finds that Gajdics was guilty of conduct which was unbecoming and of an infraction under By-law 5.01(b) as alleged. Alleged Infractions 7 It is alleged that by the trades conducted by Gajdics in "his nominee accounts at Yerkton, LOM and CIS" he "created a false impression of trading volume in the stock of Gold Spring" contrary of By-Law 5.02(h) and Rule F

11 -ll- The Panel has found that Larson's account amounted to a nominee account of Gajdics, but that Mrs. Gajdics had some beneficial interest in her account at Yorkton and in the other accounts referred to in the evidence. However, the Panel also finds that a significant amount of the trading in Mrs. Gajdics' accounts was done by Gajdics of his own volition. The evidence at the hearing with respect to the sales and purchases of Gold Spring Resources during the period that is relevant, in particular as set out in Exhibit "B" which analyzes the various accounts, make it impossible for the Panel to escape the conclusion that Gajdics was in fact operating the four accounts in question so as to create a false impression of trading volume in the stock of Gold Spring. The evidence of Larson, Mrs. Gajdics and Gajdics threw no light whatever on how or why it came about that all these transactions concerning Gold Spring were being made. The Panel finds that the allegations that Gajdics was guilty of infractions under By-law 5.02(h) and Rule F are proven. Alleqed Infractions 8 This allegation is that Gajdics simulated the signature of his mother on a cheque issued on March 23, This cheque, found at Tab 29, is in the sum of $940 and is payable to Anne Gajdics. Mrs. Gajdics' evidence was vague. She did not recall having endorsed the cheque. She does not recall why she would have given the money to her son. Gajdics testified that he did not recognize his mother's signature on the cheque, possibly he wrote her signature on the cheque as well as his own name and, if so, his mother would have instructed him to sign on her behalf. The Panel finds that this allegation has been proven and that Gajdics' conduct was unbecoming and therefore an infraction under By-law 5.01(b) as alleged.

12 -12- Alleqed Infractions 9 These allegations relate to certain transactions between November 22, 1989 and December 28, 1989 in which sales of Glenvet Resources were made in rapid succession, giving rise to what is commonly called "debit kiting". It is alleged this was contrary to By-law 5.01(b). After considering the evidence with respect to this allegation, the Panel concluded that Gajdic's conduct with respect to these transactions was inconsistent with just and equitable principles of trading and detrimental to the interests of the Exchange and the public and therefore contrary to By-law 5.01(b). Summary Alleqed Infractions 1 The Panel finds Gajdics committed an infraction as defined by By-law 5.01(b) by his operation of Larson's account. Alleqed Infractions 2 The Panel finds that the transfer of Gold Spring shares from Susan Flynn's account to Larson's account was a violation of Rule Ci.08 (off the floor trading). The Panel finds that the other allegations in this group have not been proven. Alleqed Infractions 3 The Panel finds that Gajdics was guilty of the undeclared and illegal short sales alleged in these allegations through Larsons' and Mrs. Gajdics' accounts at Yorkton (so far

13 -13- as they were made subsequent to November 30, 1989), contrary to Rule C.I.39 and Rule C.I.38. Alleqed Infractions 4 The Panel finds these allegations have not been proven. Alleqed Infractions 5 The Panel finds that Gajdics was guilty of an infraction under By-law 5.01(b). Alleqed Infractions 6 The Panel finds that it has not been proven that there was a violation of Rule CI.08 but that Gajdics was guilty of an infraction under By-law 5.01(b). Alleqed Infractions 7 The Panel finds that Gajdics was guilty of infraction under By-law 5.02(h) and Rule F Alleqed Infractions 8 The Panel finds that Gajdics was guilty of an infraction under By-law 5.01(b). Alleqed Infractions 9 The Panel finds that Gajdics was guilty of an infraction under By-law 5.01(b). The Panel was advised by Counsel at the Hearing that the matter of penalty would be the subject of argument, depending on the findings of the Panel on the allegations.

14 -14- The Panel will reconvene at a date convenient to the Panel and counsel for argument. DATED at the City of Vancouver, in the Province of British Columbia, this _7 _ day of May, / 7717i/i-14 Attachment GWEN NEWTON