INVESTMENT DEALERS ASSOCIATION OF CANADA

Transcription

1 INVESTMENT DEALERS ASSOCIATION OF CANADA IN THE MATTER OF: THE BY-LAWS OF THE INVESTMENT DEALERS ASSOCIATION OF CANADA AND OCTAGON CAPITAL CORPORATION NOTICE OF HEARING TAKE NOTICE that pursuant to Part 10 of By-law 20 of the Investment Dealers Association of Canada ( the Association ), a hearing will be held before a hearing panel ( the Hearing Panel ) on a date to be fixed by the Hearing Panel on Wednesday, October 4, 2006, at Legal Transcript Services, 111 Richmond Street West, Suite 1500, Toronto, Ontario, at 10:00 am, or as soon thereafter as the hearing can be heard. TAKE FURTHER NOTICE that pursuant to Rule 6.2 of the Association Rules of Practice and Procedure, that the hearing shall be designated on the: The Standard Track The Complex Track THE PURPOSE OF THE HEARING is to determine whether Octagon Capital Corporation ( the Respondent ) has committed the following contraventions that are alleged by the Association: 1. Between July 2002 and June 2003, the Respondent, a member of the Association, facilitated a distribution of two debentures in 97 client accounts without ensuring that: (a) the debentures had been approved for distribution; (b) a prospectus had been issued; or, (c) that clients were qualified investors under the accredited investor exemption rules,

2 - 2 - thereby engaging in business conduct or practice which is unbecoming or detrimental to the public interest, contrary to By-law 29.1 and Regulation and Policy Between 2003 and 2004, the Respondent, a member of the Association, failed to make adequate inquiries into the Benil accounts to ensure that orders to trade were not being accepted from an individual who they knew or ought to have known to have had a history of securities violations and/or an association with organized crime, thereby engaging in conduct unbecoming or detrimental to the public interest, contrary to By law 29.1 and Regulation and Policy Between 2003 and 2004, the Respondent failed to notify clients of David Staples as to the conflict of interest resulting from Staples involvement with Musicrypt Inc., thereby engaging in conduct unbecoming or detrimental to the public interest, contrary to By-law 29.1 and Regulation and Policy 2. PARTICULARS TAKE FURTHER NOTICE that the following is a summary of the facts alleged and to be relied upon by the Association at the hearing: 1. The Association s investigation into the Respondent s supervisory practices was commenced in the Fall, 2004 as a result of two ongoing investigations involving individual registered representatives in Toronto, Robertson Rodger Dow ( Dow ) and Barry Leung ( Leung ). While the investigation initially focused on the supervision of Dow and Leung, it expanded to include Toronto registered representative David Staples ( Staples ) as well. The Respondent 2. The Respondent commenced operations in 1992 as a small trading boutique. By 1999 the Respondent had seven employees and one office in Toronto. As of February 2005, it had expanded to include some 100 employees, approximately 25 registered representatives (retail), a head office in Toronto and two additional offices in Calgary and Vancouver. 3. John Palumbo ( Palumbo ) commenced employment with the Respondent in 1999 and assumed the role as President and Chief Executive Officer ( CEO ). In September 2002, Palumbo also assumed the role of Ultimate Designated Person ( UDP ). Palumbo advised

3 - 3 - the Association that since becoming UDP, the compliance related function occupies approximately 15-20% of his time. 4. Rita Lo ( Lo ) commenced employment with the Respondent as a compliance manager in February She was promoted to the position of Chief Compliance Officer ( CCO ) and Alternate Designated Person ( ADP ) in April 2002 and was registered with the Association as such in June Lo was first registered in the industry in May 1995 as a registered representative with Hong Kong Bank Discount Trading Inc. in Toronto. Following a merger in December 2000, Lo remained in the discount brokerage business and was approved as Assistant Branch Manager with Merrill-Lynch HSBC Canada Inc. where she stayed until joining the Respondent in David Mitchell ( Mitchell ) commenced employment with the Respondent in July 2000 as a registered representative. Mitchell became the Respondent s branch manager in the Toronto office in March 2001 and maintained that position through the relevant time period. He was named Trading Officer (Vice-President) with the Respondent in June Mitchell had been in the industry since 1988 but ceased being an approved person when he left the Respondent on June 8, The Respondent s Compliance Resources 6. From June 2002 to April 2003, Lo and the Operations Manager were the only two people employed by the Respondent in its head office compliance department. From April 15, 2003 to April 15, 2004, the Respondent did not employ anyone other than Lo in its head office compliance department. 7. In a 2004 Sales Compliance Review conducted by the Association, the Respondent s failure to maintain adequate supervisory resources was noted. The report states: It was noted that the Member s ratio of registered supervisory resources relative to the number of registrants and locations to be supervised, overall, lagged both that of its immediate peers and the industry as a whole. It was noted that turnover among the firm s senior and supervisory ranks had been considerable in the period preceding our visit, for which the procedures and standardized exception reports observed offered, at best, limited offset. These were challenges to which

4 - 4 - the firm s proportion of trading in higher-risk venture/growth securities could only be expected to add. Consequently, notwithstanding the Member s evident efforts, the Association was concerned that a meaningful and adverse imbalance between sales compliance risk and resources might have arisen. (I) Barry Leung ( Leung ) 8. Leung was employed by the Respondent as a Registered Representative from September 2000 until July 2004 and was approved to sell securities in Ontario, British Columbia, and Alberta. 9. Two of Leung s clients, H.J. and J.C., both held accounts with the Respondent. J.C. was a financial planner and the sole owner and director of CGC Financial Services Inc, an Ontario corporation. J.C. was not registered in any capacity with the Ontario Securities Commission or with the Association. H.J. was acting as a consultant in various capacities with Bright Star Ventures ( BSV ), a publicly traded company listed on the TSX Venture Exchange ( TSX(V) ). 10. J.C. referred a number of clients to Leung for the purpose of opening accounts with the Respondent in order to liquidate their existing holdings in locked-in retirement savings plans ( LIRAs ) and to reinvest these proceeds of sale into accounts under the administration of the Respondent. The clients then used the proceeds of sale to purchase BSV convertible debentures. Cheques were issued to BSV by the Respondent who then received and booked the debentures into the clients accounts. 11. Initially, Leung forwarded blank copies of the Respondent s NAAFs to J.C. who in turn either forwarded them to the clients to be completed as per J.C. s instructions or completed them in J.C. s presence. J.C. then returned the completed forms to Leung to open the accounts at the Respondent. 12. Despite the fact that a majority of the NAAFs for the clients indicated that their investment knowledge was either good or sophisticated, the clients personal information provided

5 - 5 - on the NAAFs themselves their occupations, income and net worth would generally be consistent with individuals of limited or poor investment knowledge. Further, a majority of the NAAFs indicated either that the clients wanted 100% higher risk, speculative securities or had a significant speculative component in the investment objectives. 13. Leung advised the Association that he had completed the section on the NAAFs relating to investment objectives and knowledge without actually speaking with the clients. 14. Between April 2002 and July 2003, 97 clients opened accounts at the Respondent for the purpose of purchasing BSV Debentures (see Schedule A attached). Leung was the Registered Representative on record for each of these accounts and received a $200 commission from BSV for each client account opened at the Respondent. The commission was split equally between the Respondent and Leung. The BSV Debentures 15. BSV was a junior mining company incorporated under the Company Act (British Columbia). In 2002, BSV purported to issue two series of convertible debentures with maturity dates of December 31st 2006 and December 31st 2007 ( the BSV Debentures ). Only the BSV Debentures maturing on December 31st 2006 was ever approved for distribution by the TSX(V). Nonetheless, at least 32 of the Respondent s clients were sold the BSV Debentures issued with a maturity date of December 31, The BSV Debenture with a maturity date of December 31, 2006 were issued as part of a private placement specifically to D.A. - the President of BSV- and Dagmar Holdings, an Ontario Corporation owned and controlled by J.C. The BSV Debentures with a maturity date of December 31, 2006 had a total face value of $1,376,000 (two debentures with a value of $688,000 each ) that were issued for a total discounted value of $862,000 (two debentures with a value of $431,000 each). Subsequently, the debenture issued to D.A. was cancelled by BSV after it had been determined that the promissory note under which the debentures had been issued had never been paid. Consequently, the amount ultimately available for distribution from the December 31st 2006 convertible debentures was only $688,000.

6 Notwithstanding the cancellation, BSV Debentures with a maturity date of December 31, 2006 with total par value of $1,440,000 were actually sold to the Respondent s clients. Furthermore, the BSV Debentures with a maturity date of December 31, 2006 purchased by the Respondent for its clients were purportedly issued directly by BSV, and not purchased from Dagmar Holdings. Accredited Investor Exemption 18. Both series of BSV Debentures were purportedly distributed through non-brokered private placements issued by way of an exemption to the prospectus requirement that recognizes accredited investors and is set out in provincial securities legislation. 19. Pursuant to the Ontario Securities Act, and Ontario Securities Commission Rule , the accredited investor exemption required an investment of at least $150,000 per investor up until February Thereafter, clients were required to own financial assets having an aggregate realizable value that, before taxes but net of any related liabilities, exceeded $1,000,000. Clients could also qualify for the exemption by having a net income before taxes that exceeded $200,000 in each of the two most recent years or a net income before taxes combined with that of a spouse that exceeded $300,000 in each of those years. Similar provisions are found in the securities legislation of both British Columbia and Alberta. 20. The Respondent facilitated purchases of the BSV Debentures by at least 96 clients who were residents of Ontario, British Columbia or Alberta. None of these clients qualified as accredited investors. Only one investor residing in Ontario purchased more than $150,000 of the BSV Debentures. Failure to Perform Due Diligence 21. On July 3, 2002, Ms. Lo sent an to Leung with a copy to Mitchell in which she commented that Leung s client H.J. was the contact person for BSV. H.J. had been actively buying and selling BSV. Lo asked Leung whether H.J. was an insider or held a controlling

7 - 7 - position in the company. She also asked Leung to update the old NAAF for H.J. s corporate account. 22. In late August 2002, Lo asked Leung about 14 clients who had purchased BSV debentures in their LIRA accounts. Lo advised the Association that Leung told her the clients had been referred to him by his friend, a financial planner for the clients. According to Lo, she was informed by Leung that his friend was not a registered representative but had his mutual fund licence. The friend referred to by Leung was in fact his client J.C. The August 2002 inquiry was the only one made by the Respondent regarding the opening of LIRA accounts and the BSV debentures. 23. Despite the large number of their clients investing in the BSV debentures, the Respondent performed no due diligence on the securities. In particular: (a) The Respondent did not perform any due diligence to ensure that, pursuant to the Ontario Securities Act, and Ontario Securities Commission Rule , a prospectus for the BSV debentures had been issued; (b) The Respondent did not ensure that the clients qualified under the Accredited Investor Exemption rule; (c) The Respondent did not perform any independent research on BSV which could have included conducting an internet search on the company and contacting BSV to request information on the company and the debentures; (d) The Respondent did not review press releases on BSV; (e) The Respondent did not contact any of the clients to make inquiries regarding suitability or discrepancies on their NAAFs; (f) The Respondent took no steps to determine the terms of distribution for the debentures including whether they were issued at a discount or approved for sale in Ontario, Alberta and British Columbia; (g) The Respondent did not make reasonable inquiries of Leung with respect to the circumstances of the purchase of BSV debentures in an increasing number of client accounts.

8 The sale of the December 31, 2007 debentures was an illegal distribution because they were never approved by the TSX(V) for distribution to the public. In addition, even if the debentures had been approved for distribution to the public, no prospectus had been issued for this debenture and none of the investors met the accredited investor exemption. 25. The sale of the December 31, 2006 debentures to Leung s clients was an illegal distribution as only a face value of $688,000 was ultimately approved for distribution by the TSX(V), while a total face value of $1,440,000 was sold to Leung s clients. Furthermore, the debentures were purchased directly from BSV and not from Dagmar Holdings, who was the recipient of the approved $688,000 debenture. In addition, even if the debentures had been approved for distribution to the public, no prospectus had been issued for this debenture and none of the investors met the accredited investor exemption. 26. Given that both these debentures were never approved for distribution, they were always and continue to be worthless. Furthermore, no marketplace exists for the subsequent sale of these securities. Trading in the common shares of BSV was halted by the TSX(V) on March 5, 2004 and was suspended indefinitely on March 18, As a result of failing to properly conduct the daily and monthly reviews of account trading activity required pursuant to Policy 2, the Respondent did not discover the questionable purchases of BSV debentures in its clients accounts. In particular, the Respondent failed to learn that the BSV debentures had not been approved for distribution and that none of the clients met the accredited investor exemption. 28. Palumbo, Lo and Mitchell readily admitted that they had not performed due diligence on the BSV debentures. Palumbo advised the Association that he only became aware of the BSV transactions in May 2003 when Lo advised him they had received a call from the Manitoba Securities Commission indicating that Leung had been distributing the Respondent s NAAFs in Manitoba through a financial planner. 29. Notwithstanding the timing of any agreement between the clients and BSV, the actual purchase of the BSV debentures occurred on the Respondent s books. The Respondent

9 - 9 - issued cheques to BSV on behalf of the clients and received the BSV debentures to be booked into their clients accounts. These transactions were effected without the Respondent having ensured that the securities were suitable for any of the clients. Leung Settlement Agreement 30. On November 4, 2005, Leung entered into a Settlement Agreement with the Association. He admitted that between July 2002 and July 2003 he failed to perform due diligence on behalf of his clients in relation to the purchase of the BSV debentures. Further, Leung admitted that he failed to ensure that the investments in the BSV debentures complied with provisions of the Securities Acts of Ontario, British Columbia and Alberta. For his breaches of the Association By-laws, Rules and Regulations, Mr. Leung was fined $100,000 and prohibited from registration in any capacity with a member of the Association for a period of five years. (II) Robertson Rodger Dow ( Dow ) 31. Dow was employed as a Registered Representative ( RR ) at the Respondent from January 25, 2002 to September 9, He described himself as a trader as opposed to a broker. He admitted to the Association that his practice of doing business was on an unsolicited basis, taking orders and executing them for people. 32. In July 2003, the Association commenced an investigation into Dow s conduct at the Respondent as a result of discussions with the United States Securities and Exchange Commission ( SEC ). The SEC had been investigating matters of apparent fraudulent activities by American residents with the apparent assistance of registered persons at Member firms in trading of shares of Hi-Energy Technologies Inc. ( Hi-Energy ), an Over-the- Counter Bulletin Board ( OTCBB ) stock. 33. In December 2000, Dow had been employed as an RR with Northern Securities Inc. ( Northern ) where he initially opened accounts in the name of a corporate entity called Benil Finance Ltd. ( Benil ). Some of these accounts would later be transferred with Dow when he commenced employment at the Respondent. While at Northern, the Benil accounts listed Jeanne Schnapik ( Schnapik ) as the client contact and gave trading authority over the

10 accounts to her common-law husband Rheal Cote ( Cote ). Personal accounts were also opened at Northern for Schnapik together with her son Phil Gurian ( Gurian ). Background of clients: 34. Schnapik is a French national. The account opening documentation at the Respondent suggested that Schnapik had dual residency both in Ottawa, Ontario and Pompano Beach, Florida. All account opening documentation at the Respondent identifies Schnapik as the sole owner of vaious corporate accounts as described below. Schnapik s investment experience and knowledge are listed as sophisticated on the New Client Application Form for the corporate accounts. 35. Cote is a Canadian citizen and Schnapik s common law spouse. The account opening documentation at the Respondent suggested that Cote also had dual residency with identical addresses as Schnapik in both Ontario and Florida. Account opening documentation on various corporate accounts at the Respondent gave authority to Cote to give trading instructions on behalf of Schnapik. 36. Phil Gurian ( Gurian ) is Schnapik s son. He is a Florida resident who pled guilty on February 24, 2000 to U.S. federal criminal charges including mail fraud, and conspiracy to commit securities fraud, mail fraud and wire fraud. A grand jury indictment of June, 1999 alleged that Gurian and others, including persons tied to organized crime, orchestrated a series of pump and dump schemes involving microcap issuers, and secretly controlled a branch office of Sovereign Equity Management Corp., then a registered Broker Dealer under NASD and SEC registration. In addition to his guilty plea and the June 1999 indictment, Gurian has been either the subject of or mentioned in a number of news articles and court cases linking him to activities that allegedly contravene U.S. securities laws and regulations and criminal statutes. In the early 1990 s the National Association of Securities Dealers ( NASD ) permanently banned Gurian from the American securities industry.

11 Benil accounts: 37. In early 2002 Dow opened six accounts at the Respondent in the name of Benil, an offshore corporation owned solely by Schnapik. All six of the accounts listed Schnapik as the sole owner of the accounts and gave trading authority to Cote. Benil operated as a small hedge fund shorting OTCBB stocks. Trading in the Benil accounts at the Respondent was primarily short selling with much of it uncovered short selling. Dow was the RR for all of the Benil accounts. 38. During 2002 to February 2004, notwithstanding that only Cote had trading authority over the Benil accounts, Dow accepted trading instructions on 5 Benil accounts from Gurian, and in three of the accounts he accepted trading instructions from 3 other individuals as well. Summary of the Benil Accounts at the Respondent Account # Benil #1 02H-5021 Account Holder Documented Trading Authority Actual Beneficiary Schnapik Cote Schnapik Gurian Actual Trading Instructions Benil #2 02H-5022 Benil #3 02H-5148 Benil #4 02H-5205 Benil #5 02H-5206 Benil #6 02H-5207 Schnapik Cote Robert Coutou Coutou and Gurian Schnapik Cote Jimmy Binns Gurian Brian Kane Kane Schnapik Cote Mark Cox Cox Schnapik Cote Dr. Nathan Nachlas Gurian Schnapik Cote Gurian

12 Hi-Energy Technologies Inc. ( HiEnergy ) 39. Dow also took instructions from Gurian with respect to making a market in the stock Hi- Energy. This was a very different activity from their usual naked short selling practice. The Benil accounts were highly concentrated in the Hi-Energy stock. 40. Two related articles written by Carol Remond regarding HiEnergy and Gurian were published on the Dow Jones newswire on February 21 and 25, The articles talked about HiEnergy s investors having a connection to Gurian, who by then had pled guilty to federal charges including mail fraud and conspiracy to commit securities fraud. The articles also stated that published reports have identified Gurian as a front man for Phil Abramo ( Abramo ) a captain in the Decavalcante organized crime family. At that time, Abramo was awaiting trial on a series of charges including murder and conspiracy to commit securities fraud. 41. The Remond article also stated that the Gurian connection with HiEnergy began with Cote. When Remond tried to reach Cote, she found him connected to an address for a condominium owned by Jeannine Gurian Phil s mother. 42. The article also raised a possible link between Benil Finance Ltd. and organized crime; as the corporate address for Benil was the same as that of a number of offshore firms connected to Gurian and Abramo and named in another article entitled The Mob on Wall Street. The Respondent s Inquiries 43. Lo advised the Association that she had read the Remond articles. She said that she started to have concerns about Benil at that time. Prior to the articles, Lo only had concerns with the OTCBB activity in the accounts. 44. It was only in response to her concerns raised by the Remond articles that Lo sent an to Dow on March 3, 2003 asking him to reply to the following questions: (a) How well do you know about these offshore clients, namely J. Gurian, Rheal Cote and for how long?

13 (b) (c) (d) (e) (f) Did you know Rheal had 61% holding of SLW? If not, did you question Benil the reason for the transfer-in of million shares of SLW an OTCBB in April? Despite the selling of the above block shares, Benil also kept buying and selling SLW through April and beginning of May. Did you know there was a reverse merger taking place? Having learned about Gurian s charges, did you conduct an investigation or review to determine the possibility of your client s involvement with the son? Could you explain or have you checked why Benil s address is shared with some offshore accounts that are named in the Mob on Wall Street case? 45. In a reply to Lo on March 4, 2003, Dow indicated that he knew Schnapik and Cote quite well, and that he had met Gurian a number of times. Dow further indicated he had spent a weekend in Colorado with Gurian, Schnapik, and Cote in September Dow indicated that both Schnapik and her son were a walking encyclopedia when it comes to bulletin board stocks, promoters etc. Dow advised Lo that he had had a number of conversations with Gurian about the charges against him and Gurian claimed he had no involvement with organized crime of any type. Dow offered to provide more information to the Respondent regarding Gurian. The Respondent did not pursue this avenue further with Dow. 46. In his March 4, 2003 response to Lo, Dow indicated that, while he was employed by Northern, the President and CCO had spent a weekend investigating the charges against Gurian including having a conversation with him. Dow said that Northern decided that there was no reason that Gurian s past should have any bearing on Dow s business relationship with Schnapik. 47. Dow never advised the Respondent that he was working with Gurian to create a market for HiEnergy or that Gurian and others were instructing him on the 6 Benil accounts. Further, Dow never advised the Respondent that Benil #2 through #6 were trading for the benefit of others not named on the account documentation. Dow did not describe the true circumstances of the operation of these accounts to the Respondent.

14 Palumbo advised the Association that Dow had been closely monitored with respect to the Benil accounts for a long time. Mitchell stated that the Respondent watched the trading closely because it was of such a concern. He advised the Association that they watched which stocks were trading and in what volume as well as monitoring margin issues and high closings. Further, Mitchell stated that another trader seated in close proximity to Dow was asked to watch over Dow and report to Mitchell or Lo if he noticed anything untoward. Palumbo stated that while it was at one time considered, he did not tape Dow s telephone calls to determine if he was dealing with Gurian. SEC Request for information: 49. Lo advised the Association that her concerns about the Benil accounts were heightened in response to requests from the SEC for information from Dow in relation to Benil and HiEnergy. In a letter sent to the Respondent dated May 27, 2003, the Enforcement Department of the SEC advised the Respondent that it was conducting a non-public investigation to determine whether violations of United Stated securities laws had occurred in connection with HiEnergy Technologies Inc. The letter included a request that Dow provide information on a voluntary basis as part of the SEC investigation into various Benil accounts. 50. Dow generated significant commissions for the Respondent. In 2002, his gross commission was $443,073 which represented approximately 6.7% of the Respondent s overall commission revenue for that year. In 2003, Dow s gross commission was $665,994 which represented approximately 7.7% of the Respondent s overall commission revenue for that year. The Benil accounts represented the majority of Dow s business. He operated on a strictly unsolicited basis. 51. While Palumbo was suspicious, he told the Association that he was never able to establish evidence that Gurian was giving instructions on the Benil and Schnapik accounts. He was concerned about the Respondent s civil liability if the Benil accounts were closed without proper evidence of Gurian s involvement. He advised the Association that having suspicions and having evidence are two different things.

15 Palumbo only made the decision to phase out the Benil accounts by February 28, 2005 after Lo provided him with a NAAF and trading agency authorization from another member firm which listed Gurian as having trading authority on a Benil account. 53. Notwithstanding the significant alerts to risk in dealing with the Benil accounts and Schnapik, Cote and Gurian, the Respondent did not take appropriate steps or make sufficient inquiries in order to satisfy themselves that operation of the Benil accounts was in the best interests of the securities industry. Inadequate Supervision 54. Notwithstanding Dow s concealment of Gurian s involvement in the Benil accounts, the Respondent failed to undertake an independent and thorough review of the accounts to satisfy themselves as to the true circumstances of the operation of the accounts. In particular, the Respondent failed to: (a) Ask appropriate and sufficient questions of Dow directed at their immediate concerns regarding any connection to or involvement by Gurian in the Benil accounts ; (b) Contact Schnapik to inquire as to who was providing trading instructions on her accounts and to make an independent assessment of her investment knowledge and sophistication; (c) Make further inquiries regarding the Benil accounts at Northern given Dow s response to the March 2003 inquiry by Lo; (d) Restrict trading in the Benil accounts; (e) Tape Dow s phone calls to satisfy themselves that he was not taking trading instructions from Gurian; (f) Take advantage of relevant issues of concern involving Gurian, Schnapik, Cote, Benil, and HiEnergy revealed in the Remond articles by independently pursuing them further; (g) Conduct independent research into HiEnergy, which may have included reviewing the history of the corporation, historical stock prices and volume and who were the major shareholders; (h) Review trading in all securities in the Benil accounts to determine whether there were any other issues of concern.

16 (III) David Staples 55. David Staples ( Staples ) was employed by the Respondent as a Registered Representative Options ( RRO ) from September 27, 2000 to August 27, He had been in the industry since Staples has not been an approved person since leaving the Respondent in August Staples involvement in Musicrypt 56. Sometime prior to November 2002, Staples co-founded a company known as Musicrypt Inc. ( MCT ), a publicly traded company on the TSX(V). Staples was also a promoter of MCT. MCT s principal business is the marketing and sale of a digital media distribution technology. 57. The Respondent was the underwriter for MCT s Initial Public Offering ( IPO ) in February The Respondent was well aware of Staples involvement in MCT, as Staples had been the one who had brought the underwriting opportunity to the Respondent. MCT and the Respondent signed an engagement letter on May 31, MCT prepared a Final Prospectus ( FP ) dated February 13, In the FP, it was disclosed that Staples was a principal shareholder of MCT, owning some 1,744,667 shares. At that time he held 19.8% of the voting securities in MCT. Staples was also listed as a co-founder of MCT. 59. In a one year period from February 2003 to February 2004, Staples received some 678,533 shares of MCT in his account at the Respondent. Specifically, he received the following MCT shares in his account: 14,000 shares in February 2003; 141,133 shares in April 2003; 261,700 shares in August 2003; and 261,700 shares in February 2004

17 Failure to advise clients of Staples Conflict of Interest 60. Although Staples ownership of MCT was disclosed in the FP in February 2003, the Respondent took no steps to notify Staples clients of a potential conflict of interest until February 17, 2004, when in an RRSP deadline reminder letter, Staples advised his clients that 15% of his shares in MCT came out of escrow on February 14, 2004 and that he may sell shares of MCT from time to time. 61. In July 2004, Staples sent out a letter to his clients, indicating that he was the principal shareholder of MCT and held 1.7 million common shares, or 12% of the voting securities at that time. He also indicated that he may trade from time to time in MCT, subject to review by his branch manager or compliance officer. 62. The Respondent did not take any steps in a timely manner to ensure that Staples clients were aware of his involvement with MCT Sales Compliance Review 63. Staples was restricted from trading his MCT shares until February Once the restriction was lifted, Staples continued to solicit buys in the stock, while he was only selling portions of his MCT holdings. 64. On April 1, 2004, Staples solicited five clients to buy MCT while on the same day he sold 5,000 shares of his own stock in MCT. 65. The Association s 2004 Sales Compliance Review noted this conflict of interest and commented that: The Association acknowledges that the Member detected the registrant s conflict of interest and monitored the registrant s trading. However, the Association is concerned that, despite the Member s stated apprehensions over the registrant s trading, this activity continued. The Member s actions did not compensate for the increased level of risk that resulted from this manner of trading.

18 The Respondent noted the conflict of interest and questioned Staples about it. No further steps were taken by the Respondent to ensure that the five clients were aware of the conflict of interest. GENERAL PROCEDURAL MATTERS TAKE FURTHER NOTICE that the hearing and related proceedings shall be subject to the Association s Rules of Practice and Procedure. TAKE FURTHER NOTICE that pursuant to Rule 13.1, the Respondent is entitled to attend and be heard, be represented by counsel or an agent, call, examine and cross-examine witnesses, and make submissions to the Hearing Panel at the hearing. RESPONSE TO NOTICE OF HEARING TAKE FURTHER NOTICE that the Respondent must serve upon the Association a Response to the Notice of Hearing in accordance with Rule 7 within twenty (20) days (for a Standard Track disciplinary proceeding) or within thirty (30) days (for a Complex Track disciplinary proceeding) from the effective date of service of the Notice of Hearing. FAILURE TO RESPOND OR ATTEND HEARING TAKE FURTHER NOTICE that if the Respondent fails to serve a Response or attend the hearing, the Hearing Panel may, pursuant to Rules 7.2 and 13.5: (a) proceed with the hearing as set out in the Notice of Hearing, without further notice to the Respondent; (b) accept as proven the facts and contraventions alleged by the Association in the Notice of Hearing; and (c) order penalties and costs against the Respondent pursuant to By-law 20.33, and PENALTIES & COSTS TAKE FURTHER NOTICE that if the Hearing Panel concludes that the Respondent did commit any or all of the contraventions alleged by the Association in the Notice of Hearing, the Hearing Panel may, pursuant to By-law and By-law 20.34, impose any one or more of the following penalties:

19 Where the Respondent is/was an Approved Person: (a) (b) a reprimand; a fine not exceeding the greater of: (i) $1,000,000 per contravention; and (ii) an amount equal to three times the profit made or loss avoided by such Approved Person by reason of the contravention. (c) (d) (e) (f) (g) (h) (i) suspension of approval for any period of time and upon any conditions or terms; terms and conditions of continued approval; prohibition of approval in any capacity for any period of time; termination of the rights and privileges of approval; revocation of approval; a permanent bar from approval with the Association; or any other fit remedy or penalty. Where the Respondent is/was a Member firm: (a) (b) a reprimand; a fine not exceeding the greater of: (i) $5,000,000 per contravention; and (ii) an amount equal to three times the profit made or loss avoided by the Member by reason of the contravention; (c) (d) (e) (f) suspension of the rights and privileges of the Member (and such suspension may include a direction to the Member to cease dealing with the public) for any period of time and upon any conditions or terms; terms and conditions of continued Membership; termination of the rights and privileges of Membership; expulsion of the Member from membership in the Association; or

20 (g) any other fit remedy or penalty. TAKE FURTHER NOTICE that if the Hearing Panel concludes that the Respondent did commit any or all of the contraventions alleged by the Association in the Notice of Hearing, the Hearing Panel may pursuant to By-law assess and order any investigation and prosecution costs determined to be appropriate and reasonable in the circumstances. DATED at Toronto, this 20th day of September, Aleksandar Popovic Vice-President Enforcement Division INVESTMENT DEALERS ASSOCIATION OF CANADA 121 King Street West Suite 1600 Toronto, Ontario M5H 3T9