IN THE MATTER OF A DISCIPLINE HEARING PURSUANT TO BYLAW 20 OF THE INVESTMENT DEALERS ASSOCIATION OF CANADA. - and- DOUGLAS FRANCIS CORRIGAN

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1 IN THE MTTER OF DISCIPLINE HERING PURSUNT TO BYLW 20 OF THE INVESTMENT DELERS SSOCITION OF CND - and- DOUGLS FRNCIS CORRIGN (RESPONDENT) District Council Members Stephen D. Gill, Chair Ron Merritt, Member Don Teatro, Member ppearing for the ID ppearing for Mr. Corrigan Paul Smith Ian Donaldson, Q.C. Heard: ugust 18; September 8, 17; October 20, 28; December 1 and 2, 2004 DECISION OF PCIFIC DISTRICT COUNCIL S TO LIBILITY 1. Pursuant to ssociation bylaw 20.11, a meeting (Disciplinary Panel) of the Pacific District Council of the Investment Dealers ssociation of Canada (the ssociation ) was convened on ugust 18, 2004, and subsequent dates by agreement of the parties, at the City of Vancouver, British Columbia, pursuant to a Notice of Hearing dated June 21, 2004 directed to Douglas Francis Corrigan (the Respondent, or Corrigan ). The parties and Council agreed that the hearing would proceed in two phases: firstly, with respect to liability;

2 - 2 - and secondly, if required, with respect to penalty. This is the decision of the Pacific District Council (hereinafter the Council ) with respect to liability. 2. The ssociation, by the Notice of Hearing and Particulars (Exhibit 3), alleges that the Respondent has committed the following violations of the bylaws, regulations or policies of the ssociation: Count 1 Between May 3, 1999 and July 31, 2001, while employed as a Registered Representative and the Branch Manager at the Vancouver Branch of Thomson Kernaghan & Co. Limited, a Member firm, the Respondent failed to adequately supervise the activities of Investment Representative S.R.J. and thereby failed to ensure that the handling of client business was within the bounds of ethical conduct, consistent with just and equitable principals of trade or not detrimental to the interests of the securities industry in contravention of ssociation Regulation Count 2 Between May 3, 1999 and July 31, 2001, while employed as a Registered Representative and the Branch Manager at the Vancouver Branch of Thomson Kernaghan & Co. Limited, a Member firm, the Respondent failed to maintain evidence to support the daily supervision of client accounts at the Branch in contravention of ssociation Policy By agreement, on ugust 26, 2004, the Respondent filed a Reply (Exhibit 4), and at the commencement of the hearing, the Respondent also agreed to a number of the facts alleged in the Particulars in the Notice of Hearing.

3 Based upon the admitted facts, and the evidence of the witnesses herein, we make the following findings of fact. Facts 5. The Respondent first entered the securities industry in December 1996 and was employed as a desk trader with West Coast Securities from 1966 until He became a Registered Representative ( RR ) with the same firm in In 1988, the Respondent transferred to First Canada Securities where, in 1991, he first became a Branch Manager. 7. In 1996, the Respondent transferred to Dominick and Dominick Securities Inc. ( Dominick ). He was approved as Branch Manager of Dominick s Vancouver branch and worked there as an RR and Branch Manager until pril, 1999, when Dominick s Vancouver branch was assumed by Thomson Kernaghan & Company Limited ( TK ), and re-opened as TK s Vancouver branch (the Branch ). 8. The Respondent was employed as an RR, and Branch Manager at the Branch from May 3, 1999 until July 31, 2001 (the Relevant Period ) when he resigned from TK. 9. During the Relevant Period, the Respondent, as Branch Manager, was responsible for approving, at the Branch, proposed new accounts. The procedure at the Branch was for the broker to submit the appropriate New Client pplication Form ( NCF ) to the Respondent, who would review them and, if he approved, would sign them. However this was not the end of the account opening procedure. The documentation was then forwarded to TK s Toronto office, where it was reviewed by the compliance department, and

4 - 4 - if approved by compliance, only then would an account number be issued. The Toronto Office review placed more emphasis on financial or credit worthiness issues. 10. During the Relevant Period, the Respondent, as Branch Manager, was also responsible for the daily supervision of account activity, and was responsible for the supervision of S.R.J., an Investment Representative ( IR ) at the Branch. 11. S.R.J. had been under the supervision of the Respondent since March, 1997, when S.R.J., who was then an RR, joined Dominick s Vancouver branch where the Respondent was the Branch Manager. 12. In pril, 1997, S.R.J. s registration as an RR was suspended because he failed to meet the education requirements to maintain his RR registration. In May, 1997, S.R.J. s registration status was changed from RR to IR. The Respondent was fully aware of these events. 13. On or about May 16, 1997, Maggie rtkan, Compliance Office at Dominick, wrote the ssociation and acknowledged the notice regarding the suspension of S.R.J. as an RR, due to his failure to complete the course within the 30-month time frame. In the letter, Ms. rtkan stated: We have advised [S.R.J.] of his change of status and the requirement that he not give investment advice or solicit orders until he has met the educational standards. He will be supervised by Douglas Corrigan, Branch Manager in our Vancouver office, to ensure that there is no breach of conduct. (Exhibit 20) (emphasis added) The letter also enclosed a change of status form. The Respondent was fully aware of this letter and its contents.

5 Throughout the Relevant Period, S.R.J. was an IR; he did not obtain his RR registration again until December 18, In pril, 1999, when TK assumed the Branch from Dominick, S.R.J. continued to work at the Branch as an IR, and continued to be supervised by the Respondent, who continued as Branch Manager. During the Relevant Period, S.R.J. had his own personal identification code for Commission tracking purposes ( Broker Code ) that was not shared with any RR. S.R.J. was not an assistant to an RR. 16. During the Relevant Period, S.R.J. opened 228 client accounts (the ccounts ) particulars of which are set out in Schedule attached to the Particulars. ccording to an analysis performed by Wesley Chan, ssociation staff, all but 9 of the 228 new client forms were signed by the Respondent. Further, the Respondent testified that due to the one room office configuration at the Branch, and his close proximity to all of the brokers, he was very familiar with and monitored the day-to-day activities in the Branch. 17. Mr. Chan conducted an investigation of S.R.J. s activities in the Relevant Period, and confirmed that S.R.J. was only an IR during the Relevant Period. With respect to the ccounts, S.R.J. signed the NCF s as the RR of record; his name was on the monthly reporting forms, and there was no other RR on those reporting forms; and S.R.J. was the contact person for the ccounts, all of which were retail accounts. For each of the ccounts, S.R.J. was the person responsible for the client s income, net worth, investment knowledge, risk tolerance and account objectives information, although the forms may have been filled in by the clients in some cases.

6 For each of the ccounts, S.R.J. signed the NCF s in the section for the RR signature, and entered his Broker Code in the section designated for that item. The Respondent authorized the opening of most, if not all of the ccounts, and signed the NCF as Branch Manager, even though he knew that S.R.J. was registered only as an IR and not an RR. 19. Throughout the Relevant Period, the Respondent knew, or ought to have known, that for each of the ccounts, S.R.J. was the person primarily responsible for servicing the ccounts, and that in so doing he was not acting as an assistant for any other RR. The Respondent took no action to ensure that an RR was in charge of the ccounts. 20. s Branch Manager responsible for S.R.J. s conduct, the Respondent permitted S.R.J. s name to appear as RR and/or ccount Representative on the monthly account statements and trade confirmations for the ccounts. 21. Of the 228 ccounts, 121 were for out-of-province clients (the Out-of- Province ccounts ) who resided in Ontario, Quebec, Manitoba, and lberta (the Other Provinces ). The Respondent authorized the opening of the Outof-Province ccounts by signing the NCF as Branch Manager when he knew that S.R.J. was not registered in any capacity in the Other Provinces. The particulars of the Out-of-Province ccounts are set out in Schedule B to the Particulars (Exhibit 3). 22. Mr. Chan conducted an analysis of the Out-of-Province ccounts (Exhibit 16). Mr. Chan determined that S.R.J. indicated that he had met 18 of the clients, and had not met 103 of the clients. Three of the Out-of-Province ccounts did not have the Respondent s signature as Branch Manager. S.R.J. indicated that with

7 - 7 - respect to his knowledge of the clients, 94 were recent or new; 17 were six months or more; and 10 were blank. 23. The Respondent testified that he was well aware of Member Regulation Notice No. 114, dated November 13, 2001 (Exhibit 6) which stated: Effective March 1, 2002, the Member and individual registered representative must either be registered in the Canadian or United States jurisdiction in which the client resides or be eligible for an exemption under all securities legislation applicable within that jurisdiction If the firm or individual is not registered, the account must be closed by March 1, fter March 1, 2002, any Member or registered representative found to be maintaining an account for a resident of any jurisdiction in Canada or the United States contrary to the legislation of that jurisdiction may be the subject of disciplinary action by the ssociation. 24. The Respondent testified that prior to MR-114, the ssociation turned a blind eye to the issue of inter-provincial or out-of-jurisdiction accounts, even though it knew that most, if not all, brokers were not registered in all of the jurisdictions where they conducted business. With respect to S.R.J., the Respondent testified that he came to him and outlined his plans to go to Ontario on family business, and that S.R.J. planned to meet with an individual who was the president of a company that was soon going public, and who had indicated that he needed a broker in B.C. S.R.J. sought the approval of the Respondent to conducting his business, but the Respondent stated that he didn t know what the policies or rules were, and suggested S.R.J. call the President of TK, Mr. Simpson. The Respondent testified that S.R.J. reported that he did call Mr. Simpson, and that Mr. Simpson had said there was no problem with what S.R.J. proposed, because TK was registered in most provinces. Based upon this information, S.R.J. proceeded with the Ontario business.

8 The Respondent also testified that he understood that S.R.J., as an IR, could open accounts, that is, could send out the NCF forms, and/or complete the forms. However, he stated that S.R.J. was advised that he couldn t give advice to the clients. The Respondent testified he believed that S.R.J. was simply opening accounts so that the clients could deposit shares from this company that was going public, and that S.R.J. then took orders to sell those shares. 26. On or about June, 2004, the ssociation and S.R.J. entered into a Settlement greement (the Settlement greement ) in which S.R.J. admitted, for the purpose of the Settlement greement, contraventions by running his own book of business, and by being the primary person responsible for servicing the ccounts, and by signing NCFs for the ccounts, acted as an RR, when he was only qualified and registered as an IR,. Mr. Chan participated in the investigation by the ssociation into S.J.R. s conduct, and attended the settlement hearing. s part of the Settlement greement, the ssociation and S.R.J. agreed to a Statement of Facts; that Statement of greed Facts included: 11. On May 16, 1997 the Respondent applied to the ssociation to be registered as an Investment Representative ( IR ). In his application he acknowledged that his status as an RR had been suspended. s part of his application, the Respondent wrote a letter to the ssociation acknowledging his change of status from RR to IR and that he was aware the change meant he could not give investment advice or solicit orders from clients. 18. Generally, in respect of the ccounts opened during the Relevant Period, His Clients gave the Respondent the information contained in the New Client pplication Form ( NCF ) verbally and/or or by filling out a NCF that the Respondent caused to be mailed to them and returning it to the Respondent signed together with other related account opening documentation. Upon receipt of the signed and completed NCF and other related account opening documentation the Respondent submitted the account opening documents to TK s branch manager s assistant, who in turn would submit them to TK s Vancouver Branch Manager for

9 - 9 - review and signature, who in turn would forward the documents to TK s Head Office Compliance for final review and approval. Upon approval by TK s Head Office Compliance an account number was assigned and the account would be opened. 19. For each of the ccounts, the Respondent signed the completed NCF in the section designated for R.R. Signature and filled in his Broker Code in the section designated for Broker Code identification. 20. Securities transactions were made in most of the ccounts. From May 1999 through February 2000 the monthly account statements and trade confirmation slips for the ccounts identified the Respondent as the Registered Representative for each ccount. From March 2000 throughout the balance of the Relevant Period the monthly account statements and trade confirmation slips for the ccounts identified the Respondent as the ccount Representative for each ccount. 21. Throughout the Relevant Period, the ccounts were the Respondent s accounts in that he was the person primarily responsible for servicing the ccounts and that in so doing he was not acting as an assistant to the Branch Manager or any other Registered Representative. 22. TK was a full service firm as opposed to a discount broker. 23. t no time during the Relevant Period did the Respondent give advice with respect to specific securities, or solicit orders from His Clients. ll securities transactions in the ccounts were within the investment objectives established by the clients for their respective ccounts. 27. Further, Mr. Chan testified that he conducted a number of interviews of S.R.J. s clients and that all of the clients he interviewed stated that S.R.J. had not provided them with advice. 28. The Respondent testified that he believed that S.R.J. was conducting himself properly, as an IR, at all times. He stated that he had not heard S.R.J. give advice to anyone, and that he believed, from his observations, that S.R.J. took unsolicited orders. He also stated that he was aware of S.R.J. transferring calls to other RR s to get advice.

10 The Respondent supervised 9 brokers at the Branch. s Branch Manager, the Respondent was required by ssociation Policy 2 ( Policy 2 ) to undertake daily reviews of the previous day s trading within the Branch to detect undesirable account activity, and maintain evidence of those daily reviews. 30. Neither the ssociation nor the Respondent were able to locate and identify the documentation from the Branch that may have indicating the daily reviews were undertaken, and thus there was no documentary evidence presented of any reviews. 31. Mr. Stuart Bartley, Manager of Sales Compliance with the ssociation, testified with respect to an interview of the Respondent held on pril 6, Mr. Bartley is a graduate B.. and LLB, and worked in the brokerage industry for approximately 9 years as a Registered Representative, and Compliance Officer. He joined the ssociation in June 1999 and as Manager of Sales Compliance had responsibility for co-ordination and compilation of sales compliance officer s reports with respect to audits of various offices. In conjunction with the B.C. Securities Commission, Mr. Bartley, in pril, 2000 was doing a survey of OTC Bulletin Board Trading, and the interview of the Respondent was initiated as a result of that activity. The interview was recorded and transcribed (Exhibit ); Mr. Howard Shapray, Q.C., was present at the interview representing Thomson Kernaghan; however he appears to have assisted the Respondent as well. Mr. R. Johnston was present at the interview for the B.C. Securities Commission. 32. In the interview, the Respondent was asked about his role as Branch Manager, and asked to describe the daily and monthly compliance review procedures that he conducted at the Branch. In response, the Respondent stated that (at the Branch) they all worked in one room and he saw and heard the orders as they

11 were traded all day. He worked side-by-side with everyone, and if he wasn t present, his partner, a 30 year broker, would perform the same function. The following exchange took place: Q nd for your daily review, do you review any exception reports or look at trading for a day? Q Q Q Well, I ll go into Surjiet and make sure we reconcile from the day of the trades, deal with reconciliation. s far as reviewing the commission slips, it s all done in Toronto, I don t review them. Okay. But I know they are reviewed in Toronto. nd who would monitor credit on a daily basis? Per order, I monitor. I m responsible. What about things such as overdue accounts or accounts trading under margin? They re monitored in Toronto. Oftentimes, they re brought to me to deal with. If it needs me to deal with it, oftentimes, I direct it to the salesmen to deal with. I get the more difficult problems. (Transcript, Exhibit, pril 6, 2000, pg. 2, line 13 to pg. 3, line 1) 33. With respect to monthly reviews, the Respondent stated: Q nd I guess if you want to describe the same on a monthly basis, what review do you undertake for compliance on a monthly basis at this branch? Q I haven t been review any in since we re just dealing with the time at Thomson Kernaghan? Yes, just Thomson Kernaghan. Thomson Kernaghan, I check my files, I don t think I ve reviewed statements. Thomson Kernaghan, I believe, is done in Toronto by their compliance department.

12 Q Was the procedure different at Dominick and Dominick? I reviewed the monthly statements. (Transcript, Exhibit, pril 6, 2000, pg. 3, line 8 to 19) 34. With respect to the monthly reviews in Toronto, the Respondent stated: Q Okay. nd for the monthly reviews in Toronto, would that be Ron Kelterborn who would do it or? Q I can t really say specifically which one does it or how their procedure works, I never inquired. Okay. Do you have maintain any evidences of the reviews you do on a daily basis or a monthly basis? MR. SHPRY: How can he answer that question? When you re talking about maintaining evidence, I honestly don t understand the question. re you asking if they keep records or make a report or something like that I can understand that. I guess the answer to the question is I m not sure. MR. BRTLEY: Q Okay. re there any special types of exception reports designed and used by this branch to monitor OTC trading? No. (Transcript, Exhibit, pril 6, 2000, pg. 3, line 27 to pg. 4, line 16) 35. The Respondent further explained the review: Q nd would you, as part of your review, look for violations of cash account rule? Well, yes, because it s referred to me by compliance. You know, we have a daily procedure of getting referral from compliance, is day too late. MR. JOHNSTON: Compliance from Toronto? Yes.

13 MR. JOHNSTON: Who would normally be the contact? Ron Kelterborn and his staff. (Transcript, Exhibit, pril 6, 2000, pg. 4, line 17 to 25) 36. With respect to New Client pplication Forms the Respondent stated: Q When an RR brings in completed new client application form and all the required documentation, is the account approved here or is it only approved in Toronto? Q Q Q That s a procedure, too. I approve it initially then with my approval it goes to Toronto. They then review it and it only gets approved after they say it s approved. In other words, I can t open an account, they can only open an account, we don t open accounts here, period. Can the Vancouver branch assign an account number? No. nd who would approve most of the client accounts in Toronto? Compliance. That s Ron and his group. nd does the firm allow client trading before you would approve an account? No. No. (Transcript, Exhibit, pril 6, 2000, pg. 15, line 26 to pg. 16, line 16) 37. The Respondent further testified with respect to the reviews generally: Q nd does anyone in this branch ever undertake reviews for clients who have an increase in trading activity? MR. SHPRY: Well, that s a big question. nd I don t know if you can answer that. I really I really can t say on a specific basis. I guess the answer to the question is, if warranted or brought to my attention then we ll do it but it s it s a hit and miss procedure based on compliance and financial compliance.

14 nd my people here may or may not spot something including the salespeople. (Transcript, Exhibit, pril 6, 2000, pg. 21, line 17 to 26) 38. In response to a question from Mr. Johnston, re the OTC bulletin board trading, the Respondent stated: Q Would you say that you were the one individual responsible for monitoring OTC bulletin board trading activity in this branch? Q t this branch? In Vancouver? Yes. (Transcript, Exhibit, pril 6, 2000, pg. 26, line 14 to 19) 39. Mr. Bartley testified that as a result of the Respondent s answers on this interview, and in particular on page 2 with respect to the daily/monthly review procedure, the ssociation scheduled a full Sales Compliance Review which was conducted in May, That Sales Compliance Review was conducted by Brian Swan and Dawn rthurworrey, and resulted in a report (Exhibit B, Tab B). The Review took place over approximately three weeks at the Branch, and the usual practice was to interview the Branch Manager and other brokers, and to inspect relevant documents. The interviews are not recorded. However, Mr. Bartley testified that the ssociation investigators are looking for evidence of daily and monthly reviews, and any documents which would evidence those daily reviews being dated and signed by the Branch Manager. Mr. Bartley assisted in the writing of the report on the Branch. fter it is completed, the report goes to the President and the Branch Manager of the firm, in this case TK.

15 Mr. Bartley testified that the usual practice with respect to a Sales Compliance Review, which he believed was followed in this case, was that the ssociation prepares a draft report which is then reviewed and discussed over time with the firm, here TK. The ssociation then finalizes the report, and TK then provides its response to the report (Exhibit B, tab B and tab D). 41. Mr. Bartley testified that in his view a Branch Manager cannot delegate his daily and monthly review responsibilities, although he could get assistance from a member of his staff, and assistance was not unusual at very busy branches. Mr. Bartley further testified that the TK head office staff did the daily and monthly reviews, and that those reviews were, to his knowledge, satisfactory, but that the Branch Manager himself did not conduct the reviews. 42. With respect to daily and monthly supervision, the 2000 Sales Compliance Review of the ssociation stated as follows: 3.3 Daily and Monthly Supervision ID Policy No. 2; ID By-law 4.6, 4.12, 29.1; Regulation (a) & (b); Regulation PRIORITY ITEM REFERRL TO ENFORCEMENT During the review, the Member informed the ssociation that the branch manager does not conduct any daily or monthly branch supervisory reviews. It is the current practice of the Member that daily and monthly reviews are performed at head office by the Compliance Manager. Mr. Corrigan, the Branch Manager confirmed to the ssociation that he does not engage in branch management activities as required by the ssociation or the BC Securities ct. Requirement The ssociation requires every branch to have a resident qualified branch manager, who will complete all required supervisory reviews. Failure to immediately address the absence of effective branch supervision by a qualified branch manager may affect the Vancouver Branch s fitness

16 for continued registration. In response to this report, please provide a detailed written response of the actions taken to ensure effective supervision of the Vancouver Branch, by the branch manager. (Exhibit B, tab B, pg. 3) 43. The Sales Compliance Review was conducted and prepared in May 2000, and Mr. Bartley testified that after the draft report was given to TK, there were a number of discussions, back and forth, with respect to the contents thereof. On or about ugust 17, 2001, TK provided their response to the 2000 Sales Compliance Review, which response was signed by the President of TK, Lee Simpson. The Respondent testified that although he was somewhat involved in the preparation of TK s initial response, the final response was very different, and he didn t see it until it was filed. In respect of paragraph 3.3 of the Review, TK s response stated: 3.3 Daily and Monthly Supervision We are in agreement with this finding and are taking the necessary steps to hire a Branch Manager who will evidence his review. Mr. Corrigan has performed active daily supervision of the Branch. He was constantly aware of all trading that took place and the risk assumed by all R.R. s. lthough we are in agreement with your findings, we feel that the daily and monthly supervision that has been conducted by our Compliance group in Toronto has led to effective supervision. We will continue to keep the ssociation updated on our search to hire a non-producing branch manager to fulfill the Branch Manager requirements. (Exhibit B, tab D, pg. 3) 44. Mr. Bartley testified that the TK Compliance Manual, dated November 3, 1999, was found during the review by the ssociation in May, 2000 (Exhibit 8). The Compliance Manual in section 8, addressed daily trading reviews and states:

17 DILY TRDING REVIEWS Daily trading reviews are the most critical compliance reviews undertaken by management. The Designated Person, Manager of Credit, Branch Managers, President and Compliance Supervisors perform these reviews each morning using the Commission Summary report produced by ISM. Branch Managers must verify that they have reviewed the report by initialing the report and noting on the report any actions taken with respect o trading. The Compliance Department is responsible for ensuring that all other designated personnel have completed the reviews and a record maintained. In the absence of the Designated Person, the Compliance Supervisor will conduct the daily review and provide a follow-up for the Designated Person upon their return. Records of inquiries made, responses received and actions taken must be maintained for (3) years. Reviews are intended to make sure the quality and integrity of business is of the highest possible standard. Some of the items reviewed are: Cancellations and corrections of previous trades Proper operation of the Client Holdings account Excessive trading Improper use of suspense accounts Client to Non-Client trades and ordering of fills Unusual trading activity by RR or calibre of stock Excessive concentration by RR in a security 8.2 MONTHLY TRDING REVIEWS Each month an additional statement is produced for each client, which generates over $1,000 in gross commissions. This statement is reviewed in the Toronto Office by the Manager of Credit and in the Montreal Office by the Compliance Supervisor. The review is intended to detect severe cases of excessive trading or unsuitable transactions. Given the very nature of clients and trading patterns, this review cannot possibly be expected to note all of these cases. s a result, it is the RR s responsibility to ensure that client trading is appropriate for the clients net worth and trading objectives. ll cases where inconsistencies are noted are sent to the RR involved for explanation or updating of the client application form. In addition, all Pro accounts must be reviewed on a monthly basis by the Designated Person and the Compliance Manager.

18 (Exhibit 8, pg. 24) 45. Mr. Bartley confirmed that, as stated in section 8.1, the ssociation required that Branch Managers must verify that they have reviewed the report by initialing the daily report and noting on the report any actions taken with respect to trading. This was the type of documentation that the ssociation was looking for when it conducted its review of the Branch; none was apparently found. 46. Mr. Corrigan testified that he did not have any real recollection of the TK Compliance manual at the Branch; however, he conceded that it may have been at the Branch. 47. Mr. Bartley also identified an ssociation internal document entitled Finding Form and produced a copy referred to as FF No. 3.3 (Exhibit 9) which he said was located in the ssociation s file on the 2000 Review. He stated it was a standard practice of the ssociation to prepare and record facts in the Finding Form at the time of the Review when the evidence was fresh in the minds of the investigators. 48. With respect to daily and monthly supervision, the Finding Form states: Finding Ref. ( ): Daily and Monthly Supervision REPET FINDING PRIORITY ITEM When the ssociation conducted the Head Office review of Thomson Kernaghan in November 1999, the Compliance Manager (Ron Kelterborn) stated that the Vancouver Branch is responsible for completing its Daily and Monthly Supervisory Reviews. During the ssociation s review of the ccount Supervision Procedures in the Vancouver Branch, Mr. Kelterborn stated that the Branch Manager does not conduct any Daily or Monthly Branch Supervision. The Branch does not maintain an audit trail as to the results of any reviews, since reviews are not conducted at the Branch. Currently, Mr. Kelterborn states that he reviews the

19 Commission Detail Report on a daily basis and that the Head Office reviews the monthly statements at the Branch level to evidence the Monthly Supervisory Review. In discussions with Mr. Corrigan (Branch Manager, Vancouver) it was confirmed that he does not engage in Branch Management activities as required by the Member, the ssociation or the B.C. Securities ct. s such, Daily and Monthly ccount Supervision is not being conducted as required at the Branch. This situation exists despite Mr. Corrigan being registered as Branch Manager and despite having undertaken to conduct Branch Supervision pursuant to the Policies, Regulations & By-laws of the ssociation. review of the Head Office Daily and Monthly ccount Supervision reports shows that Mr. Corrigan consistently allows his own client accounts to violate the Cash ccount Rule. The issue of ccount Supervision by Mr. Corrigan was also a deficiency when the same branch was reviewed by the ssociation under the Dominick and Dominick name in September Exhibit Mr. Chan also testified with respect to an interview of the Respondent conducted on February 27, 2003 (Exhibit 18). During that interview, Mr. Chan referred the Respondent to the Sales Compliance Review, and specifically the section that stated that TK informed the ssociation that the Branch Manager does not conduct any daily or monthly branch supervisory reviews, and it was the current practice that the daily and monthly reviews are performed at head office by the Compliance Manager, and that this had been confirmed by the Respondent. In response, the Respondent stated that this information, quoted to him, was not correct. He stated: Not totally correct. First of all, we did do haphazard daily reviews, maybe not to the detail required by the ID, but still we did do them and they were done in Toronto also. s far as monthly reviews they were mainly conducted in Toronto but, you know, I did look over, you know, the bigger accounts and see to that. s far as, you know, I am going from memory here and this is, you know, two and a half years ago almost and I ve gone through a world of activity since then, so I m trying to recall exactly the specifics of what we did and didn t do (Exhibit 18, page 6, line 25 to page 7, line 9) (emphasis added)

20 With respect to the daily reviews, the Respondent, in his testimony, stated he could not recall the interviews where he is reported to have stated that he did not do the Branch Manager review functions, but on the other hand he did not deny that he may well have said that. With respect to daily reviews, he stated that the procedure in the Branch was that Serj Johal, who had 35 years experience in the business, including compliance, conducted the review of the commission reports. If Ms. Johal was not there, he would do it. He also testified that Toronto did the daily reviews as well. Further, if there was an issue raised as a result of the reviews, he would deal with it. He further testified that he did initial the daily reports, and that he gave them to Ms. Johal. When he left the Vancouver office, he left the documents in TK s possession and control. 51. Summarizing matters with respect to the daily reviews, the Respondent testified the Branch was very busy, and that he did the Branch Manager s job as best he could, but he stated that he did not know what the ID requirements were. Notwithstanding this, he stated that while he did not do the reviews himself, they were done by Ms. Johal and he would touch base with her at the end of the day, or if there were any issues she would consult with him. He also stated she would call Toronto and speak to Compliance. 52. fter his employment at TK ended, the Respondent was out of the industry for a two month period before he transferred to Georgia Pacific Securities Corporation ( Georgia Pacific ). On or about October 10, 2001, the ssociation approved the Respondent s registration as an RR at Georgia Pacific subject to the outcome of an existing CDNX investigation, and subject to the Respondent being under close supervision until the outcome of the

21 CDNX investigation, with monthly supervision reports to be completed and retained by Georgia Pacific s compliance department (the Conditions ). 53. In March, 2003, the Respondent transferred to Northern Securities Inc. ( Northern ) after the amalgamation of Georgia Pacific and Northern; his registration remained subject to the Conditions. 54. In November, 2003, the Respondent resigned from Northern and transferred to Bolder Investment Partners Ltd. ( Bolder ) where his registration was approved subject to close supervision for a period of six months with monthly supervision reports to be completed and retained by Bolder s compliance department. NLYSIS Re: Count The ssociation alleges that during the relevant period, the Respondent, as Branch Manager at the Vancouver Branch of TK failed to adequately supervise the activities of S.R.J. when he was an Investment Representative, and thereby failed to ensure that the handling of client business was within the bounds of ethical conduct, consistent with just and equitable principles of trade and not detrimental to the interests of the securities industry, in contravention of ssociation Regulation , which provides: Each Member shall designate a director, partner or officer or, in the case of a branch office, a branch manager reporting directly to the designated director, partner or officer who shall be responsible for the opening of new accounts and the supervision of account activity. The director, partner or officer as the case may be, shall be responsible for establishing and maintaining procedures for account supervision and such persons or, in the case of a branch office, the branch manager shall ensure that the handling of

22 client business is within the bounds of ethical conduct, consistent with just and equitable principles of trade and not detrimental to the interests of the securities industry. 56. S.R.J. lost his registration as an RR, and carried on business as an IR. S.R.J. and the Respondent both well knew the limitations upon S.R.J., and the Respondent agreed to supervise S.R.J. to ensure there was no breach of conduct by S.R.J. acting as an IR. S.R.J. did not give up or transfer his book of business. 57. We are satisfied, on the whole of the evidence before us, that S.R.J., during the Relevant Period, did not give advice with respect to specific securities or solicit orders from his clients. 58. However, we are satisfied that the ssociation has proven that during the Relevant Period, to the knowledge of the Respondent, S.R.J. opened 228 client ccounts and completed the New Client pplication Forms as the RR of record. Once the NCF s were completed, and after the ccounts were opened, copies of the NCF s were sent to the clients. S.R.J. was being held out as an RR. 59. Further, the Respondent, as Branch Manager responsible for S.R.J. s conduct, permitted S.R.J. s name to appear as RR, or ccount Representative on the monthly account statements and trade confirmations for the ccounts. 60. Further, we are satisfied that the Respondent either knew, or ought to have known, that S.R.J. sent a letter to the new ccount clients, which enclosed the New Client pplication Form as well as other information, and that S.R.J. signed those letters as Investment dvisor which he was not permitted to do as an IR.

23 From the foregoing, we are satisfied SRJ was being held out as an RR, which was a misrepresentation. The ssociation has proven the violations alleged in Count 1. Re: Count The ssociation alleges that during the Relevant Period, the Respondent, as Branch Manager, failed to maintain evidence to support the daily supervision of client accounts at the Branch in contravention of ssociation Policy Considerable time at the hearing focused on the issue of whether or not the Respondent carried out the daily and monthly account supervision at the Branch. On a number of different occasions, the Respondent advised representatives of the ssociation who were conducting inquiries, that he did not do the daily or monthly supervision in the Branch, but that it was done, by arrangement, in Toronto. We are satisfied, on a preponderance of the evidence, that in fact, on a day-to-day basis, reviews of the Branch were primarily conducted in Toronto by the compliance department of TK. 64. However, the Respondent also stated, when perhaps the issue became more focused, that he had delegated the daily review responsibility to his administrative assistant in the Vancouver office, and that she performed that function, as well as Toronto. He stated that he would check with her each day, and deal with any irregularities, or if she was not present or able to do it, he did it himself. This state of affairs is consistent with the Respondent s February 2003 response (Exhibit 18, page 6) that his earlier answer was not correct, and that they did do haphazard daily reviews, although perhaps not as detailed as required by the ssociation.

24 In his evidence at this hearing, the Respondent testified for the first time that daily reviews were conducted by him at the Branch, and that the reports were initialed by him and placed in boxes. The boxes were left with TK, and he had no knowledge of their whereabouts. We were advised by counsel for the ssociation that while they did not accept that there necessarily were any such documents, they also did not know of their whereabouts. pparently TK s affairs were taken over by a Receiver. However, the ssociation was able to acquire, and produce at this hearing, a great deal of other TK documentation. 66. We are also disturbed by the fact that notwithstanding the reviews by the ssociation in 1999 and 2000, according to the Respondent, no one said to him that his descriptions of how the daily and monthly reviews were handled at the Branch were unacceptable, or a serious violation of ssociation Policies. Given that the purpose of the ssociation audits and reviews were remedial, we are of the view that in some respects the Respondent was lulled into a false sense of well-being because no one spelled out to him, in clear and unambiguous terms, that he was in breach and had to change his procedures. 67. The case for the ssociation on Count 2 relied heavily upon the Respondent s initial statements in 1999 and t the hearing, other evidence was led which, in our view, raised a reasonable doubt as to the accuracy, or completeness, of the Respondent s statements in 1999 and lso, we are not satisfied, on the evidence before us, that some or all of the documentation from the Branch could not have been located, or that Serj Johal could not have been called to testify as to the Branch review procedure. In our view, given the burden of proof in these proceedings, the onus was on the ssociation, at least initially, with respect to these matters.

25 We also wish to state that as a practical matter, we are satisfied that the procedures that the Respondent and TK had in place with respect to the daily and monthly reviews of the business at the Branch, were more than adequate to protect the interests of the clients, and the public. We are satisfied that the Respondent was, on a day-to-day basis, a hands-on manager who was aware of the trading that was taking place in the Branch, and communicated with the brokers and the administrative assistant, with respect to the daily events. The daily and monthly supervision that was conducted by the administrative assistant, and haphazardly by the Respondent, and the Toronto compliance group, resulted in the type of effective supervision that the ssociation demands. In our view, the ssociation s policy would likely have been more efficiently and economically met had the ssociation strived for approval, with safeguards, of the procedures that were in place in 1999, and which appear to have worked successfully. Evidence from the Respondent and others at TK was that there were no client complaints or lawsuits with respect to the operation of the Branch. 69. Having carefully reviewed the whole of the evidence, we are not satisfied that the ssociation has proven the violations alleged in Count 2, and it is dismissed. 70. Counsel may arrange with the Hearing Coordinator of the ssociation for the hearing to resume with respect to the penalty phase. Stephen D. Gill, Chair Ron Merritt, Member Don Teatro, Member

26 January 25, 2005 Lib2: