RE: Paul Joseph PALIOTTI NOTICE OF HEARING

Transcription

1 IN THE MATTER OF A DISCIPLINE HEARING PURSUANT TO BY-LAW 20 OF THE INVESTMENT DEALERS ASSOCIATION OF CANADA Quebec District Council RE: Paul Joseph PALIOTTI NOTICE OF HEARING NOTICE is hereby given that a hearing will be held before the Quebec District Council («the District Council») of the Investment Dealers Association of Canada («the Association»), on August 16, 2004, at 1, Place Ville-Marie, Suite 2802, Montreal (Quebec), at 10:00 a.m., or so soon thereafter as the hearing can be held, concerning a disciplinary action brought by the Association Staff concerning Paul Joseph Paliotti («the Respondent»). NOTICE is further given that the Staff of the Association alleges the following violations of the By-laws, Regulations or Policies of the Association by the Respondent being at all relevant time a Registered Representative with Options employed with RBC Dominion Securities Inc. ( RBC ), a Member of the Association, in Sainte-Claire, Province of Quebec: N o 1 Respondent failed to observe high standards of ethics and conduct and engaged in conduct unbecoming and detrimental to the public interest, contrary to By-law 29.1 of the Association, in that : On or around November 30, 2000, he unjustifiably modified the client s stated investment objectives and risk tolerance on the Know Your Client update forms regarding the accounts of five (5) clients, namely GDS, AS, FPS, GPS and CL, without their consent or understanding. During the period from February 2001 to December 2002, he concealed from his firm the complaint of his client, AF, for losses resulting from his failure to execute the client s instruction to switch to money market all his investments in mutual funds. Between February of 2001 and August of 2002, without the authorization of the firm, he admitted to seven (7) clients, namely AF, GDS, AS, GPS, FPS, MS and CS, his responsibility for the decline of their portfolio s value.

2 2 N o 2 During the period between August of 2001 and August of 2002, without the knowledge and approval of his firm, he engaged the responsibility of the firm by issuing seven (7) promissory notes to different clients, namely AF, GDS, AS, GPS, FPS, MS and CS, guaranteeing the prior value of their investments and covering the capital losses resulting from his mismanagement of their accounts. On or around April 18, 2001, he concealed or attempted to conceal from a client, CL, the losses resulting from his mismanagement of her account, by covering them in obtaining from a third party a guarantee in favor of her account, without her knowledge or consent. On or around April 18, 2001, he failed to update the Know Your Client Forms for the account of CS and CL, for indicating that these clients were having a financial interest in each other s account in that CS s one was guaranteeing CL s one. On or around July 24, 2001 and April 25, 2002, while updating the Know Your Client Forms for the accounts of CS and CL respectively, he failed to disclose on the forms that CL and CS were having a financial interest in each other s account. During the period between 2000 and 2002, the Respondent engaged in discretionary trading in the accounts of eight (8) clients, namely GDS, AS, MS, GPS, FPS, AF, CS and CL, without written authorization of the clients and without such accounts being specifically approved and accepted in writing as discretionary accounts, contrary to Regulation of the Association. N o 3 During the period between 2000 and 2002, the Respondent failed to use due diligence to ensure that the trading in the accounts of eight (8) clients, namely GDS, AS, MS, GPS, FPS, AF, CS and CL was appropriate for the clients and in keeping with their actual investment objectives and risk tolerance, contrary to By-law (c). PARTICULARS NOTICE is further given that the following is a summary of the facts alleged and intended to be relied upon by the Association at the said hearing:

3 3 A. The investigation 1. The Association initiated an investigation into the conduct of the Respondent following allegations of conduct unbecoming contained in the Uniform Termination Notice of the Respondent filed on January 14, 2003 by RBC Dominion Securities Inc. ( RBC ), a Member of the Association. B. The Respondent 2. At all relevant time, the Respondent was a Registered Representative with Options, employed with RBC in Pointe-Claire, Province of Quebec. 3. The Respondent has been registered with the Quebec Securities Commission as a Mutual Funds Representative from 1991 to He was registered in the securities industry as Registered Representative for RBC since October of 1995 and was approved for trading Options in January The Respondent has not been registered with a Member of the Association since his termination with RBC on January 9, C. Misconducts i) The client A.F. 5. On or around November 29, 2000, A.F. opened two offshore accounts with the Respondent at RBC, the accounts no (US funds account) and no (Cdn funds account). The client has been referred to the Respondent by M.C. of the Royal Bank. 6. These accounts were consolidated into one institutional offshore account opened with RBC for Royal Bank of Canada Channel Island under the reference no This institutional account was consolidating all mutual funds into one offshore institutional account of the Royal Bank. 7. In January of 2001, the client requested that all his mutual funds in the account no be switched to money market. 8. The Respondent did not follow the client s instruction, which resulted in a significant decrease in the client s portfolio value. 9. In or around February of 2001, the Respondent met with the client and M.C. of the Royal Bank. At this meeting, the Respondent acknowledged having failed to follow the client s instruction and admitted his responsibility over that mistake. He would have then promised to the client to bring his portfolio to its prior value.

4 4 10. On or around April 5, 2001, the client A.F. sent a letter by fax to the Respondent, in which he referred to an admission made to him by the Respondent of having failed to follow his instruction to put his entire investments on money market, which failure resulted in a decrease of $25,000 in his portfolio value. He also reminded the Respondent of the promise he made to him at that time to correct the situation by bringing his portfolio to its prior value. Finally, the client was complaining that not only the Respondent did not correct it as promised but that he was now realizing that his investments went down another $30, On or around August 10, 2001, without informing RBC nor getting its approval, the Respondent sent a letter to the client, A.F. confirming to him in writing that he was guarantying the value of the client s investments in the offshore account. The letter printed on RBC s letterhead provides the following : «This letter is to confirm that your offshore account # is guaranteed at $227, due to the error that was made by myself, Paul Paliotti. This will be adjusted by the end of December 2001.» 12. On or around January 9, 2002, without informing RBC nor getting its approval, the Respondent sent a second letter to the client, A.F., stating that he was guarantying the value that the three (3) accounts of the client were going to have by March 9th, The letter printed on RBC s letterhead was drafted in the following terms : «Re : Errors in account no / and : [A...F...] This letter is to confirm the accounts mentioned above are guaranteed at 240,000 by March 9th, 2002, due to the error made by myself not acting on a request made by the client.» 13. The day after, on or around January 10, 2002, without informing RBC nor getting its approval, the Respondent sent a third letter to the client, A.F., indicating to him that he was guarantying what will be the value of his accounts by April 9th, The letter printed on RBC s letterhead provides the following : «Re : Errors in account no / / Offshore : [A...F...] This letter is to confirm the accounts mentioned above are guaranteed at $240,000 cdn. by April 9th, 2002, due to the error made by myself not acting on a request made by the client.» 14. On or around April 17, 2002, without informing RBC nor getting its approval, the Respondent sent a fourth letter to the client, A.F., indicating to him that he was guarantying the value of the three (3) accounts of the client but now until December 30, 2002.

5 5 15. The letter printed on RBC s letterhead was drafted as follow : «Re : Errors in account no / / Offshore : [A...F...] This letter is to confirm the accounts mentioned above are guaranteed at $215,000 cdn. till december 30, 2002 The amount represents $ $40,000 withdrawal June 1, interest till December 30, This guarantee is based upon the error made by myself on not acting on instructions given by the client, Mr AF.» 16. The Respondent did not inform the firm until December of 2002 of his failure to follow instructions of his client A.F. in January of 2001 and of the subsequent events arising as a result. 17. All over the period when he was trying to rectify the situation in the account of his client, A.F., in 2001 and 2002, the Respondent engaged in discretionary trading without getting the client s prior authorization before executing each trade and without this account being duly approved as a discretionary or a managed account. ii) The clients GDS and AS 18. The clients GDS and his wife AS were family-related to the Respondent. They were speaking Italien and did not read really well English or French. 19. On or around February 6, 1998, GDS and AS each opened a new account with RBC, account no for GDS and account no for AS. 20. On or around June 11, 1999, GDS and AS each opened a new advisory RSP account with RBC (account no for GDS and account no for AS) and they opened a joint account, on the name of GDS and AS, the account no On or around June 20, 1999, a Fee-based Agreement was signed by the clients in order to convert their account no into a fee-based account and the Know Your Client Form was updated accordingly on the date of June 30, On the updated Know Your Client Form dated June 30, 1999, the clients investment knowledge was indicated as good, which the Respondent knew was not accurate, and their stated objectives and risk tolerance were indicated as follow:

6 6 Income 50 % Investment Grade 50 % Growth (Long Term) 50 % Good Quality 50 % Growth (Inter Term) 0 % Speculative % Growth (Short Term) 0 % High Risk % 23. On or around November 30, 2000, the Respondent updated the Know Your Client Forms for the accounts of GDS and AS. 24. The clients stated objectives and risk tolerance indicated by the Respondent, were modified as follow on the update form, without their knowledge or understanding: Growth (Long Term) 50 % Good Quality 25 % Growth (Inter Term) 25 % Speculative 50 % Growth (Short Term) 25 % High Risk 25 % 25. The investment knowledge of the clients was indicated as being good, which the Respondent knew was not accurate. 26. Over the period starting on or around 2000, the Respondent engaged in too speculative trading in the accounts of GDS and AS, without obtaining their prior authorization before executing each trade. 27. Their account was not approved as a discretionary account or as a managed account. 28. On or around August 27, 2001, the Respondent sent a letter to his clients, Mr. and Mrs GDS., confirming to them that he was guarantying what the value of the investment in their accounts was to be on August 31, The letter printed on RBC s letterhead provides the following : «Re: Acct: no: & This letter is to confirm that the capital investments which was invested in these accounts mentioned above are guaranteed by the date of August 31, 2002 due to the mismanagement done by myself.» 29. The Respondent did not advise his employer of this promissory note nor he got its consent to it.

7 7 30. One of the account covered by this guarantee letter, the account no was rather an account opened on the name of MS, the clients daughter. 31. On or around May 7, 2002, the Respondent filed an internal Know Your Client update form for the account no , modifying the clients investment objectives and risk tolerance as follow, without their knowledge, bringing them back to their initial profile: Income 50 % Investment Grade 50 % Growth (Long Term) 50 % Good Quality 50 % Growth (Inter Term) 0 % Speculative % Growth (Short Term) 0 % High Risk % 32. On the update form, the investment knowledge for AS was now stated as being limited. iii) The client M.S. 33. MS had an account opened at RBC since December 1996, the account no MS is family-related to the Respondent. 35. At all relevant times, MS was living in Italia and has been a non-canadian resident since In June of 1999, MS s account no was replaced by an advisory account (fee based account) no The client account was not approved as a discretionary account or as a managed account. 38. The Respondent had no direct contact with MS. She never signed a discretionary account agreement. The transactions contracts and account statements were not sent to M.S. but only to her parents, GDS and AS who did not read English very well. 39. On or around August 27, 2001, the Respondent sent a letter to GDS and AS, the client s parents, confirming to them that he was guarantying until August 31, 2002 the value of the capital invested in their accounts and in the account no , which was MS s one. The letter printed on RBC s letterhead provides the following :

8 8 «Re: Acct: no: & This letter is to confirm that the capital investments which was invested in these accounts mentioned above are guaranteed by the date of August 31, 2002 due to the mismanagement done by myself.» 40. The Respondent did not advise his firm of such promissory note nor did he get its consent to it. 41. During the period between 2000 and 2002, the Respondent engaged in unauthorized discretionary trading in the account of MS and with disregard to its suitability for the client. iv) The client FPS 42. On or around August 15, 1997, the Respondent opened a cash account (Cdn) on the name of FPS with RBC (account no ). The client signed a margin agreement on August 21, At that time, the client who is family-related to the Respondent, was 63 years old and was retired. 44. On the Know Your Client Form, her investment objectives and risk tolerance were stated as follow by the Respondent : Income 50 % Investment Grade 50 % Growth (Long Term) 50 % Good Quality 50 % Growth (Inter Term) 0 % Speculative 0 % Growth (Short Term) 0 % High Risk 0 % 45. On or around November 30, 2000, the Respondent filed an updated Know Your Client Form for the account of FPS. On the new updated Form, without the knowledge or understanding of the client, the Respondent modified her stated investment objectives and risk tolerance as follow: Growth (Long Term) 50 % Good Quality 25 % Growth (Inter Term) 25 % Speculative 50 % Growth (Short Term) 25 % High Risk 25 %

9 9 46. On or around April 19, 2001, the Respondent filed a new updated Know Your Client Form for the account of FPS. On the new updated form, the Respondent again indicated her stated investment objectives and risk tolerance as being : Growth (Long Term) 50 % Good Quality 25 % Growth (Inter Term) 25 % Speculative 50 % Growth (Short Term) 25 % High Risk 25 % 47. The Respondent indicated on the new updated form that the client s investment knowledge was good, what he knew was not accurate, identified the account as being changed to a margin account and had the client sign an Equity credit line Agreement. 48. The client was then 67 years old. 49. During the period when he was attempting to correct the situation in the account of FPS that resulted from his mismanagement of the client s investments, from 2000 to 2002, he engaged in unauthorized discretionary trading, without obtaining the prior authorization of the client before entering each order for her account. 50. The client account was not approved as a discretionary account or as a managed account. 51. On or around August of 2002, without informing RBC nor getting its approval, the Respondent prepared a letter to his clients, FPS and her husband GPS, that he back dated to August 8, 2001, confirming to them that he was guarantying the original investment in both the accounts no and no The letter printed on RBC s letterhead provided the following : «Re: Acct: no: & This letter is to confirm that I guarantee the original capital investment of the above-mentioned accounts for 47000$ and 47000$ respectively due to the mismanagement done by myself.» 52. The Respondent did not advise his firm of such a promissory note nor did he get its consent to it.

10 10 v) The client GP S 53. On or around August 14, 1997, the client, GPS opened a cash account with the Respondent at RBC (account no ). On August 25, 1997, the client signed a margin agreement. He was then 65 years old and retired. 54. The client is family-related to the Respondent. 55. On the Know Your Client Form, the client s investment objectives and risk tolerance were stated as follow by the Respondent : Income 50 % Investment Grade 50 % Growth (Long Term) 50 % Good Quality 50 % Growth (Inter Term) 0 % Speculative 0 % Growth (Short Term) 0 % High Risk 0 % 56. On or around November 30, 2000, the Respondent filed an updated Know Your Client Form for the account no which changed it from a cash account to a margin account. 57. On the new updated form, the Respondent indicated the client s investment knowledge as being good, what he knew was not accurate, and he modified the stated investment objectives and risk tolerance of the client as follow, without his knowledge or understanding: Growth (Long Term) 50 % Good Quality 25 % Growth (Inter Term) 25 % Speculative 50 % Growth (Short Term) 25 % High Risk 25 % 58. On or around May 5, 2002, the Respondent signed an internal updated Know Your Client Form for the account no The client s investment knowledge was indicated as good, what he knew was not accurate. 59. On the new updated form, without the knowledge or consent of the client, the Respondent again modified the stated investment objectives and risk tolerance of the client as follow:

11 11 Growth (Long Term) 30 % Good Quality 50 % Growth (Inter Term) 30 % Speculative 25 % Growth (Short Term) 40 % High Risk 25 % 60. The client was then 70 years old. 61. All over the period when he was attempting to correct the situation in the account of GPS, that resulted from his disregard of the client s actual objectives, he engaged in unauthorized discretionary trading, without obtaining the prior authorization of the client before entering orders for his account. 62. The client account was not approved as a discretionary account or as a managed account. 63. On or around August 2002, the Respondent prepared a letter to his clients GPS and his wife FPS, that he back dated to August 8, 2001, confirming to them that he was guarantying the value of their initial investments. The letter was printed on RBC s letterhead. 64. The Respondent did not advise his firm of such a promissory note nor did he get its consent to it. vi) The client CS 65. On or around November 1 st, 1995, the client, CS opened an account with the Respondent at RBC and signed a Client Agreement Advisor Account. 66. The client was family-related to the Respondent. He is the Respondent s nephew and was then 28 years old. 67. On the Know Your Client Form, the client s investment objectives were defined as being Growth Maximum Risk. 68. On or around June 7, 1996, the client signed a Margin account agreement. 69. On or around June 10, 1996, the Respondent updated the Know Your Client Form and on June 12, 1996, the client signed an Option trading and margin Agreement.

12 The stated investment objectives and risk tolerance of the client were indicated as follow by the Respondent on the updated Know Your Client Form: Income 20 % Investment Grade 0 % Growth (Long Term) 40 % Good Quality 50 % Growth (Inter Term) 40 % Speculative 30 % Growth (Short Term) 0 % High Risk 20 % 71. On or around February 6, 1997, the Respondent filed an updated Know Your Client Form for the account no On the new updated form, the client s investment objectives and risk tolerance remained unchanged. 72. On or around February 1, 1998, a new Margin account Agreement has been signed with the name of the client. 73. On or around November 17, 1999, the Respondent filed an updated Know Your Client Form for the account no The client investment knowledge was now indicated as being sophisticated. 74. On the new updated form, the Respondent modified the stated investment objectives and risk tolerance of the client as follow: Growth (Long Term) 20 % Good Quality 40 % Growth (Inter Term) 80 % Speculative 60 % Growth (Short Term) 0 % High Risk 0 % 75. On or around March 28, 2000, the Respondent filed an updated Know Your Client Form for the account no On the new updated form, without the knowledge or consent of the client, the Respondent modified the stated investment objectives and risk tolerance of the client as follow: Growth (Long Term) 0 % Good Quality 20 % Growth (Inter Term) 0 % Speculative 30 % Growth (Short Term) 100 % High Risk 50 %

13 The Respondent abused the client s confidence and misused his account in engaging in too aggressive trading. 77. All over the period from 2000 to 2002, he engaged in unauthorized discretionary trading, without obtaining the prior authorization of the client before entering orders for his account. 78. The client account was not approved as a discretionary account or as a managed account. 79. On or around July 24, 2001, the Respondent filed an updated Know Your Client Form for the account no On the new updated form, the Respondent modified the stated risk tolerance of the client as follow: Growth (Long Term) 0 % Good Quality 40 % Growth (Inter Term) 0 % Speculative 60 % Growth (Short Term) 100 % High Risk 0 % 80. The next month, on or around August 27, 2001, the Respondent sent a letter to his clients, CS, confirming to him that he was guarantying what the value of the investment in the client s account will be on August 31, 2002, a year later. The letter printed on RBC s letterhead provides the following : «Re: Acct: no: This letter is to confirm that the capital investments which was invested in these accounts mentioned above are guaranteed by the date of August 31, 2002 due to the mismanagement done by myself.» 81. The Respondent did not advise his firm of such a promissory note nor did he get its consent to it. vii) The client CL 82. On or around September 3, 1998, the client, CL opened a cash account with the Respondent at RBC (account no ). The client has signed a Cash account Agreement on August 27, On the Know Your Client Form, the client s investment objectives and risk tolerance were indicated as follow by the Respondent:

14 14 Income 30 % Investment Grade 100 % Growth (Long Term) 70 % Good Quality 0 % Growth (Inter Term) 0 % Speculative 0 % Growth (Short Term) 0 % High Risk 0 % 84. On or around November 25, 1999, the Respondent filed an updated Know Your Client Form for the account no in order to convert it into a margin account but the stated investment objectives and risk tolerance of the client remained unchanged on the form. 85. On or around December 8, 1999, the firm approved to change the account no from a cash account to a margin account. 86. On or around November 28, 2000, the Respondent filed another updated form for the account no On the new updated form, the Respondent modified the stated investment objectives and risk tolerance of the client, without her knowledge, as follow: Growth (Long Term) 0 % Good Quality 50 % Growth (Inter Term) 50 % Speculative 50 % Growth (Short Term) 50 % High Risk 0 % 88. Respondent then engaged in unsuitable trading and mismanaged the account of the client. He acted in a discretionary fashion without obtaining the authorization of the client prior to each transaction. 89. The account was not approved as a discretionary account or as a managed account. 90. CL experienced significant losses and her account became under-margined. 91. In order to cover losses in CL account and to avoid informing her of the situation, the Respondent rather asked his nephew, CS, who also had an account with RBC, to sign a guarantor/guarantee agreement for covering the account of CL.

15 On or around April 18, 2001, as requested by his uncle, the Respondent, who was thereby unduly using his influence over him and abusing his confidence, CS signed the guarantor/guarantee agreement. 93. The Respondent never informed CL that the account of CS no was guarantying her account no She was never made aware that CS entered into an agreement for guarantying her account nor she consented to it. 94. The Respondent did not update the Know Your Client forms for CS and CL accounts to indicate the new financial interest that the clients had in each other s account. 95. On the subsequent Know Your Client Form update of July 24, 2001 for the account of CS no , the Respondent failed to disclose the financial interest of CL in the account. 96. On or around August 27, 2001, the Respondent signed a letter to SC (the guarantor of CL s account) guarantying the capital invested in his own account no On or around April 25, 2002, the Respondent filed a new updated Know Your Client Form for the account of CL no On this new updated form, the Respondent failed to disclose that CS had a financial interest in the account of CL. 99. On the new updated form, the Respondent modified the stated investment objectives and risk tolerance of CL as follow, bringing them back to their initial profile: Income 30 % Investment Grade 100 % Growth (Long Term) 70 % Good Quality 0 % Growth (Inter Term) 0 % Speculative 0 % Growth (Short Term) 0 % High Risk 0 %

16 16 NOTICE is further given that the Respondent shall be entitled to appear and be heard and be accompanied by counsel or agent at the hearing and to call, examine and crossexamine witnesses. NOTICE is further given that the Association By-laws provide that if, in the opinion of the District Council, the Respondent has failed to comply with or carry out the provisions of any federal or provincial statute relating to trading or advising in respect of securities or commodities or of any regulation or policy made pursuant thereto; failed to comply with the provisions of any of the By-laws, Regulations, Rulings or Policies of the Association; engaged in any business conduct or practice which such District Council in its discretion considers unbecoming or not in the public interest; or is otherwise not qualified whether by integrity, solvency, training or experience, the District Council has the power to impose any one or more of the following penalties : 1) a reprimand; 2) a fine not exceeding the greater of : 1) $1,000,000. per offence; and 2) an amount equal to three times the pecuniary benefit which accrued to such person as a result of committing the violation; 3) suspension of approval of the person for such specified period and upon such terms as the District Council may determine; 4) revocation of approval of such person; 5) prohibition of approval of the person in any capacity for any period of time; 6) such conditions of approval or continued approval as may be considered appropriate by the District Council. NOTICE is further given that the District Council may, in its discretion, require that the Respondent pay the whole or part of the costs of the proceedings before the District Council and any investigation relating thereto. NOTICE is further given that the District Council may accept as having been proven any facts alleged or conclusions drawn by the Association in the Notice of Hearing and Particulars that are not specifically denied, with a summary of the facts alleged and conclusions drawn based on those alleged facts, in a REPLY.

17 17 NOTICE is further given that the Respondent has ten (10) days from the date on which this Notice of Hearing and Particulars was served, to serve a REPLY upon: Investment Dealers Association of Canada 1, Place Ville-Marie Suite 2802 Montréal, Québec H3B 4R4 Attention : Sylvie Poirier, Enforcement Counsel A REPLY may either: i) specifically deny (with a summary of the facts alleged and intended to be relied upon by the Respondent, and the conclusions drawn by the Respondent based on all the alleged facts) any or all of the facts alleged or the conclusions drawn by the Association in the Notice of Hearing and Particulars; or ii) admit the facts alleged and conclusions drawn by the Association in the Notice of Hearing and Particulars and plead circumstances in mitigation of any penalty to be assessed. NOTICE is further given that, if the Respondent fails to serve a Reply or attend at the hearing, notwithstanding that a Reply may have been served, the District Council may proceed with the hearing of the matter on the date and at the time and place set out in this Notice, or on any subsequent date, at any time and place, without further notice to and in the absence of the Respondent, and the District Council may accept the facts alleged or the conclusions drawn by the association in this Notice of Hearing and Particulars as having been proven, and may impose any of the penalties prescribed by the By-laws of the Association. DATED at Montreal, Province of Quebec, this day of CARMEN CRÉPIN Vice-President, Quebec INVESTMENT DEALERS ASSOCIATION OF CANADA 1, Place Ville-Marie, Suite 2802 Montreal, Quebec H3B 4R4