IN THE MATTER OF THE UNIVERSAL MARKET INEGRITY RULES AND IN THE MATTER OF JASON FEDIUK DECISION. Jean P. Whittow, Q.C. Chilwin C.

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1 IN THE MATTER OF THE UNIVERSAL MARKET INEGRITY RULES AND IN THE MATTER OF JASON FEDIUK DECISION Hearing Panel: Chair Industry Member Industry Member Counsel For Market Regulation Services: Counsel For Jason Fediuk: Jean P. Whittow, Q.C. David M. Pearson Bradley Doney Chilwin C. Cheng H. Roderick Anderson Dates of Hearing: July 26,2005 (Preliminary Application), August 28,29, This Hearing Panel (the "Panel") was convened to consider allegations set out in a Notice of Hearing issued to the Respondent, Jason Fediuk, on February 15, The charge is as follows: On April 26, 2002, with knowledge of a client order to purchase shares of TVX Gold Inc. ("TVX) that on entry could reasonably be expected to affect the market price of this security, you entered a non-client order on a marketplace for the purchase of this security prior to entry of the client's order, contrary to UMIR 4.1(l)(a) and for which you are liable under UMIR 10.4(l)(a). 2. LTMIR Rule 4.1(l)(a) prohibits frontrunning. It provides as follows: 4.1 Frontrunning (1) A Participant with knowledge of a client order that on entry could reasonably be expected to affect the market price of a security, shall not prior to the entry of such client order, (a) enter a principal order or a non-client order on a marketplace, stock exchange or market, including any

2 over-the-counter market, for the purchase or sale of the security or any related security The "knowledge" applicable in UMIR Rule 4.1(l)(a) is described as "actual" or "specific" knowledge. STANDARD OF PROOF 4. In argument, counsel for Market Regulation Services Inc. ("RS") described the standard of proof by saying that RS must prove that "it is more likely than not" that the alleged offence occurred. He referred to two cases, Re Sirianni, COR #91/187 (B.C. Sec. Com.) and Rak v. British Columbia (Superintendent of Brokers), [ B.C. J. No Counsel for the Respondent referred to Re: T. Shambleau Sprott Securities Ltd., [2003] R.S.D.D. No. 3 and Re J. Ing, [I9981 T.S.E.D.D. No. 3. It was the Respondent's submission that RS has the burden of establishing the charge on clear and convincing proof based upon cogent evidence. 6. On examination, the authorities referred to by counsel for RS describe the test as the balance of probabilities, but go on to say that, within the balance of probabilities, the standard varies. In the Rak case, cited with approval in the Sirianni case, the Court of Appeal said: I think the Securities Commission properly recognized that there are cases where it requires: "...that in serious matters, like the present case, we require a relatively high degree of proof..." within the civil standard of proof on a balance of probabilities (p.6).

3 ., Counsel for the Respondent noted that in the Shambleau case, RS and the Respondent had agreed that "the burden on the Exchange is to establish the charge on a standard of clear and convincing proof based upon cogent evidencew(p.l1, para.[4]). 8. The Panel is of the view that the preferable statement as to the standard of proof is that employed in the Shambleau case: RS must establish the charge on a standard of clear and convincing proof based upon cogent evidence. The standard is higher than the mere balance of probabilities, but not so high as the criminal test, described as proof beyond a reasonable doubt. The Panel agrees with the comments made in the authorities to which it was referred and, in particular, the Rak case, that the elevated standard is required because of the gravity of the misconduct alleged and the serious consequences of an adverse finding. EVIDENCE AND ISSUES 9. At the outset of the evidentiary portion of these proceedings, counsel for RS and for the Respondent filed an Agreed Statement of Facts (which is attached in its entirety as Appendix A to this decision), and an Agreed Book of Documents. The Agreed Statement of Facts dealt with background matters and the chronology of events on the relevant date. 10. In addition, Wade Cox, an investigator with RS, and Joey Javier, a trader at AIG Inc. ("AIG"), gave viva voce evidence. The Respondent gave evidence and was cross-examined by counsel for RS. Extracts from unsworn interviews of the Respondent and William Burk, a trader at Salman Partners Inc. ("Salman"), conducted by RS, were read in to the record before the Panel on the basis that counsel agreed that such material was before the Panel as though given under oath by those parties.

4 11. The factual issues for the determination of the Panel are: (a) whether the Respondent knew about an AIG order to purchase 3.5 million shares of TVX (the AIG Order) prior to entering orders on his own account to purchase TVX; and (b) whether the AIG Order, on entry, could reasonably have been expected to affect the market price of TVX. KNOWLEDGE OF THE AIG ORDER To prove the charge of frontrunning, it must be shown that the Respondent had actual knowledge of the AIG Order before entering orders on his own account. The Respondent denies that he had such knowledge. In the face of the Respondent's denial, knowledge can be established by evidence from other persons that they told the Respondent about the AIG Order, or that the Respondent otherwise learned of the AIG Order, or that the Respondent told or otherwise communicated to another person that he knew about the AIG Order. It is also possible that knowledge could be inferred from the Respondent's conduct. RS must establish the Respondent's knowledge of the AIG Order to the required standard of proof. 13. It was admitted before the Panel that, on April 26, 2002, the Respondent was a trader in the Vancouver office of Salman and was registered to trade on the Toronto Stock Exchange. He worked in close proximity to William Burk ("Burk"), another trader with Salman. 14. The events in issue occurred early on the morning of April 26, The admitted facts concerning the chronology of events are summarized as follows:

5 H At 6:49:56 a.m. Pacific Time ("PT"), the Respondent entered a non-client order to sell short 50,000 shares of TVX at $1.16 through his personal account at Salman. The short sale order was executed in three trades over the next thirty seconds; At 6:58:22 a.m. PT, the Respondent entered a non-client order to buy 50,000 shares at $1.16 through his terminal at Salman (the "Cover Order"); a By approximately 7:00 a.m. PT, the Respondent called Research Capital Corporation ("Research') to place a non-client order to buy 50,000 shares (the "Jitney Ordery); a Research entered the Jitney Order at 7:01:0 1 a.m.; a By approximately 7:01:16 a.m. PT, the Jitney Order was partially filled: 36,100 shares at $1.17; and H At 7:03:27 a.m. PT, the Respondent entered the initial portion of the AIG Order, which Burk had received earlier in the morning, by purchasing 130,000 shares of TVX Gold Inc. at $ It is agreed, then, that by 7:03:27 a.m. - that is after the Cover Order and the Jitney Order - the Respondent entered the initial portion of the AIG Order (the "7:03 Trades"). But when, in advance of the 7:03 Trades, did the Respondent learn of the AIG Order?

6 Counsel for RS asserts that the Respondent knew about the AIG Order by 6:58 a.m. He relies upon the Respondent's proximity to Burk in the trading room, the timing of the orders, the evidence of Burk and the Respondent's personal circumstances. 17. Joey Javier ("Javier"), the trader for AIG, testified that, sometime in the morning of April 26, 2002, he placed an order to buy 3.5 million TVX shares with Salman. He testified that he usually dealt with Burk. He had no further recall of the events in question. 18. Burk did not give viva voce evidence but, as stated above, counsel for RS read into the record passages from an interview of Burk conducted by RS on June 23, In his interview, Burk stated that on April 26, 2002, he received a telephone call from Javier to purchase 3.5 million shares in TVX, but Javier then hung up. Burk said that he wrote and time stamped an order ticket at that time. Salman's order ticket for the AIG Order (Exhibit 3 Tab 5) bears a time stamp of 6:57 a.m. 19. Burk said that he then called Javier back "numerous times because there was not enough detail for me to start going into the market". He said that he called "five or six times". He said that he did not yell out the order or tell others about it until he got confirmation from Javier as to its terms. He said that after he spoke to Javier a second time he told the Respondent to "lift the offering". 20. Burk further said that at the time he told the Respondent to lift the offer, he "most likely" told him of its total size. The Respondent confirms that when he was instructed to lift the offer he knew of the size of the AIG Order. 21. The 7:03 Trades are consistent with an instruction to lift the offer.

7 Salman's telephone records are contained in the Book of Documents (Exhibit 3, Tab 6). The records show telephone calls by Burk to AIG's telephone number on April 26,2002 at 6:18 a.m., 6:38 a.m., 658 a.m., 758 a.m., 8:01 a.m. and many other calls throughout the day. 23. The Panel was not provided with telephone records for calls by AIG to Salman. 24. Counsel for RS says that the Panel should find that the telephone call during which the terms of the AIG Order were confirmed took place at 6:58 a.m. This is the last time at which a call appears in Salman's telephone records prior to the 7:03 Trades. 25. However, the telephone records provided to the Panel do not capture all telephone communications between AIG and Salman. The interview of Burk and the viva voce evidence of Javier are not clear as to the number or timing of calls or their content. Therefore, the Panel is unable to determine the time at which the telephone call confirming the terms of the AIG Order took place. 26. Further, even if the Panel had found that the confirmation of the terms of the AIG Order took place at 658 a.m., the Panel is unable to make a finding as to the precise time that Burk so informed the Respondent. The Panel is therefore unable to find that Burk informed the Respondent of the AIG Order prior to the Cover Order or the Jitney Order. 27. We come to this view having regard to the evidence that, upon receipt of instructions, action would be promptly taken, and that time notations on the trading records, order tickets and telephone records are accurate. 28. RS also argues that the Respondent must have overheard the AIG Order because of his proximity to Burk. The parties agreed that the Salman trading room was 30 feet by 12

8 -8- feet. This would be small enough that it would be possible to overhear the voices of the others in the room. The Panel is not satisfied upon the evidence that the Respondent learned of the AIG Order in such fashion. 29. Counsel for RS also pointed to personal factors being the Respondent's motivation to cover his short position, his failure to advise anyone of his Cover Order and Jitney Order which operated as competing bids, and his use of a Jitney Order. The Panel is unable to infer that the Respondent had knowledge of the AIG Order based upon these factors. 30. The Panel is of the view that the timing of the trades and the personal factors referred to by counsel for RS raise suspicions and properly warranted investigation. Certainly, one possible explanation for the Respondent's Cover Order and Jitney Order is that he knew of the AIG Order and was seeking to cover his short position before an anticipated rise in price. However, the evidence as presented to the Panel is equally amenable to an innocent explanation for the series of trades. For example, the Panel notes that, had the Respondent known of the AIG Order, and wished to ensure an immediate purchase of TVX, he could have given a market order rather than an order at a specific price In all, the Panel finds that RS has not proven to the required standard that the Respondent knew about the AIG Order prior to the Cover Order or the Jitney Order. 32. The Panel is particularly troubled that the Respondent failed to advise anyone of his competing bids and did not withdraw those bids immediately upon learning of the AIG Order. However, the Panel notes that the allegations set out in the Notice of Hearing do not involve the client priority rule set out in UMIR 5.3.

9 AFFECTING THE MARKET 33. Having failed to prove that the Respondent knew of the AIG Order at the time he entered either of the Cover Order or the Jitney Order, it is unnecessary to deal with whether or not the AIG Order could reasonably have been expected to affect the market for TVX. CONCLUSION 34. The Panel therefore dismisses the charges against the Respondent. Decision dated ~ e~temberq, Industry ember - David M. Pearson

10 APPENDIX "A", - Agreed Statement of Facts Between Market Regulation Services Inc. Market Regulator And Jason Michael Fediuk Respondent The parties jointly submit the following facts as true for the purposes of a hearing before a Hearing Panel constituted under the Universal Market Integrity Rules to hear the allegations against the Respondent, Jason Michael Fediuk on 25 May The parties jointly agree to submit this Agreed Statement of Facts to the Hearing Panel and agree that it is admissible and proof of the facts and events described in the document. 1. All of the trades and orders referred to in this Agreed Statement of Facts were entered or executed, as the case may be, on the Toronto Stock Exchange ("TSE). 2. Unless otherwise stated, all prices for shares in the Agreed Statement of Facts are expressed on a "per share" basis. 3. As of April 26,2002, Salman was a dealer registered in accordance with securities legislation in the Provinces of British Columbia and Ontario. It was a Member of the Toronto Stock Exchange ! - L. r - I. 4. As of April 26,2002, Salman's business included investment banking, sales and trading, and research. Salman mainly traded on behalf of institutional clients such as mutual funds, pension funds, and other corporate clients. 5. As of April 26,2002, Salman maintained a head office in Vancouver, British Columbia. i 6. In April 2002, the Respondent was employed as a trader in Salman's Vancouver office. I The Respondent has worked in the securities industry since 1994 and has been a i, registered representative with Salman since July 1999.

11 1 7. On April 24 and 25,2002, Jason Michael Fediuk was registered to trade on the TSE having trading number SP00 1 RE. The TSE has assigned Salman dealer # The trading room at Salman's Vancouver office had dimensions of 30' x 12'. There are seats for five or six traders that were occupied by the Respondent, Mr. Jason Michael Fediuk (Fediuk), Mr. William Burk (Burk), the Head of Trading and others., 9. TVX Gold Inc. (TVX) was, at all material times, a reporting issuer whose shares traded through the facility of the TSE. 10. On 23 April 2002, Salman recommended the purchase of TVX to AIG Inc., a Salman client, on the general premise that TVX was cheaper that its peer group. 11. On 26 April 2002, Fediuk entered, on Salman's behalf, a principal order to sell 200,000 shares of TVX from Salman's H-inventory account. This order was executed as a long sale of 189,000 shares at $1.19, with the remaining 10,900 shares executed as a short sale at $ As of 6:49 a.m. PT, the Salman inventory account carried a short position of 10,900 shares in TVX. 13. At 6:49:56 a.m. PT, Fediuk entered a non-client order to sell short 50,000 shares of TVX at $1.16 through his account at Salman. The short sale order was executed in three trades over the next thirty seconds. 14. At 6:58:22 a.m. PT, Fediuk entered a non-client order to buy 50,000 shares at $1.16 through his terminal at Salman (Cover Order). 15. By approximately 7:00 a.m. PT, Fediuk called Research Capital Corporation (Research) to place a non-client order to buy 50,000 shares (Jitney Order). The TSE had assigned Research dealer # Research entered the Jitney Order at 7:O 1 :01 a.m. PT.

12 17. By approximately 7:Ol: 16 am PT, the Jitney Order was partially filled: 36,100 shares at $1.17. I ' 18. At 7:03:27 a.m. PT, Fediuk entered the initial portion of an order from AIG to purchase 3,500,000 shares of TVX, which Burk received earlier in the morning by purchasing 130,000 shares of TVX Gold Inc. at $ The Cover Order was never filled, and Fediuk cancelled the Cover Order at 7:08:32 am PT. I 20. For the balance of the morning, Fediuk and Burk attempted to fill the Client Order. 21. By the end of the trading day, Salman had purchased 1,906,200 shares of TVX for AIG at an average price of $ The Client Order was partially filled with trades executed in a price range between $1.18 and $ Fediuk realized proceeds of $58,000 from the Short Sale ($1.16/share x 50,000 shares). The cost to Fediuk to execute the Jitney Order was $58, ($1.17/share x 36,100 + $1.18/share x 13,900). Fediuk incurred a loss of $ by shorting and then covering TVX. Dated I Counsel and agent for the Respondent, John Michael Fediuk flcm 25 '-A@? Date