RE: LINO D SOUZA NOTICE OF HEARING

Transcription

1 IN THE MATTER OF A DISCIPLINE HEARING PURSUANT TO BY-LAW 20 OF THE INVESTMENT DEALERS ASSOCIATION OF CANADA RE: LINO D SOUZA NOTICE OF HEARING NOTICE is hereby given that a hearing will be held before the Ontario District Council ( the District Council ) of the Investment Dealers Association of Canada ( the Association ), on Monday, September 24, 2001 at 121 King St. West, 16th floor, Toronto, Ontario, at 10:00 a.m., or so soon thereafter as the hearing can be held, regarding a disciplinary action brought by the Association concerning Lino D Souza ("the Respondent"). NOTICE is further given that the staff of the Association allege the following violations of the Bylaws, Regulations or Policies of the Association: Failure to cooperate with the Association 1. Between October 1998 and October 1999, Lino D Souza, previously an approved person employed by a Member of the Association, engaged in business conduct or practice that is unbecoming or detrimental to the public interest by failing to cooperate with the Association by failing to attend and give information as requested by Association staff in the course of an investigation pursuant to By-law 19, contrary to By-law Incorrect information on account opening documentation 2. Between December 1993 and March 1997, inclusive, Lino D Souza, while an approved person employed by a Member of the Association, failed to use due diligence to learn the essential facts relative to his clients Norman and Celine D Souza, contrary to Regulation (a) of the Association. 3. Between April 1994 and March 1997, inclusive, Lino D Souza, while an approved person employed by a Member of the Association, failed to use due diligence to learn the essential facts relative to his clients Robert and Erica de Gama, contrary to Regulation (a) of the Association. 4. Between April 1994 and March 1997, inclusive, Lino D Souza, while an approved person employed by a Member of the Association, failed to use due diligence to learn the essential facts relative to his clients Rashida and Mahdi Ansar, contrary to Regulation (a) of the Association. 5. Between July 1996 and March 1997, inclusive, Lino D Souza, while an approved person employed by a Member of the Association, failed to use due diligence to learn the essential facts relative to his client Tajdin Damji, contrary to Regulation (a) of the Association.

2 - 2 - Unsuitable Investment Recommendations 6. Between December 1993 and March 1997, inclusive, Lino D Souza, while an approved person employed by Nesbitt Burns, a Member of the Association, failed to use due diligence to ensure that recommendations made for his clients Norman and Celine D Souza were appropriate for their situation and investment objectives, contrary to Regulation (c) of the Association. 7. Between April 1994 and March 1997, inclusive, Lino D Souza, while an approved person employed by Nesbitt Burns, a Member of the Association, failed to use due diligence to ensure that recommendations made for his clients Robert and Erica degama were appropriate for their situation and investment objectives, contrary to Regulation (c) of the Association. 8. Between April 1994 and March 1997, inclusive, Lino D Souza, while an approved person employed by Nesbitt Burns, a Member of the Association, failed to use due diligence to ensure that recommendations made for his client Rashida Ansar were appropriate for their situation and investment objectives, contrary to Regulation (c) of the Association. 9. Between July 1996 and March 1997, inclusive, Lino D Souza, while an approved person employed by Nesbitt Burns, a Member of the Association, failed to use due diligence to ensure that recommendations made for his client Tajdin Damji were appropriate for their situation and investment objectives, contrary to Regulation (c) of the Association. False client addresses 10. Between April, 1994 and March 1997, inclusive, Lino D Souza, while an approved person employed by a Member of the Association, engaged in conduct unbecoming by arranging to change the mailing address on record with the Member for Mahdi and Rashida Ansar, to addresses unknown to the Ansar s, without the Ansar s knowledge and consent, contrary to By-law Between July, 1996 and March 1997, inclusive, Lino D Souza, while an approved person employed by a Member of the Association, engaged in conduct unbecoming by arranging to change the mailing address on record with the Member for Tajdin Damji, to an address unknown to Mr. Damji, without Mr. Damji s knowledge and consent, contrary to By-law Unauthorized Trading 12. Between April, 1994 and March, 1997, inclusive, Lino D Souza, while an approved person employed by a Member of the Association, engaged in business conduct or practice that is unbecoming by trading in the accounts of Rashida and Mahdi Ansar without their knowledge or consent, contrary to By-law 29.1 of the Association. 13. Between July, 1996 and March, 1997, inclusive, Lino D Souza, while an approved person employed by a Member of the Association, engaged in business conduct or practice that is unbecoming by trading in the account of Tajdin Damji without his knowledge or consent, contrary to By-law 29.1 of the Association.

3 - 3 - Discretionary Trading 14. Between December 1993 and March 1997, inclusive, Lino D Souza, while an approved person employed by a Member of the Association, exercised his own discretion in executing trades in the accounts of Norman and Celine D Souza without the written authorization of the clients and without the accounts having been accepted by the Member as discretionary accounts, contrary to Regulation of the Association. 15. Between April, 1994 and March 1997, Lino D Souza, while an approved person employed by a Member of the Association, exercised his own discretion in executing trades in the accounts of Robert and Erica degama without the written authorization of the clients and without the accounts having been accepted by the Member as discretionary accounts, contrary to Regulation of the Association. False Witness on Account Documents 16. In or around April, 1994, Lino D Souza, while an approved person employed by a Member of the Association engaged in conduct unbecoming by falsely purporting to witness Robert and Erica degama s signatures on a Joint Account Agreement, an Option Trading Agreement, a Margin Agreement, a Trading Authorization (giving Norman D Souza a power of attorney over the account) and an account guarantee, contrary to By-law 29.1 of the Association. PARTICULARS NOTICE is further given that the following is a summary of the facts alleged and intended to be relied upon and the conclusions drawn by the Association at the said hearing: (a) Factual Background 17. The Respondent was first registered as a Registered Representative Options ( RRO ) in June of 1993 with the Hamilton branch of Burns Fry Limited, which subsequently became Nesbitt Burns Inc. ( the Member ). He worked in the Stoney Creek branch of Nesbitt Burns during the time period at issue in this case. The Respondent was terminated from Nesbitt Burns Inc. on April 22, Failure to cooperate with the Association 18. The Association began to investigate the Respondent under By-law 19 following the receipt and review of a number of written complaints about the Respondent related to his conduct while an RRO with Nesbitt Burns. Specifically, the Association reviewed written complaints from Tajdin Damji (dated May 6, 1997); Melvin Marques (dated December 29, 1997); Norman D Souza (dated December 30, 1997); Mahdi Ansar (date May 14, 1998); and Kuban Lalani (dated July 5, 1998). 19. The Respondent was notified about all five of these complaints by way of a letter from the Association. Each letter named the complainant and indicated that the Enforcement Division of the Association would be investigating the Respondent s handling of the complainant s account while the Respondent was a RR with the Stoney Creek, Ontario office of Nesbitt Burns. The letter provided the name and telephone number of the

4 - 4 - investigator assigned to the file, and indicated that the investigator would be contacting the Respondent for the purpose of obtaining documents and conducting interviews. Where possible, the letters also described the subject matter of the investigation. 20. In a letter dated September 21, 1998 the Association wrote to the Respondent to inform him that, Doug Lane, an investigator, had taken over the investigation into the Respondent s handling of the accounts of the five complainants noted above. The letter provided the Respondent with Mr. Lane s direct line. 21. In a letter dated October 26, 1998, Mr. Lane wrote to the Respondent and advised him that the investigation had progressed to the point that an interview with him was required. The letter reminded the Respondent that the complaints to be addressed were as follows: Tajdin Damji; Norman and Celine D Souza; Robert and Erica de Gama; Neville Marques; Mahdi and Rashida Ansar and Kurban Lalani. (The letter noted that the client complaints had also been outlined in a telephone conversation with the Respondent on September 21, 1998.) The letter quoted the Association s By-law 19.5, which requires cooperation with an Association investigation, including attending to give information regarding matters under investigation. The letter requested that the Respondent contact Mr. Lane by no later than Monday, November 16, 1998 to arrange for an interview. 22. The Respondent did not arrange for an interview. 23. In a letter dated February 8, 1999 Mr. Lane noted that the Respondent still had not complied with requests for an interview, despite letters from the Association dated September 21, 1998, October 26, 1998 and January 18, 1999, and telephone conversations. The letter instructed the Respondent to attend at the offices of the Association at 121 King Street West, Suite 1600 on February 26, at 10:00 a.m. in order to provide information about the client complaints. The letter requested that the Respondent contact Michael Haddad at no later than February 24, 1999 to advise of his intentions, otherwise it could be necessary to consider regulatory action. 24. The Respondent did not attend at the Association on February 26, The Association received a facsimile dated March 12, 1999 from James Higginson, a lawyer, indicating that he had been consulted by the Respondent regarding Statements of Claim issued against the Respondent which related to his association with Nesbitt Burns. Mr. Higginson indicated that the Respondent was prepared to make himself available, but Mr. Higginson wanted to clarify the issue of solicitor client privilege. The letter indicated that they attempted to contact Mr. Lane on February 23 and 26, Mr. Lane contacted Mr. Higginson by telephone on March 18, 1999 and agreed to contact him on March 22, 1999 in order to arrange for the Respondent to be interviewed. Mr. Lane called Mr. Higginson in the morning of March 22 and was told that Mr. Higginson was in court until early afternoon. Mr. Lane called back at 1:30 p.m. and was told that Mr. Higginson was in the office but could not be located. Mr. Lane left his name and number. Mr. Higginson did not call back. Mr. Lane telephoned Mr. Higginson again on March 24, Mr. Higginson was in but not available to take the call. Mr. Lane left his name and telephone number. Mr. Higginson did not call back. 27. In a letter dated April 1, 1999, Mr. Lane wrote to the Respondent and summarized his attempts to contact him and arrange for an interview. He concluded the letter by advising the Respondent that Monday April 12, 1999 was to be the date for his interview. If he chose

5 - 5 - to participate he should present himself at the offices of the Association at 10:00 a.m. The letter warned that if the Respondent did not attend to participate, it would be necessary to consider regulatory action. 28. The Respondent did not attend at the interview. 29. A new investigator, Rita Bilerman, assumed carriage of the investigation file in June of She called the Respondent on September 24, 1999 to tell him that she had carriage of the file and to discuss the fact that the Association wanted him to make a voluntary statement. She confirmed this conversation in a letter dated September 27, The letter indicated that Ms. Bilerman wished to hear from the Respondent s legal counsel by October 6, 1999 in order to arrange for an interview. This letter was sent via registered mail. After three delivery attempts, the letter was returned to the Association at the end of October In a letter dated September 30, 1999, Ms. Bilerman wrote to Mr. Higginson to advise that she had carriage of the Respondent s file. She also noted that the Respondent had already been compelled by the Association s By-law 19.5 to attend for an interview. She indicated that the Association was providing the Respondent with one final opportunity to respond to the request for an interview. She enclosed her letter of September 24, 1999 to the Respondent and requested that Mr. Higginson contact her before October 6 in order to arrange an interview time. She reiterated that this would be the Respondent s final opportunity to provide a statement. The letter was sent by ordinary mail and by facsimile. A copy of the letter was also sent to the Respondent by ordinary mail. 31. Neither the Respondent nor Mr. Higginson called to arrange for an interview. Incorrect information on account opening documentation Norman and Celine D Souza 32. Norman and his wife Celine D Souza immigrated to Canada from the middle east in They are both retired and have not worked since arriving in Canada. Prior to retiring and coming to Canada, Norman was a senior executive in a large corporation in the middle east. Norman and Celine had no exposure to investments before coming to Canada. Before dealing with Nesbitt Burns, Norman had an account at Scotia McLeod which contained equities and strip bonds. He had no experience in trading derivatives or options prior to dealing with the Respondent. 33. Norman and Celine opened a brokerage account with the Respondent in December of A New Account Application Form ( NAAF ) dated December 17, 1993 and Options Account form dated December 21, 1993 contained the following information about Norman and Celine: Net worth - $1,000,000 plus Income - $75,000 on the Options Account form; $100,000 on the NAAF Date of Birth 1937 and 1939 Occupation self-employed consultant for middle east projects Knowledge excellent Experience stocks, bonds, rights, warrants, and commodities; no to short sales

6 - 6 - Objectives 25% income; 25% long term trading; 25% short-term trading; 25% venture Risk loss limited to $15,000 (stated on the options form) Norman and Celine were not required to sign these forms, and did not sign the forms. 34. Some of the information shown on the NAAF and Options Account Application completed by the Respondent was incorrect, such as the fact that the original NAAF showed Norman as self-employed when in reality he was retired. A Client Profile and Sigma Account Agreement dated December 16, 1993 was also completed. Unlike the NAAF, Norman and Celine were required to sign this form and did so. The Respondent also signed this form. It contained the following information, some of which was different than the NAAF: Financial assets - $350,000 (not including real estate valued at $400,000) Income - $75,000 Occupation - retired Objectives/risk factors 20-30% low risk/fair returns; 70-80% moderate risk/average returns; 10% (maximum) substantial risk/substantial returns Minimum annual income expected from the portfolio 35. In August of 1997, after the Respondent left Nesbitt Burns and was replaced by a new RR, a new NAAF was completed. In contrast to the information on the original NAAF, the new NAAF showed the following client information: Net Worth - $300,000 Income - $30,000 Occupation Retired Knowledge Average 36. The new NAAF also showed the objectives as 100% aggressive trading and the risk factors as high. This reflected the content of the portfolio but was not an accurate reflection of Norman and Celine s objectives. They signed this new NAAF with these objectives in order to keep their account with Nesbitt Burns open, as closing it would result in significant losses due to the outstanding option positions. The account was not approved in August 1997 for uncovered options by the Options Principal due to the d Souza s stated risk level, objectives and annual income. Robert and Erica degama 37. Norman D Souza opened an account for his nephew Robert Michael de Gama, and Robert s wife Erica, with the Respondent in April The Respondent opened the account and completed the account opening documentation without meeting or speaking with either Robert or Erica de Gama. 38. Robert and Erica lived in Qatar throughout the period in which they had an account with Nesbitt Burns. The Respondent had no direct contact with them but rather dealt with Norman d Souza in relation to the account. As is described further below, Norman held a Power of Attorney over the account which permitted him to give instructions with respect to the degama accounts. 39. The initial Option Account Application Form for Robert and Erica degama, dated April 25, 1994, contained the following information about the degamas:

7 - 7 - Net Worth - $500,000 to $1,000,000 Income - $150,000 Date of Birth 1954 & 1959 Occupation Manager at British Bank of the Middle East (Qatar) Knowledge Excellent Experience Stocks, Bonds, Rights, Warrants, Options and Futures Objectives 75% Short-term Trading; 25% Venture The degamas were not required to sign this form, and did not do so. 40. Some of the information shown on the initial Options Account Application was incorrect, such as their net worth, their investment knowledge and experience. A new Securities and Options Account Application, dated August 26, 1997, was completed for the de Gamas after the Respondent was terminated. It contained the following information about the degamas, some of which was different that the initial form: Net Worth - $100,000 Income - $100,000 (Robert) $50,000 (Erica) Occupation same (Robert) Executive Secretary (Erica) Knowledge Average Experience Moderate with Stocks, Bonds Money Market, Mutual Funds and Options None with New Issues, Commodities, Futures and Real Estate Objectives 100% Aggressive Trading Risk Factors - High This form was signed by both Robert and Erica degama. As with the d Souzas, the degamas objectives were changed to reflect the nature of their portfolio. Rashida Ansar 41. Rashida Ansar opened an option account and an RRSP account with the Respondent in April of Ms. Ansar was not working outside the home at the time and had no income. She had worked at Bell Canada until 1992 at which time she accepted a voluntary termination package. Prior to working at Bell, Ms. Ansar earned a Doctor of Philosophy in history and did some teaching. Her husband Mahdi taught biology and science. 42. Apart from buying some Bell common shares through her employee benefits package, Ms. Ansar had never traded common shares, preferred shares or bonds before opening an account with the Respondent. She had no knowledge about investments or experience with investment accounts. She did not even know what a mutual fund was. Her only business education was a high school economics course. 43. A New Account Application Form ( NAAF ) for Ms. Ansar, dated April 12, 1994, and an Option Account Application, dated April 1, 1994, contained the following know your client information: Net Worth - $250,000 to $500,000 Income - $40,000 for R. Ansar, $75,000 for her spouse M. Ansar Date of Birth Occupation Housewife

8 - 8 - Knowledge Good Past Investment Experience account size was $90,000 and traded common stock, preferred stock, and bonds (Option Form) Objectives 70% Mutual Funds 30% Short-term Trading (April 1/94 Options NAAF); 40% Mutual Funds 10% Inc. 50% Short-term Trading (April 12/94 NAAF) Ms. Ansar was not required to sign either of these forms and did not do so. Both forms were signed by the Respondent. 44. The following information on the NAAF was incorrect: Rashida a past investment experience did not include an account worth $90,000; this was never the case. Nor did she have experience trading common stock, preferred shares, or bonds, apart from common shares in Bell Canada as noted above. Rashida did not have a good knowledge of investments when she opened her accounts with the Respondent, as shown on the option form. Rashida had no income, not the $40,000 shown on the NAAF. Mahadi s salary was $65,000, not the $75,000 stated on the forms. The Respondent did not discuss investment objectives with Rashida at all. In particular, he did not discuss the objectives shown on the forms, i.e. 70 % mutual funds and 30% short term trading shown on the option form and 40% mutual funds and 10% income and 50% short term trading shown on the NAAF. 45. The Respondent did not assess the amount of risk that Rashida was prepared to accept. Rashida did not want to accept much risk with her limited funds. Tajdin Damji 46. Tajdin Damji opened an option account with the Respondent in August of 1996 and an RRSP in December of Mr. Damji was 63 years old when he opened the accounts. He was working as an accountant with an electrical company and had done so since he arrived in Canada in 1974 from Kenya. 47. Mr. Damji had an RRSP account before opening an account with the Respondent, but he had never bought stocks and bonds. 48. The Securities and Options Account Application, dated August 2, 1996, and the Securities and Options Account Application for the RRSP account, dated December 21, 1996, contained the know your client information: Net Worth - $500,000 Income - $150,000 Date of Birth Occupation Self Employed Importer/ Exporter (for 20 years) Knowledge Sophisticated Experience Extensive for Stocks, Bonds, Money Market, Options and Real Estate Moderate for New Issues, Mutual Funds, and Commodities/Futures

9 - 9 - Objectives 10% Moderate Growth 90% Aggressive Trading (July/96 Options NAAF) 20% Inc. 30% Moderate Gr. 50% Aggressive Trading (Dec/96 RRSP NAAF) Risk Factors Dec/96 NAAF shows High - Options A/C & Some - RRSP A/C 49. Mr. Damji signed the options account form without it being completely filled out. The only information on it when he signed it was his name, address and social insurance number. Mr. Damji signed the account opening form for his RRSP account in blank. 50. The following information on Mr. Damji s account opening forms was incorrect: Mr. Damji was not self employed but worked as an accountant for an electrical company and had done so since he arrived in Canada. He had never been an importer/exporter. Mr. Damji did not have extensive investment experience. His only prior investment experience was having a RRSP account with TD Bank which was invested in income products. He had never bought stocks and bonds before investing with the Respondent. He had no experience with options of commodities futures. His only experience with real estate was the purchase and sale of his own home. Mr. Damji did not have a liquid net worth of $500,000. He mortgaged his condominium in order to borrow $100,000 to invest with. The investment objectives were not accurate. Mr. Damji did not want to do 90% aggressive trading in the options account or 50% aggressive trading in his RRSP account. Mr. Damji needed to generate sufficient income from his options account to pay for the mortgage he obtained in order to invest. Unsuitable Investment Recommendations Norman and Celine D Souza 51. Norman and Celine D Souza s background and account objectives when they opened an account with the Respondent are set out above. They were recent immigrants to Canada, in their fifties, and retired. In addition to the documentation noted above (NAAF dated December 17, 1993; Option Account Application Form dated December 21, 1993; Sigma Account Agreement and Client Profile, dated December 16, 1993) the D Souza s signed a Joint Account Agreement dated December 16, 1993 and a Margin Agreement dated December 16, The following accounts were opened for them: Margin CDN [Burns Fry: 53-DNSE-1] Margin CDN [Burns Fry: 53-DNRE-4] Margin USD [Burns Fry: 53-DNRE-7] Margin USD The options account was approved for purchasing calls/ puts; covered call writing; spreading; uncovered call/put writing. 52. The Respondent told Norman that nobody knew how to do derivatives trading, and it was an extremely good way to make money. Norman agreed to trade options. At the time, Norman had no experience in derivatives or options trading, nor did he understand options.

10 He did not know the difference between covered and uncovered calls, or the difference between buying or selling at first. 53. Norman expected that he would be exposed to a maximum of 10% high risk investments, as stated on his Sigma Account Agreement and Client Profile. (The Options Account form stated that the maximum loss should be limited to $15,000.) Norman did not know exactly what was being done or how to assess the risk for some time. The Respondent assured Norman that options fluctuated in value but would make money in the end. 54. The option accounts required a significant amount of assets to be in the account in order to cover the margin requirements arising from the short option positions. The following observations are made regarding the option trading in the d Souza accounts: Beginning in 1995, account (US & CDN) contained a significant portion of assets in short XAU options and was heavily concentrated. Beginning in 1995, the value of the short options grew steadily in the US account. By December 1995, the value of the short option positions in the account was $61,000 US, which represented about 36% of the entire net equity. During 1996, the short positions continued to grow and by June 1996, the US account contained $171,000 US worth of short options. This amount peaked in December 1996 when the value of the short options reached $328,000 US. Both of these values surpassed the net equity amount in the US and Canadian accounts combined. In January, February and March 1997 the values of the short options were $204,000 US, $193,000 US, and $228,000 US respectively. All of these values significantly surpassed the net equity in the US and Canadian accounts combined. Generally, the US account did not maintain a significant positive net equity value. Instead the Canadian account maintained a net equity ranging between $183,000 to $237,000 from December 1995 to March This was necessary to cover the large margin requirements on the options. Account (US) from November 1994 to January 1995 had mostly aggressive trading investments (options) and a cash balance, which would have been required for margin purposes. The net equity was negative during this period. Account had no income portion from January 1994 to January During most of this period there was a cash balance, which averaged $11,000 each month, that would have paid interest. The cash balance averaged 18% of the account. Most of the assets in the account were classified as moderate growth and aggressive trading. Also in this account, during February to April 1994 and September and October 1994, the speculative portion of the account, comprising mostly of options, surpassed the stated 25% level. 55. The primary options strategy the Respondent employed in the D Souzas accounts, and for all the complainants in question in this case, was the short combination. The underlying interest was the Philadelphia Stock Exchange s Gold/Silver Index (XAU). With the short combination, the investor sells (or writes ) puts and calls on the underlying interest without owning the underlying interest. The Respondent usually established the short combination by selling both out of the money puts and out of the money calls with the index approximately centered between the two strike prices. The combination writer will make the maximum profit if the index stays anywhere between the two strike prices at and before expiration. 56. The market value of the short option combinations that appeared on the D Souza statements, and on all of the complainant s statements, does not fully reflect the risk of the

11 positions, as it shows the premium value of the options, and does not account for the possible assignment value, which represent the actual liability or risk of the positions. Numerous positions were assigned and did cause losses in the D Souza accounts. 57. While under the Respondent s guidance, the D Souza accounts also held naked short put and call options. These were high risk positions. The naked short puts made the accounts vulnerable to a decline in price in the underlying interest. The naked short calls made the accounts vulnerable to an increase in price in the underlying interest. 58. Norman had a heart attack on January 1, The D Souza accounts surpassed their stated risk factors (10% on the Sigma Account Agreement and Client Profile and $15,000 maximum loss on the Options Account Form). While their combined accounts had a net loss of $9, up to the end of March 1997, the monthly gains and losses were extremely volatile. After the Respondent left Nesbitt Burns Inc. at the end of March 1997, the D Souza s felt unable to extricate themselves from their option positions. Their losses as of the end of December 1997 were $196, As noted above, when the D Souzas were required to complete a new NAAF after the Respondent left, the account was not approved for uncovered options by the Options Principal due to their stated risk level, objectives and annual income. Robert and Erica degama 61. Robert and Erica degama lived in Qatar throughout the time they had an account with the Respondent. They had very limited investment experience. In addition to the documentation noted above (Option Account Application Form dated April 25, 1994), the degamas signatures were placed on a Joint Account Agreement (dated April 15, 1994), a Full Trading Authorization (dated April 23, 1994) giving Norman D Souza trading authority over their account, an Option Trading Agreement (dated April 15, 1994), and a Margin Agreement (dated April 15, 1994). The following accounts were opened for them: Margin CDN [Burns Fry: ] Margin USD [Burns Fry: ] The option account was approved for purchasing calls/ puts; covered call writing; spreading; uncovered call/put writing. 62. As with the D Souzas, the primary options strategy the Respondent employed in the de Gama s account was the short combination based on the Philadelphia Stock Exchange s Gold/Silver Index (XAU) (see explanation above). Similar to the D Souza s, a significant amount of assets was required to be in the account in order to cover the margin requirements arising from the short option positions. 63. Under the Respondent s direction, large concentrations of short combinations accumulated in the account. By the end of 1995 and throughout 1996, the degama s account became very concentrated in short XAU option positions. The following observations are made regarding the option trading in the degama accounts: By October 1995, the degama s account was heavily concentrated in short XAU combinations ($86,000 US). The equity in the US account was just over $54,000 US and

12 the Canadian account had $336,000. By December 1995 the account was short options valuing over $100,000 US. In January 1996 the account was short $184,000 US in options while the net equity in the Canadian and US accounts was $368,000. By February the short option positions were almost $262,000 US while net equity declined to $279,000. This represented a loss of $89,000 in one month. In April 1996 the value of the short combinations started to increase once again and by July 1996 the short positions were over $337,000 US (roughly $472,000 CDN). The net equity in July 1996 was $365,000 in the Canadian account and minus $64,000 US in the US account, totaling $277,000 CDN. The value of the short positions hovered around $300,000 US from August 1996 to March 1997 and started to decline in April From October 1995 to March 1997, the Canadian account had an equity value that slowly increased from almost $336,000 to $398,000, which was primarily invested in income vehicles. While the US account had cash and US T-Bills ranging in value during this same period, combined with the short options, the US equity was $54,000 US in October 1995 and declined to minus $95,000 US in March The market value of the short combinations that appeared on the monthly statements, and which is summarized above, was the premium value of the option. The market value does not incorporate the possible assignment value, which represents the true liability or risk. Some of the short options sold by the degamas were assigned. 65. While under the Respondent s guidance, the degama account also held uncovered (or naked) short put and call options. These were high risk positions. The naked short puts made the accounts very vulnerable to a decline in price in the underlying interest. The naked short calls made the accounts very vulnerable to an increase in price in the underlying interest. 66. The de Gama account also sold options which had intrinsic value, making them vulnerable to early assignment. 67. The US and CDN sides of the de Gama account combined had losses of $ at the end of March, According to d Souza, after the Respondent left Nesbitt Burns Inc. at the end of March 1997, the de Gamas felt unable to extricate themselves from their option positions. Their losses as of the end of December 1997 were $131, The large concentrations of short options and aggressive options strategies employed by the Respondent were not suitable for the de Gamas in light of the following factors: The de Gamas had little investment experience (as reflected in the new client account information collected in 1997 after the Respondent left Nesbitt Burns); The de Gamas had limited income and resources (as reflected in the new client account information collected in 1997 after the Respondent left Nesbitt Burns);

13 The fact that the de Gamas lived in the Middle East (Qatar) making it difficult to reach them if their input was needed for an investment decision. This was important as the option positions were volatile and high risk and potentially needed rapid corrective action. Norman d Souza, who purportedly held a Power of Attorney over the account, had no experience dealing with options before opening an account with the Respondent. Rashida Ansar 69. Rashida Ansar s background and account objectives when she opened an account with the Respondent are set out above. Rashida was not working outside of the home at the time, and had almost no prior investment experience. She did not even know what a mutual fund was. In addition to the documentation noted above (NAAF dated April 12, 1994; Option Account Application Form dated April 1, 1994) Rashida signed a Margin Agreement on April 13, The following accounts were opened for Rashida: 53-EGRA-4 (changed to in January of 1995) The options account was approved for purchasing calls/ puts; covered call writing; spreading; uncovered call/put writing. 70. Rashida was not aware of any of the trading in her accounts until after the Respondent left Nesbitt Burns. Her account statements were not sent to her address and she did not receive them until she called Nesbitt Burns and asked for them. (This is described further below.) Rashida was not prepared to accept much risk as she had limited funds. 71. The following observations are made regarding the trading in Rashida s RRSP account for the months May 1994 through March 1997: On average, 20 to 25% of the account was invested in one speculative security Dynamic Precious Metals Fund. The account generally held a significant portion in options (long and covered calls), ranging from 0% to 22%, and usually at least 10%. Throughout this period the account was invested in 19% to 46% aggressive or speculative investments. The RRSP account lost a total of $ during this period. 72. The following observations may be made regarding the trading in Rashida s margin account based on the June 1994 to February 1997 statements: In May 1994, $10,500 was invested in Leadley Gunning & Culp (which was about 55% of the net equity by June 1994). This is considered to be in the speculative/ aggressive trading category. By March 1995, this investment dwindled to $4200, which represented 75% of the account s net value or equity. By December 1995, this security was worthless. Throughout this period, the account traded numerous option positions, mostly short XAU combinations, which were generally longer-term when they were initially placed and

14 therefore more risky. During 1996, the options represented most of the account, with the value of the short options sometimes surpassing the net equity value. The total percentage of the account invested in speculative investments ranged between 18% and 88%. Generally, the account had more than 50% in speculative securities. After Leadley Gunning & Culp became worthless, the speculative / aggressive trading portion, due to the option positions, generally represented more than one third of the account. Rashida s cash and margin accounts profited by $1, and $ respectively throughout this period. 73. The trading in Rashida s accounts included the following: a ratio put spread based on options on shares of General Motors in which there was a small potential gain and a relatively large potential loss; holding short uncovered or naked call options on the XAU index, which made the account vulnerable to an increase in the price of the underlying interest (the XAU index); holding uncovered or naked put options on the XAU index, which made the account vulnerable to a decrease in the price of the underlying interest (the XAU index); selling in-the-money options, which are at risk of assignment (which happened); 74. The trading in Rashida s cash and margin account did not meet the stated objectives for these accounts for most of the time they were under the Respondent s direction. In addition, the options trading was not suitable for Rashida given the fact that she had little or no investment knowledge or experience, limited funds, she was not working outside the home, and she had a low tolerance for risk. Tajdin Damji 75. Tajdin Damji s background and account objectives when he opened an account with the Respondent are set out above. Mr. Damji was working as an accountant for an electrical company and had very limited investment experience. He had never bought stocks, bonds, options, commodities/futures, and his only experience with real estate was the purchase and sale of his own home. 76. When Mr. Damji sold his home and moved into a condominium he took a mortgage on the condominium in order to borrow $100,000 to invest. Mr. Damji explained this to the Respondent and the fact that he wanted his capital to be secure and he needed income of $800 to $850 every month in order to pay the mortgage. Mr. Damji opened a bank account at the Bank of Montreal so that the Respondent could transfer the necessary funds each month from his brokerage account into his bank account. Mr. Damji received four deposits of $850 each. 77. Mr. Damji s options and margin account (account number ) was approved for purchasing calls/ puts; covered call writing; spreading; uncovered call/put writing. The following observations may be made regarding the trading in Mr. Damji s options and margin account for the period of July 1996 to March 1997:

15 The value of the short option positions ranged from $18,000 to over $44,000 US. The net equity declined from $100,000 to $75,000 (in Canadian $) during this period. The options represented roughly 30% to 80% of the net equity value. The account lost $22, while under the direction of the Respondent. 78. The trading in Mr. Damji s accounts included selling in-the-money put options, which are at risk of early assignment (which happened). In addition, while under the Respondent s guidance, the Damji account also held uncovered (or naked) short put and call options. These were high risk positions. The naked short puts made the accounts very vulnerable to a decline in price in the underlying interest. The naked short calls made the accounts very vulnerable to an increase in price in the underlying interest. 79. The trading in Mr. Damji s option and margin account was not suitable for him given his circumstances: Mr. Damji wanted his capital to be secure and needed a steady and fixed income (none of the investments in the account produced the necessary income); Mr. Damji had limited investment experience and financial resources; Mr. Damji had never traded options before and did not understand option trading. In particular, he did not know or understand the strategies that the Respondent pursued in his account, such as a straddle or combination write; Mr. Damji was 63 years old when he opened his account and close to retirement. False address Mahdi and Rashida Ansar 80. When Mahdi and Rashida Ansar opened their accounts with the Respondent they lived at 26 Tamara Drive, Richmond Hill, Ontario, L4S 1E4. They gave this address to the Respondent but told the Respondent that they would be moving to 80 Silas Hill Drive, North York, Ontario, M2J 2X9 soon. Rashida opened her accounts in April of 1994 and Mahdi opened his account in June of The Ansars moved to 80 Silas Hill Drive in June of The Respondent arranged to have Rashida Ansar s account statements sent to the following addresses during the following periods of time: between May, 1994 and May, 1995 the account statements were sent to 26 Tamara Drive, Richmond Hill, Ontario, L4S 1E4; between June, 1995 and September, 1995 the account statements were sent to 4460 Tucana Court, Apt. 1712, Mississauga, Ontario, L5R 3K9;

16 between November, 1995 and December, 1996 the account statements were sent to Suite 159, Barton St. E., Stoney Creek, Ontario, L8E 4A2; from January, 1997 on the account statements were sent to 80 Silas Hill Drive, North York, Ontario, M2J 2X Rashida Ansar has no knowledge of the Mississauga or the Stoney Creek addresses. She did not give the Respondent instructions to have her account statements sent to these addresses. 83. The Respondent arranged to have Mahdi Ansar s account statements sent to the following addresses during the following periods of time: between July, 1994 and November, 1995 the account statements were sent to 26 Tamara Drive, Richmond Hill, Ontario, L4S 1E4; between December, 1995 and December, 1995 the account statements were sent to Suite 159, Barton St. E., Stoney Creek, Ontario, L8E 4A2; from January, 1997 on the account statements were sent to 80 Silas Hill Drive, North York, Ontario, M2J 2X Mahdi has no knowledge of the Stoney Creek address. He did not give the Respondent instructions to have his account statements sent to this address. Tajdin Damji 85. When Mr. Damji opened his options account in July 1996 he lived at 160 Willowbrook Drive, Thornhill, Ontario L3T 5P4. When he opened his RRSP account in December of 1996 he lived at 10 Kenneth Avenue, Unit 806, North York, Ontario, M2N 6K6. His RRSP account statements were always sent to this (correct) address. 86. The Respondent arranged to have the account statements for Mr. Damji s options account sent to the following addresses during the following periods of time: between July, 1996 and September, 1996 the account statements were sent to 160 Willowbrook Dr., Thornhill, ON L3T 5P4; between October, 1996 and January, 1997 the account statements were sent to Suite 159, Barton St. E., Stoney Creek, Ontario, L8E 4A2; for the month ended February 28, 1997 the account statements were sent to 10 Kenneth Ave Unit 806, Thornhill, Ontario, M2N 6X6; for the month ended March 31, 1997 the account statements were sent to Suite 159, Barton St. E., Stoney Creek, Ontario, L8E 4A Mr. Damji has no knowledge of the Stoney Creek address. Mr. Damji did not give the Respondent instructions to have his account statements sent to this address. Mr. Damji s condominium at 10 Kenneth Avenue is in North York not Thornhill, and the postal code is M2N 6K6.

17 When Mr. Damji asked the Respondent where his statements were, the Respondent told him that because there were no trades, no statements were produced. This was not true. Unauthorized Trading Mahdi and Rashida Ansar 89. The Ansars did not receive account statements throughout most of the time that the Respondent was responsible for their accounts. They were not aware of the trading that the Respondent conducted in their accounts. The Respondent did not telephone about the trading he did. In particular, the Respondent did not speak to Rashida about the options trading he did in her account 90. Mahdi and Rashida Ansar did not authorize or consent to the trading that the Respondent conducted in their accounts. Tajdin Damji 91. Mr. Damji received one or two statements for his option account after opening it and then did not receive any more statements until the Respondent left Nesbitt Burns. When Mr. Damji asked the Respondent about his account statements the Respondent told him that he was not receiving any because there was no trading in the account. Mr. Damji was not aware of the trading in his account. In particular, the Respondent did not discuss trading options with Mr. Damji and Mr. Damji did not know or understand what option strategies the Respondent was employing in his account. 92. Mr. Damji did not authorize or consent to the trading that the Respondent conducted in his option account. Discretionary Trading Norman and Celine D Souza and Robert and Erica degama 93. At no time while the Respondent was responsible for the D Souza and degama accounts did either the D Souzas or the degamas sign any documents giving the Respondent authorization to trade in the accounts on a discretionary basis. Nesbitt Burns did not approve the D Souza or the degama accounts for trading on a discretionary basis. 94. The Respondent visited Norman every week or two and explained how his accounts and the de Gama accounts had done and what trades had been made. In addition, Norman and Celine received trade confirmations and monthly account statements. However, the Respondent did not explain and obtain authorization prior to each trade he made on their behalf or on behalf of the degamas. Norman did not understand the option strategy the Respondent was pursuing and did not participate in the decision making process regarding the handling of his accounts and the degama accounts for the first two years of their operation. The Respondent told Norman not to worry about the confirmation slips he and his wife were receiving.

18 False Witness on Account Documents 95. Accounts were opened for Robert and Erica degama with the Respondent in April of The Respondent purported to witness signatures for Robert and Erica degama on a Joint Account Agreement, an Option Trading Agreement, and a Margin Agreement, all of which were dated April 15, The degamas were not in Canada when the accounts were opened and did not sign these documents. Rather, Norman and Celine D Souza signed these documents as if they were Robert and Erica de Gama. 96. The Respondent purported to witness Robert and Erica de Gama s signatures on a Trading Authorization, dated April 23, 1994, giving Norman D Souza a power of attorney over their accounts. Robert and Erica de Gama did not sign this document. Rather, Norman and Celine D Souza signed this document as if they were Robert and Erica de Gama. The Respondent purported to witness Robert and Erica de Gama s signatures as guarantors of the margin account opened by Norman and Celine d Souza. Robert and Erica de Gama did not sign as guarantors. Rather, Norman and Celine D Souza signed the guarantee as if they were Robert and Erica de Gama. 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 cross-examine witnesses. NOTICE is further given that 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 applicable federal or provincial statute relating to trading or advising in respect of securities or commodities or of any regulation or policy made pursuant thereto; has failed to comply with or carry out the provisions of any By-law, Regulation, Ruling or Policy of the Association; has 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: (a) (b) (c) (d) (e) (f) a reprimand; a fine not exceeding the greater of: (1) $1,000, 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; suspension of approval of the person for such specific period and upon such terms as such District Council may determine; revocation of approval of such person; prohibition of approval of the person in any capacity for any period of time; such conditions of approval or continued approval as may be considered appropriate by the District Council.