IN THE MATTER OF the Toronto Stock Exchange Act, R.S.O. 1990, c. T.15, as amended, and Part XVII of the General By-law of The Toronto Stock Exchange

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1 Decision June 12, IN THE MATTER OF the Toronto Stock Exchange Act, R.S.O. 1990, c. T.15, as amended, and Part XVII of the General By-law of The Toronto Stock Exchange AND IN THE MATTER OF Taylor SHAMBLEAU, an Approved Person, at all material times employed with Sprott Securities Ltd., formerly a Member of The Toronto Stock Exchange (now a Participating Organization of The Toronto Stock Exchange Inc.) Members of the Panel: L. W. Houlden, Q.C., John Huckstep and Brigitte J. Geisler Counsel: Jane P. Ratchford for Market Regulation Services Inc. Matthew P. Gottlieb for Taylor Shambleau Heard: May 5, 6, 8 and 9, 2003 REASONS OF THE PANEL

2 2 [1] We are sitting as a Panel of the Hearing Committee of the Toronto Stock Exchange Inc. ("the Exchange"), to determine the guilt or innocence of Taylor Shambleau on the charges brought against him by the Exchange. The matter is being prosecuted by Market Regulation Services Inc. on behalf of the Exchange. [2] The notice of hearing alleges that Taylor Shambleau has committed the following infractions: TAYLOR SHAMBLEAU, on March 30, 1999 and March 31, 1999, while an Approved Person employed with Sprott Securities Ltd., formerly a Member of The Toronto Stock Exchange (now a Participating Organization of The Toronto Stock Exchange Inc.), Toronto Stock Exchange Inc.), made a bid and executed a trade for the account of a customer when there was reason to believe that the intended purpose of such action was to establish an artificial price or quotation in a listed security or to effect a high closing price or quotation in a listed security contrary to section 11.26(1) of the General By-law of the Toronto Stock Exchange. [3] Counsel for Shambleau waived the reading of the charge and pleaded not guilty. Onus of Proof [4] The parties are agreed that the burden on the Exchange is to establish the charge on a standard of clear and convincing proof based upon cogent evidence. We agree with defence counsel that the onus of proving each of the required elements of the charge is higher than the balance of probabilities standard in civil cases. [5] Each side called expert witnesses. The expert witness for the prosecution was Michael Prior, a member of the Exchange staff. Although objection was taken to the calling of Prior as a witness, after hearing evidence, we found that he was qualified to give expert testimony and, in our opinion, he gave his evidence in an impartial and independent manner. [6] The defence's expert was Sandra J. Macdonald. Ms. Macdonald was head of equity trading for Sun Life Canada from Although Ms. Macdonald had great experience in buying and selling securities, her time as a trader was limited to the period from , when she was employed by C.J. Hodgson & Co. We were not impressed with the evidence given by Ms. Macdonald. In our judgment, she was not an impartial and objective witness; rather, she was an advocate for the defence. However,

3 3 since we are sitting as an expert tribunal, we did not find the expert evidence to be of crucial importance in arriving at our decision. Section 11.26(1) of the General By-law [7] Section 11.26(1) of the General By-law reads as follows: Sec Manipulative or Deceptive Method of Trading. - (1) No member or Approved Person shall use or knowingly participate in the use of any manipulative or deceptive method of trading in connection with the purchase or sale of any security which creates a false or misleading appearance of trading activity or an artificial price for the said security. It is the creation of an artificial price that is the crux of the charge in this case. [8] Part XIV of the Rulings and Directions of the Board of Governors of the Exchange, "Establishing Artificial Prices", states, in part, the following: It shall constitute a manipulative or deceptive method of trading within the meaning of subsection 11.26(1)... of the General By-law for a member or an Approved Person to make a bid or offering or to execute a trade for the account of a customer when there is reason to believe that the intended purpose of such action is to establish an artificial price or quotation in a listed security..., or to effect a high... closing price or closing quotation in a listed security... An artificial price is one that is not justified by real demand or supply in a stock... Some of the relevant considerations which must be taken into account by the member and its traders in deciding whether or not an order, bid, offer or trade is proper are: (1) the prices of the immediately preceding and succeeding trades; (2) the change in price or quotation that would result from carrying the instruction or entering the order; (3) the time the order is entered, or any instructions relevant to the time of executing the order; (4) the effect that such a change would have on other members who are or have been interested in the stock or option; (5) whether or not the person entering the order is associated with a promotional group or other group with an interest in effecting an artificial price, either for banking and margin purposes or for purposes of effecting a distribution of the shares of the company. The responsibility for deciding whether or not an order has been entered with the bona fide intention of buying and selling shares... or to establish an artificial price or quotation lies with the member, and specifically with the person(s) responsible for handling the order...

4 4 Purchase orders for the account of an individual or company which may be for the purpose of closing a particular security... at a higher price or quotation than is justified by previous market activity are more likely to appear at year end than at any other time. Month ends, quarter ends and Option expiries are also periods where members should be particularly alert to this problem. [9] The Exchange publishes an Equities Trading Manual for the assistance of its Members. The Manual deals with manipulative or deceptive methods of trading and sets out the provisions of s.11.26(1) and explains the conduct that may infringe the section. On or about December 11, 1998, the Exchange sent a Notice to Members concerning Ruling XIV. Attached to the Notice was a copy of the Ruling. The Notice stated, in part, the following: The Ruling clarifies the existing prohibition on establishment of artificial trading prices. The Ruling states that it is improper for Members or Approved Persons to trade as principal for the purpose of establishing artificial prices, or to make a trade on behalf of a client where there is reason to believe that the intended purpose is to establish an artificial price. For the purpose of the Ruling, an "artificial price" includes high and low closing a stock or entering a bid or offering with the intent of establishing an artificial closing quotation. Taylor Shambleau [10] Taylor Shambleau is 57 years of age. He has been employed in the securities industry since He has an unblemished record. No person has ever lodged a complaint against him nor has he ever been an object of disciplinary proceedings. When he joined Sprott Securities in 1995, he was employed as a manager. After about two years, he ceased to be a manager and continued with that company as a trader. In March, 1999, he was employed as a salesman, registered representative and institutional trader. In March, 1999, he had about established clients that he traded for, one of which was RT Capital. RT Capital was one of the 10 largest clients of Sprott Securities and generated about $150,000 in commissions each year. Mr. Shambleau admitted in crossexamination that he was familiar with s.11.26(1) of the General By-law, the Equities Trading Manual and the Notice of December 11, Amended Agreed Statement of Facts [11] The parties agreed upon an Amended Agreed Statement of Facts. This was of great assistance to the Panel and saved considerable time at the hearing. The Amended Agreed

5 5 Statement of Facts reads as follows: The charges AMENDED AGREED STATEMENT OF FACTS 1. These proceedings have been commenced against Taylor Shambleau ('Shambleau') to determine whether Shambleau breached Section 11.26(1) of the General By-law of the Toronto Stock Exchange (the 'Exchange') on March 30 and 31, Section 11.26(1) of the General By-law (the 'General By-Law') of the Exchange states as follows: Sec Manipulative or Deceptive Method of Trading. - (1) No member or Approved Person shall use or knowingly participate in the use of any manipulative or deceptive method of trading in connection with the purchase and sale of any security which creates a false or misleading appearance of trading activity or an artificial price for the said security. 3. It is alleged that the violations occurred with respect to a trade executed on March 30, 1999 and a bid entered on March 31, Parties and securities involved 4. Shambleau became an Approved Person in Since 1995, he has been employed with Sprott Securities Ltd. ('Sprott Securities'), at all material times a Member of the Exchange. On March 30 and 31, 1999, Shambleau was employed as a Salesman, Registered Representative and Institutional trader. 5. At all material times, RT Capital Management Inc. ('RT Capital') held numerous accounts (the 'RT Capital Accounts') at Sprott Securities. Shambleau was the assigned trader for the RT Capital Accounts. 6. As of March, 1999, RT Capital was a wholly-owned subsidiary of the Royal Bank of Canada and a vehicle for pension and institutional asset management services in the Royal Bank Financial Group. RT Capital described itself as one of Canada's leading institutional fund managers, with more than $25 billion in discretionary assets managed for pension funds, corporations, insurance firms, central banks and endowment/charities. 7. RT Capital portfolio positions were valued monthly using the last closing price with traded volumes within the month. For instance, if the last day of the month was a business day and there was a traded closing price for that day, the month end closing price would have been that day's traded closing price. If the last traded closing price

6 6 within the month was on the 20 th and only bid and ask were provided subsequent to the 20 th, the month end closing price would have been the closing price for the 20 th.. It is not admitted that Shambleau was aware how RT Capital valued its portfolio. The Trading on March 30 and March 31, 1999 March 30, As of March. 1999, shares of Pacifica Paper Limited Partnership were listed on the Exchange under the trading symbol 'PPP'. 9. At approximately 3:40 on March 30, 1999, Shambleau received the following instructions from Pat Shea ('Shea'), a trader employed with RT Capital: Just before the close, would you buy 1,000 PPP for me, please? 1,000 - Triple P. 1,000 triple P. Yes, I will. Only if necessary, eh? Okay, Got you. 10. At 3:40, the quotation for shares of PPP was 700 shares bid at $9.30 and 8,100 offered at $9.50. The last trade price was $9.30. As at 3:40, 42,150 shares of PPP had traded that day, with 41,500 of those trading at $ Shambleau prepared a trade ticket and time-stamped it at 3: Approximately 16 minutes later, Shambleau contacted Shea and had the following conversation: Hi, Pat. On the triple P. Yes. Did you want me to tick it at- $9.50. I think I'm confused on your instructions. Just buy 1,000 at $9.50. Okay. Got you. 13. At 15:59:33, Shambleau entered the order to buy 1,000 shares of PPP at $9.50 for the RT Capital Account. Shambleau's order resulted in a

7 7 purchase of 1,000 shares of PPP at $9.50. This was the last trade for that day in PPP. 14. The shares were transferred the following day to an RT Capital Account. 15. The immediately succeeding trade in PPP on March 31, 1999 was at $ At approximately 3:47 on March 31, 1999, Shambleau received the following instructions from You know this PPP thing again? The triple P, yeah. Yeah. What I want to do here tonight is something slightly different. Okay. Have you got it on your screen there? Yes, I do. Okay. You see it's offered below the last one. Yes. What I want to do is unless somebody sells it at 9.50, just in the last minute or so, would you put in a 9.90 bid for 2,000? Buy 2,000 at 9.90 fairly late in the day. OK. Yes. Okay. I'll keep an eye on it. If it does trade, I'll call you right away. Very good. Thanks, sir. 17. At 3:47, the quotation for shares of PPP was 1,000 shares bid at $9.50 and 5,000 shares offered at $9.95. The last trade price was $10.00 at 12:20:4. This was also the closing trade. 18. Shambleau prepared a trade ticket and time-stamped the ticket at 3: At 15:59:45, Shambleau entered the order to buy 2,000 shares of PPP at $9.90. The order expired unfilled at the end of the day but it changed the market quote from $9.50 bid to $9.90 bid with the offer side remaining at $ The immediately succeeding trade executed on April 1, 1999 was at $9.55 at 9:30:0.

8 8 21. For the purpose of 'artificial price' contained in s (1) of the General By-law and Part XIV of the Rulings and Directions of the Board only, it is agreed that RT Capital's intention was not bona fide with respect to the trade in the shares of PPP on March 30, 1999 and the bid in the shares of PPP on March 31, It is agreed that the admission in paragraph 21 above is not evidence of Shambleau's knowledge of RT Capital's intention and cannot be used by Market Regulation Services Inc. with respect to the issue of Shambleau's knowledge of RT Capital's intention. Pacifica Paper Partnership Limited ("PPP") [12] PPP is a very illiquid stock. We were given the trading records for PPP for the months of January, February, March and April, During these months, there were very few trades in the stock, the daily average being about 2-3 trades each day. However, on March 30, 1999, there were 14 trades, 43,150 shares being traded with a value of $409,825. On March 31, there were 5 trades, 14,700 shares were traded with a value of $142,630. Essential matters that must be proved for a conviction in this case [13] To obtain a conviction, the Exchange must prove two things: (a) That Shambleau knowingly participated in a manipulative or deceptive method of trading; and (b) That an artificial price was created by the trade on March 30 and by the bid on March 31, The five bullets [14] Ruling XIV sets out what have been referred to in these proceedings as five bullets, which must be taken into consideration by traders in deciding whether or not an order, bid, offer or trade is proper. These are the following: (i) the prices of the immediately preceding and succeeding trades. On March 30, the immediately preceding trade occurred at 15:29 at a price of $9.30. The immediately succeeding trade occurred on March 31, 1999 at $9.50. On March 31, 1999, the preceding trade occurred at 12:20 at $10. The succeeding trade occurred on April 1, 1999 at $9.50.

9 9 (ii) the change in price or quotation that would result from carrying the instruction or entering the order. On March 30, 1999, as a result of Shambleau's trade, the price of PPP was increased by $0.20. The market quotes of $9.30 bid and $9.50 offer remained unchanged. On March 31, 1999, as a result of Shambleau's bid, the closing market quote changed from $9.50 bid to $9.90, but the offering remained unchanged at $9.95. The closing market price remained at $ (iii) the time the order is entered, or any instructions relevant to the time of executing the order. On March 30, 1999, although Shambleau time stamped the order ticket at 3:40, he did not receive the firm offer to buy until some 16 minutes later. He did not enter the order until 15:59:33. On March 31, 1999, although Shambleau time stamped the order ticket at 3:47, he did not enter the purchase order until 15:59:45. (iv) the effect that such a change would have on other members who are or have been interested in the stock. March 30 was a day before the month end. March 31 was the last day of the month and was also the end of the first quarter. The $0.20 increase in price on March 30, 1999, inflated the market capitalization of PPP. (v) whether or not the person entering the order is associated with a promotional group or other group with an interest in effecting an artificial price, either for banking and margin purposes or for purposes of effecting a distribution of the shares of the company. Little emphasis was put on this bullet at the hearing and, accordingly, we make no comment about it. DECISION [15] In para. 21 of the Amended Agreed Statement of Facts, it is acknowledged that for the purpose of 'artificial price' contained in s.11.26(1) of the General By-law and Part XIV of the Rulings and Directions of the Board only, it is agreed that RT Capital's intention was not bona fide with respect to the trade in the shares of PPP on March 30, 1999 and the bid in the shares of PPP on March 31, This does not mean, of course, that Taylor Shambleau had an improper intent in making the trade or the bid; that is the issue this Tribunal has to decide. [16] With reference to the trade on March 30, 1999, while we are extremely troubled by Taylor Shambleau's actions and conversations on that day and while we believe that he should have known that the trade was an improper one, we are prepared to give him the

10 10 benefit of the doubt by accepting his explanation that he was confused by the order and to find him not guilty. [17] In connection with the bid on March 31, 1999, when we consider the evidence as a whole and the actions and conversations of Shambleau on that day, we are satisfied that he knowingly participated in a manipulative or deceptive trading and that an artificial price was created by the bid on March 31, In particular, considering that it was the last day of the month, the instructions given and the timing of the bid would not reasonably have allowed a response from the market. There was no genuine intent to complete a purchase of the shares and accordingly there will be a conviction for that offence. CONCLUSION [18] In the result, we find Taylor Shambleau guilty of making a bid on March 31, 1999 for the account of a customer when there was reason to believe that the intended purpose of such action was to establish an artificial quotation in a listed security or to effect a high closing quotation in a listed security contrary to section 11.26(1) of the General By-law of the Toronto Stock Exchange. We find him not guilty of executing a trade on March 30, 1999 for the account of a customer when there was reason to believe that the intended purpose of such action was to establish an artificial price in a listed security or to effect a high closing price in a listed security contrary to section 11.26(1) of the General By-law of the Toronto Stock Exchange. [19] Counsel may speak to us regarding a date and time for sentencing. Dated at Toronto, this 10 th day of June L.W. Houlden The Honourable L.W. Houlden, Q.C., Chair John Huckstep John Huckstep Brigitte J. Geisler Brigitte J. Geisler