INVESTMENT INDUSTRY REGULATORY ORGANIZATION OF CANADA IN THE MATTER OF: THE BY-LAWS OF THE INVESTMENT DEALERS ASSOCIATION OF CANADA AND THE DEALER MEMBER RULES OF THE INVESTMENT INDUSTRY REGULATORY ORGANIZATION OF CANADA AND JULIUS CAESAR PHILIP VITUG NOTICE OF HEARING TAKE NOTICE that pursuant to Part 10 of Dealer Member Rules 20 of the Investment Industry Regulatory Organization Canada ( IIROC ), and to Section 1.9 of Schedule C.1 to Transition Rule No.1, a set date hearing will be held before a hearing panel of IIROC ( the Hearing Panel ) on October 1, 2008, at 121 King Street West; Suite 1600; Toronto, Ontario, Boardroom 2, at 1:00 p.m., or as soon thereafter as the hearing can be heard. TAKE FURTHER NOTICE that pursuant to Rule 6.2 of the Dealer Member Rules of Practice and Procedure, that the hearing shall be designated on the: The Standard Track The Complex Track TAKE FURTHER NOTICE that on June 1, 2008, IIROC consolidated the regulatory and enforcement functions of the Investment Dealers Association of Canada ( IDA ) and Market Regulation Services Inc. With respect to conduct of IDA s registrants occurring before June 1, 2008, the IDA has retained IIROC to provide services necessary for the IDA to carry out its regulatory functions, pursuant to the Administrative and Regulatory Services Agreement between the IDA and IIROC.
- 2 - THE PURPOSE OF THE HEARING is to determine whether Julius Caesar Philip Vitug ( Vitug ) (or the Respondent) has committed the following contraventions that are alleged by the Staff of IIROC (the Staff ): In or about April 2003 to August 2005 the Respondent engaged in business conduct or practice which is unbecoming or detrimental to the public interest in that he had an undisclosed financial interest and undisclosed financial dealings in s, including s held at another member firm, of two of his clients, in violation of IDA By-law 29.1 PARTICULARS TAKE FURTHER NOTICE that the following is a summary of the facts alleged and to be relied upon by the Staff at the hearing: A. Registration History 1. The following is the registration history of the Respondent: Firm From / To Registration Fortune Financial Corp. Sept 5, 1997 Aug 27, 1999 Securities Dealer Dundee Securities Corp. Aug 27, 1999 Apr 14, 2000 Apr 14, 2000 Apr 2, 2001 TD Securities Inc. Apr 3, 2001 July 18, 2001 TD Waterhouse Canada Inc. (TD) July 18, 2001 June 30, 2002 July 1, 2002 Oct 22, 2004 Trading Officer (TO), Registered Representative (RR), Branch Manager (BM) Director, RR, BM Salesperson, RR, BM, TO, RR, BM TO, RR, Associate Portfolio Manager (APM), BM Blackmont Capital Inc. (Blackmont) Oct 25, 2004 present TO, RR, APM 2. On June 1, 2008, the Respondent became a regulated person of IIROC.
- 3 - B. Undisclosed Financial Interest and Financial Dealings I. Relevant Parties 3. The following are outlines about individuals, corporations and activities material to the allegations. EB 4. At all material times EB was Vitug s aunt, as well as his client at TD and Blackmont. EB also maintained a trading at SSCC, another member firm. DT 5. At all material times DT was Vitug s father-in-law, as well as his client at TD and Blackmont. DT also had a trading at SSCC. AD 6. At all material times AD was a childhood friend of Vitug s, as well as his client at TD and Blackmont. AD was the head of the corporate finance department at SSCC. AD was registered with the IDA at the material time. He has not been registered with the IDA since June 30, 2005. 7. AD had full trading authority over EB s at SSCC. The trading authorization had been witnessed by Vitug. MM 8. At all material times, MM was the registered representative on the EB at SSCC, as well as UDP at SSCC. MM admitted to the IDA that he had never met nor spoken to EB. He further admitted that he allowed AD to exercise full authority over the EB as per the trading authorization. BG 9. At all material times BG was Vitug s friend and client as well as the principal of a private Company, BGCG. Spectrum Sciences and Software Corp. (Spectrum) 10. At all material times Spectrum was a US based public company. On January 6, 2004, 300,000 shares of Spectrum were transferred to EB s SSCC from BGCG s brokerage at another member firm, NFB. The transfer took place for no apparent consideration as detailed below.
- 4-11. By June 30, 2005 Vitug s clients at Blackmont held approximately 3,500,000 share of Spectrum. MCAL 12. At all material times MCAL was a private company. At various times in 2003, EB received cheques from MCAL for no apparent consideration. On some occasions, shortly after receiving funds from MCAL, EB issued cheques to Vitug in the same amounts as follows: i.) July 9, 2003 ii.) August 13, 2003 iii.) August 27, 2003 iv.) November 11, 2003 Cheque from MCAL payable to EB for $26,000 deposited into her TD Bank Cheque from MCAL payable to EB for $20,000 deposited into her TD Bank EB issued a draft payable to Vitug for $19,980 from her TD Bank Cheque from MCAL payable to EB for $5,000 deposited into her TD Bank v.) November 26, 2003 EB issued a personal cheque payable to Vitug for $5,000 from her TD Bank LECP 13. Within the material time LECP was a partnership and Vitug s client at TD. LECP was owned 1/3 by AD and 1/3 each by MI and RD. Together, AD, MI and RD were the three principals of the corporate finance group at SSCC. In early 2004 the following transactions took place: i.) February 19, 2004 Cheque from LECP payable to EB for $18,000 for no apparent consideration ii.) March 2, 2004 EB issued a personal cheque payable to Vitug for $18,000 from her TD Bank Account Fareport Capital Inc. (Fareport) 14. At all material times Fareport was a public company that conducted numerous financings through the corporate finance department at SSCC. AD was head of corporate finance at SSCC at the material time and is presently the Chairman of Fareport.
- 5-15. By June 30, 2005, 17 of Vitug s clients at Blackmont held approximately 1,566,500 shares of Fareport. Afriore Ltd. (Afriore) 16. At all material times Afriore was a public company that conducted a private placement through SSCC corporate finance department in 2003. In late 2003 the following transactions took place: i.) November 17, 2003 ii.) November 17, 2003 ii.) December 4, 2003 Vitug deposited $65,000 via credit memo from his TD Bank into EB s TD Bank Cheque in the amount of $65,000 drawn on EB s TD Bank and payable to SSCC was processed EB paid $65,000 from her SSCC to exercise warrants of Afriore Mint Inc. (Mint) 17. At all material times Mint was a public company that had been created through a reverse takeover (RTO) of a publically listed shell company. The RTO was facilitated by SSCC. 18. On April 21, 2003, EB deposited a cheque from Mint for $4000 into her TD Bank for no apparent consideration. 19. On May 6, 2003, EB wrote a cheque for $2600 payable to Cash. Vitug admitted that he deposited the cheque into his bank. II. EB s Brokerage Accounts at TD and SSCC, and Bank Accounts at TD 20. Around May 2001, EB opened a brokerage at TD with Vitug as her RR. EB s New Account Application Form (NAAF) at TD indicated the following information about her: DOB April 5, 1944 Status Single, no dependants Income $25,000-50,000-nurse s aid at retirement residence Net Worth $100,00-$250,000 Investment Objectives Short term trading -10% Long term trading 80%
- 6 - Speculative trading 10% Risk Tolerance High -100% 21. Around March 2002, while employed at TD, Vitug attempted to open an at SSCC for his personal holding company, 1082824 Ontario Inc., in order to participate in corporate finance deals at SSCC. TD compliance did not approve this opening. 22. Subsequently, around May 2002, EB opened an at SSCC over which AD was given full trading authority. EB was a client of MM and the trading authority form was witnessed by Vitug. The trading in this was designated as 100% speculative for the entire time it was open from May 2002 to November 2004. The traded almost exclusively in securities that conducted transactions with SSCC s corporate finance department. 23. EB s May 2002 NAAF at SSCC indicated the following information about her: DOB April 5, 1944 Status Single, no dependants Income $120,000 -nurse s aid at retirement residence Net Worth $800,000 Investment Objectives Risk Tolerance Medium - 75% High -25% Medium term capital gains - 50% Long term capital gains 25% Short term speculative trading 25% 24. A second NAAF for EB at SSCC dated April 12, 2004 indicated updated information about her: DOB April 5, 1944 Status Single, no dependants Income $120,000 -nurse s aid at retirement residence Net Worth $1,500,000 Investment Objectives Long term capital gains 50% Short term capital gains 50% Risk Tolerance Medium - 20% High -80% 25. While EB s employment had not changed from May 2001 to April 2004, her reported income and net worth increased dramatically. Vitug could not provide the IDA with a reasonable explanation for these changes. 26. Numerous transactions that occurred in EB s brokerage and bank s from April 2003 to August 2005 appear incongruous with her personal circumstances. The details of these transactions are set out in Schedule A, attached to the Notice of Hearing, and include the following:
- 7 - a.) Throughout the material time, EB was employed as a nurses aid with the same employer, a retirement residence. Her bi-monthly paycheque was in the range of $700- $800. Her monthly rent was approximately $788. According to banking records, EB s annual income from employment sources for the 2003 to 2005 period was under $20,000. b.) EB s TD Bank was repeatedly in an overdraft position for 22 of the 29 months between April 2003 and August 2005. c.) EB s TD Bank incurred NSF or presentment charges for lack of sufficient funds over 50 times between April 2003 and August 2005. d.) With the exception of those set out in Schedule A, and two unexplained transactions, not a single transaction in EB s TD Bank s was otherwise over $1,200 in value. e.) During the material time, in approximately 13 transactions, EB gave Vitug a total of over $337,000 CDN and $125,000 USD from her TD Bank (s). In every instance where these funds originated in EB s brokerage (s) the funds were transferred to her TD Bank (s) before being paid out to Vitug. As a result, Vitug s member firm did not have an opportunity to review or supervise these transfers of funds to him. f.) From August 2003 to December 2003 Vitug transferred a total of $86,000 to EB, $85,000 of which ended up in EB s SSCC, as follows: i.) September 26, 2003 Vitug deposited $20,000 to EB s SSCC via bank draft from his personal bank ii.) November 17, 2003 Vitug deposited $65,000 to EB s TD bank via credit memo form his personal bank ; and on the same day $65,000 was transferred to EB s SSCC via cheque from her TD Bank, subsequently used to exercise warrants of Afriore ii.) December 25, 2003 Vitug gave EB $1000 as a Christmas gift, which was deposited to her TD Bank via cheque from his personal bank There is no evidence that EB ever benefited from the proceeds of any of the transactions that took place in her SSCC. g.) A total of $73,000 was transferred into EB s bank and brokerage s from Mint, MCAL and LECP for no apparent consideration.
- 8 - h.) On January 6, 2004, 300,000 Shares of Spectrum were received into EB s SSCC for no apparent consideration. Through the sale of a portion of those shares for proceeds of $616,225USD, EB s was able to purchase more shares of Spectrum which were subsequently sold. Between March 9, 2004 and April 20, 2004, EB s SSCC profited over $700,000USD from the sale of Spectrum shares. 27. Notwithstanding the movement of hundreds of thousands of dollars through her various s as detailed in Schedule A, during the material time EB took no steps to change her lifestyle. EB remained working at the same job and living in the same apartment rental unit until April 2007 when she moved into a condominium unit owned by Vitug. Vitug s evidence regarding financial dealings in EB s 28. Vitug attended at three interviews with the IDA on April 11, 2006, July 21, 2006 and May 1, 2008. 29. On July 21, 2006 Vitug advised the IDA that the funds he received from EB were gifts from his aunt. 30. On May 1, 2008 Vitug advised the IDA that the funds he received from EB during the material time were in fact repayments for loans he had made to AD. Vitug advised the IDA that he did not know at that time that AD was using EB s SSCC to facilitate the loan repayments. Vitug could not provide the IDA with the details of how much he had loaned AD or the balance outstanding. 31. Throughout the material time, AD was also Vitug s client, holding both personal and corporate s with him at TD and subsequently Blackmont. 32. A review of the stock holdings of several of Vitug s other clients as at June & December 2003, January & June 2004, and January & August 2005 reveals that many of Vitug s other clients held positions in securities that were corporate finance deals headed by AD at SSCC. Several of these other clients sustained losses as a result of holding these positions. 33. Despite repeated written requests to attend for an interview, EB has not responded to the IDA in any manner. 34. By letter dated August 4, 2005 the IDA notified Vitug of its investigation into this matter. By the end of August 2005, the activity detailed in Schedule A had ceased. 35. Vitug did not disclose his financial interest or financial dealings in EB s to his member firm employer.
- 9 - III. DT s Account at SSCC 36. Originally, in or about May 2001 DT opened an with Vitug at TD. DT s TD NAAF indicated as follows: DOB January 1945 Status Married, with dependant spouse Income $50,000-100,000 as supervisor at food processing company Net Worth $250,000-500,000 Investment Long term capital gains 100% Objectives Risk Tolerance High -100% 37. On or September 21, 2003, Vitug referred DT to SSCC in order to open an. DT s SSCC NAAF indicated as follows: DOB January 18, 1945 Status Married, with dependant spouse Income $150,000 as supervisor at food processing company Net Worth $1,600,000 Investment Objectives Short-term 25% Medium-term 50% Long-term 25% Risk Tolerance High -100% 38. Vitug admitted at an IDA interview that there is no explanation for the increase in DT s income or net worth between May 2001, the date on the NAAF at TD and September 2003, the date on the NAAF at SSCC. He agreed that the TD NAAF contained the correct information. DT remained in the same position with the same employer throughout this time. 39. In or about September 2003 Fareport completed a private placement through the corporate finance department at SSCC; where AD was the head of corporate finance. 40. On September 22, 2003 Vitug withdrew $125,000 from his personal TD Waterhouse brokerage and deposited those funds into his personal TD bank. Vitug then withdrew $108,000 in favour of SSCC from this bank via bank draft. 41. On the same day, September 22, 2003, the bank draft for $108,000 was deposited into the of DT at SSCC. This amount was used to pay for DT s purchase of special warrants of Fareport at $0.12. This was the only dollar amount ever deposited into DT s SSCC and one of a total of only three transactions that took place in this from September 2003 to at least April 2006.
- 10-42. DT s Fareport special warrants purchased in September 2003 via a private placement were originally restricted for a period of four months. They became free trading in January, 2004 and underwent a conversion: one special warrant was converted to one common share plus one half common share purchase warrant. 43. In or about March 12-15, 2004, DT s entire holdings of approximately 900,000 shares of Fareport were sold out of his SSCC. The sale was at $0.25/share, or equal to more than double what DT originally paid. The Fareport warrants expired with no value. 44. Vitug s clients at TD purchased approximately 642,000, or 71%, of the Fareport shares sold by DT from his at SSCC. As the volume of trading in Fareport during this time was very limited, these trades were pre-arranged. This transaction (a gypsy swap ) was confirmed in a press release issued by Fareport dated March 12, 2004. 45. Rather than take any profits, the proceeds of the sale of these shares in the amount of approximately $220,000, were immediately re-invested in a second private placement in Fareport units at $0.25, in DT s. 46. Despite repeated written requests to attend for an interview, DT has not responded to the IDA in any manner 47. Vitug did not disclose his financial interest or financial dealings in DT s to his member firm employer. GENERAL PROCEDURAL MATTERS TAKE FURTHER NOTICE that the hearing and related proceedings shall be subject to IIROC s Dealer Member Rules of Practice and Procedure ( Rules of Practice and Procedure ). TAKE FURTHER NOTICE that pursuant to Rule 13.1 of Practice and Procedure, the Respondent is entitled to attend and be heard, be represented by counsel or an agent, call, examine and cross-examine witnesses, and make submissions to the Hearing Panel at the hearing. RESPONSE TO NOTICE OF HEARING TAKE FURTHER NOTICE that the Respondent must serve upon the IIROC and the Staff a Response to the Notice of Hearing in accordance with Rule 7 of Practice and Procedure within twenty (20) days (for a Standard Track disciplinary proceeding) or within thirty (30) days (for a Complex Track disciplinary proceeding) from the effective date of service of the Notice of Hearing.
- 11 - FAILURE TO RESPOND OR ATTEND HEARING TAKE FURTHER NOTICE that if the Respondent fails to serve a Response or attend the hearing, the Hearing Panel may, pursuant to Rules 7.2 and 13.5 of Practice and Procedure: (a) proceed with the hearing as set out in the Notice of Hearing, without further notice to the Respondent; (b) accept as proven the facts and contraventions alleged by the Staff in the Notice of Hearing; and (c) order penalties and costs against the Respondent pursuant to Dealer Member Rules 20.33, 20.34 and 20.49. PENALTIES & COSTS TAKE FURTHER NOTICE that if the Hearing Panel concludes that the Respondent did commit any or all of the contraventions alleged by the Staff in the Notice of Hearing, the Hearing Panel may, pursuant to Dealer Member Rules 20.33 and Dealer Member Rules 20.34, impose any one or more of the following penalties: Where the Respondent is/was an Approved Person: (a) (b) a reprimand; a fine not exceeding the greater of: (i) $1,000,000 per contravention; and (ii) an amount equal to three times the profit made or loss avoided by such Approved Person by reason of the contravention. (c) (d) (e) (f) (g) (h) suspension of approval for any period of time and upon any conditions or terms; terms and conditions of continued approval; prohibition of approval in any capacity for any period of time; termination of the rights and privileges of approval; revocation of approval; a permanent bar from approval with the IIROC; or
- 12 - (i) any other fit remedy or penalty. Where the Respondent is/was a Dealer Member: (a) (b) a reprimand; a fine not exceeding the greater of: (i) $5,000,000 per contravention; and (ii) an amount equal to three times the profit made or loss avoided by the Dealer Member by reason of the contravention; (c) (d) (e) (f) (g) suspension of the rights and privileges of the Dealer Member (and such suspension may include a direction to the Dealer Member to cease dealing with the public) for any period of time and upon any conditions or terms; terms and conditions of continued Membership; termination of the rights and privileges of Membership; expulsion of the Dealer Member from membership in the IIROC; or any other fit remedy or penalty. TAKE FURTHER NOTICE that if the Hearing Panel concludes that the Respondent did commit any or all of the contraventions alleged by the Staff in the Notice of Hearing, the Hearing Panel may pursuant to Dealer Member Rules 20.49 assess and order any investigation and prosecution costs determined to be appropriate and reasonable in the circumstances. DATED at Toronto, this 3 rd day of September, 2008. JEFFREY KEHOE DIRECTOR, ENFORCEMENT INVESTMENT INDUSTRY REGULATORY ORGANIZATION OF CANADA Suite 1600, 121 King Street West Toronto, Ontario M5H 3T9
Notice of Hearing Julius Caesar Philip Vitug SCHEDULE A Date Transaction From To Amount Type 2003 1 April 21, 2003 Mint EB TD bank $4,000 cheque 2 May 13, 2003 EB TD bank Vitug (payable to cash and $2,600 cheque deposited to Vitug s personal TD bank ) 3 July 8, 2003 MCAL EB TD bank $26,000 cheque 4 July 8, 2003 EB SSCC EB TD bank $80,000 transfer 5 July 17, 2003 EB TD bank Fareport [to its law firm] $50,000 bank draft 6 July 17, 2003 EB TD bank Vitug personal TD bank $55,500 bank draft 7 Aug. 18, 2003 MCAL EB TD bank $20,000 cheque 8 Aug. 27, 2003 EB TD bank Vitug personal TD bank $19,980 cheque 9 Sept. 26, 2003 Vitug personal TD bank EB SSCC $20,000 bank draft 10 Nov. 17, 2003 Vitug personal TD bank EB TD bank $65,000 credit memo 11 Nov. 17, 2003 EB TD bank EB SSCC $65,000 cheque 12 Nov. 19, 2003 MCAL EB TD bank $5,000 cheque 13 Nov. 26, 2003 EB TD bank Vitug personal TD bank $5,000 cheque 14 Dec. 4, 2003 EB SSCC Afriore $65,000 exercise warrants of Afriore 15 Dec. 25, 2003 Vitug personal TD bank EB TD bank $1,000 cheque 2004 16 Jan. 6, 2004 BGCG NBF brokerage EB SSCC 300,000 shares of Spectrum deposit for no apparent consideration 17 Feb. 23, 2004 LECP EB TD bank $18,000 cheque 18 Mar. 2, 2004 EB TD bank Vitug personal TD bank $18,000 cheque 19 Mar. 9, 2004 Purchasers EB SSCC $616,225 USD sale of Spectrum shares 20 Mar.15, 2004 EB SSCC Spectrum $527,140 USD purchase of Spectrum shares 21 Mar.18, 2004 EB SSCC EB TD US bank $50,000USD transfer Schedule A Page 1 of 5
Notice of Hearing Julius Caesar Philip Vitug 22 Mar.29, 2004 EB SSCC EB TD US bank $35,000USD transfer 23 Mar.30, 2004 EB TD US bank Vitug personal TD US bank $45,000USD cheque 24 Apr. 8, 2004 Purchasers EB SSCC $97,768USD sale of Spectrum shares 25 Apr. 15, 2004 Purchasers EB SSCC $153,246 USD sale of Spectrum shares 26 Apr. 16, 2004 Purchasers EB SSCC $77,348USD sale of Spectrum shares 27 Apr. 16, 2004 EB SSCC EB TD US bank $50,000USD Transfer 28 Apr. 19, 2004 EB SSCC EB SSCC $155,746 USD 29 Apr. 19, 2004 EB SSCC EB TD US bank $100,000 USD 30 Apr. 20, 2004 Purchasers EB SSCC $127,547 USD sale of Spectrum shares transfer sale of Spectrum shares 31 Apr. 23, 2004 EB SSCC EB TD US bank $449,990USD transfer 32 Apr. 30, 2004 EB TD bank EB TD brokerage $500,000 transfer 33 June 17, 2004 EB TD bank Vitug personal TD US bank $80,000USD bank draft 34 July 14, 2004 EB TD brokerage EB TD bank $58,379.63 transfer 35 July 16, 2004 EB TD bank Vitug personal TD bank $58,000 cheque 36 Dec.13, 2004 EB Blackmont brokerage EB TD bank $75,000 cheque 37 Dec.16, 2004 EB Blackmont brokerage EB TD bank $100,000 cheque 38 Dec.20, 2004 EB TD bank Vitug personal TD bank $75,000 bank draft 39 Dec.29, 2004 EB TD bank Vitug personal TD bank $75,000 certified cheque 2005 40 Jan. 18, 2005 EB TD bank Vitug TD personal bank $23,000 cheque 41 May 24, 2005 CRA EB tax refund EB TD bank $2,108.11 cheque 42 May 26, 2005 EB TD bank Vitug TD personal bank $1,600 certified cheque 43 July 13, 2005 Fareport EB TD bank $4,000 cheque 44 Aug. 9, 2005 Fareport EB TD bank $4,000 cheque 45 Aug. 9, 2005 EB TD bank Vitug personal TD bank $4,000 cheque Schedule A Page 2 of 5