IN THE MATTER OF A DISCIPLINE HEARING PURSUANT TO BY-LAW 20 OF THE INVESTMENT DEALERS ASSOCIATION OF CANADA RE: EDWARD PAUY KIM ING 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 May 3, 2004, at 155 University Avenue, Suite 302, Toronto, Ontario, at 10:00 am or as soon thereafter as the hearing can be held, regarding a disciplinary action brought by Association Staff concerning Edward Pauy Kim Ing ( Ing or the Respondent ). NOTICE is further given that the staff of the Association allege the following violations of the By-laws, Regulations or Policies of the Association: Charge 1: VIOLATIONS From January 1999 to November 1999, Ing, while the Ultimate Designated Person at St. James Securities Inc., violated Association Regulation 1300.2 by failing to adequately supervise the trading of John Illidge. Charge 2: From May 1996 to November 1999, Ing, while the Chief Financial Officer ( CFO ) of St. James Securities Inc., violated Association By-law 29.1 by failing to discharge his duties as CFO in a prudent and reasonable manner thereby engaging in conduct unbecoming or detrimental to the public interest. I. BACKGROUND St. James Securities Inc. PARTICULARS 1. St. James Securities Inc. ( SJS ) became a Member of the Association in May 1996. In November 1999, SJS wound up its business and transferred all of its client accounts to Northern Securities Inc. At that time, SJS requested permission to resign its membership
in the Association. This request was denied pending an Association investigation into SJS s activities. SJS s request to resign was ultimately granted in December 2002. Ing 2. Between May 1996 and November 1999, Ing was employed with SJS. From May 1996 until SJS s demise in November 1999, Ing was a Director, CFO and Registered Representative ( RR ) of SJS. During this time, Ing was also responsible for reviewing the trading at SJS for any compliance concerns. He occupied the position of Alternate Designated Person ( ADP ) from May 1996 until he became SJS s Ultimate Designated Person ( UDP ) in January 1999. 3. Prior to being employed by SJS, Ing was employed by Merit Investment Corporation from April 1989 until August 1995, where he held various positions of responsibility including CFO, Director and Trading Officer, ADP, and UDP. 4. Ing was first registered as an RR in November 1977 and is currently employed as a RR, Director and Vice President of Byron Securities Limited, a member of the Association. John Illidge 5. John Illidge ( Illidge ) was an RR of SJS from 1996 to 1999. In addition, he held the position of Director of SJS from September 1997 to November 1999 as well as Officer, ADP and Chairman, at various times. At all material times Illidge was a major shareholder of St. James Holdings Inc. ( SJH ), the parent company of SJS. II. (A) FAILURE TO SUPERVISE ILLIDGE Fictitious Clients Provident: 6. On or about February 1998, Illidge created fictitious corporate client accounts in the name of Provident United Investments ( Provident ). No corporate resolutions or similar documentation was ever provided by SJS for these accounts despite requests by the Association. Illidge had listed the client contact as one RW. Neither RW, nor any corporation controlled by him, had ever opened an account at SJS. 7. From January 1998 to October 1999, Illidge effected numerous trades in the fictitious Provident accounts, effectively using the accounts as his own personal trading accounts. 8. Trading in the Provident accounts was carried out without adequate margin or funds. Large debit balances accumulated in these accounts, the largest being in the amount of $ 1, 090, 898 (Account No. 08774A5/E6/G2). SJS eventually wrote off $ 22, 220.56 as a bad debt owing on this account. 2
9. At various times during 1998 and 1999, client mail for Provident was directed to addresses where Illidge resided. Between November 1998 and September 1999, account statements for Provident were marked address unknown. ST: 10. ST was a client of SJS. Illidge was the RR for its accounts. The New Client Application Form ( NAAF ) for ST reflects that it was an estate trust. 11. On or about June 1998, Illidge was made aware that ST was terminated as a trust. Notwithstanding this fact, Illidge failed to close ST s trading accounts at SJS. Moreover, Illidge continued to trade in ST s accounts from July 1998 to June 1999, effectively using the accounts for his own personal trading. 12. Trading in ST s accounts was carried out without adequate margin or funds. Large debit positions accumulated in these accounts, the largest being $ 464, 832.32 (Account No. 8638E2/A1) 13. On April 29, 1999, ST s account (Account No. 8638E2) purchased 5,000,000 Government of Canada Bonds ( 8% Jun 23) at $ 135.43 ( Purchase Transaction ). On the same day, this account sold this position at $ 131.43 resulting in a loss of approximately $ 200,000 ( Sell Transaction ). The $ 131.43 price for the Sell Transaction was not supported by the market and was unreasonably low. Moreover, the trade tickets for the Buy and Sell Transactions were time stamped at the same time and the counter party to these transactions was the same account. 14. Client mail for ST account no. 08638A-1 and ST account no. 08638E-2 was directed by Illidge to various addresses from September 1997 to June 1999, including two of Illidge s personal addresses. The account statements for ST account no. 08638E-2 also indicated address unknown from December 1998 to June 1999 and for November 1999. (B) Illidge Associated Entities Profit at SJS s Expense 15. From October 1998 to July 1999, Illidge directed several transactions in SJS s inventory accounts ( inventory ) to the undue detriment of SJS. These transactions unduly prejudiced inventory because the prices paid for the securities were not supported by the market. At all material times, Illidge was the RR for all of the accounts involved in these transactions and was associated with the counter parties who profited from these transactions at SJS s expense. Issuers 3
Charrington shares: 16. Charrington Business Consultants Inc. ( Charrington ), now known as Digital Duplication Inc., is a small capital company whose shares were traded on the CDNX. At all material times, the market for Charrington shares was illiquid and very large positions of Charrington s shares were held in SJS s accounts. MYO Shares: 17. At all material times, MYO Diagnostic Ltd. ( MYO ) was an unlisted small capital company based in California with an illiquid market for its shares. 18. Ing knew or ought to have known that SJS, under the direction of Illidge, had arranged private placements for MYO in November 1998 and April 1999. At all material times, large positions of MYO s shares were held in SJS accounts. Illidge Related Accounts SJC account: 19. Ing knew or ought to have known that St. James Capital Corporation ( SJC ) was owned by Illidge. 20. On December 7, 1998, SJS s inventory account purchased a block of 600,000 MYO shares from Griffiths McBurney. The price agreed upon was 6 (U.S.) per share for total proceeds of $36,000 (U.S.). On December 10, 1998, SJC purchased 600,000 shares of MYO from inventory at 9 per share. On December 18, 1998, SJC sold 300,000 shares of MYO back to inventory at $2.39 per share. On December 29, 1998, SJC sold the remaining 300,000 shares of MYO back to inventory at $2.39 per share, thereby making a profit of $1,380,000 with a corresponding detriment to inventory. Southampton accounts: 21. Ing knew or ought to have known that Southampton Capital Ltd. ( Southampton ) was a holding company owned by PM, who had a close personal relationship with Illidge, and who was also a shareholder of SJH. 22. Although Southampton opened accounts at SJS in November 1998 and began trading at that time, it was not incorporated until March 1999. 23. From November 1998 to November 1999, Southampton s accounts were permitted to trade without adequate margin or funds. Large debit positions accumulated in these accounts, the largest being $ 1, 199, 218.94 (Account No. 8882A0/F/G7/H5/E1). 24. On January 19, 1999, Southampton purchased 500,000 MYO shares from inventory at $2.40 per share. On February 10, 1999, Southampton sold the 500,000 MYO shares back 4
to inventory at $3.40 per share, thereby making a profit of $500,000, with a corresponding detriment to inventory. Southampton s account did not have available funds or equity to make this purchase and no commission was charged by SJS for these transactions. 25. On February 25, 1999, Southampton purchased 570,000 shares of Charrington from inventory at $1.18 per share. On March 11, 1999, Southampton sold the 570,000 shares back to inventory at $1.60 per share, thereby making a profit of $239,400, with a corresponding detriment to inventory. BTC and BTF accounts: 26. Ing knew or ought to have known that Beinn Tighe Farms Ltd. ( BTF ) and Beinn Tighe Capital Ltd. ( BTC ) were owned or controlled by Illidge. The BTC and BTF accounts were designated as accounts for which mail should be held at SJS. 27. From January 1998 to April 1999, BTC and BTF s accounts were permitted to trade without adequate margin or funds. Large debit positions accumulated in these accounts, the largest being $ 3, 011, 412.11 (BTC Account No. 08-773A-6). 28. On October 20, 1998, inventory sold 568,000 shares of Charrington to BTC at $.442 cents per share. Two days later, BTC sold the 568,000 shares of Charrington back to inventory at 96 per share, thereby making a profit of $295,360 with a corresponding detriment to inventory. 29. On October 19, 1998, BTF purchased 572,000 shares of Charrington from inventory at 96 per share. Illidge then moved this position to another BTF account. On November 2, 1998, BTF sold the 572,000 shares of Charrington back to inventory at $1.10 per share, thereby making a profit of $80,080, with a corresponding detriment to inventory. 30. On February 24, 1999, BTC purchased 570,000 shares of Charrington from inventory at $1.18 per share. On March 8, 1999, BTC sold the 570,000 shares of Charrington back to inventory at $1.60 per share, thereby making a profit of $239,400 with a corresponding detriment to inventory. Provident: 31. On July 21, 1999, Provident purchased 275,000 shares of MYO from inventory at $2.19 per share. On the same day, Provident sold the 275,000 shares of MYO back to inventory at $3.41 per share, thereby making a profit of $335,500, with a corresponding detriment to inventory. Summary of Inventory Losses 32. The following chart is a summary of the detriment to inventory more particularly described above in paragraphs 15 to 31. 5
Date of Sale to Inventory October 22, 1998 November 2, 1998 December 18 & 29, 1998 February 10, 1999 March 8, 1999 March 11, 1999 July 21, 1999 Security Counterparty Detriment to inventory 568,000 shares BTC $295,360 of Charrington 572,000 shares of Charrington 600,000 shares of MYO Diagnostics Ltd. ( MYO ) 500,000 shares of MYO 570,000 shares of Charrington Business Consultants Inc. ( Charrington ) 570,000 shares of Charrington 275,000 shares of MYO BTF $80,080 SJC $1,380,000 Southampton $500,000 BTC $239,400 Southampton $239,400 Provident $335,500 (C) Debit Kiting 33. From January 1999 to November 1999, Illidge conducted transactions in various client, inventory and personal accounts, without any economic benefit for the accounts. The only effect of these transactions was to move unpaid securities between accounts for the purpose of unduly delaying settlement of the purchases and/or avoiding margin requirements and generally obscuring SJS s capital position. 34. Between January 1999 and November 1999, accounts for twenty- nine (29) individuals or corporate entities traded in the shares of Charrington and MYO. Illidge was the RR for all of these accounts. 35. On forty-four (44) occasions, these accounts bought positions in Charrington and MYO and then sold their positions, at the same price and within a short time of having purchased them. These transactions provided no economic benefit to the accounts and any debit interest accumulated in these accounts was often written off by SJS. 36. Ing knew or ought to have known that MYO was one of Illidge s clients. Ing was also made aware of the Association s concerns about the trading in MYO shares following an Association Sales Compliance Review of SJS in 1999. 6
(D) Free-riding 37. From February 1997 to November 1999, thirty-one (31) accounts, for which Illidge was responsible, were opened in the names of twenty-nine (29) different individuals or corporate entities and traded for prolonged periods of time without adequate funds or margin. Trading occurred in sixteen (16) of these accounts without any funds ever having been deposited in the accounts. 38. The resulting losses in some of these accounts were eventually written off. Large sums were written off in an account belonging to an Ontario numbered company ($ 24,179.97) and in one of Provident s accounts ($ 22,250.56). Failure to supervise: 39. As UDP, Ing was responsible for supervision at SJS. Policy 2 of the Association describes minimum standards for retail account supervision at Member firms. These standards include a requirement that weekly and monthly reviews of account trading activity be conducted. Had Ing conducted those reviews to an acceptable standard, the trading activity described herein would have been detected. 40. Even prior to becoming UDP, Ing conducted the trading compliance reviews for SJS. Much of the type of trading activity described herein was part of an on-going pattern commencing at least in 1998 while Ing was ADP at SJS. 41. Ing failed to take appropriate and reasonable steps to ensure that Illidge s activities at SJS were within the bounds of ethical conduct, consistent with the just and equitable principles of trade and not detrimental to the public interest. Client account documentation: 42. At all material times, Ing was responsible for ensuring that all new client accounts were opened in accordance with Association Regulation 1300.2. As such, Ing was required to approve all NAAFs before accounts could be opened for clients or shortly thereafter. Ing failed to exercise due diligence in ensuring that Illidge s client accounts were properly opened and designated. Culture of non-compliance: 43. During 1998 and 1999, Ing encouraged a culture of non-compliance at SJS by failing to take appropriate steps as a Director, CFO and UDP, to ensure that SJS was managed in a reasonable and prudent manner in compliance with Association requirements. 7
III. CAPITAL DEFICIENCIES: 44. A series of capital deficiencies occurred at SJS on July 29, 1999, August 31, 1999, October 31, 1999 and November 15, 1999. 45. None of these capital deficiencies were reported to the Association by Ing. (i) July 29, 1999 capital deficiency: 46. In 1998 and 1999, the Association s Sales Compliance staff identified a number of unusual transactions involving trading of MYO shares in client accounts. The Association s Financial Compliance staff then reviewed these transactions to determine their impact on SJS s risk adjusted capital. 47. Association Financial Compliance staff determined that on July 29, 1999, SJS was long 1,250,000 shares of MYO, resulting in a capital deficiency of $2,475,000. The deficiency was corrected on July 30, 1999. Ing did not appropriately and knowledgeably respond to Association staff inquiries regarding this deficiency. (ii) August November 1999 Capital Deficiencies: SLM Software Control Block shares: 48. After November 1998, various accounts were opened at SJS which SJS advised were cross guaranteed accounts (the M group ) although no guarantee documents were ever provided by Ing, despite Association requests. 49. Association Financial Compliance staff determined that the SLM Software shares held in the M group accounts were control block shares and that no loan value should have been extended. Ing knew or ought to have known that the SLM Software shares were a control block. 50. Association Financial Compliance staff reviewed the M group accounts and determined that SJS was capital deficient as of August 31, 1999, in the amount of $1,505,343. SJS was also capital deficient as of October 31, 1999 in the amount of $199,039 and on November 15, 1999 in the amount of $451,359. Ing failed to detect and report these capital deficiencies to the Association. 51. On or about October 25, 1999, after SJS had been capital deficient on at least two occasions, and an investigation by Enforcement staff had been commenced, SJS notified the Association that it wished to resign its membership. IV. FAILURE TO PRODUCE DOCUMENTS: 52. In May 2000, the Association requested that Ing produce various documents and information. The documents were also requested at his subsequent interviews by the 8
Association. Despite some early indication that he would assist in providing documents, Ing has refused and/or failed to produce any of the documents or information requested by the Association. 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: (i) $1,000,000.00 per offence; and (ii) 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. NOTICE is further given that the District Council may, in its discretion, require that the Respondent pay the whole or part of the costs of the proceedings before the District Council and any investigation relating thereto. NOTICE is further given that the District Council may accept as having been proven any facts alleged or conclusions drawn by the Association in the Notice of Hearing and Particulars that are not specifically denied, with a summary of the facts alleged and conclusions drawn based on those alleged facts, in a Reply. NOTICE is further given that the Respondent has ten (10) days from the date on which this Notice of Hearing and Particulars was served, to serve a Reply upon: Investment Dealers Association of Canada Suite 1600 121 King St. West, Toronto, Ontario M5H 3T9 Attention: Kathryn Andrews and Ricardo Codina, Enforcement Counsel 9
A Reply may either: (i) (ii) specifically deny (with a summary of the facts alleged and intended to be relied upon by the Respondent, and the conclusions drawn by the Respondent based on all the alleged facts) any or all of the facts alleged or the conclusions drawn by the Association in the Notice of Hearing and Particulars; or admit the facts alleged and conclusions drawn by the Association in the Notice of Hearing and Particulars and plead circumstances in mitigation of any penalty to be assessed. NOTICE is further given that if the Respondent fails to serve a Reply or attend at the hearing, notwithstanding that a Reply may have been served, the District Council may proceed with the hearing of the matter on the date and at the time and place set out in this notice, or on any subsequent date, at any time and place, without further notice to and in the absence of the Respondent, and the District Council may accept the facts alleged or the conclusions drawn by the Association in this notice as having been proven and may impose any of the penalties prescribed by the By-laws of the Association. DATED at Toronto this day of December, 2003. ALEKSANDER POPOVIC Vice-President Enforcement Division INVESTMENT DEALERS ASSOCIATION OF CANADA 121 King St. W., Ste 1600 Toronto, ON M5H 3T9 10