INVESTMENT INDUSTRY REGULATORY ORGANIZATION OF CANADA IN THE MATTER OF: THE DEALER MEMBER RULES OF THE INVESTMENT INDUSTRY REGULATORY ORGANIZATION OF CANADA AND THE BY-LAWS OF THE INVESTMENT DEALERS ASSOCIATION OF CANADA AND JOHN SKELTON NOTICE OF HEARING TAKE NOTICE that pursuant to Part 10 of Dealer Member Rule 20 and Section 1.9 of Schedule C.1 to Transition Rule No.1 of the Investment Industry Regulatory Organization of Canada (IIROC), a hearing will be held before an IIROC hearing panel (the Hearing Panel) on a date to be fixed by the Hearing Panel on Wednesday, November 30, 2011, at Reportex Agencies Ltd., Suite 1010 925 West Georgia Street, Vancouver, British Columbia at 10:00 a.m., or as soon thereafter as the hearing can be heard. TAKE FURTHER NOTICE that pursuant to Rule 6.2 of IIROC s 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. Pursuant to the Administrative and Regulatory Services Agreement between the IDA and IIROC, effective June 1, 2008, the IDA has retained IIROC to provide services for the IDA to carry out its regulatory functions. THE PURPOSE OF THE HEARING is to determine whether John Skelton (the Respondent), who at all material times was a registered representative employed by Raymond James Ltd. (Raymond James), committed the following contraventions that are alleged by Staff of IIROC:
- 2 - Contravention 1 Between July 2003 and December 2008, the Respondent failed to use due diligence to ensure that orders he placed for the account of his client BT were suitable for BT, contrary to IDA Regulation 1300.1(p) and IIROC Dealer Member Rule 1300.1(p). Contravention 2 Between September 2003 and December 2008, the Respondent effected discretionary trades on behalf of his client BT, without having BT s prior written authorization, and without the account having been designated and approved as a discretionary account by Raymond James, contrary to IDA Regulations 1300.4 and 1300.5, and IIROC Dealer Member Rules 1300.4. and 1300.5. PARTICULARS TAKE FURTHER NOTICE that the following is a summary of the facts alleged and to be relied upon by Staff of IIROC at the hearing: Overview 1. Between 2003 and 2008, the Respondent effected discretionary trades of higher risk gold and other precious metal securities on behalf of his client BT s investment account, without the account having been designated and approved as a discretionary account. These transactions were not suitable for BT because of her financial circumstances and they did not conform to her stated investment objectives and/or risk tolerance. The Respondent 2. The Respondent was first employed in the securities industry as a registered representative in 1972. 3. Since 2000, the Respondent has worked at the Kelowna business location of Raymond James (formerly Goepel McDermid Inc.). The Client 4. BT was born in 1916. At all material times, she was a retired widow. 5. In or around January 2001, BT opened an investment account at the Kelowna business location of Raymond James (the BT Account). 6. The New Client Application Form (NCAF) for the BT Account indicated that she was 85 years old and her: annual income was $60,000 plus; net worth was $600,000; investment knowledge was good; risk tolerance was 90% medium and 10% high; and investment objectives were 40% income; 50% growth; and 10% short term trading.
- 3-7. The Respondent was the registered representative who signed the NCAF and at all material times he was the registered representative who was responsible for the BT Account. 8. At or around the time it was opened, $10,000 was deposited into the BT Account. 9. No additional funds or securities were deposited into the BT Account until in or around June 2003 when BT transferred in cash and investments (in kind) from an account at another dealer member. As a result, as of July 31, 2003 the holdings in BT Account were worth approximately $518,657. Despite the substantial increase in the value of the account holdings, the Respondent did not update the NCAF for the BT Account. Unsuitable Investments 10. Virtually all of the securities that were transferred into the BT Account were sold and on the Respondent s recommendations, the BT Account began to buy and sell higher risk gold and other precious metals securities, including: mining companies with little or no earnings; various precious metals mutual funds; and leveraged and inverse exchange traded fund products that are based on total market or gold indices. 11. As of February 28, 2006, the holdings in the BT Account were worth approximately $757,444. 12. On or about March 23, 2006, BT completed a second NCAF which indicated that she was 90 years old and her: annual income was $40,000 plus; net worth was $1,250,000 ($950,000 in liquid assets and $300,000 in fixed assets); investment knowledge was good; risk tolerance was 55% medium and 45% high; and investment objectives were 60% growth and 40% speculative. 13. The Respondent did not contact BT in order to discuss her actual risk tolerance and investment objectives. Rather, they were changed in order to conform to the holdings in the BT Account. 14. As of March 31, 2007, the holdings in the BT Account were worth approximately $861,000. 15. In April 2007, a further $113,000 in cash and securities were transferred into the BT Account from her account at another investment dealer. With these additional assets, as of April 30, 2007 the holdings in the BT Account were worth approximately $1,007,827.
- 4-16. On or about July 26, 2007, BT telephoned the Respondent and informed him that she would be transferring the BT Account to another dealer member. As a result, the next day BT met with the Respondent. In the course of their meeting, BT asked about switching her portfolio to income trusts as some of her friends who owned income trusts were getting more income from their portfolios. Ultimately, BT did not transfer the BT Account. 17. On or about July 30, 2007, BT withdrew $5,000 from the BT account. 18. On or about March 14, 2008, BT met with the Respondent. In the course of their meeting, BT again expressed concern that the BT Account was not generating sufficient income. 19. By way of a March 25, 2008 letter to the Respondent, BT wrote that her son and daughter had reviewed her portfolio and they were very insistent that she have investments that are less aggressive and less risky. Therefore, she was going to transfer the BT Account to a registered representative at another dealer member. After receiving the letter, the Respondent spoke to BT and she elected to not transfer the BT Account. 20. On or about April 10, 2008, BT withdrew $5,000 from the BT Account. 21. As of June 30, 2008, the holdings in the BT Account were worth approximately $950,000. 22. Beginning in or around July 2008, the value of the holdings in the BT Account started to significantly decrease in value. 23. As of September 30, 2008, the holdings in the BT Account were worth approximately $707,000. 24. In October 2008, BT withdrew $203,000 from the BT Account in order to purchase a condominium at a retirement care facility. 25. By way of a December 22, 2008 letter to Raymond James, BT s son complained that given BT s age it was inappropriate that a high percentage of the securities in the BT Account were speculative. BT later confirmed that she had given her son permission to act on her behalf. 26. As of January 31, 2009, the holdings in the BT Account were worth approximately $436,000. 27. In or around February 2009, BT transferred the BT Account to another dealer member. 28. The purchase of large quantities of high risk gold and other precious metal securities were not suitable for BT given, among other things, her age and financial situation.
- 5-29. Further, between July 2003 and December 2008, the holdings in the BT Account did not conform to the stated investment objectives and/or risk tolerance levels for the BT Account. Discretionary Trading 30. At no point did the Respondent obtain BT s written authorization for discretionary trading, and the BT Account was never designated and approved as discretionary by Raymond James. 31. However, in or around September 2003, the Respondent and BT agreed that the Respondent could place whatever orders he deemed appropriate without consulting her. As a result, between September 2003 and December 2008, the Respondent used his discretion with respect to the type of security, quantity, price, and/or timing of the orders for the BT Account. GENERAL PROCEDURAL MATTERS TAKE FURTHER NOTICE that the hearing and related proceedings shall be subject to IIORC s Rules of Practice and Procedure. TAKE FURTHER NOTICE that pursuant to Rule 13.1, the Respondent(s) 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(s) must serve upon Staff of IIROC a Response to the Notice of Hearing in accordance with Rule 7 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. FAILURE TO RESPOND OR ATTEND HEARING TAKE FURTHER NOTICE that if the Respondent(s) fails to serve a Response or attend the hearing, the Hearing Panel may, pursuant to Rules 7.2 and 13.5: (a) proceed with the hearing as set out in the Notice of Hearing, without further notice to the Respondent(s); (b) accept as proven the facts and contraventions alleged by Staff in the Notice of Hearing; and (c) order penalties and costs against the Respondent(s) pursuant to By-law 20.33, 20.34 and 20.49.
- 6 - PENALTIES & COSTS TAKE FURTHER NOTICE that if the Hearing Panel concludes that the Respondent did commit any or all of the contraventions alleged by Staff in the Notice of Hearing, the Hearing Panel may, pursuant to By-law 20.33 and By-law 20.34, impose any one or more of the following penalties: (a) (b) (c) (d) (e) (f) (g) (h) (i) 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. 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 Association; 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 Staff of IIROC in the Notice of Hearing, the Hearing Panel may pursuant to By-law 20.49 assess and order any investigation and prosecution costs determined to be appropriate and reasonable in the circumstances. DATED at Vancouver, this 7th day of November, 2011. Warren Funt Warren Funt Vice-President, Western Canada Investment Industry Regulatory Organization of Canada Suite 2800-1055 West Georgia Street Vancouver, BC V6E 4N9