IN THE MATTER OF DISCIPLINE PROCEEDINGS PURSUANT TO BY-LAW 20 OF THE INVESTMENT DEALERS ASSOCIATION OF CANADA RE: MANAS DICHOW SETTLEMENT AGREEMENT I. INTRODUCTION 1. The staff ( Staff ) of the Investment Dealers Association of Canada ( the Association ) has conducted an investigation (the Investigation ) into the conduct of Manas Dichow ( the Respondent ). The investigation was initiated after the Association received a referral from the British Columbia Securities Commission regarding a complaint from JE, the brother of the Respondent s former client, CE. 2. The Investigation discloses matters for which the District Council of the Association ( the District Council ) may penalize the Respondent by imposing discipline penalties. II. Joint Settlement Recommendation 3. Staff and the Respondent consent and agree to the settlement of these matters by way of this Settlement Agreement in accordance with By-law 20.25. 4. This Settlement Agreement is subject to its acceptance, or the imposition of a lesser penalty or less onerous terms, or the imposition, with the consent of the Respondent, of a penalty or terms more onerous, by the District Council in accordance with By-law 20.26. 5. Staff and the Respondent jointly recommend that the District Council accept this Settlement Agreement. 6. If at any time prior to the acceptance of this Settlement Agreement, or the imposition of a lesser penalty or less onerous terms, or the imposition, with the consent of the Respondent, of a penalty or terms more onerous, by the District Council, there are new facts or issues of substantial concern in the view of Staff regarding the facts or issues set out in Section III of this Settlement Agreement, Staff will be entitled to withdraw this Settlement Agreement from consideration by the District Council.
III. Statement of Facts (i) Acknowledgment 7. Staff and the Respondent agree with the facts set out in this Section III and acknowledge that the terms of the settlement contained in this Settlement Agreement are based upon these specific facts. The Respondent s agreement is solely for the purpose of the within Settlement Agreement. (ii) Factual Background Respondent 8. At all material times the Respondent was employed as a Registered Representative with the predecessor companies to CIBC World Markets Inc. ( Wood Gundy ), a member of the Association. 9. The Respondent is currently employed as a Registered Representative and Officer with Wood Gundy. 10. The Respondent has been in the industry since 1982. He has no previous disciplinary history with the Association. CE 11. CE was born on December 6, 1915. He did not complete High School and worked as a laborer until his retirement. 12. CE resided in a retirement home in Vancouver, B.C. from July 1992 until his death in September 1999. 13. CE had several serious health problems prior to his death, and was hospitalized three times during the period 1995 to 1997. The Respondent was aware of some of the health problems of CE. 14. In March 1998, with the support of CE s family doctor, Revenue Canada approved a retroactive disability credit for the period 1992-1997 (inclusive) for CE based on a physical disability, and forgave a late filing penalty for 1996 because CE was hospitalized and unable to do business such as completing his tax return. CE s doctor indicated there were no concerns about CE s mental functions, except that he required supervision for his medication. However, he also indicated that CE had been suffering with major depression. The Respondent was not aware of these facts. - 2 -
(c) Account Documentation 15. CE opened an investment Margin Account and Registered Retirement Investment Fund account with Wood Gundy on June 14, 1988, when he was 73 years old. He was retired and deriving the majority of his annual income from government pensions. 16. New client application forms ( NCAF ) completed in June 1988 for the Margin and RRIF accounts recorded CE s net worth as $200,000 and his annual income as $20,000. Investment objectives were recorded as 30% Safety of Capital, 40% Income and 30% Growth. The NCAFs for both accounts had no provisions for a description of risk factor or for a client signature. The description of Investment Knowledge was incomplete. The Respondent was not involved in the completion of this form. 17. In May 1992 the Respondent took over management of CE s accounts and completed an updated NCAF for the Margin account. CE was 77 years old. His net worth was recorded as $500,000 and annual income as $20,000. Investment objectives were changed to 80% Income and 20% Long-Term gain. The account risk factor was recorded as 100% Investment Grade/Good Quality and CE s investment knowledge was recorded as Fair. CE signed the NCAF. 18. In October 1996, a second updated NCAF form was completed for the Margin account. CE was 81 years old. Investment objectives were changed to 100% Long-Term Capital Gains and risk factor as 100% Medium-Risk. The provisions on this updated NCAF for Total Net Worth, Annual Income and Investment Knowledge were incomplete. CE did not sign this updated NCAF. 19. At all material times, the practice of CIBC Wood Gundy was to send a copy of completed NCAFs to each client. (d) Account Activity 20. In September 1994, the Respondent purchased E&P Balance Fund ( E&P ) in the Margin account. E&P was an asset allocation mutual fund. During the approximate period of September 1994 to July 1996, E&P represented a concentrated position in the Margin Account. Although, this investment was in accordance with the account requirement for 100% Investment Grade/Good Quality type securities, this holding resulted in the account being over-weighted in Long-Term Capital Gains by more than forty percent (40%). 21. In July 1996, the investment in E & P was sold to purchase the AIC Advantage Fund ( AIC ). The AIC holding exposed the Margin account to close to 100% Long-Term Capital Gains type investments and was the sole holding in the account from approximately July 1996 to March 1997. AIC was sold in April 1997. The Respondent had CE s instructions to sell the AIC security but he used his own discretion regarding the timing of the actual sale of the AIC security. - 3 -
22. On or about April 4, 1997, the Respondent transferred the $300,000 proceeds from the sale of AIC holding into a 30 day CIBC Bankers Acceptance Note. The Respondent was unable to contact CE for specific re-investment instructions and therefore attempted to make a determination of an investment that would be appropriate for CE. The Respondent used discretion when purchasing the 30 day CIBC Bankers Acceptance Note for the Margin account. 23. During the period March 1997 to September 1997 the Respondent recommended the purchase of 9 new issue investments. Each of these new issues was sold very shortly after purchase. This short term trading was not in accordance with CE s recorded investment objectives. 24. During the period of October 1997 to June 1998, the margin account was primarily invested in three medium to high-risk securities. The overall holdings in the account during this period were not in accordance with CE s recorded investment objectives. 23. In adopting a more aggressive strategy for CE commencing in 1997, the Respondent attempted to follow CE s instructions to aggressively grow his portfolio because he did not require any income from the accounts and intended to leave the proceeds to his nephew following his death. The Respondent acknowledges, however, that the margin account was not always operated within the recorded investment parameters for the margin account and that the strategy adopted in 1997 and 1998 was too aggressive for CE given his personal and financial circumstances, including his ongoing health problems. 24. Counsel for the Estate of CE has advised the Association in writing that the complaint has been resolved to the satisfaction CE s brother and the beneficiaries of CE s estate. 25. The facts as stated above demonstrate that some of the trade recommendations made by the Respondent were not appropriate and not in keeping with the stated investment objectives for the margin account, nor otherwise suitable for CE given his personal and financial circumstances. 26. Further, the facts as stated above demonstrate that the Respondent failed to obtain CE s specific instructions and authority regarding the type of security and timing in respect of two trades executed for the Margin account. IV. CONTRAVENTIONS 27. The Respondent admits contravention of IDA Regulation 1300.1(c), in that he failed to ensure that recommendations made for CE s account were appropriate for the client and in keeping with his investment objectives. 28. The Respondent admits contravention of IDA Regulations 1300.4 and 1300.5, in that he failed to obtain the client s specific instructions and authority for the type of security and the timing in respect of two trades for the margin account. - 4 -
V. ADMISSION OF CONTRAVENTIONS AND FUTURE COMPLIANCE 29. The Respondent admits the contravention of the Statutes or Regulations thereto, By-laws, Regulations, Rulings or Policies of the Association noted in Section IV of this Settlement Agreement. In the future, the Respondent shall comply with these and all By-laws, Regulations, Rulings and Policies of the Association. VI. DISCIPLINE PENALTIES 30. The Respondent accepts the imposition of discipline penalties by the Association pursuant to this Settlement Agreement as follows: a fine in the amount of $25,000, payable to the Association within one (1) month of the effective date of this Settlement Agreement; and as a condition of continued approval that, in the event the Respondent fails to comply with any of these discipline penalties within the time prescribed, the District Council may upon application by the Senior Vice President, Member Regulation and without further notice to the Respondent suspend the approval of the Respondent until the penalties are complied with. VII. ASSOCIATION COSTS 29. The Respondent shall pay the Association s costs of this proceeding in the amount of $6,000, payable to the Association in accordance with the terms times set out in Section VIII of this Settlement Agreement. PAYMENT OF PENALTY AND COSTS 30. The Respondent agrees that the sums paid in accordance with paragraphs 28 and 29 shall be allocated first against the Association s costs of this proceeding, and second against the penalty described in Section VI of this Agreement. IX. EFFECTIVE DATE 31. This Settlement Agreement shall become effective and binding upon the Respondent and Staff in accordance with its terms as of the date of: (c) its acceptance; or the imposition of a lesser penalty or less onerous terms; or the imposition, with the consent of the Respondent, of a penalty or terms more onerous, by the District Council. - 5 -
X. WAIVER 32. If this Settlement Agreement becomes effective and binding, the Respondent hereby waives his right to a hearing under the Association By-laws in respect of the matters described herein and further waives any right of appeal or review which may be available under such By-laws or any applicable legislation. XI. STAFF COMMITMENT 33. If this Settlement Agreement becomes effective and binding, Staff will not proceed with disciplinary proceedings under Association By-laws in relation to the facts set out in Section III of the Settlement Agreement. XII. PUBLIC NOTICE OF DISCPLINE PENALTY 34. If this Settlement Agreement becomes effective and binding: the Respondent shall be deemed to have been penalized by the District Council for the purpose of giving written notice to the public thereof by publication in an Association Bulletin and by delivery of the notice to the media, the securities regulators and such other persons, organizations or corporations, as required by Association By-laws and any applicable Securities Commission requirements; and the Settlement Agreement and the Association Bulletin shall remain on file and shall be disclosed to members of the public upon request. XIII. EFFECT OF REJECTION OF SETTLEMENT AGREEMENT 35. If the District Council rejects this Settlement Agreement: the provisions of By-laws 20.10 to 20.24, inclusive, shall apply, provided that no member of the District Council rejecting this Settlement Agreement shall participate in any hearing conducted by the District Council with respect to the same matters which are the subject of the Settlement Agreement; and - 6 -
the negotiations relating thereto shall be without prejudice and may not be used as evidence or referred to by the Respondent at the City of Vancouver, in the Province of British Columbia, this 17 th day of December, 2003. illegible WITNESS Manas Dichow MANAS DICHOW Respondent AGREED TO by Staff at the City of Vancouver, in the Province of British Columbia, this 17 th day of December, 2003. Steve Winder WITNESS Charlene McLaughlin CHARLENE L. MCLAUGHLIN Enforcement Counsel, on behalf of Staff of the Investment Dealers Association of Canada ACCEPTED by the Pacific District Counsel of the Investment Dealers Association of Canada, at the City of Vancouver, in the Province of British Columbia, this 17 th day of December, 2003. INVESTMENT DEALERS ASSOCIATION OF CANADA (PACIFIC DISTRICT COUNSEL) Per: John Rogers, Chair Per: Elaine Davison, Industry Member Per: Brian Worth, Industry Member K:\Files to Remain\PROSECUTIONS\Quick Law\2004\3249.Dichow.SA.doc - 7 -