' IN THE MATTER' OF THE VANCOUVER STOCK EXCHANGE (THE "EXCHANGE") BY-LAW 5 - DISCIPLINE -AND- DAVID LLOYD SANGSTER, RESPONDENT HEARING COMMITrEE: Stephen D. Gill, Chairman John McCoach, Member Lawrence H. McQuid, Member COUNSEL: Gordon R. Johnson, Appearing for the Exchange David L. Sangster, Appearing in person HEARING DATES: January 24, 1995 at Vancouver, British Columbia BACKGROUND: On December 23, 1994, the Exchange issued to David Lloyd Sangster ("Mr. Sangster") a Citation (the "Citation") which is Exhibit 1 in these proceedings and set 9:00 A.M., January 24, 1995, at the date and thne for the hearing. The alleged infractions in the Citation are as follows: "WHEREAS it is alleged that the Respondent David Lloyd Sangster CSangster") while a registered representative and assistant vice-president employed by Wood Gundy Inc. committed infractions as defined by Exchange By-Law 5.01 as follows: On or about November 26, 1993 Sangster received an Order from a client to sell 10,000 shares of Dueling Grounds Thoroughbred Racing Corp. ("Dueling Grounds") with a $7.00 limit (the "Order").
1-2- The posted bids for Dueling Grounds at the time the Order was received were as follows: 500 shares at the price of $7.75 per share 500 shares at the price of $7.75 per share 5,000 shares at the price of $7.50 per share 1,000 shares at the price of $6.50 per share 2,000 shares at the price of $4.25 per share Prior to entering the Order, Sangster contacted other traders to solicit their interest in purchasing the balance of the Order being 4,000 shares. Sangster's solicitation resulted in a further bid being posted by a trader for 4,000 shares at $7.00 and the Order being filled. Sangster also contacted the same trader when he sought to repurchase a share position in Dueling Grounds for a client later that same trading session. By providing other traders with advance informa_tion regarding the Order outside of the usual channels of the market, Sangster deprived other market pa(ticipants of any opportunity to bid for any portion of the Order. Sangster also deprived his client of any opportunity to have the balance of the Order Idled at a price exceeding $7.00 per share. Sangster thereby committed an infraction as defined in By-Law 5.01(19)." An Agreed Statement of Facts and documents between the V.S.E. and the Respondent Sangster was filed as Exhibit #2 in the proceedings. In addition the Committee received evidence from Mr. Lyle Davis, the Manager of Trading for the V.S.E., the Respondent Mr. Sangster gave evidence, Mr. Wayne Groom of Wood Gundy Inc. gave evidence as well as a Mr. Brown, a registered representative. On completion of the evidence, submissions were made on behalf of counsel for the Exchange, and on behalf of Mr. Sangster, and the Committee reserved its decision. From the Agreed Statement of Facts and documents, and the witnesses, we flnd the following facts. Mr. Sangster was born on June 10, 1956 and he became a registered
-3- representative at Yorkton Securities Inc. in May of 1981. In July of 1981 he became a registered representative of Wood Gundy Inc. and in January of 1988 was given the title of Assistant Vice-President. The events in issue occurred in the fall of 1993, at which time Mr. Sangster was a very experienced representative. At 6:38:00 on the morning of November 26, 1993, Mr. Sangster received an Order from the London, England office of Wood Gundy on behalf of a client to sell 10,000 shares of Dueling Grounds Thoroughbred Racing Corp. ("Dueling Grounds") with a $7.00 per share limit. According to the trading surveillance report, Dueling Grounds had been trading near or above $8.00 per share prior to November 26. Mr. Sangster agreed he had the prior trading information "at his fingertips". The posted bids for Dueling Grounds wereas follows: " at the time the Order was received by Mr. Sangster 500 shares at a price of $7.75 per share 500 shares at a price of $7.75 per share 5,000 shares at a price of $7.50 per share 1,000 shares at a price of $6.60 per share 2,000 shares at a price of $4.25 per share It would appear that Mr. Sangster could sell 6,000 shares to the posted bids and achieve a price of between $7.50 and $7.75 per share. It was acknowledged that Mr. Sangster would have had available to him the daily summary of activity in the stock and could have easily tracked the trades for November 22, 23, 24 and 25. During that period the high was $8.75 and the low was $7.88, and approximately 29,000 shares had traded.
-4- According to the Agreed Statement of Facts, Sangster stated that before entering the clients' Order he contacted three or four other traders, including his wife, Nancy Sangster, a trader at Majendie Securities Ltd. ('Majendie"). Sangster told Nancy Sangster that he had an order to sell shares in Dueling Grounds and asked if she wanted to buy 4,000 shares at a price of $7.00 per share. Nancy said that she would like to buy. Counsel for the Exchange alleged that the release of this information could hurt Sangster's client but could never help Sangster's client. Further, the only logical reason Sangster would call another trader in these circumstances would be to ensure that the other trader had an opportunity to buy the stock before anyone else. Counsel for the Exchange alleges that these facts confirm Sangster's knowledge that a $7.00 per share price for Dueling Grounds was below what could be obtained on the market. Counsel for the Exchange also alleged that Mr. Sangster had other options which may have produced a benefit to his client, such as he could have called his client to confirm his instructions, or, while he was phoning other traders, he could have entered his order to sell the Dueling Grounds shares at a price over $7.00 per share. Counsel for the Exchange alleges that the trading activity before and after Sangster entered his order shows that there clearly was a market for Dueling Grounds share. at a price above $7.00 per. According to the Agreed Statement of Facts, Nancy Sangster entered her order to buy 4,000 shares of Dueling Grounds at the price of $7.00 for an inventory account which she shared on an equal basis with Majendie. She entered the order at 6:38:45 on November 26, 1993 (Exhibit #1, Tab 1). Sangster entered his order to sell 10,000 shares of Dueling Grounds at 6:39:49 or approximately one minute after Nancy Sangster. Of course Nancy Sangster's bid would have been visible to all other traders on the system
5- -,L during this time frame, and any other trader interested in posting a better bid had the opportunity to have it entered into the system. According to Mr. Davis, the affect of the sell order by Sangster resulted in a temporary freez_ of the stock, which was released at approximately 6:40:19 where upon the first trade took place, and the stock was allowed to trade out. Mr. Davis stated that the freeze occurred because of the $7.00 per share price, which was out of the usual range. The order entered by Sangster was filled as follows: 500 shares at $7.75 per share 500 shares at $7.75 per share 5,000 shares at $7.50 per share 4,000 shares at $7.00 per share (to Nancy Sangster) Mr. Davis testified that there was absolutely no advantage to Sangster's client to disclose the $7.00 limit price, or before he put the offer in place. In fact, by disclosing the limit price of $7.00 he virtually guaranteed that no one would bid higher. In other words, the net result of the process by which Mr. Sangster arranged to sell the client's stock was to guarantee the minimum selling price stipulated by the client. According tothe Agreed Statement of Facts and documents, the trade at the price of $7.00 per share triggered a stop loss order which had been entered on November 15, 1993 by Sangster, to sell 4,000 shares of Dueling Grounds at a price of $7.25 per share on behalf of the Client. This order was filled in four separate trades on November 26, i993 between 6:40:49 and 6:41:05. Mr. Sangster testified that he did not know that the client who entered the order to sell 10,000 shares with the limit of $7.00 was the same client who had previously entered the stop loss order at $7.25.
-6- According to the Agreed Statement of Facts, Nancy Sangster immediately sold the shares of Dueling Grounds which she had purchased: at 6:42:30 she entered an order to sell 2000 shares at the price of $7.50 per share and at 6:42:53 she entered an order to sell the remaining 2000 shares at the price of $7.25 per share. That latter order was immediately filled pursuant to a buy order which had previously been entered. According to the Agreed Statement of Facts the saga does not end there. Subsequently, Sangster was told that Wood Gundy should have cancelled the previous stop loss orders for the client and Sangster was instructed to buy back 4,000 shares of Dueling Grounds at the market price. According to the Agreed Statement of Facts Sangster states that he then called Nancy Sangster by telephone and asked if he could cancel the trade in which he sold 4,000 shares. She replied that she had already sold 2,000 shares. Sangster informed Nancy Sangster that he would try to buy 4,000 shares back and at 6:56:25 Sangster entered an order to buy 4,000 shares of Dueling Grounds at the price of $7.375 per share. 6:56:29 Nancy Sangster changed her former sell order from a price of $7.50 per share At to a sell order at a price of $7.375 per share and the order was immediately filled from the buy order which Sangster had entered at 6:56:25. Counsel for the Exchange submitted that the trading activity, both before and after Sangster entered his order, shows that there was a market for Dueling Grounds at a price above $7.00 per share, and an experienced trader like Mr. Sangster would know that. Counsel for the Exchange alleged that the foregoing facts demonstrated a breach of By- Law 5.01(b), namely that there was conduct "unbecoming or inconsistent with just and equitable principles of trade or detrimental to the interests of the Exchange or the public." In other words, Sangster breached the By-Law by complying with the client's instruction,
-7- albeit at the lowest price, but in fact arranging a trade, at below previous market prices, with his wife. Counsel for the V.S.E. submitted that the only inference to be drawn from the foregoing trades is that Sangster and his wife colluded, or that Sangster gave his wife preferential treatment. Mr. Davis stated that in his opinion the client's instructions could have been carried out, especially by an experienced trader, by "testing the waters", and he further stated that in his opinion there was evidence available to Mr. Sangster of a lot of buyers at $7.25 per share. However, also in his evidence he agreed that the next best / bid was $6.60 per share and that there was at that time equal opportunity for any other trader on the system to have entered a better bid between $6.60 and $7.50. He also testified that if Mr. Sangster missed $7.25 he would have to guarantee was confirmed by Mr. Groom. a "fill", which fact Mr. Davis also acknowledged, in cross-examination, that it is not common practice for a representatwe to phone around to other traders, in order to fill an order, but agreed that it is an option that is open to a trader. According to Mr. Davis there were a number of "options" open to a trader with instructions like those received by Mr. Sangster, without "prearranging" a trade at the lowest price. Mr. Sangster took the stand and gave evidence, and said thal_he had received the order from London office at 6:38:00, and he then made a number of calls, probably four in total, and that only his wife returned his interest. He testified that there was no interest at $7.00 by the other traders but that Nancy Sangster expressed interest at $7.00 and that he wanted $7.00 "or better". Later, Mr. Sangster indicated that he did not give a price to the other traders, but merely gave them information as to the size of the order he wished to sell. During cross-examination, Mr. Sangster admitted that he was interviewed on July 5, 1994 by representatives of the Exchange, and that he told Mr. Hurkett that he had called other
-8- traders and inquired if they wanted to purchase the stock at $7.00. He further admitted that his statement (to the Exchange) was true, although subsequently he attempted to resile from this admission and again stated that he did not mention the $7.00 price. Under further cross-examination, Mr. Sangster took the position that he did make the statement to Mr. Hurkett (that he called traders and wanted to know if they wanted stock at $7.00) but then testified, under oath, that in fact he did not give to the traders he contacted the $7.00 selling price. He attempted to explain this contradiction by stating that he had thought about the sequence of events subsequent to his interview with Mr. Hurkett. Under further cross-examination, Mr. Sangster stated that he had called a number of traders, and finally Nancy Sangster had told him that she would buy 4,000 shares at $7.00. Hetestified that Nancy Sangster had offered to purchase at $7.00, as opposed to his offering it at $7.00, and he testified that he alsoexpected she might sell the stock immediately for a profit. He also admitted that he knew, after his telephone conversation with Nancy Sangster, that she wasn't going to offer more than $7.00 per share. Under further cross-examination, Mr. Sangster was asked to carefully review paragraph 4 of the Agreed Statement of Facts (Exhibit #2) which states: "Sangster states that before entering the order he contacted three or four other traders, including his wife, Nancy Sangster, a trader at Majendie Securities Ltd. ("Majendie"). Sangster told Nancy Sangster that he had an order to sell shares in Dueling Grounds and asked if she wanted to buy 4,000 shares at a price of $7.00 per share. Nancy said that she would." He agreed that he and other members of his firm had reviewed the Agreed Statement of Facts very carefully, and that he had agreed to paragraph 4. Notwithstanding this, before us in the witness stand he still offered other explanations.
-9- Under further cross-examination, when confronted with the very short period of tune between his receipt of the order, and his sell order, and his alleged telephone activity, Mr. Sangster, for the first time, said that he had personally only made two calls, and that his assistant, John Glanville, had made the other two calls! This revelation unfolded for the first time Iduring the hearing; Mr. Sangster admitted that he had never told the investigator that anyone else was involved in his telephone calls; he provided no explanation for this new version of events. This testimony of Mr. Sangster on the witness stand, that he personally only made two calls, again conflicts with paragraph four of the Agreed Statement of Facts. Having had the opportunity to observe Mr. Sangster give his evidence, especially under cross-examination, and consider the whole of his testimony, the Hearing Committee has very serious doubts about Mr. Sangster's evidence in relation to his conduct after receiving the order. In all, we found Mr. Sangster to be a very unsatisfactory witness, and not credible. Counsel for the V.S.E. submitted that there were two issues: firstly, from the various options open to Mr. Sangster in order to fill his Client's order, did he have a duty to choose the option most beneficial to his client. Put another way, did he have a duty not to provide advance information to Nancy Sangster with respect to his instructions to sell at $7.00, but to "play the market" and attempt to obtain the highest price possible. The second issue, according to counsel for the V.S.E., is whether Sangster was entitled to favour some traders over others when he is about to enter an order at an attractive price into V.C.T.
- 10- Counsel for the V.S.E. submitted that there was a duty on Mr. Sangster to avoid favouring the interests of his wife over the interest of his client. While agreeing that Mr. Sangster had not breached any of the specific trading rules of the Exchange, counsel for the V.S.E. submitted that in all the circumstances of the case, Mr. Sangster's conduct was unbecoming or inconsistent with just and equitable principles of trade, or detrimental to the interests of the Exchange or the public. He submitted that all transactions are to be conducted in an open fashion with equal access given to all market participants, and that on the evidence it was clear that this had not occurred. He submitted that Mr. Sangst'er did tell other traders that he was prepared to sell at $7.00, and this was of no assistance to his client. In his submission, the most egregious conduct by Mr. Sangster was in indicating the $7.00 selling price in advance. Counsel for the Exchange submitted that Mr. Sangster had a number of options which would have protected his client's interest, such as calling to confirm the instructions regarding the trade because $7.00 was far below market; call and seek instructions to work the market to effect the best possible price; fall the order with the 6,000 shares and then seek instructions, etc. Counsel agreed that selling 6,000, but then "working the market" would potentially put the member at risk with respect to the 4,000 remaining shares, and there was no way of knowing the average price would not drop. Counsel for the Exchange submitted that the one thing that was not open to Mr. Sangster was to sit on the order, leave his client vulnerable, and at the same time give an inside tip to Nancy Sangster at $7.00 and then put the 4,000 shares out. Counsel for the Exchange argued that Sangster's telephone call to Nancy Sangster guaranteed that his wife would get the 4,000 shares at $7.00, and suggested.that the only logical inference from this conduct was that he also realized she would make a quick profit. While agreeing that the effect on the client was the same whether the shares were purchased by Nancy Sangster or someone else, counsel for the Exchange pointed out that Nancy Sangster was
-11- not active in the market prior to this, and the only reason to call her was in effect to tip her on the price. In summary, counsel for the Exchange submitted that there was clear evidence the conduct of Sangster was inconsistent with just and equitable principles of trade, and was also detrimental to the interests of the Exchange and the public. In this sense the "public" included Mr. Sangster's client. In support of his position with respect to the conduct of Mr. Sangster, counsel for the Exchange referred to the decision of the Honourable Mr. Justice Hall in Delmas v. Vancouver Stock Exchange (1994) 119 D.L.R.(4th) the following: 136 at page 144 where the Court said "I think these matters have to be looked at from the perspective of what trade or profession is being regulated. It is, I suppose, always possible to point to some element of uncertainty in language in these regulatory statutes dealing with professional responsibilities or obligations. However, on reflection, -I am of the opinion that the language used here is adequate to provide a measure or standardthat is sufficiently clear to provide a meaningful framework of decision for those delegated to hear this sort of matter. I should also note that I have found helpful in my analysis herein the comments of my colleague Clancy J. in the Pearce case, supra. I lhink there is and was available sufficient material such as course material, by-laws and rules, policy statements and dec'tsions of tribunals and courts to enable persons in the securities industry including the petitioner and members of panels to allow them to be able to properly appreciate the relevant standards and to apply the provisions of By-Law 5.01(b) in a fair and orderly fashion." (emph. added) Mr. Wayne Groom, a Vice-President of Wood Gundy, responded on behalf of Mr. Sangster. In essence, he stated the Respondent did not understand the citation, or did not know how his conduct was alleged to have breached the rules. He submitted that Mr. Sangster was obliged to execute the client's instructions, as received, and that if he had
- 12- sold the 6,000 shares, and then put the 4,000 shares up, and then called around, there was no guarantee of a sale. Mr. Groom agreed that the principle issue was whether Mr. Sangster disclosed the $7.00 price in his telephone call to Nancy Sangster, and the other traders. Mr. Groom submitted that Mr. Sangster did carry out his role professionally, and there was no breach in Sangster contacting Nancy Sangster and ensuring that the order was Idled. Mr. Groom agreed, in response to a question from the panel, that Mr. Sangster could well have been criticized if he had not called other traders. It should also be noted that there is no evidence that the client of Mr. Sangster has made a complaint in relation to the manner in which Mr. Sangster carried out his instructions, but we have no evidence that the client was ever made aware of the true nature of the transaction. We note however', that the client previously had a stop loss in at $7.25 - and clearly the new sell order with a $7.00 limit demonstrates a conscious decision by the client to change the order. Considering the whole of the evidence before us, we find that Mr. Sangster did communicate to Nancy Sangster both the quantity of shares he had to sell (4,000) and the price of $7.00 per share that he was prepared to sell them for. It may have been, in the circumstances, that imparting this information to another trader in effect guaranteed that Mr. Sangster's client would not receive greater than $7.00 per share for the remaining 4,000 shares. However, on the other hand, it also guaranteed that the client's instructions were followed and the stock was sold in accordance with those instructions. The fact that in hindsight we know that Nancy Sangster was immediately able to resell the shares at a price greater than $7.00 is very troublesome, but as was acknowledged by counsel for the Exchange, Mr. Sangster could well have been criticized if he had not approached other traders in order to carry out the client's instructions.
- 13- In considering all the evidence of Mr. Sangster's conduct, we believe that upon reflection Mr. Sangster could have carried out the client's instructions without raising an appearance of impropriety. However, the duty of this Hearing Committee is to determine if Mr. Sangster's actions violated any V.S.E. bylaws or rules. Having considered all of the facts Of this case, we are not satisfied, on a balance of probabilities, that the Exchange has proven Mr. Sangster committed an infraction as defined in By-Law 5.01(b); the allegations contained in the Citation are dismissed. Lastly, there is a matter of general concern which this committee wishes to comment on, and that is the fact we believe the V.S.E. is aware that it is common practice for traders to seek a better market or the opposite side of an order. If the V.S.E. is of the view that the foregoing should not be a permitted activity, we suggest that the proper process should be for the matter to be referred to the appropriate Exchange standing committee for review, so that appropriate 'direction could be given in respect of what we understand is a common and accepted practice. DATED at Vancouver, B.C. this 3rd day of April, 1995. EKB:65896