IN THE MATER OF DISCIPLINARY PROCEEDINGS INITIATED BY THE INVESTMENT DEALERS ASSOCIATION OF CANADA Re: BRANT SECURITIES LTD., KEITH McMEEKIN, HUGH JACKSON JR. AND JOHN DAVIES DECISION AND REASONS The hearing in this matter was held in Toronto, Ontario, on April 27, 2004. The panel of the District Council consisted of the Honourable Alvin B. Rosenberg, Q.C., Mr. Robert J. Guilday and Mr. David Kerr. Enforcement Counsel: Mr. Andrew P. Werbowski. Respondents Counsel: Mr. T. Nigel M. Campbell The Settlement Agreement that was put before the panel reads as follows: 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 Brant Securities Limited ( Brant ), Keith McMeekin ( Mr. McMeekin ), Hugh Jackson Jr. ( Mr. Jackson ) and John Davies ( Mr. Davies ), (collectively the Respondents ). 2. The Investigation discloses matters for which the District Council of the Association ( the District Council ) may penalize the Respondents by imposing discipline penalties. II. JOINT SETTLEMENT RECOMMENDATION 3. Staff and the Respondents 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 Respondents, of a penalty or terms more onerous, by the District Council in accordance with By-law 20.26.
2 5. Staff and the Respondents jointly recommend that the District Council accept this Settlement Agreement (and both confirm the facts as herein set out). 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 Respondents, 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 7. Brant is a Member of the Association. At all material times, Brant conducted business as a Type 2 Introducing Broker from its business premises located at 70 University Avenue, Toronto, Ontario. 8. Mr. McMeekin was registered with Brant as Registered Representative on August 26, 1997. On December 11, 1997, Mr. McMeekin was approved as Director (Trading Officer) and a Managing Director. On September 16, 1998, his title changed to Director, Trading Officer (Managing Director and CFO). Mr. McMeekin was designated Ultimate Designated Person ( UDP ) on December 9, 1998. On October 14, 1999, his title changed to Trading Officer (Managing Partner) and on July 30, 2002 his title changed to Trading Officer (President, CFO and Managing Director). On July 29, 2003 Mr. McMeekin was registered as CFO. 9. Mr. Jackson was registered with Brant as a Director and Trading Officer (Managing Partner) on December 11, 1997. Mr. Jackson was designated Alternate Designated Person ( ADP ) on May 3, 1999. 10. Mr. Davies was registered with Brant as a Trading Officer (CFO and VP) on November 4, 1999. 11. Mr. McMeekin, as Managing Partner and UDP, Mr. Jackson as Managing Partner and ADP, and Mr. Davies as Vice-President and CFO were at all material times Senior Executive Officers of Brant, were responsible for the organization of the Member and had ultimate responsibility for compliance by Brant with Association Requirements. The Association requires the Senior Executives of a Member to exercise active supervision over all activities of the Member. Where management and supervisory functions are delegated to others, the Association requires the Senior Executives to retain ultimate responsibility and control at all times. 12. In particular, the Association expects that the Senior Executive(s) of a Member will inter alia:
3 (i) (ii) (iii) (iv) (v) ensure that responsibility for each activity within the Member s business is clearly established and communicated to those responsible; ensure that those responsible fully understand the business that they manage; ensure that relevant compliance procedures and practices have been established and are working effectively; follow up immediately on any warning signals of problems emerging in the business, ask all necessary questions and take action accordingly; and follow up on all matters that the Association identifies as needing attention and ensure that appropriate action is taken and completed expeditiously. Overview of Allegations 13. The particulars of the alleged failure of Brant to conduct certain compliance procedures and the alleged failures of the individual respondents to carry out certain supervisory requirements are set out below: A. Sales Compliance Reviews and Deficiencies B. Account Supervision C. Policies and Procedures A. Sales Compliance Reviews and Deficiencies 14. In order to monitor whether Members are in compliance with Association Requirements in the supervision of account activity and activity relating to securities, the Sales Compliance and Financial Compliance Division of the Association conducts Compliance Reviews of Members. In order to ensure that any deficiencies are brought to the attention of the Senior Executives of the Member, the Compliance Review reports are sent under covering letter addressed to the Senior Executive(s) of the Member. 15. Where deficiencies in compliance practices or procedures are noted in a Compliance Review, the Member is required to provide a written response indicating what corrective measures will be taken to address the deficiencies. 16. Any representations given to the Association by a Member in response to findings by the Association of deficiencies in a Member s compliance procedures or practices must be fulfilled by the Member. Senior Executives of the Member responsible for
4 the compliance function, including the CEO, must ensure that appropriate action is taken and completed expeditiously in accordance with any such representations given on behalf of the Member. Sales Compliance Reviews, 1999-2001 17. In January 1999, an annual Sales Compliance Review was conducted at Brant. As a result of the review, concerns with Brant s Sales Compliance procedures were identified, including: (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) deficiencies in Brant s Policies and Procedures Manuals; relatively few controls in place with respect to journals between unrelated accounts, third party cheques and depositing securities to accounts; members of the corporate finance department not being segregated from traders; no active use of grey and restricted lists and no policies and procedures governing the containment of confidential information; no written evidence of daily trading reviews was maintained and review of monthly statements was deficient; deficiencies with respect to client correspondence; account documentation deficiencies; and deficiencies in signature verification for money laundering purposes. 18. On July 15, 1999, a written report of the results of the 1999 Sales Compliance Review was sent to Brant. The covering letter was addressed directly to William Fern, the former President of Brant and was copied to Mr. McMeekin and Mr. Jackson. This covering letter specifically directed Brant and its Senior Executives to matters which required immediate action as priority items. The problems relating to the Policies and Procedures manual, internal controls relating to journal entries and corporate finance activities, account supervision and client correspondence were identified as priority items. This letter also indicated that the Association required a written reply addressing all topics within one month of receipt by Brant of the Sales Compliance Review. 19. On November 8, 1999, a written response to the 1999 Sales Compliance Review was sent from Brant to the Association. Brant responded that:
5 (i) (ii) (iii) (iv) (v) (vi) (vii) a revised Policies and Procedures manual had been created; tighter internal controls would be implemented and no client disbursements or journal entries would take place without written authorization; the procedural manual had been updated to include sections on confidentiality, grey lists and restricted lists; Brant would no longer accept photocopies of identification unless an employee of Brant had taken the photocopy for purposes of money laundering verification; account documentation deficiencies would be remedied and a new staff member had been hired whose job would be to handle the new client account openings; appropriate daily and monthly reviews would be conducted immediately; and client correspondence issues would be remedied. 20. This response was on behalf of Brant and was signed by Mr. Jackson as Managing Partner. 2000 Sales Compliance Review 21. Throughout 2000 and into early 2001, a Sales Compliance Review was conducted at Brant. This review identified many repeat deficiencies from the 1999 Sales Compliance Review, despite representations from Brant that the problems would be rectified. Repeated Sales Compliance deficiencies included: (i) (ii) (iii) (iv) deficiencies with respect to the organization of corporate finance and the use of grey and restricted lists; deficiencies in signature verification for money laundering purposes; insufficient daily and monthly supervision of accounts; and account documentation deficiencies. 22. In addition to repeat items from the 1999 Sales Compliance Review, additional problems identified in the 2000 Sales Compliance Review included: (i) (ii) (iii) questionable distributions from control blocks; deficient monthly activity reports; certain trading and suitability concerns;
6 (iv) (v) various internal control deficiencies; and retention of research material problems. 23. On June 18, 2001, a written report of the results of the 2000 Sales Compliance Review was sent to Brant. The covering letter was addressed directly to Mr. McMeekin. This covering letter highlighted the matters which required immediate action as priority items. General account supervision problems, money laundering verification process, corporate finance problems and retention of research material and were all identified as priority items. This letter also indicated that the Association required a written reply addressing all topics within one month of receipt by Brant of the 2000 Sales Compliance Review. 24. On July 31, 2001 a written response to the 2000 Sales Compliance Review was sent from Brant to the Association. Brant responded that: (i) (ii) (iii) (iv) (v) (vi) (vii) a daily log would be kept and inquiries made via email and memorandum regarding supervision issues; the monthly activity report was prepared by Brant s carrying broker and it therefore had no control over its format; a new master list of control block positions and officers and directors would be kept; concerns regarding trading and suitability issues would be addressed and remedied; there had been confusion over the IDA report on committee updates regarding the use of fax, documents for purposes of money laundering verification but the requirement would be clarified; identified account documentation deficiencies would be remedied; the office structure had been reconfigured for purposes of separating corporate finance and trading activity and revised grey and restricted lists had been prepared; (viii) an amended policy regarding trading during the Restricted Period had been prepared; and (ix) client priority would be given for purposes of participating in corporate finance deals. 25. This response was on behalf of Brant and signed by Mr. McMeekin as managing partner.
7 26. Based on the representations made by Brant and assurances provided in Mr. McMeekin s letter, Association staff advised that the majority of items identified in the 2000 SCR appeared to be appropriately addressed with certain exceptions including: (i) (ii) client priority regarding private placements; and the policies regarding the grey and restricted lists and trading during the restricted period were still inaccurate or unavailable. 2001 Sales Compliance Review 27. In October 2001, a Sales Compliance review was conducted at Brant. This review identified a significant number of repeat deficiencies, some of which carried over from the 1999 and 2000 Sales Compliance reviews, despite assurances from Brant that these problems would be rectified. Repeated deficiencies included: (i) (ii) (iii) account supervision deficiencies; money laundering verification problems; and cash account rule violations. 28. In addition to these repeated items, additional priority items identified in the 2001 Sales Compliance Review included: (i) (ii) (iii) (iv) (v) (vi) exception reports regarding monthly reviews; concerns regarding out of jurisdiction accounts; concerns regarding pending documentation collection; advertising, sales literature and research report approval issues; identification of Pro orders; and issues with respect to changes to filled orders. 29. On August 27, 2002, a written report of the 2001 Sales Compliance review was sent to Brant. The covering letter was addressed directly to Mr. McMeekin as Managing Partner. The covering letter noted that a modest number of prior issues appeared to be addressed but that a persistent and problematic pattern remained evident. The covering letter advised that despite Brant s representations in its response to the 2000 SCR, the number of Priority Items from the 2000 SCR to the 2001 SCR had only been reduced from 11 to 10. Of additional concern was the fact that at least one half of the
8 priority items identified in the 2001 SCR had also been priority items in the 2000 SCR. 30. The covering letter further advised that the improvements and remedies promised by Brant in its response to the 2000 SCR had failed to materialize, either as a result of ineffective implementation or, in some cases, due to employee disregard of Brant s published policies. In at least one case, the trading activities of an active registrant continued to generate significant concerns with very meager evidence that the more rigorous supervision required previously by the Association had been seriously undertaken. 31. On September 25, 2002, Brant provided a written response to the 2001 SCR. In this response, Brant advised as to further steps it had taken regarding the improvement of account supervision including: (i) the hiring of a full time Chief Compliance Officer as of January, 2002; (ii) (iii) (iv) (v) the fact that Brant had internally placed a registrant on close supervision as of June 26, 2002; Brant had recently changed carrying brokers and that concerns regarding the exception reports for monthly reviews would be conveyed to the new carrying broker for remedying; documentation deficiencies would be addressed by the new Chief Compliance Officer; and out of jurisdiction accounts as well as money laundering verification concerns would be addressed. 32. The Association acknowledges that Brant made these substantial and satisfactory changes to satisfy Association s requirements. B. Account Supervision Brant Compliance Infrastructure 33. Mr. McMeekin, as the UDP pursuant to Association regulation 1300.2 was responsible to oversee Brant s supervision of accounts. Mr. McMeekin was not directly involved in the daily and monthly supervision of account activity as he had delegated this responsibility to Mr. Jackson. 34. Mr. Jackson, as the ADP was at all material times its Head of Compliance, was responsible to oversee Brant s supervision of accounts. Mr. Jackson was responsible for conducting daily and monthly account supervision. He also supervised the trading
9 desk and was involved in institutional sales as a producing person. Mr. Jackson did not have a back-up for monthly supervision. 35. Mr. Davies, as CFO, was responsible for daily account supervision in Mr. Jackson s absence. Mr. Davies monitored Brant s inventory positions, and approved all cash and stock journals entries. He was ultimately responsible for all client credit issues. Supervision of Accounts 36. Policy 2 of the Association describes minimum standards for retail account supervision at Member firms. These standards include a requirement that the Member conduct weekly and monthly reviews of account trading activity. Had these reviews been properly conducted between January 2000 and October 2001, with respect to certain client accounts, the following trading irregularities would have been detected: a) various instances of Cash Account Rule violations where cash accounts were able to act as margin accounts or clients were able to re-age the client debit; b) various instances where clients were able to make purchases of securities and sell those securities without paying for the initial trade, the positions frequently being liquidated at month end and at a loss to the client; c) various instances of transactions in the certain securities in which positions were purchased at the beginning of the month and sold at the end of the month to avoid a mark-to-market adjustment; d) a group of accounts apparently acting in concert for purposes of free-riding and debit-kiting which in October, 2001 left an accumulated deficit of approximately $500,000 and which culminated in Brant s carrying broker requiring an immediate end to the client trading activity or the injection of further capital. Repeated Cash Account Rule Violations 37. The 2000 SCR found that certain client accounts revealed a pattern of Cash Account Rule violations. Brant clients were able to re-age the client debit. The concern was specifically raised with Brant Senior Executives by Association Sales Compliance personnel and added to the planning process for the next SCR to examine in greater detail. 38. Subsequently, the 2001 SCR found that certain accounts revealed questionable trading practices and Cash Account Rule violations. Of these accounts three of them had been identified in the 2000 SCR as having Cash Account Rule violations. Brant did not provide satisfactory evidence that the activities were questioned except for one memo questioning the registered representative on the trading in one of the accounts. Staff is of the view that there was no satisfactory response or follow-up to this memorandum.
10 39. In virtually all of one registered representative s accounts, clients were allowed to make purchases and subsequently sell the securities, without paying for the initial trade. In most instances, the positions were liquidated at month end and usually at a loss to the client. The activity should have been questioned by Senior Executives and the investigation should have been documented with appropriate follow-up noted. Transactions in Two Specific Securities 40. A Brant registered representative has a personal relationship with two individuals whose accounts were amongst those identified for Cash Account Rule violations as set out above. One of these individuals was a promoter of a certain security which was repeatedly traded amongst the registered representative s clients accounts. A second specific security was also repeatedly traded amongst the registered representative s clients accounts. Brant was the market maker for both these securities. 41. A review of the trading blotters was conducted by Association Staff for trades involving these two securities. Five accounts were selected for further analysis for the period January 1, 2001 to September 30, 2001. 42. This account analysis confirmed: (a) A pattern in four of the accounts of buying stock at the beginning of the month with a subsequent sale of the same stock at the end of the month without settlement for the initial purchase. Occasionally these accounts had a debit balance prior to the purchase being made. At the end of the month, the debit balance was usually cleared or reduced by the sale; and (b) The sale at the end of the month was almost always to either of another of the registered representative s clients, a Brant inventory account or an account located at an American brokerage firm. 43. The month end daily commission report for September 2001 identified sales of the two securities from clients cash accounts to Brant s inventory account. Each of these clients had a debit in the account at the time of the sales. There is no evidence of inquiries into the trading activity found on the daily log for that date. 44. The trading activity relating to the two securities should have been questioned by Senior Executives and the investigations should have been documented with appropriate follow-up noted. Free Riding 45. A selection of the registered representative s clients accounts were further analyzed by Association Staff to detect patterns of free riding. The analysis reveals that certain accounts appear to have acted in concert. The trading activity in the subject accounts was terminated in October 2001 when there was an accumulated deficit of approximately $500,000. The end of this trading activity coincides directly with the
11 October 2001 instructions to Brant by its carrying broker s new credit manager to put an immediate end to this trading activity or inject more capital. 46. Brant s carrier reported to Brant that the aggregate holdings of certain holdings in the subject accounts totalled approximately 16% of the issued shares and were illiquid positions. At this point, Brant s carrying broker demanded the immediate provision of an increased comfort deposit to $700,000 from $530,000 and prohibited further purchases of the two securities referred to in paragraphs 40-44 above unless the client account was fully funded with cash to support the entire purchase. 47. This trading activity should have been questioned by Senior Executives and the investigations should have been documented with appropriate follow-up noted. Supervision of a second Registered Representative 48. Policy 2 of the Association describes minimum standards for retail account supervision at Member firms. These standards include a requirement that the Member conduct weekly and monthly reviews of account trading activity. Had these reviews been properly conducted between November 1999 and October 2001, with respect to a second registered representative s trading activity, the following trading irregularities would have been detected: (c) certain sales from control blocks which were not reported as such; (d) (e) Three Specific Accounts certain crosses and wash trades; and unusual trading activity in certain accounts controlled by individuals with questionable trading backgrounds. 49. The second registered representative opened accounts for D.P. Limited (the DP Ltd. Account ), M.M. (the MM Account ) and G.E.G. Ltd. ( the GEG Ltd. Account ). 50. A number of transactions occurred in these accounts which should have been reviewed during the following mandatory monthly reviews of statements generating $1,000 or more in commissions: DP Ltd.: November and December, 1999, January July, 2000, September, 2000 April, 2001 and June August, 2001 MM: September October, 2000, December, 2000, January, April and August 2001 GEG Ltd.: March August, 2001 51. A monthly review of the DP Ltd. account for the months of January 2000 to April 2000 and June to July 2000 should have resulted in the detection of a pattern of multiple receipts and deliveries of a large number of share certificates in a variety of stocks and subsequent cash disbursements. The trading activity involved:
12 a) Letters of Authorization written on DP Ltd. s letterhead, indicating corporate addresses in Brussels, London and Gibraltar despite account opening documentation indicating the account is domiciled in Gibraltar; b) large cash disbursements made by wire transfer to banks or entities not identified in the bank section found on DP Ltd. s account opening documentation; c) the account regularly liquidated blocks of stock after the securities had been transferred into the account; d) the existence of numerous wire transfers to unrelated banks or entities, when DP Ltd. was domiciled in Gibraltar. e) over $1,000 in commissions for the month of July 2001 which ought to have been reviewed by Mr. Jackson, because it was not included in the July 2001 Branch Account Activity Report ( BAAR ). 52. Mr. McMeekin, Mr. Jackson and Mr. Davies failed to fully investigate these transactions or adequately supervise the registered representative s management of the DP Ltd. Account. 53. Mandatory monthly reviews of the MM Account should have resulted in the detection of a pattern of multiple receipts and deliveries of a large number of share certificates in a variety of stocks, and one particular stock FB.com. 54. The account activity also involved multiple cheques issued in the name of Bendix Foreign Exchange for pick-up at Brant despite the fact that the account opening documentation indicates the MM Account was domiciled in the Turks & Caicos. 55. Mr. McMeekin, Mr. Jackson and Mr. Davies failed to fully investigate these transactions or adequately supervise the registered representative s management of the MM Account. 56. Mandatory monthly reviews of the GEG Ltd. account during March through August 2001 would have revealed multiple wire payments out of the account to an unrelated corporation s account at a U.S. bank and subsequently into GEG Ltd. s own name by way of ABN AMRO Bank in New York and Swiss American Bank in Antigua. 57. Despite the trading activity described above, no supervision with respect to these accounts was found during the 2000 Sales Compliance Review. During the 2001 Sales Compliance Review only three memos from Mr. Jackson to the registered representative dated February and September 2001 were provided to the Association s sales compliance team. As a result of his compliance review of January 2001 account statements, Mr. Jackson questioned the registered representative on the relationship between MM and an account in the name of MB, one of the accounts that transferred shares of FB.com to MM. Mr. Jackson also asked if either of the two accounts had a relationship with FB.com. The registered representative s response was simply that MB told him that the transfers were for consulting services rendered. There was no further investigation or follow-up.
13 58. Mr. Jackson s memo dated September 2001 regarding the August monthly review noted activity in the MM and GEG Ltd. Accounts. Regarding the MM account, Mr. Jackson instructed the registered representative to closely monitor the trading activity on the account for patterns of buying high and selling low. With respect to the GEG Ltd. Account, the registered representative was asked to provide an explanation for the transfer of certain share certificates from GEG Ltd. to DP Ltd. and then back again the following month. The registered representative replied in a memo dated September 24, 2001, that MM was trying to catch the right side of the market with regard to the buy and sell transactions. 59. These limited inquiries made by Mr. Jackson regarding the account activity in the DP Ltd., MM and GEG Ltd. Accounts do not meet the minimum standards for retail account supervision as described in Policy 2 of the Association. The F Accounts 60. The registered representative opened five accounts for an individual IB in the name of F Holdings Limited as follows: F Holdings Ltd. 001 F Holdings Ltd. #1 F Holdings Ltd. #2 F Holdings Ltd. #3 F Holdings Ltd. #4 61. The F Holdings Ltd. 001 account was opened in February 1998, while F Holdings Ltd. #1 was opened in January 1999. The three other F accounts were opened in March 2000. IB is listed as President and CEO of F and identifies his business as either investments or asset management. The accounts are domiciled at a Post Office Box in Nassau, Bahamas. During the period September 1999 to October 2001 the F #1 account was operated mostly as a bank account with relatively little securities trading activity. 62. Typically on a monthly basis there would be a dozen or more cheques deposited from a variety of institutions, one or two wire payments or cheques issued, several share certificate deposits, several cash or certificate transfers from/to other Brant accounts. The trades in the account were overwhelmingly sells of shares previously deposited into the account. 63. The F accounts generated little commission and, as such, the activity would not be found on the daily and monthly supervision reports. Brant, Mr. McMeekin, Mr. Jackson and Mr. Davies however, should have monitored journals, transfers and share certificate deposits. Minimal and insufficient inquiries were made into the account activity. In addition, there were no formal policies or procedures in place to identify
14 the significant chequeing and wire transfer activity. Between September 1999 and October 2001, several million dollars were deposited and wired out of the F #1 account. 64. In November 2000, 2.5 million shares of FB.com shares were received in the F #1 account. At that time 18.6 million shares were issued and outstanding and the shares received potentially represented a control block position. No evidence of any inquiries into these receipts or for the balance of 2.87 million shares held at the end of December 2000, was found. 65. Mr. Jackson directed two memoranda to the registered representative dated February and March 2001 regarding control block concerns in shares of FB.com in the F #1 account. However, there was no response nor any adequate follow-up conducted to resolve those concerns. The February 2001 memo states that Mr. Jackson s compliance review of January account statements identified holdings of 2,870,220 FB.com shares. This figure is in excess of 10% of the outstanding shares. Mr. Jackson requested information relating to the shares but received no response from the registered representative and did not follow up further. 66. Similarly, Mr. Jackson s March 2001 memo cites a further 2,830,000 shares of FB.com deposited into the F #1 account during February 2001. FB shares at this time totaled 5.7 million representing over 30% of the 18.6 million shares outstanding. Mr. Jackson requested the identity of the owner of the shares and an update to the NAAF. 67. It was not until May 2001 that Mr. Jackson restricted all activity in FB in the F accounts and required clarification of the situation directly from the client. Mr. Jackson expressed a concern that blocks of FB.com shares were deposited and F had not made the proper filings with the OSC regarding control block activity. IB indicated that the FB.com shares were the property of at least nine of his clients and that he was therefore confident that they had not exceeded the control block limits. 68. Prior to May 2001, F regularly received in blocks of shares for other issuers and trading activity was similar to that of FB. Brant failed to adequately supervise the trading in the F accounts by failing to adequately question this activity. It was not until October 2001 that Mr. Jackson requested IB to take his business elsewhere, after a fruitless search for F s registration as an investment counsel firm in the Bahamas. The Accounts Involving RS 69. The registered representative opened a number of accounts for individuals who are connected to, or involved with, an individual named RS. 70. RS was President and Director of TMCorp., an account opened with the registered representative on August 30, 1999.
15 71. A priority finding of the Association s 2000 SCR priority findings was the absence of a system at Brant to monitor activity in control positions and of insiders. The sales compliance team discovered physical certificates representing control blocks in CDNlisted securities being deposited or transferred into third party accounts at Brant and sold into the market. There was no evidence found during the 2000 SCR to indicate Brant had inquired about the requisite filings with the OSC or why the deposits were being made to a number of Brant accounts. 72. The CDN securities discovered by the sales compliance team were: WN Inc.; DC Corp.; AC Corp.; and ME Ltd. 73. Many of the shareholders and officers of WN Inc., DC Corp., AC Corp. and ME Ltd. were the same for each company: 74. With the exception of DC Corp., the transfer agent, FM Ltd. made all the requisite filings for the four issuers. FM Ltd. s phone number is the same as the phone number for the corporate offices of AC Corp., ME Ltd. and WN Inc. WN Inc. and DC Corp. had the same address. 75. The trading activities in these stocks were generally conducted through TM Corp. and RS related accounts. Both TM Corp. and a relative of RS s accounts were domiciled in British Columbia. Neither the registered representative nor Brant were registered in this province. The trading activities in these stocks ought to have generated concerns and questions from the Respondents. No such concerns or questions were raised or evidenced. 76. At a minimum, the following activity should have been investigated by Brant and its Senior Executives: (a) whether the receipt of a series of physical share certificates of WN Inc. by client accounts opened by the registered representative came from control blocks or insiders and whether requisite filings were made; (b) why the change of beneficial ownership of the WN Inc. Securities did not go through an exchange; (c) whether account documentation needed to be updated to reflect possible insider information; (d) why the WN Inc. shares were subsequently journalled to client accounts at Brant and other Member Firms to related, or apparently related, individuals; (e) apparent wash trades in WN Inc. Securities between certain corporate accounts at Brant and other Member Firms; (f) whether the TM Corp. receipt of large blocks of shares in DC Corp. represented control block transactions;
16 (g) (h) (i) (j) (k) (l) (m) why large deposits of DC Corp. shares were made by an insider to his account and journalled a significant number of DC Corp. shares to a corporate account controlled by RS and an associate, only to have those shares journalled back two months later; whether large deposits of share certificates in AC Corp. to other accounts maintained by associates of RS represented control block or insider transactions; whether subsequent journal transfers of AC Corp. shares to TM Corp. were control block or insider transactions; why AC Corp. shares were purchased by TTM Corp. at $1.00 when all other AC Corp. transactions that day were purchases at $2.25, including purchases by a relative of RS; why TM Corp. had journalled to third parties or sold on several occasions shares of ME Ltd. from a control block; why there were cash account violations and free-riding in several accounts serviced by the registered representative relating to the WN Inc., DC Corp., AC Corp. and ME Ltd. transactions; and why crosses and possible wash trades were utilized to reduce but not fully eliminate debits in various accounts serviced by the registered representative relating to the WN Inc., DC Corp., AC Corp. and ME Ltd. transactions. C. Brant s Corporate Policies & Procedures 77. As noted in both the 1999 and 2000 Sales Compliance Reviews, Brant did not have a physical structure in place to restrict access to its Corporate Finance department. Brant s Corporate Finance staff worked in close proximity to trade desk and research staff. This physical structure persisted until at least the summer of 2000. 78. Prior to December 1999, Brant had limited experience in corporate finance work. Prior financings were of a small magnitude and Brant s role was limited to part of an overall syndicate. Brant s involvement in corporate financings related exclusively to the oil & gas sector. At this time, Brant had little, if any, experience using Grey and Restricted Lists, as such lists are described in the Ontario Securities Act. 79. Ontario Securities Commission Policy 33-601 provides guidelines for policies and procedures concerning inside information. It defines a Grey List as a highly confidential list, compiled by a registrant, of issuers about which the registrant has inside information. Policy 33-601 defines a Restricted List as a list, compiled by a Registrant, of issuers about which the registrant may have inside information. Policy 33-601 defines Inside Information as a material fact or a material change with respect to a reporting issuer that has not been generally disclosed. 80. The purpose of Policy 33-601 is to provide general guidelines that registrants may wish to consider in satisfying the requirements of the exemption contained in Subsection 175(1) of the Regulation to the Ontario Securities Act. Subsection 175(1)
17 of the Regulation provides an exemption from the Insider Trading provisions of Subsection 76(1) of the Act. Policy 33-601 encourages registrants to consider which practices and procedures would be appropriate for their business. 81. Policy 33-601 goes on to recommend that registrants consider establishing written policies on procedures for purposes of education employees, containing inside information, restricting transactions and compliance with the general prohibition on insider trading. 82. In particular, Policy 33-601 advises that a registrant should normally place an issuer on the Grey List when it has received inside information about the issuer and specifically cites the example of where a registrant has been invited to manage or participate in a possible offering. Grey Lists are to be disseminated only to those employees who require the list to monitor unusual principal or agent trading in the securities by the registrant or its employees and, if necessary, to inquire about or restrict trading. Policy 33-501 advises that a registrant should normally move an issuer s name from the registrant s Grey List to the registrant s Restricted List when the registrant has agreed to act as an underwriter, or banking group member and the transaction on which the registrant is acting has been generally disclosed but the registrant is still in possession of, or may gain access to, inside information during the course of the transaction. 83. In the 2000 SCR, the Association s Sales Compliance team noted that Brant had not used the Grey or Restricted List as it was intended, nor did Brant appropriately distribute the Restricted List to all applicable employees. 84. It was not until November, 2001, after a second request by the Sales Compliance department that Brant provided a copy of amended policies and procedures with respect to Grey and Restricted Lists that corresponded to those of OSC Policy 33-601. IV. CONTRAVENTIONS Brant 85. From December 1998 through 2001, as noted above, Brant, a Member of the Association, contravened Association By-laws, Regulations and Policies and engaged in conduct unbecoming a Member by failing to respond in a timely manner to Association concerns regarding the design, establishment, oversight and implementation of an effective sales compliance program to ensure proper compliance with regulatory requirements; contrary to Association By-law 29.1. 86. From December 1998 through 2001, as noted above, Brant, a Member of the Association, failed to maintain adequate supervisory procedures in accordance with Association Policy No. 2, contrary to Association Regulation 1300.2.
18 87. From December 1998 through 2001, as noted above, Brant, a Member of the Association, failed in many instances to use due diligence to learn the essential facts relative to certain customers and orders or accounts accepted, and to ensure that such orders or accounts accepted were within the bounds of good business practice contrary to Association Regulation 1300.1(a) and 1300.1(b). 88. From December 1998 through 2001, as noted above, Brant, a Member of the Association violated Association By-Law 29.1 by engaging in a business conduct or practice that is unbecoming and detrimental to the public interest by failing in many instances to ascertain the identities and investigate trading activity as required by clause 1.5(1) of Rule 31-505, made under the Securities Act, R.S.O. 1990, c. S. 5, as amended. Mr. McMeekin 89. From December 1998 through 2001, as noted above, Mr. McMeekin, an Approved Person employed by Brant, a Member of the Association, and a Senior Executive of Brant, failed in many instances to carry out his duties and responsibilities to ensure the Member was in compliance with Association Requirements pursuant to Association Regulation 1300.2 and Policy No. 2. 90. From December 1998 through 2001, as noted above, Mr. McMeekin, an Approved Person employed by Brant, a Member of the Association, and a Senior Executive of Brant, engaged in conduct unbecoming his positions by failing in many instances to carry out his duties and responsibilities to ensure that Brant fulfilled representations provided to the Association to put into place and implement procedures to ensure compliance with Association requirements contrary to Association By-law 29.1. 91. From December 1998 through 2001, as noted above, Mr. McMeekin, an Approved Person employed by Brant, a Member of the Association and a Senior Executive of Brant, violated Association By-Law 29.1 by engaging in a business conduct or practice that is unbecoming and detrimental to the public interest by failing in many instances to ascertain the identities and investigate trading activity as required by clause 1.5(1) of Rule 31-505, made under the Securities Act, R.S.O. 1990, c. S. 5, as amended.
19 Mr. Jackson 92. From May 1999 through 2001, as noted above, Mr. Jackson, an Approved Person employed by Brant, a Member of the Association, and a Senior Executive of Brant, failed in many instances to carry out his duties and responsibilities to ensure the Member was in compliance with Association Requirements pursuant to Association Regulation 1300.2 and Policy No. 2. 93. From May 1999 through 2001, as noted above, Mr. Jackson, an Approved Person employed by Brant, a Member of the Association, and a Senior Executive of Brant, engaged in conduct unbecoming his positions by failing in many instances to carry out his duties and responsibilities to ensure that Brant fulfilled representations given to the Association to put into place and implement procedures to ensure compliance with Association requirements contrary to Association By-law 29.1. 94. From May 1999 through 2001, as noted above, Mr. Jackson, an Approved Person employed by Brant, a Member of the Association and a Senior Executive of Brant, violated Association By-Law 29.1 by engaging in a business conduct or practice that is unbecoming and detrimental to the public interest by failing in many instances to ascertain the identities and investigate trading activity as required by clause 1.5(1) of Rule 31-505, made under the Securities Act, R.S.O. 1990, c. S. 5, as amended. Mr. Davies 95. From November 1999 through 2001, as noted above, Mr. Davies, an Approved Person employed by Brant, a Member of the Association, and a Senior Executive of Brant, failed to carry out his duties and responsibilities to ensure the Member was in compliance with Association Requirements pursuant to Association Regulation 1300.2 and Policy No. 2. V. ADMISSION OF CONTRAVENTIONS AND FUTURE COMPLIANCE 96. The Respondents admit the contravention of the Statutes or Regulations thereto, Bylaws, Regulations, Rulings or Policies of the Association noted in Section IV of this Settlement Agreement, for the purposes of this regulatory proceeding only. In the future, the Respondents shall comply with these and all By-laws, Regulations, Rulings and Policies of the Association.
20 DISCIPLINE PENALTIES The panel approved the penalties imposed by the Association pursuant to the Settlement Agreement, and accepted by the Respondents, as follows: Brant (a) a fine in the amount of $125,000.00; (b) as a condition of continued approval, that in the event Brant fails to comply with any of these discipline penalties within the ensuing 30 days, the District Council may, upon application by the Senior Vice President, Member Regulation and without further notice to Brant, suspend the approval of Brant until the penalties and costs herein are complied with. Mr. McMeekin (a) (b) a fine in the amount of $35,000.00; and as a condition of continued approval, that in the event Mr. McMeekin fails to comply with any of these discipline penalties within the ensuing 30 days, the District Council may, upon application by the Senior Vice President, Member Regulation and without further notice to Mr. McMeekin, suspend the approval of Mr. McMeekin until the penalties and costs herein are complied with. Mr. Jackson (a) (b) a fine in the amount of $35,000.00; and as a condition of continued approval, that in the event Mr. Jackson fails to comply with any of these discipline penalties within the ensuing 30 days, the District Council may, upon application by the Senior Vice President, Member Regulation and without further notice to Mr. Jackson, suspend the approval of Mr. Jackson until the penalties and costs herein are complied with. Mr. Davies (a) (b) a fine in the amount of $25,000.00; and as a condition of continued approval, that in the event Mr. Davies fails to comply with any of these discipline penalties within the ensuing 30 days or additional time as agreed, the District Council may, upon application by the Senior Vice President, Member Regulation and without further notice to Mr.
21 Davies, suspend the approval of Mr. Davies until the penalties and costs herein are complied with. The panel also approved the imposition of costs against the Respondent Brant in the amount of $60,000.00. The panel considered mitigating factors, in that the Respondents no longer employed the offending brokers and that the Respondents were now in full compliance and that the public interest had been served by having the matter disposed of as a hearing would have been lengthy and had impact on the Respondents and on the IDA and Staff. Accordingly, the panel was of the view that suspension was not appropriate or warranted. DATED at Toronto, this 10th day of May 2004. [Signed] A B Rosenberg The Honourable Alvin B. Rosenberg, Q.C. Chair Mr. Robert J. Guilday Member Mr. David Kerr Member