Download CANACCORD CAPITAL CORPORATION, DONALD GRANT

IN THE MATTER OF A SETTLEMENT HEARING PURSUANT TO BY-LAW 20
OF THE INVESTMENT DEALERS ASSOCIATION OF CANADA
PACIFIC DISTRICT COUNCIL
Re: CANACCORD CAPITAL CORPORATION, DONALD GRANT
MACDONALD AND PAUL PETER DIPASQUALE – SETTLEMENT
AGREEMENT
Panel:
Leon Getz, Chair, Mark Schiefner and Brian Worth
Appearances:
Barbara Lohmann and Paul Smith, for the Investment Dealers
Association
Dwight Stewart, for the Respondents
Hearing held:
November 23, 2006
DECISION
Introduction
[1]
We were constituted as a panel of the Pacific District Council of the Investment
Dealers’ Association of Canada (the “Association”) to consider, pursuant to Association
By-law 20.36, whether to accept a settlement agreement that had been negotiated
between the Association’s Enforcement Division and Canaccord Capital Corporation,
Donald Grant MacDonald and Paul Peter DiPasquale (the “Respondents”). At the
conclusion of the hearing held for this purpose in Vancouver, B.C. on November 23,
2006, and after considering the submissions of counsel for the Association and for the
Respondents, the terms of the settlement agreement (the “Settlement Agreement”), the
authorities referred to, the Association’s Disciplinary Sanctions Guidelines, and the
nature of the contraventions involved, we accepted the Settlement Agreement. These are
our reasons for doing so.
The Settlement Agreement
[2]
The Settlement Agreement is annexed to this Decision. It contains:
(a)
in Section III, the facts that gave rise to the negotiations that
resulted in the Settlement Agreement;
(b)
in Section IV, a recitation of certain “mitigating factors”; and
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(c)
in Section V, an admission by each of the Respondents of
contraventions of Association Bylaw 29.1, Association Regulation
1300.2 and Association Policy 2,
(d)
the agreement of
(i)
Canaccord Capital to pay a fine of $500,000;
(ii)
Mr. MacDonald (A) to pay a fine of $125,000 and (B) to undertake
never to apply for registration in any capacity with any Member
firm;
(iii)
Mr. DiPasquale (A) to pay a fine of $100,000, (B) to a six month
suspension from acting as a Branch Manager, (C) to a requirement
that he successfully re-complete the Branch Manager’s Course
before reregistering as a Branch Manager and (D) to a permanent
prohibition from acting in any higher supervisory position than
Branch Manager with any Member firm.
(iv)
all three Respondents to make an aggregate payment of $25,000 on
account of the Association’s investigation and prosecution costs.
The principles
[3]
The principles that govern us, and that we applied in deciding that we should
accept the Settlement Agreement, are set out in the following passage from the decision
in Re Milewski:1
A District Council considering a settlement agreement will tend not to
alter a penalty that it considers to be within a reasonable range, taking into
account the settlement process and the fact that the parties have agreed. It
will not reject a settlement unless it views the penalty as clearly falling
outside a reasonable range of appropriateness.
Analysis
[4]
We have been influenced by several considerations.
[5]
First, the contraventions that have been admitted relate generally to the
responsibilities of the individual Respondents to perform the supervisory functions entrusted
to them and of the corporate Respondent to install appropriate personnel and systems to
ensure that effective supervision was achieved.. The principle or policy behind the
requirements in this connection are obvious: to ensure that, in the language of Association
Regulation 1300.2 (a), “the handling of client business is within the bounds of ethical
conduct, consistent with just and equitable principles of trade and not detrimental to the
interests of the securities industry.”
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[1999] I.D.A.C. No. 17, August 5, 1999 at page 11. Se also Re Clark, [1999] I.D.A.C.D. No. 40, Bulletin No. 2674,
December 14, 1999.
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[6]
Secondly, we reviewed several prior decisions involving similar contraventions.
These included BMO Nesbitt Burns Inc. [2002] I.D.A.C.D. No. 25, Bulletin No. 3032,
July 23, 2002, Re MGI Securities Inc. and Crawford Gordon, Bulletin No. 3545, May 25,
2006 and Re Research Capital Ltd., [2005] I.D.A.C.D. No. 36, Bulletin No. 3489,
December 8, 2005. We considered the facts before us, the penalties agreed to and the
mitigating considerations in the light of those decisions, the penalties agreed to or
imposed in them, the facts upon which they were based and the factors that were taken
into account in them.
Conclusion
[7]
On the basis of that consideration we are satisfied that the sanctions provided for
in the Settlement Agreement fall within “a reasonable range of appropriateness”.
[8]
Accordingly we have accepted the Settlement Agreement.
_____________________________
Leon Getz
_____________________________
Brian Worth
Vancouver, British Columbia
As of November 23, 2006
________________________
Mark Schiefner
INVESTMENT DEALERS ASSOCIATION
IN THE MATTER OF:
THE BY-LAWS OF THE INVESTMENT DEALERS
ASSOCIATION OF CANADA
And
CANACCORD CAPITAL CORPORATION;
DONALD GRANT MACDONALD; AND
PAUL PETER DIPASQUALE
SETTLEMENT AGREEMENT
I.
INTRODUCTION
1.
The Enforcement Department Staff (Staff) of the Investment Dealers Association of Canada (the
Association) has conducted an investigation into the conduct of Canaccord Capital Corporation
(Canaccord), Donald Grant MacDonald (MacDonald) and Paul Peter DiPasquale (DiPasquale)
(collectively, the Respondents).
2.
The Investigation discloses matters for which the Respondents may be disciplined by a hearing
panel appointed pursuant to Association By-law 20 Part 10 (the Hearing Panel).
II.
Joint Settlement Recommendation
3.
Hearing Panel accepts the Settlement Agreement:
4.
Staff and the Respondents consent and agree to the settlement of these matters by way of this
settlement agreement (the Settlement Agreement) in accordance with By-laws 20.35 to 20.40,
inclusive and Rule 15 of the Association Rules of Practice and Procedure.
5.
The Settlement Agreement is subject to acceptance by the Hearing Panel.
6.
The Settlement Agreement shall become effective and binding upon the Respondents and Staff as of
the date of its acceptance by the Hearing Panel (the Effective Date).
7.
Settlement Hearing) for approval. Following the conclusion of the Settlement Hearing, the Hearing
Panel may either accept or reject the Settlement Agreement.
If the
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(i)
the Respondents waive their rights under the Association By-laws and any
applicable legislation to a disciplinary hearing, review or appeal; and
(ii)
Staff will not proceed with disciplinary proceedings under the Association ByLaws in relation to the facts set out in section III of this Settlement Agreement.
8.
If the Hearing Panel rejects the Settlement Agreement, Staff and the Respondents may enter into
another settlement agreement; or Staff may proceed to a disciplinary hearing in relation to the
matters disclosed in the Investigation.
9.
The Settlement Agreement will become available to the public upon its acceptance by the Hearing
Panel.
10.
Staff and the Respondents agree that if the Hearing Panel accepts the Settlement Agreement, they, or
anyone on their behalf, will not make any public statements inconsistent with the Settlement
Agreement. Nothing in this section or in this Settlement Agreement including the requirement not
to make inconsistent statements is intended to restrict the Respondents or any other approved person
from making full answer and defence to any other proceedings against them.
11.
This Settlement Agreement and any admissions made herein are not binding on any other party.
12.
Staff and the Respondents jointly recommend that the Hearing Panel accept the Settlement
Agreement.
13.
If the Hearing Panel rejects this Settlement Agreement:
III.
(i)
The provisions of By-law 20.10 to 20.24, inclusive, shall apply, provided that no
member of the Hearing Panel rejecting this Settlement Agreement shall participate
in any hearing conducted by a Hearing Panel with respect to the same matters
which are the subject of the Settlement Agreement; and
(ii)
This Settlement Agreement and the negotiations relating thereto shall be
confidential and without prejudice and may not be used as evidence or referred to
in any hearing.
Statement of Facts
Acknowledgment
14.
Staff and the Respondents 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 those specific facts.
Factual Background
Background
15.
The contraventions herein occurred during the period from July 1998 – June 2001 (the Relevant
Period).
16.
Canaccord is a Member of the Association, with its head office located on Granville Street in
Vancouver, British Columbia.
17.
Brink, Hudson & Lefever Ltd. (Brink) was a Member of the Association with its head office located
at #1200 – 595 Burrard Street in Vancouver, British Columbia. In or about November 1998
Canaccord took over Brink’s business (the Takeover) and Brink’s head office continued to operate
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as a Canaccord branch office (the Burrard Branch) with no change of management or supervisory
personnel from when the Burrard Branch was Brink.
The Supervisors
18.
MacDonald, first registered in 1983, was the President and Chief Executive Officer of Brink, who,
after the Takeover, continued to work at the Burrard Branch as the Co-Branch Manager, primarily
responsible for administrative functions. He has not been in an approved position since he left
Canaccord on March 31, 2005.
19.
Dipasquale, first registered in 1982, was the Executive Vice-President of Brink. After the Takeover
he continued to work at the Burrard Branch as Co-Branch Manager and Executive Vice-President,
primarily responsible for sales functions. As of the date of this Settlement Agreement, he is
registered as a Branch Manager at Canaccord.
20.
Dipasquale and MacDonald joined Brink in late September and early October, 1997, respectively.
21.
Martin Stead (Stead), first registered in 1991, was the Compliance Officer at Brink who, after the
Takeover, continued to work at the Burrard Branch as a Compliance Officer. In January 2000,
Stead became a Vice-President of Compliance and continued to work at the Burrard Branch.
22.
Ann Olson (Olson), not registered until after the Relevant Period, was the Manager of Client
Accounts at Canaccord during the Relevant Period.
23.
Keith Titterton (Titterton), first registered in 1983, was the Vice-President of Compliance at
Canaccord who worked at Canaccord’s head office on Granville Street.
Pryde
24.
John Frederick Pryde (Pryde) was a Registered Representative (RR) who was first registered in
1987. He joined Brink in October 1995 after having served as a Branch Manager at BZW Canada
Limited. During his time at Brink, Pryde was consistently one of the top three RRs in terms of gross
commissions. His client base which consisted almost exclusively of family, friends and referrals
placed a high degree of trust in him.
25.
Prior to the Relevant Period, Pryde had no disciplinary history.
26.
Pryde continued to work at the Burrard Branch after the Takeover until May 2001 when his
employment was suspended by Canaccord and ultimately terminated in June 2001.
27.
In or about July 1997, Pryde consulted a physician complaining about stress and anxiety. He was
prescribed medication to treat these complaints.
Pryde’s Small Cap Stocks
28.
Throughout the early stages of his career and prior to MacDonald and Dipasquale joining Brink in
the fall of 1997, Pryde had made a number of recommendations for his clients to invest in smaller
capitalization (Small Cap) companies. By the summer of 1998, Pryde was becoming more focused
on certain Small Cap companies as the primary investment vehicle for many of his clients and Pryde
became determined to hold significant positions in a limited number of Small Cap companies,
namely: Voxcom Inc. (Voxcom); Dexton Technologies Corp. (Dexton); Illusion Systems Inc.
(Illusion); ESI Environmental Sensors Inc. (ESI); Polymer Solutions Inc. (Polymer); and CST
Coldswitch Technologies (Coldswitch) (collectively Pryde’s Small Cap Stocks).
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29.
For the months of March, April, May and June 1998, Pryde’s commissions were more than double
his commissions for the same months in 1997. His gross monthly commissions in the spring and
summer of 1998 were as follows:
30.
During this period, Pryde was the top producing RR at Brink.
March 1998
$81,740
April 1998
$93,297
May 1998
$94,902
June 1998
$107,477
Breakdown/First Admitted to Hospital
31.
On or about July 30, 1998 during a business discussion, Pryde had a significant breakdown in
MacDonald’s office in the presence of MacDonald. Pryde became delusional and was shouting at
MacDonald. He asked MacDonald “Are you the devil?” Pryde subsequently left the Brink Office
and went home. Macdonald brought the incident to the attention of Dipasquale.
32.
That same day Pryde was admitted to hospital where he remained in the Inpatient Unit until he was
discharged on or about September 1, 1998.
33.
While in hospital, Pryde was diagnosed with Bipolar Disorder, also known as Manic Depressive
Illness. The condition is characterized by periods of emotional “highs” (manic phase) and “lows”
(depressive phase).
34.
While Pryde was in the hospital throughout August 1998 and thereafter, Pryde’s wife (Esther) had
telephone conversations with Dipasquale, and advised him that Pryde suffered from a chemical
imbalance.
35.
MacDonald and Dipasquale deny they were aware Pryde was in hospital for the entire month of
August, but acknowledge they were aware he was away from the office being treated for a chemical
imbalance and failed to make sufficient inquiry to determine the extent of his condition.
Trading From Hospital
36.
While he was in hospital, Pryde communicated with his trader C. Bataggliola (Bataggliola) but did
not tell Bataggliola where he was.
37.
Although Pryde’s trading decreased from the previous month by more than 50%, for the month that
Pryde was in the hospital there were at least 502 trades under Pryde’s broker code which generated
gross commissions of at least $26,597. Only 93 of these trades were marked unsolicited. This
trading occurred when MacDonald and Dipasquale knew or ought to have known that Pryde was out
of the office and being treated for a mental health related issue. MacDonald and Dipasquale
therefore knew, or ought to have known, that Pryde was not in a position to be recommending trades
to clients. All trading in client accounts in the month of August 1998 should therefore have been
scrutinized by them to ensure the trades were in the best interests of the clients.
38.
Neither MacDonald or Dipasquale made any inquiries of Pryde, his trader or any of his clients to
ensure that the trading conducted while he was in the hospital was authorized and in the best
interests of his clients.
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No increased supervision after Pryde’s breakdown
39.
40.
41.
When Pryde returned to work, MacDonald and Dipasquale failed to take any appropriate measures
to effectively supervise Pryde despite the fact that they ought to have known, that Pryde, one of their
top producing RRs:
39.1
had just returned from a month in hospital where he was being treated for mental health
related illness;
39.2
had increasingly been trading in Pryde’s Small Cap Stocks; and
39.3
had conducted a significant volume of trading while he was in hospital being treated for
mental health related illness.
In such circumstances, a reasonable supervisor would have taken action to ensure that Pryde’s
trading was being conducted in the best interests of his clients. In particular, MacDonald and
Dipasquale should have taken some or all of the following action:
40.1
made some further inquiry regarding Pryde’s condition and how that condition might affect
Pryde’s clients or the investing public generally.
40.2
in the circumstances pay closer attention to Pryde’s trading in client accounts and the risk
factors;
40.3
made more frequent inquiries of Pryde and asked for more detailed explanations and
documented those inquiries and explanations in greater detail in the form of memoranda;
and
40.4
not tolerate any unusual trading patterns, settlement deficiencies or other irregularities in
any of Pryde’s client accounts.
MacDonald and Dipasquale took none of the basic steps outlined in paragraph 40. The failure on
the part of MacDonald and Dipasquale to take any action to effectively supervise Pryde exposed
Pryde’s clients to significant risk and was contrary to the public interest.
After the Takeover
42.
After the Takeover was completed in November 1998, Pryde continued to work at the Burrard
Branch and continued to be supervised by MacDonald and Dipasquale. MacDonald and Dipasquale
became the Co-Branch Managers. Stead, who was the Compliance Officer at Brink, continued as a
Compliance Officer working at the Burrard Branch.
43.
After the Takeover, there was a failure to effectively integrate the Burrard Branch with the
Canaccord Head Office Compliance regime. Head Office did not do daily or monthly supervision
of the Burrard Branch. Effectively, all aspects of supervision remained solely the purview of
MacDonald and Dipasquale and Stead, essentially unchanged from the time the Burrard Branch was
Brink.
Indiscriminate Purchasing/Re-aging Debits/Cross Trades
44.
Pryde appeared to perform as an RR without incident throughout 1999, but by 2000, he was using
his own discretion when purchasing Small Cap Stocks in client accounts. He routinely made
transactions in client accounts without authorization from the clients and without regard to whether
the transaction was in the best interests of the client or whether there were any funds available in the
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client account to pay for the purchases. As a result, a significant number of debits began
accumulating in client accounts for trades that were not authorized in the first place.
45.
Few, if any of Pryde’s clients complained to Pryde about the unauthorized purchases because they
implicitly trusted Pryde to act in their best interests. Some of Pryde’s clients did not have sufficient
investment knowledge to understand the transactions in their accounts or to understand the resulting
debit balances which the transactions created.
46.
The number of debits accumulating in client accounts should have been noticed by MacDonald and
Dipasquale because of the amount of debits and further, because it was uncharacteristic of Pryde to
have outstanding debits in client accounts.
47.
By January 2000, Pryde had accumulated over $1.5 million outstanding debits in his client’s
accounts.
48.
In some cases, Pryde attempted to reduce outstanding debit balances in client accounts by selling
other securities without authorization from the client.
49.
This resulted in the accounts of many Pryde’s clients being over-concentrated in high risk securities
in general and the Pryde Small Cap Stocks in particular.
50.
In other cases, the debits simply remained outstanding.
51.
The debits were consistently outstanding. Most were also consistently outstanding for under 10
days and consistently recurring which should have been notice to MacDonald and Dipasquale that
Pryde was re-aging the outstanding debit balances.
52.
Pryde often re-aged the debit positions by selling the same security or another one of Pryde’s Small
Cap Stocks. If there was no immediate market for the security Pryde was trying to sell to clear off
the debt, Pryde made a market by entering an unauthorized buy order for another client. The buying
client often had no available cash either. Pryde therefore entered an unauthorized sell order for one
of the Pryde Small Cap Stocks. This pattern of cross-trading simply re-aged the outstanding debits.
53.
In an attempt to ensure the client received back enough money from the sale to cover the debit
created by the purchase, Pryde made unauthorized purchases in the accounts of other clients at
prices which were fixed by Pryde to match the ask of the selling client. Most or all of these
transactions were made by Pryde without authorization from the clients involved.
Pryde Admitted to Hospital in 2000
54.
By February 25, 2000, Pryde’s debits had reached $3,489,565.96.
55.
Pryde was admitted to hospital a second time on February 23, 2000.
56.
After spending 9 days in hospital, Pryde was released on March 2, 2000. Pryde again returned to
work without any change in the manner, quality or effectiveness of supervision.
Supervisors were aware of client complaints and allegations of false price support
57.
On or about May 8, 2000, MacDonald, Dipasquale and Stead became aware of a complaint by SD,
one of Pryde’s clients. In a written complaint letter SD alleged that on or about February 24, 2000,
he was told “in no uncertain terms” that he could not sell his Dexton shares because Pryde “was
trying to get the price back up.”
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58.
In the course of investigating SD’s complaint, MacDonald, Dipasquale and Stead were advised by
Pryde’s trader, Battaglia that she did not tell SD that Pryde was “trying to get the price back up” but
she did advise that SD and Pryde spoke on the telephone on February 24, 2000, at a time when
Pryde was in hospital.
59.
At or around the same time, MacDonald, Dipasquale and Stead knew, or ought to have known, that
the practice of crossing the Pryde Small Cap Stocks between Pryde’s clients had become
problematic.
60.
MacDonald, Dipasquale and Stead took no action to inquire or investigate the possibility that Pryde
was in any way attempting to “get the price back up” on Dexton or any of the other Pryde Small Cap
Stocks at any time, including on or about February 24, 2000, when they knew there was such an
allegation.
Failure to Effectively Supervise Enables Pryde to Continue Erratic Trading
61.
From at least January 2000 until he was suspended by Canaccord on or about May 25, 2001 and
eventually dismissed, there were numerous indicators which would have caused a reasonably
diligent supervisor to make inquiries of Pryde and/or his clients to ensure that Pryde’s handling of
client business was ethical and not detrimental to the interests of the securities industry and/or his
clients.
62.
Throughout this period Pryde’s client account statements, which were subject to mandatory monthly
reviews because the monthly commissions in the account were over $1,000, showed transactions
and trading patterns which would have caused a reasonably diligent supervisor to question whether
Pryde’s clients’ accounts were subject to:
63.
62.1
over concentration in the Pryde Small Cap Stocks;
62.2
continual re-aging and running debit balances in cash accounts; and
62.3
unauthorized or discretionary trading.
The daily reviews for this same period showed transactions and trading patterns which would have
caused a reasonably diligent supervisor to question whether Pryde’s clients’ accounts were subject
to:
63.1
over concentration in the Pryde Small Cap Stocks;
63.2
continual re-aging and running debit balances in cash accounts; and
63.3
unauthorized or discretionary trading.
64.
The daily reviews also showed transactions and trading patterns which would have caused a
reasonably diligent supervisor to question whether Pryde was re-aging debits for the Pryde Small
Cap Stocks by arranging for some of his clients to purchase one of the Pryde Small Cap Stocks from
some of his other clients in situations in which Pryde appeared to be making conflicting
recommendations to his clients.
65.
The aged debit reports for this period showed that a large number of Pryde’s clients’ accounts were
continuously in significant debit positions but that the debits rarely extended past 10 days, factors
which would have caused a reasonably diligent supervisor to consider whether Pryde was re-aging
debits in client accounts.
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66.
All of the information which would have caused a reasonably diligent supervisor to make and
document inquiries of Pryde or his clients and to receive satisfactory assurances that the trading in
the client accounts was ethical and in the best interests of the client were more compelling in this
particular situation because of the complaint of SD and because of Pryde’s mental health issues
which MacDonald and Dipasquale knew or ought to have known about.
67.
Despite the indicators set out in paragraphs 61-65, MacDonald, Dipasquale and Stead failed to take
effective steps to supervise Pryde and failed to make effective inquiries to ensure that the trading in
his clients’ accounts was in the best interests of his clients.
Cash Accounts Converted to Margin
68.
On or about January 13, 2001, a number of Pryde’s clients’ cash accounts were converted to margin
accounts, notwithstanding that the holdings in these accounts, primarily the Pryde Small Cap Stocks,
were not margin eligible.
69.
The conversion from cash account to margin account was done without consulting with the client as
to whether they wished to open a margin account. Instead the accounts were converted based on the
pro forma client authorization contained in the clients’ NCAFs which allowed the firm to convert an
account to a margin account. The conversion to margin accounts was effected without consideration
for the individual needs of the particular client.
70.
Olson only considered credit issues before deciding whether to authorize the conversion from cash
to margin account. She did not contact any person in Canaccord’s head office compliance
department, including Titterton, to ask whether he felt it was appropriate to make a universal switch
from cash to margin for accounts that had a lengthy history of outstanding debits. She gave no
consideration to whether a margin account was in the best interests of the client at all.
71.
When she authorized the opening of the margin accounts, Olson knew, or ought to have known, the
purpose of opening the margin accounts was to reduce the outstanding debit balances but did not
consider whether the client was aware that the margin account was being opened or the reason for
opening the margin account.
72.
Pryde’s clients were not notified by Canaccord in writing or otherwise after their accounts were
converted from cash to margin en masse. They were instead left to learn of the conversion on their
own when they received their next account statement.
73.
Some of Pryde’s clients did not know what a margin account was.
Special Margin Rate Applied to Voxcom
74.
Because none of the Pryde Small Cap Stocks were margin eligible under Canaccord firm rules and
because Pryde’s client accounts held predominately these stocks only, the switch from cash to
margin did not resolve the outstanding debits.
75.
Following a discussion with MacDonald, Olson also authorized a special exception to Canaccord’s
margin rules to make Voxcom margin eligible.
76.
At the time Voxcom was trading at a level which made it margin eligible pursuant to TSX rules but
not margin eligible pursuant to Canaccord’s more restrictive requirements.
77.
The primary purpose for the conversion of accounts from cash to margin and the special margin
eligibility for Voxcom was to eliminate the outstanding debit balances which Pryde had improperly
accumulated in client accounts. Olson on behalf of Canaccord authorized the conversion from cash
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account to margin account without considering whether the opening of such an account was in the
best interests of the client.
78.
The full effect of these actions was to essentially mask the problems Pryde had created in his clients’
accounts.
Supervisors Intervene
79.
Commencing on or about February 15, 2001, MacDonald and Dipasquale began working with Pryde
directly to effect trades which would clear up the debits in his clients’ accounts.
80.
From approximately February 15, 2001 to March 31, 2001, MacDonald spent time with Pryde
everyday to eliminate the debit positions. They did not phone clients together. Instead, MacDonald
relied on Pryde to call clients and to have trade tickets filled out and ready for execution which
would liquidate other securities in the accounts of clients with outstanding debit balances.
81.
Although the primary purpose of the trading was to eliminate debit positions, MacDonald did not
question why there were so many outstanding debit balances and he did not ensure that clients
delivered sufficient funds to settle the outstanding debit balances which resulted from the trades in
their account.
82.
Although Pryde specifically reported to MacDonald about the calls he had made to clients,
MacDonald knew or ought to have known that the outstanding debit problem was not simply a
matter of clients who did not deliver funds to settle trades in time. Notwithstanding this point,
MacDonald did not make any reasonable inquiries of Pryde to ask him to ensure that the trades were
in the best interests of the client.
83.
Instead, MacDonald unintentionally exacerbated the problem by allowing Pryde to continue to
purchase the Pryde Small Cap Stocks by trading among his clients.
84.
It should have been further obvious to MacDonald that the manner of trading was such that it was
likely that the trades which created the debt in the first place and the subsequent trades which
attempted to eliminate the debt were unauthorized.
Internal Supervision
85.
On or about March 31, 2001, Pryde was placed on internal supervision at the Burrard Branch after a
written complaint from Pryde’s client M was delivered to Dipasquale. MacDonald was on vacation
when this occurred.
86.
Because the supervisors at the Burrard Branch did not know or adhere to Canaccord policy to report
all decisions to place an RR on internal supervision, Head Office was never notified that Pryde was
placed on internal supervision. Dipasquale and Stead did not know of any requirement to notify
Head Office when an RR was placed on internal supervision. MacDonald knew that it was the
responsibility of himself, Stead or Dipasquale to notify head office that Pryde was placed on internal
supervision but he did not do it himself nor did he check to see whether Dipasquale or Stead had
notified Head Office.
87.
As part of the internal supervision at the Burrard Branch, after March 31, 2002, one of MacDonald,
Dipasquale or Stead was required to initial every trade ticket.
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Failure of Canaccord’s Supervisory Structure
Failure to Integrate Credit and Compliance
88.
The formal divide between Canaccord’s compliance and credit departments contributed to the
failure to properly supervise Pryde. Olson approved the conversion of cash accounts to margin
accounts, on a credit basis only. She did not consider contacting any person in Canaccord’s Head
Office compliance department, including Titterton, to ask whether it was appropriate to make a
universal switch from cash to margin for a large number of accounts all at once. She did not
consider whether a margin account was in the best interests of the client at all.
89.
Similarly, when dealing with debit balances, any issues which came to Olson’s attention were dealt
with only from a credit perspective. There was no combined analysis into the client accounts that
were accumulating and running these debit balances to determine why the debit balances existed and
what implications these had for the client.
90.
Head Office Compliance only became involved in debit issues if a problem was referred from the
credit department. At no point did Olson consult Head Office Compliance about this matter.
91.
Canaccord’s failure to integrate a reporting structure between credit and compliance resulted in
Canaccord’s Head Office Compliance department having no knowledge of the huge problem of
outstanding debits in Pryde’s client accounts.
Failure to Integrate Head Office Supervision with the Burrard Branch
92.
The failure to effectively integrate the Burrard Branch into Canaccord’s Head Office supervisory
structure contributed to Canaccord’s failure to supervise Pryde. Head Office did not do daily or
monthly reviews. Head Office did not oversee the Burrard Branch in any meaningful way to ensure
that effective supervision of the activity at the Burrard Branch was achieved.
93.
Supervision at the Burrard Branch was not only ineffective but also disorderly. Supervisors did not
have a clear understanding of their responsibilities or reporting procedures.
94.
Dipasquale was responsible for conducting daily reviews and monthly reviews at the Burrard
Branch. Stead was also responsible for doing monthly reviews but did not do daily reviews because
he did not believe it was his responsibility. MacDonald and Dipasquale both believed that Stead
was also conducting daily reviews but never asked him for a report on his daily reviews. If they had
asked him at any time during the Relevant Period to report to them on his daily reviews they would
have been aware that he was not doing them.
95.
The Canaccord supervisory structure enabled this unsatisfactory level of supervision which existed
at the Branch level to go undetected at the Head Office. This structural failure is part of the overall
failure by Canaccord and its managers to supervise Pryde’s activities.
Pryde Dismissed from Canaccord
96.
In May 2001, during a Canaccord sponsored trip to Italy, Pryde informed Canaccord’s Chairman
and Chief Executive Officer that he had problems with debit balances in client accounts.
97.
On or about May 25, 2001, after returning from Italy, Pryde was suspended by Canaccord.
98.
Pryde’s employment was terminated by Cancaccord on or about June 26, 2001.
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99.
A number of Pryde’s clients complained to Canaccord about losses in their accounts which resulted
from Pryde’s pattern of trading. Canaccord has paid a total of approximately $12 million to
compensate almost all of the approximately 160 clients who complained.
100.
In September 2005, Pryde entered into a Settlement Agreement with the Association which
permanently prohibited him from acting in any registered capacity with any Member of the
Association. Pryde was also ordered to pay $20,000 toward the Association’s investigation and
prosecution costs.
101.
In the Settlement Agreement, Pryde admitted that he did not resign as an RR despite the fact that he
posed a significant threat of loss to his clients, Canaccord, the capital markets, and the public
interest.
Mitigating Factors
102.
Staff and the Respondents acknowledge and agree that the following factors mitigate the
circumstances of this case:
a)
After suspending Pryde, Canaccord conducted a complete review of all of Pryde’s accounts
and contacted Pryde’s clients to inquire about the trading in their accounts. Canaccord
initiated contact with some clients who had not complained to Canaccord. There were also
a number of Pryde’s clients who complained to Canaccord about losses in their accounts
which resulted from Pryde’s pattern of trading. In total, Canaccord has paid approximately
$12 million to compensate most of the approximately 160 clients who complained;
b)
Brink was one of three Member firms experiencing financial or operational difficulties that
Canaccord took over at or about the end of 1998 and early 1999. Canaccord made a
strategic decision to focus its compliance and supervisory resources on the other two firms
because it was generally agreed that those two firms were a higher risk from a compliance
and supervision perspective. Canaccord therefore decided to integrate its financial
supervisory and compliance staff, with this office, after the other newly acquired firms;
c)
On March 30, 2001 MacDonald started a six-week vacation which was to be his transition
into retirement. When MacDonald returned from vacation, Pryde’s activities were being
investigated. Instead of fully retiring, MacDonald remained in full time employment with
Canaccord for an additional two years with the exclusive task of assisting Canaccord’s
internal investigation and helping to settle client complaints. Now 73 years old and fully
retired, MacDonald has not been registered in any capacity since 2005;
d)
Dipasquale has continued to act as a Branch Manager at Canaccord for the past five years,
during which time the Association has had no cause to investigate any supervisory
deficiencies by him;
e)
Neither MacDonald, first registered in 1983, nor DiPasquale, first registered in 1982, have
any prior disciplinary history.
V.
Contraventions
103.
The Respondents admit that:
a)
Between July 1998 and June 2001, while registered in supervisory positions at Brink, and
subsequently Canaccord, MacDonald and Dipasquale, each individually and together
collectively failed to effectively supervise the activities of Pryde and failed to ensure that
effective supervision of Pryde was achieved, contrary to Association By-Law 29.1,
Association Regulation 1300.2 and Association Policy 2.
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b)
VI.
Between November 1998 and June 2001, Canaccord failed to have proper systems,
procedures and personnel in place to ensure that effective supervision of the activities of its
Burrard Branch was achieved, and failed to properly supervise the activities of Pryde and
failed to ensure that effective or adequate supervision of Pryde was achieved, all of which
is contrary to Association By-Law 29.1, Association Regulation 1300.2 and Association
Policy 2.
Terms of Settlement
104. The Respondents agree to the following terms of settlement:
a)
The Respondents will pay a total fine of $750,000, attributable as follows:
• $500,000 to Canaccord;
• $125,000 to MacDonald;
• $100,000 to Dipasquale; and
• $25,000 to the Association’s investigation and prosecution costs.
b)
MacDonald undertakes to never apply for registration in any capacity, with any Member
firm.
c)
DiPasquale is suspended from acting as a Branch Manager for a period of six months and
must successfully re-complete the Branch Manager’s Course before re-registering as a
Branch Manager. He is permanently prohibited from acting in any higher supervisory
position, with any Member firm.
105.
Unless otherwise stated, any monetary penalties and costs imposed upon the Respondents are
payable immediately upon the latter of the Effective Date or November 30, 2006.
106.
Unless otherwise stated, any, prohibitions or restrictions, or other terms of the Settlement Agreement
shall commence on the Effective Date.
AGREED TO by the Respondents at the City of Vancouver in the Province of British Columbia, this ______
day of ________________, 2006.
____________________________
WITNESS
_______________________________
CANACCORD CAPITAL CORPORATION
____________________________
_______________________________
Witness
____________________________
WITNESS
Donald Grant Macdonald
_______________________________
Peter Paul DiPasquale
AGREED TO by Staff at the City of Vancouver in the Province of British Columbia, this day of November ,
2006.
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____________________________
_______________________________
Witness
Paul Smith
Enforcement Counsel on behalf of Staff of
the Investment Dealers Association of
Canada
____________________________
________________________________
Witness
Barbara Lohmann
Enforcement Counsel on behalf of Staff
of the Investment Dealers Association
of Canada
ACCEPTED this ______ day of ____________________, 2006, by the following Hearing Panel:
Per:
___________________________
Panel Chair
Per:
___________________________
Panel Member
Per:
___________________________
Panel Member