Post by jcline on Sept 14, 2007 10:23:18 GMT -5
OSC Fines Canaccord Cap. for Illegal NSS
INVESTMENT DEALERS ASSOCIATION
IN THE MATTER OF:
THE BY-LAWS OF THE INVESTMENT DEALERS
ASSOCIATION OF CANADA
And
CANACCORD CAPITAL CORPORATION
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 or the Respondent).
2. The Investigation discloses matters for which the Respondent may be disciplined by a
hearing panel appointed pursuant to Association By-law 20 Part 10 (the Hearing Panel).
II. JOINT SETTLEMENT RECOMMENDATION
3. Staff and the Respondent 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.
4. The Settlement Agreement is subject to acceptance by the Hearing Panel.
5. The Settlement Agreement shall become effective and binding upon the Respondent and
Staff as of the date of its acceptance by the Hearing Panel (the Effective Date).
6. The Settlement Agreement will be presented to the Hearing Panel at a hearing (the
Settlement Hearing) for approval. Following the conclusion of the Settlement Hearing, the
Hearing Panel may either accept or reject the Settlement Agreement.
7. If the Hearing Panel accepts the Settlement Agreement:
- 2 -
(i) the Respondent 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
By-Laws 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 Respondent 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 Respondent 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 Respondent 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 Respondent jointly recommend that the Hearing Panel accept the Settlement
Agreement.
13. If the Hearing Panel rejects this Settlement Agreement:
(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.
III. STATEMENT OF FACTS
Acknowledgment
14. Staff and the Respondent agree with the facts set out in this Section III and acknowledge
that the terms of the settlement contained in this Settlement Agreement are based upon
those specific facts.
- 3 -
Factual Background
The Respondent
15. These Particulars relate to events which occurred from November 2001 through November
2002 (the Relevant Period).
16. The Respondent is a Member of the Association, with its head office located in Vancouver,
British Columbia. It has 22 branch offices across Canada including one on Bay Street in
Toronto (the Toronto Branch).
Finkelstein & Leonard
17. Michael Finkelstein (Finkelstein) was registered with the Association from January 1985
to August 2004. During the Relevant Period, he was a Registered Representative Options
at the Toronto Branch. He resigned from Canaccord on August 4, 2004.
18. Elizabeth Leonard (Leonard) has been registered with the Association since 1980. During
the Relevant Period, she was a Registered Representative Options and a Portfolio Manager,
Options at the Toronto branch.
The Stonestreet Account
19. Stonestreet Limited Partnership (Stonestreet LP) was an Ontario limited partnership, which
was sold in Ontario to “accredited investors” as defined by the Ontario Securities Act. The
minimum investment in Stonestreet LP was $150,000 for each limited partner.
20. The general partner of Stonestreet LP was Stonestreet Corporation (Stonestreet Corp.). As
general partner, Stonestreet Corp. administered all aspect of Stonestreet LP including
making decisions on how to invest the assets of Stonestreet LP.
21. During the relevant period, Stonestreet Corp. maintained a pro account (the Stonestreet
Account) at Canaccord in the name of Stonestreet LP. The Stonestreet Account operated
as a hedge fund in that it used leverage, long, short and derivative positions with the goal
of maximizing return on investment.
22. Finkelstein was one of the limited partners in Stonestreet LP and was the President and
Chief Investment Officer of the general partner Stonestreet Corp.
23. Finkelstein was the RR for the Stonestreet Account. Leonard was the Chief Operating
Officer and Portfolio Manager of the general partner, Stonestreet Corp. In practice,
Finkelstein and Leonard were both jointly responsible for the investment of the assets in
the Stonestreet Account.
The Trading Strategy
24. Finkelstein and Stonestreet Corp. became aware of private placement opportunities
through “finders” who connected issuers with investors for the purposes of raising capital.
One of these finders was a company whose President, was also an officer of a Cayman
- 4 -
Islands company that had an account with Finkelstein and engaged in similar trading
activity as Stonestreet LP.
25. Stonestreet LP’s trading strategy involved securing private placement deals with various
United States issuers, to acquire securities at a discount to the market price. Stonestreet
LP, however, did not acquire the securities with the intent of remaining long those
securities.
26. Upon securing an agreement to purchase shares by way of private placement or upon
learning that it would soon secure such an agreement, Stonestreet LP sold short the issuer’s
underlying common stock by initiating “naked” short sales in the Stonestreet Account.
27. Naked short selling generally refers to selling short without having borrowed the securities
to make delivery. As a result, the seller fails to deliver securities to the buyer when
delivery is due. This is known as a “failure to deliver" or a "fail."
28. Stonestreet LP continued to short the underlying stock until the accumulated short position
was approximately equal to the number of shares that Stonestreet LP would received
through the private placement. Eventually the shares purchased in the private placement
were used, either directly or indirectly, to close out the accumulated short positions.
29. This trading strategy generated profits for Stonestreet LP on the difference between the
short sale price and the discount price of the private placement.
Unfair Trading
30. This trading strategy was unfair to other market participants and contrary to the public
interest because when Stonestreet LP initiated naked short sales of the issuer’s shares, it
did so with knowledge of the terms of a private placement or with general knowledge of
the terms of an imminent private placement at a discount to the market price of the shares,
without that information having been publicly disclosed.
31. The naked short sale simply locked in Stonestreet LP’s profit, based on the spread between
the short sale price and the private placement price. They were, in effect, pre-selling
shares they knew they would acquire without disclosing to the public that they had an
agreement to acquire the shares.
Specific Instances of Unfair Trading
32. Between November 2001 and October 2002 on four separate occasions involving three
United States issuers, namely: Trikon Technologies Inc.; Novatel Wireless Inc.; and
General Magic Inc., (the Issuers) the Stonestreet Account executed naked short sales of the
Issuers’ shares after Stonestreet had entered into written share purchase agreements to
acquire restricted shares of the Issuers at a discount to the market price as part of a private
placement, but before the general terms of the private placement were publicly disclosed.
33. In each instance, Stonestreet eventually (at least one month later and in one case more than
three months later) received freely trading shares of the Issuer as part of the private
- 5 -
placement after the Issuer made required filings with the United States Securities and
Exchange Commission. Stonestreet then used its free trading shares to, directly or
indirectly, close out its outstanding failed short positions.
Previous IDA Discipline Hearing
34. In September 2005 after a contested Discipline Hearing pursuant to Part 10 of Association
By-law 20, in which Finkelstein and Leonard were the named Respondents, a Hearing
Panel dismissed all allegations against Finkelstein and Leonard after ruling there was “a
state of real uncertainty about whether (their) conduct constituted a violation of Section
10(b)” of the United States Securities and Exchange Act of 1934.
Failure to restrict the trading activity
35. Canaccord supervisors were aware that Stonestreet LP’s general trading strategy was to
sell short shares of companies to lock in profits on private placement shares already
purchased in the same company.
36. Reasonable and diligent supervisors, aware of Stonestreet LP’s basic trading strategy
would have taken proactive measures to reduce the potential for improper trading,
including some or all of the following:
(i) prohibit the trading strategy outright;
(ii) upon learning of Stonestreet LP’s participation in a private placement, review
all trading in the issuer’s shares for the prior 30, 60 and/or 90 day period to
determine if there was any trading in the issuer’s shares by Stonestreet LP, other
Finkelstein Clients, or any other accounts;
(iii) upon learning of Stonestreet LP’s participation in a private placement,
temporarily freeze Stonestreet LP and any other Finkelstein Clients from trading
the issuer’s shares until the private placement was publicly disclosed;
(iv) upon learning of Stonestreet LP’s participation in a private placement,
temporarily freeze Stonestreet LP and any other Finkelstein Clients from short
selling the issuer’s shares until the private placement shares became unrestricted
and freely tradable;
(v) make and record reasonable and diligent inquiries to determine the exact nature
and purpose of the trading strategy; and/or
(vi) upon learning of Stonestreet LP’s participation in a private placement, review
the private placement documents to determine if there were any restrictions
imposed upon Stonestreet LP or Canaccord with respect to trading of the
issuer’s shares at any time before or after the private placement.
37. The Respondent allowed Stonestreet LP to execute its trading strategy, without taking any
reasonable steps to determine, among other things:
(i) whether Stonestreet LP, or any other Finkelstein Clients were trading ahead of
news releases, during periods when they would be reasonably expected to be in
possession of undisclosed material information;
(ii) whether the practice of naked short selling the issuer’s shares without the intent
of actually being in a short position, in combination with the resulting fails
- 6 -
created a misleading appearance of trading activity and the true number of short
shares; and/or
(iii) whether the effect of naked short selling and subsequently covering the failed
short position after the shares acquired in the private placement were no longer
restricted had the effect of an illegal distribution because they were in effect
selling restricted stock.
38. The Respondent approved Stonestreet LP’s trading strategy without taking reasonable
measures to ensure that the trading was not unfair or detrimental to the interest of the
securities market.
V. CONTRAVENTIONS
39. The Respondent admits that during the Relevant Period it failed to adequately supervise
the Stonestreet Account and engaged in business conduct or practice which was
detrimental to the public interest, contrary to Association By-law 29.1., by failing to
restrict a trading strategy which it knew, or ought to have known, might be unfair to other
market participants and contrary to the public interest, and by failing to establish
procedures which would enable it to detect whether the trading in the account was fair to
other market participants or contrary to the public interest.
VI. TERMS OF SETTLEMENT
40. The Respondent agrees to pay a total eighty-five thousand dollars ($85,000) in penalty and
costs, of which five thousand dollars ($5,000) is attributed to the Association’s
investigation and prosecution costs in this matter.
41. Unless otherwise stated, any monetary penalties and costs imposed upon the Respondent
are payable immediately upon the latter of the Effective Date or May 15, 2007.
AGREED TO by the Respondent at the City of Vancouver in the Province of British Columbia,
this ______ day of March, 2007.
____________________________ _______________________________
WITNESS CANACCORD CAPITAL CORPORATION
- 7 -
AGREED TO by Staff at the City of Vancouver in the Province of British Columbia, this ______
day of March, 2007.
____________________________ _________________________________
WITNESS PAUL SMITH
Enforcement Counsel on behalf of
Staff of the Investment Dealers
Association of Canada
ACCEPTED this ____ day of ___________, 2007, by the following Hearing Panel:
Per: ______________
Panel Chair
Per: _______________
Panel Member
Per: ________________
Panel Member
INVESTMENT DEALERS ASSOCIATION
IN THE MATTER OF:
THE BY-LAWS OF THE INVESTMENT DEALERS
ASSOCIATION OF CANADA
And
CANACCORD CAPITAL CORPORATION
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 or the Respondent).
2. The Investigation discloses matters for which the Respondent may be disciplined by a
hearing panel appointed pursuant to Association By-law 20 Part 10 (the Hearing Panel).
II. JOINT SETTLEMENT RECOMMENDATION
3. Staff and the Respondent 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.
4. The Settlement Agreement is subject to acceptance by the Hearing Panel.
5. The Settlement Agreement shall become effective and binding upon the Respondent and
Staff as of the date of its acceptance by the Hearing Panel (the Effective Date).
6. The Settlement Agreement will be presented to the Hearing Panel at a hearing (the
Settlement Hearing) for approval. Following the conclusion of the Settlement Hearing, the
Hearing Panel may either accept or reject the Settlement Agreement.
7. If the Hearing Panel accepts the Settlement Agreement:
- 2 -
(i) the Respondent 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
By-Laws 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 Respondent 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 Respondent 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 Respondent 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 Respondent jointly recommend that the Hearing Panel accept the Settlement
Agreement.
13. If the Hearing Panel rejects this Settlement Agreement:
(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.
III. STATEMENT OF FACTS
Acknowledgment
14. Staff and the Respondent agree with the facts set out in this Section III and acknowledge
that the terms of the settlement contained in this Settlement Agreement are based upon
those specific facts.
- 3 -
Factual Background
The Respondent
15. These Particulars relate to events which occurred from November 2001 through November
2002 (the Relevant Period).
16. The Respondent is a Member of the Association, with its head office located in Vancouver,
British Columbia. It has 22 branch offices across Canada including one on Bay Street in
Toronto (the Toronto Branch).
Finkelstein & Leonard
17. Michael Finkelstein (Finkelstein) was registered with the Association from January 1985
to August 2004. During the Relevant Period, he was a Registered Representative Options
at the Toronto Branch. He resigned from Canaccord on August 4, 2004.
18. Elizabeth Leonard (Leonard) has been registered with the Association since 1980. During
the Relevant Period, she was a Registered Representative Options and a Portfolio Manager,
Options at the Toronto branch.
The Stonestreet Account
19. Stonestreet Limited Partnership (Stonestreet LP) was an Ontario limited partnership, which
was sold in Ontario to “accredited investors” as defined by the Ontario Securities Act. The
minimum investment in Stonestreet LP was $150,000 for each limited partner.
20. The general partner of Stonestreet LP was Stonestreet Corporation (Stonestreet Corp.). As
general partner, Stonestreet Corp. administered all aspect of Stonestreet LP including
making decisions on how to invest the assets of Stonestreet LP.
21. During the relevant period, Stonestreet Corp. maintained a pro account (the Stonestreet
Account) at Canaccord in the name of Stonestreet LP. The Stonestreet Account operated
as a hedge fund in that it used leverage, long, short and derivative positions with the goal
of maximizing return on investment.
22. Finkelstein was one of the limited partners in Stonestreet LP and was the President and
Chief Investment Officer of the general partner Stonestreet Corp.
23. Finkelstein was the RR for the Stonestreet Account. Leonard was the Chief Operating
Officer and Portfolio Manager of the general partner, Stonestreet Corp. In practice,
Finkelstein and Leonard were both jointly responsible for the investment of the assets in
the Stonestreet Account.
The Trading Strategy
24. Finkelstein and Stonestreet Corp. became aware of private placement opportunities
through “finders” who connected issuers with investors for the purposes of raising capital.
One of these finders was a company whose President, was also an officer of a Cayman
- 4 -
Islands company that had an account with Finkelstein and engaged in similar trading
activity as Stonestreet LP.
25. Stonestreet LP’s trading strategy involved securing private placement deals with various
United States issuers, to acquire securities at a discount to the market price. Stonestreet
LP, however, did not acquire the securities with the intent of remaining long those
securities.
26. Upon securing an agreement to purchase shares by way of private placement or upon
learning that it would soon secure such an agreement, Stonestreet LP sold short the issuer’s
underlying common stock by initiating “naked” short sales in the Stonestreet Account.
27. Naked short selling generally refers to selling short without having borrowed the securities
to make delivery. As a result, the seller fails to deliver securities to the buyer when
delivery is due. This is known as a “failure to deliver" or a "fail."
28. Stonestreet LP continued to short the underlying stock until the accumulated short position
was approximately equal to the number of shares that Stonestreet LP would received
through the private placement. Eventually the shares purchased in the private placement
were used, either directly or indirectly, to close out the accumulated short positions.
29. This trading strategy generated profits for Stonestreet LP on the difference between the
short sale price and the discount price of the private placement.
Unfair Trading
30. This trading strategy was unfair to other market participants and contrary to the public
interest because when Stonestreet LP initiated naked short sales of the issuer’s shares, it
did so with knowledge of the terms of a private placement or with general knowledge of
the terms of an imminent private placement at a discount to the market price of the shares,
without that information having been publicly disclosed.
31. The naked short sale simply locked in Stonestreet LP’s profit, based on the spread between
the short sale price and the private placement price. They were, in effect, pre-selling
shares they knew they would acquire without disclosing to the public that they had an
agreement to acquire the shares.
Specific Instances of Unfair Trading
32. Between November 2001 and October 2002 on four separate occasions involving three
United States issuers, namely: Trikon Technologies Inc.; Novatel Wireless Inc.; and
General Magic Inc., (the Issuers) the Stonestreet Account executed naked short sales of the
Issuers’ shares after Stonestreet had entered into written share purchase agreements to
acquire restricted shares of the Issuers at a discount to the market price as part of a private
placement, but before the general terms of the private placement were publicly disclosed.
33. In each instance, Stonestreet eventually (at least one month later and in one case more than
three months later) received freely trading shares of the Issuer as part of the private
- 5 -
placement after the Issuer made required filings with the United States Securities and
Exchange Commission. Stonestreet then used its free trading shares to, directly or
indirectly, close out its outstanding failed short positions.
Previous IDA Discipline Hearing
34. In September 2005 after a contested Discipline Hearing pursuant to Part 10 of Association
By-law 20, in which Finkelstein and Leonard were the named Respondents, a Hearing
Panel dismissed all allegations against Finkelstein and Leonard after ruling there was “a
state of real uncertainty about whether (their) conduct constituted a violation of Section
10(b)” of the United States Securities and Exchange Act of 1934.
Failure to restrict the trading activity
35. Canaccord supervisors were aware that Stonestreet LP’s general trading strategy was to
sell short shares of companies to lock in profits on private placement shares already
purchased in the same company.
36. Reasonable and diligent supervisors, aware of Stonestreet LP’s basic trading strategy
would have taken proactive measures to reduce the potential for improper trading,
including some or all of the following:
(i) prohibit the trading strategy outright;
(ii) upon learning of Stonestreet LP’s participation in a private placement, review
all trading in the issuer’s shares for the prior 30, 60 and/or 90 day period to
determine if there was any trading in the issuer’s shares by Stonestreet LP, other
Finkelstein Clients, or any other accounts;
(iii) upon learning of Stonestreet LP’s participation in a private placement,
temporarily freeze Stonestreet LP and any other Finkelstein Clients from trading
the issuer’s shares until the private placement was publicly disclosed;
(iv) upon learning of Stonestreet LP’s participation in a private placement,
temporarily freeze Stonestreet LP and any other Finkelstein Clients from short
selling the issuer’s shares until the private placement shares became unrestricted
and freely tradable;
(v) make and record reasonable and diligent inquiries to determine the exact nature
and purpose of the trading strategy; and/or
(vi) upon learning of Stonestreet LP’s participation in a private placement, review
the private placement documents to determine if there were any restrictions
imposed upon Stonestreet LP or Canaccord with respect to trading of the
issuer’s shares at any time before or after the private placement.
37. The Respondent allowed Stonestreet LP to execute its trading strategy, without taking any
reasonable steps to determine, among other things:
(i) whether Stonestreet LP, or any other Finkelstein Clients were trading ahead of
news releases, during periods when they would be reasonably expected to be in
possession of undisclosed material information;
(ii) whether the practice of naked short selling the issuer’s shares without the intent
of actually being in a short position, in combination with the resulting fails
- 6 -
created a misleading appearance of trading activity and the true number of short
shares; and/or
(iii) whether the effect of naked short selling and subsequently covering the failed
short position after the shares acquired in the private placement were no longer
restricted had the effect of an illegal distribution because they were in effect
selling restricted stock.
38. The Respondent approved Stonestreet LP’s trading strategy without taking reasonable
measures to ensure that the trading was not unfair or detrimental to the interest of the
securities market.
V. CONTRAVENTIONS
39. The Respondent admits that during the Relevant Period it failed to adequately supervise
the Stonestreet Account and engaged in business conduct or practice which was
detrimental to the public interest, contrary to Association By-law 29.1., by failing to
restrict a trading strategy which it knew, or ought to have known, might be unfair to other
market participants and contrary to the public interest, and by failing to establish
procedures which would enable it to detect whether the trading in the account was fair to
other market participants or contrary to the public interest.
VI. TERMS OF SETTLEMENT
40. The Respondent agrees to pay a total eighty-five thousand dollars ($85,000) in penalty and
costs, of which five thousand dollars ($5,000) is attributed to the Association’s
investigation and prosecution costs in this matter.
41. Unless otherwise stated, any monetary penalties and costs imposed upon the Respondent
are payable immediately upon the latter of the Effective Date or May 15, 2007.
AGREED TO by the Respondent at the City of Vancouver in the Province of British Columbia,
this ______ day of March, 2007.
____________________________ _______________________________
WITNESS CANACCORD CAPITAL CORPORATION
- 7 -
AGREED TO by Staff at the City of Vancouver in the Province of British Columbia, this ______
day of March, 2007.
____________________________ _________________________________
WITNESS PAUL SMITH
Enforcement Counsel on behalf of
Staff of the Investment Dealers
Association of Canada
ACCEPTED this ____ day of ___________, 2007, by the following Hearing Panel:
Per: ______________
Panel Chair
Per: _______________
Panel Member
Per: ________________
Panel Member