Re: JAMES DONALD WOOSTER. Leon Getz, Chair, Robert C. Blanchard and Daniel Siu. Barbara Lohmann for the Investment Dealers Association

Transcription

1 IN THE MATTER OF A DISCIPLINE HEARING PURSUANT TO BY-LAW 20 OF THE INVESTMENT DEALERS ASSOCIATION OF CANADA PACIFIC DISTRICT COUNCIL Re: JAMES DONALD WOOSTER Panel: Appearances: Leon Getz, Chair, Robert C. Blanchard and Daniel Siu Barbara Lohmann for the Investment Dealers Association No appearance for Mr. Wooster Hearing held: July 28, December 15 and 16, 2003 Introduction PENALTY DECISION [1] In a Decision dated May 5, 2004 (the Earlier Decision ) we concluded, for reasons that we set out, that the Respondent, Donald James Wooster: (b) failed to use due diligence to learn essential facts concerning his client in breach of Association Regulation (Notice of Hearing, paragraph 1); in February 1993, unilaterally and without the knowledge or consent of his client, RM, amended her stated investment objectives for her cash account, as set out in the relevant New Client Account Form, in breach of Association Bylaw 29.1 (Notice of Hearing, paragraph 2); in June 1993, unilaterally and without RM s knowledge or consent, in breach of Association Bylaw 29.1, amended the stated investment objectives for both her cash and her RRSP accounts (Notice of Hearing, paragraph 4) and did so by completing a single NCAF, in breach of his obligation under Association Regulation to use due diligence to learn the essential facts relative to every account accepted (Notice of Hearing, paragraph 3);

2 2 (b) between May 24 and November 20, 1995 effected a total of 10 unauthorized trades in RM s margin and RRSP accounts, in breach of Association Bylaw 29.1 (Notice of Hearing, paragraph 6); (c) (d) (e) between July 1991 and September 1997, in breach of Association Regulation (c), recommended to RM purchases in each of her cash, RRSP and margin accounts that unreasonably exceeded her actual investment objectives with respect to those accounts (Notice of Hearing, paragraph 7); between February 24, 1993 and January 22, 1997 Mr. Wooster, in breach of Association Regulation (c), recommended the purchase of certain specific securities in RM s accounts that were not suitable for purchase by her (Notice of Hearing, paragraph 8) 1 ; in around October 2000 and April 2001 Mr. Wooster, in breach of Association By-law 29.1, misrepresented to his client, KP, the status of certain funds deposited in KP s margin account but belonging to KP s brother (Notice of Hearing, paragraph 9); and (f) in around March 2001 Mr. Wooster, in breach of Association By-law 29.1, made certain misrepresentations to his employer concerning the margin account of his client, KP (Notice of Hearing, paragraph 10). [2] In the Earlier Decision we invited written submissions from the Association and Mr. Wooster as to appropriate sanctions for the breaches identified, and proposed a timetable for these submissions. We said that we would, on request, receive supplementary oral submissions. [3] Mr. Wooster advised us that he did not intend to make any further submissions, in writing or orally, and he has not done so. The Association has made written submissions but did not seek to make supplementary oral representations. General Framework [4] In January 2003 the Association approved a document entitled Disciplinary Sanctions Guidelines (the Guidelines ). The introduction to the Guidelines includes the following: The securities industry is a business of trust and confidence. As the industry's national self-regulatory organization, the Association regulates the activities of its Member firms and the approved persons employed by those Member firms in terms of their capital adequacy and conduct of business. To qualify as a Member firm, an organization must meet stringent capital requirements and demonstrate an ability and willingness to conduct its business in a manner consistent with the Securities Act(s) of the province or provinces 1 There is a typographical error in paragraph 70(f) of the Earlier Decision. The reference there to paragraph 76 below should be a reference to paragraphs 52 and 54 above.

3 3 in which registration is held, and adhere to the By-laws, Regulations, Policies and Rulings of the Association. Approved persons share analogous responsibilities, and must above all conduct themselves with trustworthiness and integrity, and act in an honest and fair manner in all their dealings with the public, their clients, and the securities industry as a whole. Association By-law 20 ( Approvals and Discipline ) provides that a District Council of the Association has the power to impose specified penalties where it has been found that an individual registrant or a Member firm fails to comply with the Association's By-laws, Regulations, Policies and Rulings. A District Council also may impose penalties where a registrant has failed to comply with applicable securities regulations or engages in any business conduct or practice which such Council in its discretion considers unbecoming a Member or not in the public interest. Pursuant to paragraph of the Association's By-Laws, a District Council is authorized to impose sanctions that may include any one or a combination of: (i) (ii) (iii) (iv) (v) (vi) a reprimand; a fine up to $1,000,000 per offence or an amount equal to three times the pecuniary benefit obtained as a result of any violation, whichever is greater; suspension for a specified period of a Member's rights and privileges or of an individual's approval to act as a partner, director, officer or employee of a Member, possibly on terms; termination of a Member's membership and the accompanying rights and privileges or revocation of an individual's approval; expulsion of a Member from the Association or prohibition of an individual's approval for any period of time; and imposition of terms and conditions on a Member or conditions on a subsequent approval or continued approval of an individual, as the District Council considers appropriate in the circumstances. As paragraph provides no guidance on the imposition of the penalties it authorizes, the penalty is left to the discretion of the District Council to be determined in light of the circumstances of each case. In making their determinations as to penalty, in the past, District Councils have looked to sources that reflect industry understandings and expectations. These sources have included The Toronto Stock Exchange's Penalty Guidelines for Disciplinary Proceedings (November 5, 1996) (the "TSE Guidelines") [recently superceded by the Market Regulation Services Inc. Sanction Guidelines for RS Disciplinary Proceedings- August 2002] and the NASD Sanction Guidelines (2001). Although the TSE and NASD Guidelines are not binding on the District Council, they have been cited with approval. In its decision in Re Milewski, [1999] I.D.A.C.D. No. 17, the Ontario District Council held it reasonable to treat such guidelines as indicative of industry expectations and as relevant to a penalty determination, although neither exhaustive nor determinative. [5] The Guidelines set out principles and rules designed to provide a framework for assessing the gravity of a particular breach of the Association s By-laws, Regulations,

4 Rules and Policies, and help to determine which sanction(s) is reasonable in the circumstances. These principles and rules include the following: 1. Disciplinary Sanctions Are Remedial In Nature As set out in Re Derivative Services Inc., [2000] I.D.A.C.D. No.26, at page 3, a District Council's main concerns in determining an appropriate penalty are: 1. Protection of the investing public; 2. Protection of the Investment Dealers Association s membership; 3. Protection of the integrity of the Investment Dealers Association s process; 4. Protection of the integrity of the securities markets, and 5. Prevention of a repetition of conduct of the type under consideration. 4 The penalty imposed in a specific proceeding should reflect the District Council's assessment of the measures necessary in the specific case to accomplish these goals, ranging from a reprimand to an absolute bar, and may take into account the seriousness of the respondent's conduct and specific and general deterrence. 2. Disciplinary Sanctions As Deterrence Registrants and Member firms have significant responsibilities that they must meet if investors are to be protected and market integrity maintained. Registrants who choose to act in ways that threaten the integrity of the capital markets must have the expectation that they will be held accountable through enforcement action by regulators. Sanctions should be based on the circumstances of the particular misconduct by a respondent with an aim at general deterrence. General deterrence will follow from an appropriate decision and deter others from engaging in similar misconduct and improve overall business standards in the securities industry. This can be achieved if a sanction strikes an appropriate balance by addressing a registrant s specific misconduct, but also being in line with industry expectations. As was observed by the Ontario District Council in Re Mills, [2001] I.D.A.C.D. No. 7, April 17, 2001, at p. 3: Industry expectations and understandings are particularly relevant to general deterrence. If a penalty is less than industry understandings would lead its Members to expect for the conduct under consideration, it may undermine the goals of the Association's disciplinary process; similarly, excessive penalties may reduce respect for the process and concomitantly diminish its deterrent effect. Thus the responsibility of the District Council in a penalty hearing is to determine a penalty appropriate to the conduct and respondent before it, reflecting that its primary purpose is prevention rather than punishment. However, an important objective of the disciplinary process is to deter future misconduct by imposing progressively escalating sanctions on repeat offenders. For this reason, when appropriate, a District Council should consider a respondent s relevant disciplinary history in determining sanctions. Relevant disciplinary history may include past misconduct similar to that at issue; or (b) past misconduct that, while unrelated to the misconduct at issue, evidences prior disregard for regulatory requirements, investor

5 protection, or commercial integrity. Even if a respondent has no history of relevant misconduct, however, the misconduct at issue may be so serious as to justify a higher penalty. [6] In exercising our discretion under Association By-law to determine the appropriate penalties for the infractions that we found that Mr. Wooster committed, we have taken into account both the Guidelines and the principles and rules. 5 [7] One relevant factor, it is clear, is Mr. Wooster s disciplinary history. It is summarized in paragraph 90 of the summary of facts contained in the Notice of Hearing (the Summary 2 ) as follows: The Respondent was disciplined by the Association in 2000 for failing to use due diligence to ensure that recommendations he made for a client were appropriate and in keeping with that client's investment objectives (Association Regulation (c)) and for failing to use due diligence to ensure that he learned the essential facts relative to his client (Association Regulation ). This conduct transpired between November 1992 to August For these infractions, the Respondent was fined $12,000 and as a condition of continued approval, he was required to re-write and pass the Conduct and Practices Handbook for Securities Industry Professionals examination. In addition, the Respondent was required to pay $2,000 toward the Association's costs. [8] Against this background, we turn to the breaches that we have found were committed by Mr. Wooster. Breaches of Association Regulation [9] We found that Mr. Wooster violated Association Regulation which requires due diligence to learn and remain informed of the essential facts relative to every customer - and Association Regulation (c) which requires due diligence to ensure that recommendations made to a client are suitable based on, among other things, the client s financial situation, investment knowledge, investment objectives and risk tolerance in each case in two respects. [10] The two breaches of Association Regulation were: (i) (ii) including in the NCAF of his client, RM, information about her that was demonstrably wrong in a number of fundamental respects, including her occupation, income and net worth, and investment knowledge and experience ; 3 and using a single NCAF to change the investment objectives of both RM s cash account and her RRSP account. 4 2 See paragraph 90 of the Summary, attached to the Earlier Decision. 3 Paragraphs 16 to 19 of the Earlier Decision. 4 Paragraph 26 of the Earlier Decision.

6 [11] The two breaches of Association Regulation (c) were: 6 (i) (ii) making recommendations to RM for the purchase securities that resulted in both her actual and her stated investment objectives being exceeded; 5 and making recommendations to RM for the purchase of specific securities that were not suitable for purchase by her. 6 [12] We have reservations as to whether, in the scheme of things, the use of a single NCAF to effect a change the investment objectives in two different accounts is particularly significant. Each of the other breaches identified, however, represents a disregard of the know your client rule which the Guidelines describe, appropriately, as being of paramount importance for the securities industry. [13] The Guidelines suggest a variety of possible sanctions for breaches of this kind, among them a minimum fine of $10,000 for each breach. The Association has proposed the imposition of an aggregate fine of $25,000 in respect of these matters. Breaches of Association Bylaw 29.1 [14] So far as material, Association By-Law 29.1 says that participants in the securities industry: (i) shall observe high standards of ethics and conduct in the transaction of their business, (ii) shall not engage in any business conduct or practice which is unbecoming or detrimental to the public interest, and (iii) shall be of such character and business repute and have such experience and training as is consistent with the standards described in clauses (i) and (ii).... [15] In our Earlier Decision we concluded that the Association s complaints that Mr. Wooster committed the following breaches of By-Law 29.1, were well-founded: (b) that in February 1993, unilaterally and without the knowledge or consent of his client, RM, he amended the stated investment objectives for her cash account, as set out in the relevant NCAF; that in June 1993, unilaterally and without RM s knowledge or consent, he amended the stated investment objectives for both her cash and her RRSP accounts; (c) that between May 24 and November 20, 1995 he effected a total of 10 unauthorized trades in RM s margin and RRSP accounts, 5 Paragraphs 38 and 39 of the Earlier Decision. 6 Paragraphs 40 to 49 of the Earlier Decision.

7 7 (d) (e) that in around October 2000 and in April 2001 he misrepresented to his client, KP, the status of certain funds deposited in KP s margin account but belonging to KP s brother; and that in around March 2001 he made certain misrepresentations to his employer concerning the margin account of his client, KP. [16] Each of these complaints involves a betrayal of a client or an employer. Cumulatively, and in particular when considered in the light of the fact that in many respects they echo complaints that were the subject of the Settlement Agreement with the Association that Mr. Wooster signed in , they reflect a startling pattern of indifference to the standards of conduct reflected in By-Law 29.1, the interests of clients and employers and the industry of which Mr. Wooster was a part. [17] It is difficult to overstate the seriousness of any of this conduct. Each of the elements involves, to put it simply, rank dishonesty. No mitigating circumstances have been suggested nor can we think of any. [18] The Association has proposed the following fines in respect of the breaches of By-Law 29.1: (i) in respect of the unilateral and unauthorized changes to RM s investment objectives, $15,000; (ii) in respect of the 10 unauthorized trades, $25,000; (iii) in respect of the misrepresentation to KP concerning his brother s funds, $25,000; and (iv) in respect of Mr. Wooster s misrepresentations to his employer, $15,000, for an aggregate fine, in respect of breaches of By-Law 29.1, of $80,000. [19] The Association also seeks an order that Mr. Wooster disgorge $2,236.50, being the aggregate commission he earned in respect of the 10 unauthorized trades. [20] Having regard to: (b) (c) the nature and seriousness of Mr. Wooster s breaches; the principles and rules contained in the Guidelines; Mr. Wooster s disciplinary history, the distinct similarity between many of the breaches that he acknowledged in his 2000 Settlement Agreement and those that we have found were committed here, and his steadfast refusal to 7 See paragraph 7 above.

8 8 acknowledge any wrongdoing even in the face of persuasive evidence to the contrary; and (d) precedent decisions of similar panels cited to us by counsel for the Association that we have considered, we have reached the conclusion that the aggregate fine of $105,000 proposed by the Association in respect of all of the breaches that we have found that Mr. Wooster committed, is appropriate, and our order, accordingly, is that he pay a fine of $105,000. We also order that Mr. Wooster disgorge the amount of $2, in commissions that he earned on the 10 unauthorized trades. [21] The Association has also presented evidence that staff costs of approximately $118,000 were incurred by it in connection with the investigation into and prosecution of the complaints against Mr. Wooster. It has asked that we order that he pay $40,000, representing approximately 33% of those costs. In coming to the conclusion that this is a reasonable request by the Association, we have taken account of the fact that we found that one of the important allegations against Mr. Wooster that he misled his client, RM, about the reason she was required to open a margin account was not proved. 8 [22] The Association has also sought orders that: Mr. Wooster be declared ineligible for approval in any capacity by the Association for a period of one year from the date of this decision; it be a condition of Mr. Wooster s eligibility for approval by the Association in any capacity that he have successfully completed the CPH; it be a condition of Mr. Wooster s eligibility for approval by the Association in any capacity that he have paid in full the aggregate fine of $105,000, the costs of $40,000 and the $2, in commissions that we have ordered that he disgorge. [23] We consider the second and third of these orders to be entirely appropriate. In our opinion, however, to impose an ineligibility period of one year, as contemplated in the first order, would be little more than a gesture. We have already noted the seriousness of Mr. Wooster s infractions and that they all involve, in one form or another, betrayal or dishonesty. In the circumstances, we have reached the conclusion that it is appropriate and in the public interest that Mr. Wooster be declared ineligible for approval in any capacity by the Association for a period of three years from the date of this decision. [24] In summary, we order that Mr. Wooster: pay an aggregate fine of $25,000 in respect of the breaches of Regulation 1300; 8 See paragraphs 27 to 33 of the Earlier Decision.

9 9 (b) (c) (d) (e) (f) (g) pay an aggregate fine of $80,000 in respect of the breaches of By-law 29.1; disgorge the sum of $2, in improperly earned commissions; pay $40,000 of the costs incurred by the Association in connection with these proceedings; is ineligible for approval in any capacity by the Association for a period of 3 years from the date of this decision; is ineligible for approval in any capacity by the Association unless he has successfully completed the CPH; and is ineligible for approval in any capacity by the Association unless he has paid in full the amounts specified in paragraphs to (d) inclusive. On behalf of the panel Leon Getz (Chair) Vancouver, July 9, 2004