IN THE MATTER OF THE INVESTMENT DEALERS ASSOCIATION OF CANADA (ENFORCEMENT DIVISION) AND XAVIER CHENG KUO LI

Transcription

1 IN THE MATTER OF THE INVESTMENT DEALERS ASSOCIATION OF CANADA (ENFORCEMENT DIVISION) AND XAVIER CHENG KUO LI DECISION OF A HEARING PANEL OF THE PACIFIC DISTRICT COUNCIL OF THE INVESTMENT DEALERS ASSOCIATION OF CANADA Hearing Date: July 13, 2007 Hearing Panel Members: Respondent: Counsel: John Rogers, Chair, Chris Lay, Robert Travers Xavier Cheng Kuo Li Lorne Herlin, Enforcement Counsel for the Investment Dealers Association of Canada Thomas Manson, Counsel For Xavier Cheng Kuo Li A hearing panel of the Pacific District Council of the Investment Dealers Association of Canada ( Association ) was convened on July 13, 2007 pursuant to Association By-laws to inclusive and Rule 15 of the Association s Rules of Practice and Procedure, to consider a settlement agreement negotiated between the Enforcement Division of the Association and Xavier Cheng Kuo Li (the Respondent ) and agreed to by the Respondent on June 28, 2007 and by Enforcement Counsel of the Association on July 13, 2007 (the Settlement Agreement ). Statement of Facts The Settlement Agreement contains certain facts agreed upon by the Association and the Respondent solely for the purpose of the Settlement Agreement. A summary of these facts are set out below. The Respondent s Employment History The Respondent was first licensed as a Registered Representative with Edward Jones in December In September 2006 this registration terminated and the Respondent became registered with RBC Dominion Securities Inc. This latter registration terminated on July 6, Unauthorized Altering of Authorization to Transfer: Non-Registered Account Form In November 2005, HFC and CKL became clients of the Respondent. Among other documents executed by HFC and CKL, they signed and mailed to the Respondent a

2 2 completed Authorization to Transfer: Non-Registered Account Form ( Transfer Form ). Following receipt of the Transfer Form, the Respondent spoke by telephone with HFC. The Transfer Form when signed by HFC and CKL indicated that all the assets in the joint investment account in the names of HFC and CKL ( Joint Account ) with CIBC Investor Services Inc. ( CIBC ) were to be transferred to Edward Jones all in kind (as is). The Respondent without the knowledge and consent of HFC and CKL instructed his assistant to alter the Transfer Form so that it authorized the transfer to be made all in cash. The Respondent caused the Transfer Form to be altered to generate additional commissions. In accordance with the instructions contained in the Transfer Form, CIBC sold all of the assets held in the Joint Account. This sale required HFC and CKL to pay approximately $625 in deferred sales charges (DSC s). The Respondent mistakenly believed that all of the mutual funds that were held in the Joint Account were no longer subject to any DSC s. Unauthorized Transactions Following receipt of the proceeds from the sale of the assets in the Joint Account with CIBC and without the knowledge or consent of HFC and CKL, the Respondent used all of these proceeds to purchase units in 5 mutual funds, all of which mutual fund units were subject to DSC s. These purchases generated approximately $3,191 in commissions of which the Respondent received approximately $1,117. Of the new mutual fund units purchased, some of the mutual funds were managed by the same management company as the mutual fund units that had been sold in the Joint Account at CIBC. Had the assets in the Joint Account at CIBC been transferred all in kind (as is) the Respondent could have switched some of the mutual fund units in the Joint Account at CIBC for some of the newly purchased mutual fund units without cost to HFC and CKL. By selling the assets in the Joint Account at CIBC and subsequently buying the new mutual fund units with the proceeds, the Respondent generated approximately $619 in additional commissions for himself. Unauthorized Offer to Settle Complaint In January 2006, HFC and CKL learned that all of the assets held in the Joint Account at CIBC had been sold. On January 24, 2006 they met with the Respondent to complain about his conduct. They met again on the following day, January 25, 2006, and the Respondent made an offer to settle the complaint of HFC and CKL ( Settlement Offer ). Edward Jones was not aware of and did not authorize the Settlement Offer. HFC and CKL rejected the Settlement Offer and on January 26, 2006 the Respondent informed the Compliance Department of Edward Jones of the complaint of HFC and CKL. HFC and CKL by way of a January 27, 2006 letter complained directly to Edward Jones about the Respondent s conduct.

3 3 By way of a January 31, , the Respondent informed the Compliance Department of Edward Jones that in order to settle their complaint he had told HFC and CKL that he could reverse the purchases of the mutual fund units and give HFC and CKL a cheque for $64,212 or he could sell the newly purchased mutual fund units and then purchase the mutual funds that were previously held in the Joint Account at CIBC. In fact, the Settlement Offer was not as the Respondent represented to the Compliance Department of Edward Jones. Rather, pursuant to the Settlement Offer the Respondent had told HFC and CKL that they would have to wait three months to sell the newly purchased mutual fund units and then purchase the mutual funds that were held in the Joint Account at CIBC. On September 6, 2006, Edward Jones terminated the Respondent s employment due to the complaint of HFC and CKL. Contraventions The Settlement Agreement contains the Respondent s admission of the following contraventions of Association By-law 29.1 for the purpose of this proceeding: 1. in December 2005, without the knowledge and consent of HFC and CKL, the Respondent caused the instructions on the Authorization to Transfer: Non- Registered Account Form that had been signed on or about November 28, 2005 by HFC and CKL, to be altered from transfer all in kind (as is) to transfer all in cash, and thereby failed in his duty to observe high standards of ethics and conduct in the transaction of business and engaged in business conduct unbecoming or detrimental to the public interest; 2. in January 2006, without the knowledge and consent of HFC and CKL, the Respondent purchased units of mutual funds for HFC and CKL, and thereby failed in his duty to observe high standards of ethics and conduct in the transaction of business and engaged in business conduct unbecoming or detrimental to the public interest; and 3. in January 2006, without the knowledge and consent of his employer, the Respondent attempted to settle HFC s and CK s complaint, and thereby failed in his duty to observe high standards of ethics and conduct in the transaction of business and engaged in business conduct unbecoming or detrimental to the public interest. Terms of Settlement In the Settlement Agreement, the Respondent agrees to the following terms of settlement: Penalties 1. a suspension from approval in any registered capacity with the Association for a period of six weeks; 2. payment of a fine in the amount of $45,000; 3. close supervision for a period of 12 months upon any subsequent registration with a Member firm; and

4 4 4. Costs payment towards the Association s costs of the investigation and the prosecution of this matter in the amount of $4,000. Mitigating Factors The Settlement Agreement provides that in determining the terms of the Settlement Agreement, Staff of the Association took into account the following mitigating factors: 1. on or about March 26, 2007 the Respondent gave Edward Jones approximately $1,117, which represents the amount that he earned in commissions from the purchase of the units in the 5 mutual funds on behalf of HFC and CKL; 2. on or about January 11, 2007 the Respondent successfully completed the examination based on the Conduct and Practices Handbook (the CPH ) without being obligated to do so; and 3. the Respondent has co-operated with Staff of the Association throughout the course of the investigation of this matter. Decision The Hearing Panel accepts the Settlement Agreement. Reasons In Milewski [1999] I.D.A.C.D. No. 17, Bulletin No. 2605, August 5, 1999 and Clark [1999] I.D.A.C.D. No. 40, Bulletin No December 14, 1999, the test for a Hearing Panel to use in determining whether or not to accept a settlement agreement has been defined as whether or not the settlement agreement reached between the respondent and the Association includes a penalty which clearly falls outside a reasonable range of appropriateness. If in the opinion of the Hearing Panel the penalty falls outside this reasonable range, the Hearing Panel should not accept the settlement agreement. Otherwise it should do so. In making this decision, the Hearing Panel must be cognizant of the settlement process and not interfere in a negotiated settlement by attempting to substitute its discretion for that of the staff of the Association. The Settlement Agreement contains three contraventions agreed to by the parties: unauthorized altering of the Transfer Form, unauthorized trading, and unauthorized attempt to settle a complaint. Unauthorized Altering of the Transfer Form A Hearing Panel of the Ontario District Council in Bishop [2002] I.D.A.C.D No. 35, Bulletin No. 3056, October 4, 2002 accepted a settlement agreement whereby the respondent agreed that he had contravened the Association s by-laws by altering without his client s consent a document signed by his client. The statement of facts agreed to by the respondent discloses that the respondent had opened a new account for a new client. The application to open the account was sent by the respondent to his employer s compliance department, but the application was rejected as the client s financial position as disclosed in the application did not meet the minimum requirements for opening such an account. Upon the rejection of the submitted application and without the client s consent, the respondent amended the application in such a manner that the client s

5 5 financial position as disclosed in the application met the minimum financial thresholds for such an account and then resubmitted the application. In the settlement agreement, the respondent agreed to pay a fine of $20,000. The facts set out in Bishop are similar to the contravention agreed to by the Respondent in altering the Transfer Form. We agree that a penalty of $20,000 is an appropriate penalty for the contravention acknowledged by the Respondent. Unauthorized Trading Section 3.7 of the Disciplinary Sanction Guidelines of the Association dated January 2006 (the Guidelines ) recommends the following five sanctions for contraventions of the Association s by-laws involving unauthorized trading: 1. A minimum fine of $15,000; 2. Disgorgement of profits; 3. A period of close and/or strict supervision; 4. Re-writing of the CPH; and 5. A period of suspension for egregious cases involving a large number of large value trades. In the matter at hand, the Respondent has disgorged the commissions he earned on the unauthorized trades, he has re-written the CPH and he has agreed to a period of close supervision. We do not consider the unauthorized trades conducted by the Respondent to involve a large number of trades of a large value and, therefore, a period of suspension is not applicable. In Husky [2006] I.D.A.C.D. No. 14, Bulletin No. 3540, May 11, 2006, a Hearing Panel of the Alberta District Council accepted a settlement agreement wherein the respondent agreed that he had executed a trade in each of a client s two accounts without the consent of the client. The fine agreed to by the parties for this contravention of the Association s by-laws was the minimum fine of $15,000 as recommended by the Guidelines. As in Husky, we believe that the minimum fine of $15,000 is appropriate for the unauthorized trading contravention agreed to by the Respondent. Unauthorized Attempt to Settle a Complaint Section 2.6 of the Guidelines recommends the following five sanctions for a contravention of the Association s by-laws involving the unauthorized attempt to settle a client s complaint: 1. A minimum fine of $10,000; 2. A suspension of 6 to 12 months; 3. A successful completion of the appropriate industry program within 6 months; 4. A period of close supervision for 12 to 24 months; and 5. In egregious cases, consideration of a permanent prohibition on approval in any capacity.

6 6 As referred to above, the Respondent on his own initiative has re-written the CPH. He has agreed to a fine of $10,000 and to a period of close supervision for 12 months. This is not an egregious case, so a permanent ban is not appropriate. The Guidelines recommend as a minimum, a suspension for 6 to 12 months. However, the penalty agreed to in the Settlement Agreement includes a suspension for only 6 weeks. In Kim [2006] I.D.A.C.D. No. 26, Bulletin No. 3578, October 25, 2006, a Hearing Panel of the Pacific District Council accepted a settlement agreement which included the minimum penalty of a suspension of 6 months as recommended by the Guidelines where the respondent agreed that he had attempted to settle a client s complaint without the knowledge or consent of his employer. In considering the lesser penalty of 6 weeks, we reviewed the following mitigating circumstances in the matter at hand: 1. The Respondent has not previously been subject to the Association s disciplinary proceedings; 2. The Respondent advised his employer, Edward Jones, of the clients complaint and, although not entirely accurate, the details of his attempt to settle the complaint prior to the employer being advised of the complaint directly by the clients; 3. As referred to above, the Respondent disgorged the commissions he received and re-wrote the CPH without having been required to do either of these actions; and 4. The Respondent cooperated throughout with the Association Staff in arriving at the Settlement Agreement. In light of the above mitigating circumstances, we find that this matter is different from the facts before the Pacific District Council in Kim and that the lesser penalty of 6 weeks contained in the Settlement Agreement is appropriate. We therefore find that the penalty agreed to in the Settlement Agreement is appropriate for the contraventions acknowledge by the Respondent after taking into account the mitigating circumstances above set out. Dated at Vancouver, British Columbia, this 31st day of July, John Rogers, Chair Chris Lay Robert Travers