IN THE MATTER OF THE BY-LAWS OF THE INVESTMENT DEALERS IDA OF CANADA Re: JORY CAPITAL INC., PATRICK MICHAEL COONEY AND REES MERTHYN JONES Heard: April 5 and 6; November 28, 2005 Decision: January 5, 2006 Hearing Panel: Eric T. Spink, Chair Craig Harrison Stephen Ellis Counsel: Andrew P. Werbowski Jonathan B. Kroft James H. Saper for the Investment Dealers Association of Canada for Jory Capital Inc. and Patrick Michael Cooney for Rees Merthyn Jones REASONS FOR DECISION Introduction [1] This is the second phase of an enforcement hearing brought pursuant to Part 10 of By-law 20 of the Investment Dealers Association of Canada ( IDA ). In the first phase of these proceedings, the Panel heard evidence and argument concerning the allegations in the Notice of Hearing dated February 8, 2005. On July 28, 2005 the Panel issued Reasons for Decision on those matters (the July decision ). [2] The July decision found that the respondents Jory Capital Inc. ( Jory ), Patrick Michael Cooney ( Mr. Cooney ) and Rees Merthyn Jones ( Mr. Jones ) each violated IDA By-law 30.3(iv)(3). It also found that Mr. Cooney and Mr. Jones thereby engaged in conduct that was unbecoming or detrimental to the public interest, contrary to IDA By-law 29.1. [3] The hearing re-convened on November 28, 2005. The purpose of this second phase of the hearing was to receive evidence and submissions regarding what sanctions the Panel should impose as a result the July decision. After hearing counsel, the Panel adjourned to consider its decision. Background [4] The evidence and findings are described in the July decision, and what follows should be read together with the July decision. In summary, the Panel found that Mr. Cooney, while CEO of Jory, received a $10,000 payment from Jory in violation of the IDA Early Warning Restrictions. The payment was approved by Mr. Jones, who was then CFO of Jory. General principles applicable to sanctions [5] A number of general principles applicable to sanctions are set out in the IDA Disciplinary
Sanction Guidelines ( Guidelines ) published in January 2003. The Guidelines say (at p. 6): [The] main concerns in determining an appropriate penalty are: 1. Protection of the investing public; 2. Protection of the IDA s membership: 3. Protection of the integrity of the IDA s process; 4. Protection of the integrity of the securities markets, and 5. Prevention of a repetition of conduct of the type under consideration. 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. [6] We were also referred to two Supreme Court of Canada decisions which discuss the nature and scope of a securities commission s jurisdiction to impose sanctions under securities regulatory law. These decisions are particularly relevant to the deterrent function of sanctions, which is an issue in these proceedings. [7] In Committee for Equal Treatment of Asbestos Minority Shareholders v. Ontario (Securities Commission) ( Asbestos ), 2001 SCC 37, the court said [citations omitted]: [para. 42] [I]t is important to recognize that s. 127 is a regulatory provision. In this regard, I agree with Laskin J.A. that [t]he purpose of the Commission s public interest jurisdiction is neither remedial nor punitive; it is protective and preventive, intended to be exercised to prevent likely future harm to Ontario s capital markets. This interpretation of s. 127 powers is consistent with the previous jurisprudence of the OSC in cases such as Canadian Tire Corp. v. C.T.C. Dealer Holdings Ltd., in which it was held that no breach of the Act is required to trigger s. 127. It is also consistent with the objective of regulatory legislation in general. The focus of regulatory law is on the protection of societal interests, not punishment of an individual s moral faults. [para. 45] In summary, pursuant to s. 127(1), the OSC has the jurisdiction and a broad discretion to intervene in Ontario capital markets if it is in the public interest to do so. However, the discretion to act in the public interest is not unlimited. In exercising its discretion, the OSC should consider the protection of investors and the efficiency of, and public confidence in, capital markets generally. In addition, s. 127(1) is a regulatory provision. The sanctions under the section are preventive in nature and prospective in orientation. Therefore, s. 127 cannot be used merely to remedy Securities 2
Act misconduct alleged to have caused harm or damages to private parties or individuals. [8] In Re Cartaway Resources Corp. ( Cartaway ), 2004 SCC 26, the court examined the issue of whether general deterrence is an appropriate factor in assessing a penalty that is in the public interest. The court reviewed the Asbestos decision and said (at para. 58): It should be observed that our Court was not considering the function of general deterrence in the exercise of the jurisdiction of a securities commission to impose fines and administrative penalties nor denying that general deterrence might play a role in this respect. [9] Speaking for the court in Cartaway, LeBel J. went on to say [citations omitted]: [para. 60] In my view, nothing inherent in the Commission s public interest jurisdiction, as it was considered by this Court in Asbestos, prevent the Commission from considering general deterrence in making an order. To the contrary, it is reasonable to view general deterrence as an appropriate, and perhaps necessary, consideration in making orders that are both protective and preventive. Ryan J.A. recognized this in her dissent: The notion of general deterrence is neither punitive nor remedial. A penalty that is meant to generally deter is a penalty designed to discourage or hinder like behaviour in others. [para. 61] The Oxford English Dictionary, 2 nd ed. vol. II, defines preventive as: [t]hat anticipates in order to ward against; precautionary; that keeps from coming or taking place; that acts as a hindrance or obstacle. A penalty that is meant to deter generally is a penalty that is designed to keep an occurrence from happening; it discourages similar wrongdoing in others. In a word, a general deterrent is preventive. It is therefore reasonable to consider general deterrence as a factor, albeit not the only one, in imposing a sanction under s. 162. The respective importance of general deterrence as a factor will vary according to the breach of the Act and the circumstances of the person charged with breaching the Act. [para.62] It may well be that the regulation of market behaviour only works effectively when securities commissions impose ex post sanctions that deter forward-looking market participants from engaging in similar wrongdoing. That is a matter that falls squarely within the expertise of securities commissions, which have a special responsibility in protecting the public from being defrauded and preserving confidence in our capital markets. 3
[para.64] The weight given to general deterrence will vary from case to case and is a matter within the discretion of the Commission. Protecting the public interest will require a different remedial emphasis according to the circumstances. Courts should review the order globally to determine whether it is reasonable. No one factor should be considered in isolation because to do so would skew the textured and nuanced evaluation conducted by the Commission in crafting an order in the public interest. Nevertheless, unreasonable weight given to a particular factor, including general deterrence, will render the order itself unreasonable. Iacobucci J. in Pezim, at p. 607, suggested that an example of such unreasonableness would be the exercise of the Commission s discretion in a manner that was capricious or vexatious. [emphasis in original] Proposed sanctions and arguments [10] IDA counsel proposed the following sanctions. Against Jory, a $50,000 fine. Against Mr. Cooney, a $50,000 fine and a one-year suspension in all capacities. Against Mr. Jones, a $25,000 fine, a 6-month suspension as CFO and the requirement to re-write the CFO examination. [11] IDA counsel suggested that the following factors support these proposed sanctions. need for sanctions to deter future misconduct The Guidelines say (at p. 7) that an important objective of the disciplinary process is to deter future misconduct by imposing progressively escalating sanctions on repeat offenders. Jory and Mr. Cooney are repeat offenders. Jory was suspended for failing to maintain proper risk-adjusted capital in 1999, only 2 months after Jory was admitted to the IDA. Between May 2001 and July 2002, Jory and Mr. Cooney violated several IDA By-laws, including the Early Warning System restrictions on payments to Mr. Cooney, as described in the Settlement Agreements approved on July 20, 2004. At that time, Jory was fined $35,000 while Mr. Cooney was fined $45,000, suspended as Ultimate Designated Person for 18 months, suspended as CEO for 6 months and required to re-write the Partners, Directors and Officers examination. need to protect the public and the integrity of the IDA s process for ensuring financial compliance Financial compliance generally, and the Early Warning System specifically, are crucial to the IDA s system for protecting the public. This violation occurred while Jory and Mr. Cooney were under the Early Warning System and dealing regularly with IDA staff on this very subject. IDA counsel suggested that Mr. Cooney s actions showed a cavalier disregard for the rules and process, if not his ungovernability. With respect to Mr. Jones, IDA counsel noted that the CFO always has primary responsibility for financial compliance. IDA counsel also acknowledged that Mr. 4
Cooney exercised influence over Mr. Jones in this case, and that it is for the panel to determine the relative blameworthiness of each respondent. blameworthiness Under this heading the Guidelines say (at p. 7): In appropriate cases, distinctions should be drawn between conduct that was unintentional or negligent, and conduct that involves manipulative, fraudulent or deceptive conduct. Distinctions should also be drawn between isolated incidents and repeated, pervasive, or systemic violations of the Association s By-laws, Regulations or other rules. IDA counsel argued that our findings in the July decision showed the violations in this case to be more intentional than inadvertent on the part of Mr. Cooney. [12] Counsel for Mr. Cooney and Jory proposed the following sanctions. Suspension of Mr. Cooney in his capacity as Ultimate Designated Person, together with extensive conditions on Mr. Cooney s continuing registration. The conditions on Mr. Cooney s continuing registration should be linked to a proposed reorganization of Jory (Exhibit 10), intended to isolate Mr. Cooney from Jory s financial compliance. A maximum fine of $50,000 against Mr. Cooney and Jory combined. [13] Counsel for Mr. Cooney and Jory suggested that that the following factors support these proposed sanctions. the need for sanctions to fit the root cause of the problem Counsel acknowledged that Mr. Cooney has a problem with financial compliance, which has affected Jory, but emphasized that Mr. Cooney has no disciplinary history in relation to sales and client services. A blanket suspension would therefore address areas where Mr. Cooney has not been shown to act improperly. The public interest requires that the suspension be more focused on the root problem. the need for sanctions to be appropriate to the circumstances It was submitted that the fines sought by IDA counsel were too severe and placed too much emphasis on general deterrence over other considerations. Counsel pointed out that the violation involved a relatively small amount, which was repaid by Mr. Cooney. Counsel also noted that Winnipeg is not Toronto Mr. Cooney and Jory earn less than comparable parties in larger centres. We were referred to several decisions of the Manitoba Securities Commission, approving settlements under the Securities Act involving relatively modest payments. It was also noted that, since Mr. Cooney owns 85% of Jory, Mr. Cooney will be punished by any fine against Jory. the proposed restructuring of Jory Counsel for Jory and Mr. Cooney introduced Exhibit 10, which described a proposal to change Jory from a Type 3 to a Type 2 Introducing Broker and to remove Mr. Cooney from financial compliance functions at Jory. Exhibit 10 was suggested as the 5
starting point for appropriate sanctions. The panel was urged to impose conditions that would dictate the re-organization of Jory along the lines of Exhibit 10, effectively suspending Mr. Cooney from having any role in financial compliance but enabling Jory to carry on. This was described as a surgical approach to sanctions that avoided causing collateral damage. It was submitted that the panel should not allow this violation to be, in effect, a capital crime from Jory s perspective. [14] Counsel for Mr. Jones proposed the following sanctions. Mr. Jones should be reprimanded. No suspension of any kind. A moderate fine, if any. [15] Counsel for Mr. Jones suggested that that the following factors support the proposed sanctions in this particular case. Mr. Jones has no previous disciplinary record This incident is a singular blot on Mr. Jones otherwise admirable 30-year history in the industry. According to the Guidelines (at p. 8), this allows the panel to presume Mr. Jones good moral character, which is also evident from Mr. Jones history in the community. The Guidelines also say that, in these circumstances, a first conviction may be seen as a measure of punishment in and of itself, given the attendant stigma attached to the process of charging, finding guilt, and imposition of sanction. Mr. Jones passive role in the violation Mr. Jones did not initiate the violation in this case, but acquiesced somewhat reluctantly to Mr. Cooney s urgent request. The violation produced no personal gain for Mr. Jones. It presented minimal risk to Jory and no injury to the public. the need for sanctions to be appropriate to the circumstances Mr. Jones counsel submitted that no significant additional sanctions are appropriate because there is no real risk that Mr. Jones will re-offend, and the mere conviction provides sufficient general deterrence. We were advised that Mr. Jones has already re-written the CFO examination. Decision [16] Counsel referred to a number of previous IDA decisions imposing sanctions. The decisions affirm general principles of sanctioning but we did not find them otherwise useful. Appropriate sanctions depend upon the unique circumstances of each case. Sanctions must be considered globally no single factor should be considered in isolation. None of the previous decisions considered a situation similar to this case, so they do not assist us in determining what sanctions are appropriate here Mr. Jones [17] We find that Mr. Jones role in this case was relatively minor compared to that of Mr. Cooney. Essentially, Mr. Jones violation was his failure to resist Mr. Cooney s influence. We cannot condone a CFO s violation of financial compliance rules under any circumstances, but we 6
distinguish between Mr. Cooney s dominant role in this violation and Mr. Jones passive role. We must also contrast Mr. Jones lack of any disciplinary history with Mr. Cooney s chronic violations of financial compliance rules. [18] We largely agree with the arguments advanced by Mr. Jones counsel. In our view, the conviction in this proceeding is the most significant sanction against Mr. Jones. We therefore reprimand Mr. Jones and order that he pay a fine in the amount of $5,000. Mr. Cooney [19] We agree with counsel for Mr. Cooney that appropriate sanctions must address the root cause of the problem, which in this case is Mr. Cooney s inability to follow financial compliance rules. We find that it would be unduly punitive to suspend Mr. Cooney s registration in all categories. The evidence showed that Mr. Cooney has an unblemished 18-year registration history in sales-related capacities, in contrast with his short and troubled history with financial compliance. Since there is nothing to suggest that Mr. Cooney s other industry activities pose any danger to the public or the industry, no remedial or preventive purpose is served by suspending them. As a purely deterrent measure, we consider such a complete suspension too severe in this case. [20] We do not agree with the suggestion that we should impose detailed conditions on the future relationship between Mr. Cooney and Jory along the lines of the proposal described in Exhibit 10. That proposal assumes that Mr. Cooney s behavioral deficiencies can be adequately addressed by such structural or governance measures. We disagree with that assumption, and are not satisfied that any prescribed structure or governance model would reliably protect the public and the industry from Mr. Cooney s tendency to dominate others in relation to financial compliance. [21] There was much discussion about whether Mr. Cooney s actions in this case could be described as intentional, inadvertent, or reckless, and whether Mr. Cooney is ungovernable. Although we found that Mr. Cooney offered no credible explanation for thinking that the payment was justified in this case, we are unable to find that he intentionally violated the rules. Mr. Cooney has always denied intentionally violating the rules, saying that he was confused by the rules and paid little attention to them in this case. We find that Mr. Cooney s blindness to the violation in this case, combined with his domineering, manipulative approach towards Jory s CFO, and the fact that Mr. Cooney s actions were obviously driven by his self-interest in meeting a personal financial need, are almost as threatening to the public interest as intentional violation of the rules. We find that the circumstances of this violation, considered together with Mr. Cooney s disciplinary history, show that Mr. Cooney is practically ungovernable in relation to financial compliance. [22] In order to be an effective preventive sanction, any suspension must address Mr. Cooney s ungovernability in the area of financial compliance. In our view, this requires prohibiting (or suspending, as the case may be) Mr. Cooney s approval in any capacity where he might exercise significant influence on, or responsibility for, financial compliance. The result is most conveniently described by listing all the categories described in the September 2005 Guide 7
to IDA Categories and indicating those where we find it necessary to prohibit Mr. Cooney s approval. IDA Category Associate Portfolio Manager Branch Manager BC Designated Compliance Officer Chief Compliance Officer Chief Financial Officer Designated Registered Futures Options Principal Director Designated Registered Options Principal Futures Contract Options Supervisor Investment Representative Investor Officer Partner Portfolio Manager Registered Representative Sales Manager Trader Ultimate Designated Person Prohibited = [23] These selective prohibitions are the most precise and effective preventive sanction available to us in this case. In light of Mr. Cooney s history of problems in this area, and the circumstances of the present violation, we find that it is unlikely that Mr. Cooney will soon be capable of dealing responsibly with financial compliance. Accordingly, we find that the selective prohibitions should remain in place for a period of 5 years. [24] We agree with IDA counsel that Mr. Cooney's repeated violations of financial compliance and Early Warning System requirements must attract progressively escalating sanctions. The selective prohibitions against Mr. Cooney's approval are a significant and appropriate escalation from the sanctions imposed by the Settlement Agreement approved on July 20, 2004. We recognize that these selective prohibitions will have considerable specific and general deterrent effect but, in our view, fines are also necessary in this case to achieve the appropriate global measure of deterrence. Although the amount of the improper payment in this case was small, posed no significant risk to the public, and was repaid, in our view the more salient factor here is that Mr. Cooney failed to learn from his previous disciplinary proceedings that Early Warning System requirements must be obeyed. Fines are necessary in this case to signal the importance of financial compliance and intolerance for repeated violations. We order that Mr. Cooney pay a fine in the amount of $25,000. 8
Jory [25] We order that Jory also pay a fine in the amount of $25,000. We recognize that Mr. Cooney will be indirectly responsible for the bulk of this fine, in addition to the fine we imposed against him directly. In our view, the minority owners of Jory should bear some responsibility for Jory s violations and the proportionate responsibility for the global fines is appropriate in light of Mr. Cooney s role. [26] Jory is essentially Mr. Cooney s firm. Although we recognize that the prohibitions on approval of Mr. Cooney will impact Jory, the incidental consequences to Jory should not significantly influence the central issue what preventive sanctions are appropriate against Mr. Cooney. In our view, it would be inappropriate for the panel in this case to dictate how Jory should deal with the incidental consequences of the sanctions imposed against Mr. Cooney. Although Mr. Cooney s capacity will be limited, there are many options available and it is for Mr. Cooney and the other shareholders of Jory to decide among those options. Costs [27] Counsel for the IDA sought costs in the amount of $14, 245.50 pursuant to By-law 20.49. A fairly detailed bill of costs was entered as Exhibit 7. Counsel for Mr. Cooney and Jory suggested that the costs were high, and pointed out that it is unusual for such costs to include an allowance for overhead costs of investigation and enforcement staff. [28] We find the costs described in Exhibit 7, including the allowance for overhead costs, to be appropriate and reasonable in the circumstances. We also find that the respondents contributed to the efficient and orderly conduct of these proceedings. [29] Bearing in mind each respondent s relative responsibility for the violations that led to these proceedings, we order that: Mr. Jones pay costs in the amount of $1,000; Mr. Cooney pay costs in the amount of $7,000; and Jory pay costs in the amount of $4,000. When sanctions take effect and time to pay [30] Counsel agreed that it would be appropriate to delay the imposition of any suspensions for a period of time to allow a more orderly transition for Jory s clients. We order that Mr. Cooney s approval be suspended or prohibited (as the case may be) in the following categories: Branch Manager, BC Designated Compliance Officer, Chief Compliance Officer, Chief Financial Officer, Designated Registered Futures Options Principal, Director, Designated Registered Options Principal, Futures Contract Options Supervisor, Officer, 9
Partner, Sales Manager, and Ultimate Designated Person commencing on February 5, 2006, and that such suspension or prohibition remain in effect for 5 years from that date. [31] By-law 20.44 says: [i]n the event that a fine or costs imposed by a Hearing Panel are not paid within the prescribed time, the Senior Vice-President Member Regulation, or his or her designate may summarily, without further notice, suspend a Member or Approved Person, until such fine or costs are paid. We direct that: Mr. Jones pay his fine and costs within 45 days of the date of this decision; Mr. Cooney pay his fine and costs within 90 days of the date of this decision,; and Jory pay its fine and costs within 90 days of the date of this decision. DATED at Winnipeg, Manitoba, this 5 day of January, 2006 Eric T. Spink Craig Harrison Stephen Ellis 10