37. In 2010, the US Securities and Exchange Commission filed a Civil Complaint against certain parties alleging that they participated in a scheme to "pump" Spongetech's share price and then "dump" shares by illegally selling them to the public through affiliated entities in unregistered transactions. The alleged scheme included lawyer opinion letters which induced Spongetech's transfer agent to remove restrictive legends from share certificates that were transferred to at least two of the six Canaccord clients. Five individuals have since pled guilty in related criminal proceedings. No allegations of wrong-doing were made in any civil, criminal or regulatory proceeding against any of Canaccord's clients.
Supervisory failures
38. In each of the above examples, the first tier supervisors - the branch managers, or a senior compliance officer in the Spongetech example - in Canaccord's two tier supervisory structure failed to effectively carry out their responsibility to identify or question transactions or trading which, on its face, appeared suspicious or potentially unsuitable for the client.
39. Canaccord did not sufficiently monitor the performance of its first tier supervisors. It did not check or audit their performance as supervisors in any meaningful way to ensure that the first level supervision was being adequately conducted. Canaccord only required monthly checklists from its Branch Managers requiring them to make written representations that they had performed their supervisory duties.
40. Canaccord's second tier supervisors - its compliance staff at its head office - were responsible for identifying account problems that may have been missed by the first level supervision. In the examples of Phillips, Budnik and Melkonian, although compliance staff at Canaccord's head office did detect the excessive and unsuitable transactions, they failed to effectively ensure that the red flags were addresses by first tier supervisors.
41. The result of this dual failure was that significant losses or activity that was potentially unfair to other market participants went undetected.
42. Had Canaccord properly monitored the performance of its first tier supervisors and conducted effective second tier supervision it would have identified the unsuitable recommendations made by Phillips and the excessive and unsuitable transactions made by Budnik and Melkonian at an early stage and prevented their recurrence. It would have ensured that the conditions attached to M&H's Option Strategy were actually being adhered to and enabled Canaccord to more closely monitor the risk in client accounts as markets became more volatile in the summer of 2008. It would have sought reasonable answers to questions raised by the red flags related to the trading by Melkonian and to the deposit of Spongetech share certificates and subsequent sale of those shares.
[...]
Commissions
57. In the examples of Budnik, Melkonian, M&H, Myatovic, Spongetech, and the Accredited Investors, Canaccord earned commission on transactions that should not have been made. The total of these commissions paid to Canaccord was $310,000.
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