William; I will have to do this in two parts as they are long! Here is Part 1:
TSE IMPOSES TOTAL PENALTY OF $4 MILLION ON FIRST MARATHON IN SETTLEMENT OF DISCIPLINARY PROCEEDINGS FOR FAILURE TO SUPERVISE
TORONTO, July 20 /CNW/ - The Toronto Stock Exchange (TSE) announced today the issuance of, and agreements to settle, enforcement proceedings against First Marathon Securities Limited (First Marathon) and certain employees of First Marathon relating to the firm's failure to supervise its business and employees in various areas during the period from 1992 through 1996. The proceedings relate primarily to First Marathon's failure to supervise its activities and employees relating to involvement in Cartaway Resources Corp. (Cartaway). They also extend to the general and systemic failures in the firm's compliance program and its supervision of its business, and to its supervision of certain other market activity. The TSE's charges include the charges originally issued in September 1996 relating to deficiencies identified in compliance reviews from 1992 through 1995 which were not corrected.
By Notice of Hearing issued today by each of the Alberta Securities Commission (ASC), the British Columbia Securities Commission (BCSC) and the TSE, enforcement proceedings were commenced against First Marathon and certain current and former employees of First Marathon, and other parties associated with Cartaway. The staff of the TSE has agreed to settle its proceedings against First Marathon and certain employees of the firm, subject to ratification by a TSE hearing panel.
John Carson, Senior Vice-President of Market Regulation for the TSE, said "This case establishes a very strong precedent on the obligation of securities firms to both establish, and effectively implement, a thorough compliance program covering all of their operations. An effective compliance program must include effective supervision and oversight of the firm's business activities and of employees. This means that indicators of potential problems, or "red flags," must be identified and followed up."
Mr. Carson added, "The penalties imposed in this case serve as clear notice to member firms by the self-regulatory organizations that the financial and reputational costs of an inadequate investment in the compliance function will significantly exceed any savings realized in the short run. Furthermore, members' executive officers are responsible and accountable for ensuring the adequacy and effectiveness of the firm's compliance program. The case also demonstrates that the self-regulatory system works both effectively, and with cooperative efficiency, to ensure compliance with industry rules and standards of integrity. The TSE has worked closely and cooperatively with Fred Maefs, Director of Enforcement at the IDA, and his staff on this investigation."
Summary of the Settlement Agreements
First Marathon
First Marathon has agreed to pay a $3.5 million fine and to pay investigative costs of $500,000 for:
General Compliance Issue
- A general failure, between 1992 and 1996, to design and implement an effective compliance program to ensure proper compliance by the firm with a range of regulatory requirements.
1996 Charges
- Failing to carry out monthly account reviews of client and non-client accounts in 1993, 1994 and part of 1995.
- Failing to ensure the firm complied with rules on the use of average price accounts in 1992, 1993 and 1994.
- Failing to honour undertakings to rectify compliance deficiencies identified by the TSE in 1993, 1994, and 1995.
Cartaway
- Failing to supervise the firm's officers, directors and employees in matters relating to Cartaway.
- Failing to question client and non-client involvement in the purchases of Cartaway shares.
- Failing to respond effectively and in a timely manner to the firm's involvement in Cartaway.
Investment Club
- Failing to implement procedures for supervising account opening and account activity.
- Failing to ensure the trading activity in the investment club was suitable.
Lawrence Sheldon Bloomberg
Mr. Bloomberg, President and CEO of First Marathon, has agreed to pay a $250,000 fine for:
- Failing to honour undertakings to rectify compliance deficiencies identified by the TSE in 1993, 1994 and 1995.
- Failing to respond effectively and in a timely manner to the firm's involvement in Cartaway between July 1995 and June 1996.
Stuart Ward Henry
Mr. Henry, Vice President and Ultimate Designated Person of First Marathon, has agreed to pay a $485,000 fine, to a suspension in all capacities for a 4 month period, and to a permanent suspension from acting in any compliance capacity for:
1996 Charges
- Failing to ensure the firm complied with rules on the use of average price accounts between 1992 and 1994.
- Failing to ensure that the firm honoured undertakings given to the TSE to rectify compliance deficiencies identified by the TSE in 1993, 1994 and 1995.
Cartaway
- Failing to question client and non-client involvement in Cartaway.
Investment Club
- Failing to ensure that daily and monthly reviews of non-client accounts were conducted between May 1991 and October 1993.
- Failing to establish and maintain procedures for supervising account opening and account activity between May 1991 and October 1993.
- Failing to ensure that the trading activity in the investment club was suitable.
Robert Disbrow
Cartaway
Mr. Disbrow, Vice Chairman of First Marathon, has agreed to pay a $110,000 fine, to a suspension in all capacities for a 3 month period, and to a permanent suspension from acting as a branch manager or any similar capacity for:
- Failing to bring to the attention of the Head Office the participation of the Vancouver branch employees in Cartaway.
- Failing to question client and non-client involvement in purchases of Cartaway.
Remedial Actions by First Marathon
In entering into the settlement agreements, the TSE acknowledges that since the problems identified in the enforcement proceedings came to light, First Marathon has made a substantial investment in its compliance program and its compliance procedures reflect current "best practices" in the field. The firm has formed a Board-level Compliance Committee so that compliance is treated as a matter of corporate governance. The TSE recognizes and endorses these initiatives, and consequently has determined that additional remedial steps to address shortcomings in First Marathon's compliance program are unnecessary.
Other Charges
The Notice of Hearing also contains charges against Michael Stuart, formerly Vice President and Calgary Branch Manager of First Marathon; Robert Eccles, formerly Compliance Officer of First Marathon; and Elizabeth Sgro, formerly Designated Registered Options Principal at First Marathon. These charges relate to various of the matters outlined above and remain unresolved at this time.
Next Steps
The settlement agreements between the TSE and the various defendants must be accepted by a TSE Hearing Panel before they are final. A hearing for this purpose will be set in the near future.
Hearing dates will be set shortly for the parties against which charges have been issued by the TSE and whom have not agreed to a settlement at this time.
Additional Information
Please see the attached Backgrounder for additional details.
Backgrounder
TSE AGREES TO SETTLE ENFORCEMENT ACTIONS AGAINST FIRST MARATHON SECURITIES LIMITED AND CERTAIN OFFICERS AND EMPLOYEES
The Settlement
The settlement agreements outlined in the TSE's media release cover 15 charges laid against First Marathon Securities Limited ("FMSL"), 2 charges laid against Lawrence Bloomberg, 2 charges laid against Robert Disbrow and 8 charges laid against Stuart Henry. The settlements are subject to ratification by a TSE Hearing Panel.
The Cartaway Investigation
Following events surrounding the reactivation of Cartaway Resources Corporation ("CWA") and leading up to the announcement of assay results on May 17, 1996, each of the Alberta Securities Commission ("ASC"), the Alberta Stock Exchange ("ASE"), the British Columbia Securities Commission ("BCSC") and the Toronto Stock Exchange ("TSE"), have co-ordinated their investigations in an effort to avoid duplication of regulatory efforts. The Investment Dealers Association of Canada has provided significant assistance to the TSE in carrying out the investigation.
The Role of the Toronto Stock Exchange
The TSE's investigation primarily focused on the issue of whether FMSL properly supervised its affairs and the activities of FMSL employees relating to involvement in CWA. The TSE's investigation also extended to the general quality of FMSL's compliance program and the supervision of its business. Finally, the TSE investigated whether FMSL properly supervised its operations relating to certain other market activity.
The TSE had previously investigated FMSL as a result of deficiencies found in compliance reviews conducted by the TSE in 1992, 1993, 1994, and 1995. This resulted in charges against FMSL Chief Executive Officer Lawrence Bloomberg, Vice President Stuart Henry and former Compliance Officer Robert Gilles Eccles, in September 1996 relating to the firm's supervisory procedures for retail account activity and undertakings to correct them.
The TSE also investigated the events concerning the actions of Lee Patrick Leslie and the investment club, the Consolidated Artists Investment Club, he controlled. FMSL and certain employees had a general duty to supervise account activities at an introducing broker where the investment club account was held because FMSL acted as the carrying broker for the accounts. A supervision investigation was launched by the TSE to determine if FMSL had met its obligations to supervise account activity.
As a matter of administrative efficiency, the charges issued in September 1996 were combined with charges that have resulted from the investigation of the events surrounding the Consolidated Artists Investment Club and the supervision issues relating to Cartaway. All of these charges are contained in the current Notice of Hearing and Particulars, and form part of the settlements agreed to.
Summary of Charges
1. First Marathon Securities Limited
FMSL, certain senior officers, employees and former employees have been charged with 44 regulatory offences over the time period of 1992 to 1996. The firm has agreed to pay a $3.5 million fine, and to pay costs of investigation of $0.5 million. Of these charges 15 relate specifically to the conduct of FMSL.
General Compliance Issue
- A general and systemic failure to design, establish, oversee and implement an effective compliance program to ensure proper compliance with regulatory requirements concerning client and non-client trading, opening of accounts, supervision of account activity, suitability of clients and the conduct of its officers, directors and employees, and concerning corporate finance activities at its branch offices.
1996 Charges
- Failing to carry out monthly account reviews of client and non-client accounts in 1993, 1994, and from January 1 to July 5, 1995.
- Contravening Exchange Requirements in its use of average price accounts in 1992, 1993, and 1994.
- Failing to honour undertakings given by FMSL in 1993, 1994, and 1995 by the TSE to put into place and carry out procedures to ensure compliance with Exchange Requirements.
Cartaway Resources Corporation
- Failing to supervise the participation of its officers, directors and employees at both the head office and Vancouver and Calgary branches in matters relating to the financing, sale of securities, and operations of CWA.
- Failing to conduct daily and monthly reviews of client and non-client accounts and thereby failing to question client and non-client involvement in the purchase of Cartaway. The head office, and the Calgary and Vancouver branches, also failed to ensure that a complete set of buy and sell records for trading in Cartaway were maintained.
- Failing to carry out its duties and responsibilities to identify, investigate and respond in an appropriate and timely manner to the events surrounding the participation of its officers, directors and employees in matters relating to the financing, sale of securities and operations of CWA.
Consolidated Artists Investment Club
- Failing to establish and maintain procedures for supervising account opening and account activity.
- Failing to conduct daily and monthly reviews of the investment club account and failing to ensure that the trading activity in the investment club was suitable, as well as failing to establish and maintain procedures for supervising account opening and account activity.
2. First Marathon Securities Limited Conduct of Employees and Former Employees
The current Notice of Hearing and Particulars also contains charges for regulatory offences against employees and former employees at FMSL. The named individuals are:
- Lawrence Sheldon Bloomberg, President, Chief Executive Officer and Director at FMSL
- Stuart Ward Henry, Vice President, Director and Ultimate Designated Person at FMSL
- Christopher Michael Stuart, formerly Vice President, Director, Corporate Finance Officer and Calgary Branch Manager
- Robert Disbrow, Officer and Director, Vice Chairman at FMSL
- Robert Gilles Eccles, formerly Compliance Officer and Ultimate Registered Options Principal at FMSL
- Elizabeth Sgro, Designated Registered Options Principal of Marathon Brokerage Investor Services at FMSL
The TSE has agreed to settle the charges against Lawrence Bloomberg, Stuart Henry and Robert Disbrow as part of the settlement agreements announced today. The charges against Michael Stuart, Robert Eccles and Elizabeth Sgro, who are no longer employees of FMSL, have been issued and remain unresolved.
In terms of general compliance issues, the employees who had the specific obligation to design, supervise or carry out compliance functions such as monthly and daily account reviews have been named in the Notice of Hearing and Particulars. Charges were also issued against individual employees who allegedly failed to fulfill their duty to supervise or conduct daily and monthly reviews and establish proper account opening and account activity procedures in relation to the Cartaway Resources Corporation and the Consolidated Artists Investment Club.
3. Settlement and Hearing Procedures
The TSE, ASC and BCSC agreed to issue and serve all charges relating to their investigations into FMSL's involvement in CWA at the same time. The TSE has entered into settlement agreements with FMSL and Messrs. Bloomberg, Disbrow and Henry.
Any settlement entered into between the TSE and a defendant must be approved by a TSE Hearing Panel, under the TSE's By-law on disciplinary proceedings. A Hearing Panel may either accept or reject a settlement agreement. An agreement could be rejected if the Panel found it unreasonable.
If this occurred, the settlement would be nullified and the matter would proceed to a disciplinary hearing before a different Panel.
TSE Hearing Panels are comprised of 3 persons. The Chairman of any panel is an independent person, generally a former member of the judiciary. The other 2 persons are securities industry representatives with expertise in the subject matter in question.
4. Background Related to Cartaway Resources Corporation ("CWA")
CWA began as a garbage container rental company in Kamloops, British
Columbia, and later became an exploration/mining company.
FMSL employees became involved with CWA in July 1994 when a number of employees at the Calgary and Vancouver branches agreed to purchase a large number of its outstanding shares.
By October 1994, 8 FMSL employees held 45.5% of the outstanding CWA shares. One employee, Michael Stuart, was appointed Director and president of CWA and shortly after he was appointed the Secretary of CWA.
In May 1995 FMSL agreed to act as CWA's agent for a special warrant financing. CWA completed the private placement of 7,000,000 special warrants with the entire issue being placed through the Calgary and Vancouver offices of FMSL. FMSL employees purchased 5,966,000 special warrants and FMSL clients purchased 144,000 shares.
In June 1995 Michael Stuart resigned as President and Secretary of CWA and CWA issued an offering memorandum regarding a proposed private placement through FMSL, as agent of 4,000,000 special warrants at $1.00 per warrant.
On May 1, 1996 the closing price of CWA on the Alberta Stock Exchange was $3.75 per share. Between May 2, 1996 and May 16, 1996 the share price of CWA increased from $3.52 on May 2, 1996 to a high of $26.00 on May 16, 1996. On May 17, 1996 trading in CWA was halted at the request of the company. On May 21, 1996 CWA resumed trading at $2.00 per share. The closing price of CWA shares on May 21, 1996 was $2.78.
As a result of the dramatic rise and fall of the price of the shares in CWA in May 1996, securities regulators across Canada commenced an investigation.
Source: CNW
newswire.ca |
