Here is the Globe and Mail coverage:
First Marathon fined $4-million
TSE slaps broker with record penalty for 'failures' to supervise employees
Tuesday, July 21, 1998
By Karen Howlett
The Toronto Stock Exchange has hit First Marathon Securities Ltd. with a record $4-million penalty over the
brokerage firm's failure to supervise its business operations and employees in the early 1990s.
First Marathon has agreed to the penalty -- consisting of a $3.5-million fine and $500,000 in costs -- as part of a
settlement negotiated with the TSE and announced yesterday. The settlement, the biggest penalty ever imposed by a
Canadian stock exchange against a brokerage, must be presented to a TSE hearing panel before it becomes final.
The penalty relates to "general and systemic failures" in First Marathon's compliance program and its involvement
with Cartaway Resources Corp., which gained notoriety in 1996 as one of the most spectacular stock flops in
junior mining history.
The British Columbia and Alberta securities commissions also announced yesterday that they will hold hearings
into the potentially conflicting roles played by a group of eight First Marathon employees who together owned a
45-per-cent stake in Cartaway.
The separate announcements from the securities commissions and the TSE are the culmination of a two-year
investigation into First Marathon's involvement with Cartaway. For its part, the TSE's investigation focused on the
firm's lack of compliance, in general, over a four-year period ending in 1996. Because of these lax procedures, the
firm was not properly monitoring the employees' involvement with Cartaway, the TSE said.
"The First Marathon situation clearly is quite wide-ranging and covers a number of different failures . . . so clearly
a significant penalty was merited," John Carson, the TSE's senior vice-president of market regulation, said in an
interview yesterday. "In our view this establishes a very strong precedent that firms have an obligation to not only
establish but implement compliance programs covering all of their business operations."
The TSE also fined three First Marathon executives, including founder and chief executive officer Lawrence
Bloomberg. He must pay $250,000, but unlike the other two executives, he did not get suspended from his job.
"It was in his role as the supreme overseer that we thought he failed to carry out his responsibilities, but he wasn't
directly culpable for the many failures that occurred," Mr. Carson said. "The other two were much more hands on."
Stuart Henry, the firm's vice-president of compliance, was fined $485,000, barred from the industry for four
months and can never work again in compliance -- the area responsible for supervising a brokerage firm and its
employees.
Robert Disbrow, former manager of the Vancouver office, was fined $110,000 and banned for three months from
his current job as a salesman at the firm. Also, he is not allowed to act as a branch manager again.
The Cartaway fiasco has been hugely embarrassing for First Marathon, one of Canada's biggest independent
brokerage firms. Michael Walsh, a vice-president at the firm, said the fine will not have a material impact on the
company, which last year had a profit of about $50-million. He said he expects the fine to chop this year's profit by
about 15 cents a share.
"We don't feel good about it. It's a big number," he said. "No matter what size company you are, you don't want to
pay a fine of this significance, but we are a pretty big company."
Shares in First Marathon's parent, First Marathon Inc., sank 95 cents to $23.05 each on the TSE yesterday.
Mr. Bloomberg said in a statement yesterday that he is pleased the matter is now behind the firm. "The company's
directors and senior management deeply regret the circumstances that gave rise to these issues."
The TSE said yesterday that since First Marathon's problems first became public, the firm has taken steps to beef
up its compliance procedures, including setting up a committee of the board, which is responsible for overseeing
this area.
The allegations relating to First Marathon's lax compliance procedures are not new. In September, 1996, the TSE
accused Mr. Bloomberg and Mr. Henry of failing to ensure proper supervision of client accounts in the early 1990s
and of not honouring undertakings they made to the exchange to strengthen the area.
The hearing was adjourned because the TSE said at the time that it was also looking at the firm's involvement with
Cartaway and needed more time to complete that review.
A group of eight First Marathon officials in Vancouver and Calgary triggered numerous allegations of conflicts of
interest by playing multiple roles as major investors, promoters and underwriters of Cartaway's stock.
Mr. Walsh said yesterday that only three of these individuals -- Mr. Disbrow and Eric Savics, two of First
Marathon's founding partners, and David Lyall -- are still with the firm.
A Globe and Mail investigation in 1996 showed that the group had played multiple roles in eight other junior
stocks in addition to Cartaway. But the regulators confined their probes to Cartaway.
The TSE said First Marathon failed to supervise the participation of its employees in Cartaway. It also said the
investment dealer failed to maintain a complete set of buy and sell records for trading in Cartaway's shares and
failed to conduct daily and monthly reviews of client and non-client accounts.
The TSE's notice of hearing also names three former First Marathon officials who have not agreed to settle
allegations against them. One of them, Michael Stuart, the firm's former Calgary branch manager and a Cartaway
director, is also cited in the B.C. and Alberta commissions' hearing notices.
Mr. Stuart sold a large chunk of his Cartaway shares before the company's stock price crashed to $2 from $26 in
one trading session after the release of negative drill results in May, 1996.
First Marathon officials have said in the past that even though its eight employees owned 45 per cent of Cartaway,
they did not act as a control group.
The B.C. Securities Commission counters in its notice of hearing that members of the group were involved from
Day 1 in setting up Cartaway. The commission cited a number of breaches of the securities act by the group. It
alleged that the group's active involvement with Cartaway put it in a conflict of interest with the firm's clients. |
