Member Firm and
Approved Persons Disciplined
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Notice to Members #54/98
By way of an Offer of Settlement, Darren Anthony Ricci
("Ricci"), Thomas Lutzke ("Lutzke"), approved persons employed by the
Member Firm, Pacific International Inc. ("Pacific"), Stephen Anthony Yehle
("Yehle"), Andrew Sim Katz ("Katz"), former approved persons employed
by Pacific agreed to the imposition of the following penalties by the Exchange regarding
the trading in Exchange listed Bonaventure Resources Ltd. ("Bonaventure") and
also in the case of Katz with respect to Exchange listed ATS Wheel Inc. ("ATS
Wheel"). Pacific has agreed to the imposition of the following penalties by the
Exchange regarding the trading in Bonaventure and former Exchange listed Caprice Greystoke
Enterprises Ltd. ("Caprice"):
Katz, for violation of Exchange Rules F.1.02, F.1.03, F.2.10, F.2.17.1
and F.2.17.2:
- a fine in the amount of $50,000;
- disgorgement of profits in the amount of $41,000;
- Katz voluntarily agrees to the permanent withdrawal of Exchange Approval, and
- an assessment of investigative costs in the amount of $10,000.
The recent disciplinary action against Katz and settlement as detailed
in Notice to Members #30/98 were taken into consideration in determining the amount of the
Katz penalty.
Ricci, for violation of Exchange By-Law 5.02.4(a):
- a fine in the amount of $20,000;
- disgorgement of profits in the amount of $11,000;
- withdrawal of Exchange Approval for a period of 30 days;
- withdrawal of VCT approval for a period of 6 months upon expiration of the withdrawal of
Exchange approval;
- prior to the expiration of the withdrawal of VCT approval, Ricci must have successfully
completed the Canadian Securities Institute Trader Training Course;
- strict supervision for a period of 1 year commencing upon the expiration of the
withdrawal of Exchange Approval, and
- an assessment of investigative costs in the amount of $2,500.
Yehle, for violation of Exchange Rules F.2.17.3 and F.2.17.4:
- a fine in the amount of $10,000;
- disgorgement of profits in the amount of $5,500;
- withdrawal of Exchange Approval for a period of 18 months, and
- an assessment of investigative costs in the amount of $2,500.
Lutzke for violation of Exchange By-Law 5.02.4(a):
- a fine in the amount of $10,000;
- disgorgement of profits in the amount of $13,000;
- strict supervision for a period of 1 year;
- to rewrite and pass the examination based on the Conduct and Practices Handbook for
Securities and Industry Professionals, and
- an assessment of investigative costs in the amount of $2,500.
Pacific, for violation of Rule F.1.01(1)(b):
- a fine in the amount of $125,000; and
- an assessment of investigative costs in the amount of $25,000.
Outline of Rules Violated:
Rule F.1.02 states in part, that an Approved Person shall, prior to
accepting orders from a third party for the account of any client, have on file a trading
authority signed by the client empowering the third party to enter orders on the account.
Rule F.1.03 states in part, that where an agency account is carried by
a Member the files should contain the name of the principal for whom the agent is acting
and written evidence of the agent's authority to trade.
Rule F.2.10 states in part, that no Member acting as agent for a client
to buy or sell securities shall be the buyer or seller for his own account or otherwise
act in such manner as to create conflict between his own interest and those of his
clients.
Rule F.2.17.1 states in part that no Member, partner, officer, director
or approved person of a Member shall use or knowingly participate in the use of any
manipulative or deceptive method of trading in connection with the purchase or sale of any
such security listed on a stock exchange which creates or may create a false or misleading
appearance of trading activity or an artificial price for the security.
Rule F.2.17.2 states in part that no Member, partner, officer, director
or approved person of a Member shall effect, cause to be effected, or assist in effecting
or causing to effect, a market corner.
Rule F.2.17.3 states in part that any Member, partner, officer,
director or approved person of a Member which or who has, or ought to have reasonably had
knowledge of the arrangement referred to in Rule F.2.17.2 above and who has authorized,
permitted or acquiesced in the said arrangement shall be deemed, for the purpose of Rule
F.2.17.2 above to have assisted in effecting the market corner.
Rule F.2.17.4 states in part that for the purpose of Rule F.2.17.2 the
term "control or direction" shall include but not be limited to refusing to
execute sell orders.
By-Law 5.02(4)(a) states in part that a specific infraction includes
the purchasing and selling of securities where the person knows or ought to have known
that the effect of such a purchase or sale would be to unduly disturb the normal position
of the market or create an abnormal market condition in which market prices do not fairly
reflect current market values.
Bonaventure
During the period of June 1, 1993, to March 7, 1994, (the
"Relevant Period"), Bonaventure had an investor relations agreement with Euro
Pacific Management Ltd. ("The Investor Relations Group"). The Investor Relations
Group through a number of phone persons used high pressure and aggressive sales tactics to
promote Bonaventure. The Investor Relations Group directed potential investors ("The
Bonaventure Referrals") to Pacific investment advisers to open accounts and purchase
shares of Bonaventure.
Pacific Trading Analysis
During the Relevant Period, the share price of Bonaventure increased
from $1.25 to period high of $5.625. Pacific was the dominant "buy" Member Firm,
by purchasing 3,838,389 shares or 59% of the market total, executing 3,054 buy trades or
58.5% of market total. Pacific initiated 500 upticks or 57.5% of the market total upticks,
created 58 new highs or 44.6% of the market total and established 45 high close trades or
76.3% of the market total high close trades after 1:00 pm. Approximately 781 Bonaventure
Referrals purchased Bonaventure which constituted the majority of the Pacific Bonaventure
buy trading.
Katz was an investment adviser and Vancouver Computerized Trading
("VCT") trader with Pacific during the Relevant Period. The Pacific Bonaventure
buy orders were routed to Katz's VCT Desk for execution. Katz’s VCT executed 96% of
the Pacific Bonaventure buy trades.
Pacific was also the dominant selling Member Firm, selling 4,015,904
shares or 61.7% of the market total. Of the total shares sold by Pacific, 908,300 shares
or 22.6% of the sales were executed as jitney trades through other Member Firms.
Katz’s clients and the Katz inventory account used by Katz and his staff (the
"Katz Inventory Account") sold 2,883,854 shares or 44.3% of the market total
("the Katz Sell Volume"). Of the Katz Sell Volume 55% was sold into other
Pacific Bonaventure buy orders and Katz’s VCT executed 83.6% of the total Pacific
non-jitney sell trades.
Of the Bonaventure trades executed through Katz's VCT ("the Katz
Trades"), 751 trades were executed as cross trades and 180 trades were executed where
there was less than a 10 second time difference between the entry of the buy and the sell
order.
Katz Clients
Of the Katz Sell Volume, 13 Katz clients ("the Katz Clients")
sold 2,314,554 shares or 83% of the total Katz Sell Volume. The majority of the Katz
Clients were either directly related to The Investor Relations Group, alleged Bonaventure
employees or Investor Relations Group referrals. Of the Katz Clients, 9 clients exercised
and sold Bonaventure stock options in their respective accounts ("the Optionee
Accounts"). The Optionee Accounts executed Bonaventure sell transactions only. The
Investor Relations Group controlled and directed the Bonaventure sell transactions in the
majority of the Katz Clients accounts.
Katz Violations
Rule F.1.02.2 & F.1.03
Katz or his staff accepted orders for undisclosed nominee accounts and
accepted third party orders in the Katz Client Accounts without having on file a written
trading authorization signed by the client empowering the third party to enter orders on
the account. Katz thereby violated Exchange Rule F.1.02(2) and F.1.03.
During the period of January 1996 to May 1996, Katz or his staff
accepted orders from a third party on behalf of a Katz client account that traded in the
shares of Exchange listed ATS Wheel Inc. Katz failed to have a written trading
authorization signed by the client empowering the third party to enter orders on the
account. Katz thereby violated Exchange Rule F.1.02(2).
Rule F.2.10
During the Relevant Period, the Katz client Bonaventure order tickets
were frequently time stamped well after the close of trading. The Bonaventure VCT trades
for the Katz Inventory Account were not marked to distinguish the Katz professional trades
from the Katz Client trades, as required in NTM #106/90. Katz acted in a manner that
created a conflict between his own interests and those of his clients and thereby violated
Exchange Rule F.2.10.
Rule F.2.17.1 & F.2.17.2
The Investor Relations Group through the Katz VCT controlled and
directed the majority of the Bonaventure sell trading. In addition, approximately 100% of
the Pacific Bonaventure buy trading was executed through Katz's VCT. Katz Clients were the
predominant sellers into the Bonaventure buy trading generated by The Investor Relations
Group promotion. By accepting certain orders Katz or his staff acquiesced in transactions
by the Investor Relations Group that created a market corner and a false appearance of
trading activity and unduly influenced the Bonaventure market. Katz thereby violated
Exchange Rules F.2.17.1 and F.2.17.2.
Ricci
During the Relevant Period, Ricci worked as Katz’s assistant, was
an approved VCT Trader and an investment adviser. Under Katz’s VCT number, Ricci
executed the majority of the Pacific Bonaventure orders on behalf of Katz and other
Pacific investment advisers. The Bonaventure trading activity executed by Ricci unduly
disturbed the normal position of the market and created an abnormal market condition in
which market values did not fairly reflect current market values. Ricci knew or ought to
have known the effect of such trading on the Bonaventure market. Ricci thereby violated
Exchange By-Law 5.02.4(a).
Lutzke
During the Relevant Period, The Investor Relations Group referred the
Bonaventure Referrals to Lutzke to purchase shares of Bonaventure. Approximately 314
Lutzke clients ("the Lutzke Clients") traded Bonaventure of which 93% were the
Bonaventure Referrals referred by The Investor Relations Group. The Investor Relations
Group would connect the Bonaventure Referrals directly to Lutzke, who, prior to speaking
with Lutzke, the Bonaventure Referrals knew how many shares of Bonaventure they wished to
purchase and were well informed about Bonaventure.
The Lutzke Clients purchased 1,066,475 shares or 16% of the total
market buy volume, initiated 150 upticks or 17.3% of the market total, created 14 new
highs or 10.8% of the market total and established 15 high close trades or 25% of the high
close trades executed after 1:00 pm.
Lutzke was aware that his Bonaventure client buying was largely
generated by one source, The Investor Relations Group. Therefore, Lutzke ought to have
known that his Bonaventure client buying was likely to create an abnormal market condition
in which market prices did not necessarily reflect current market values. Lutzke thereby
violated Exchange By-Law 5.02.4(a).
The Exchange acknowledges that Lutzke advised his clients to sell and
brought his concerns about The Investor Relations Group to the attention of Pacific who
informed the Exchange.
Yehle
During the Relevant Period the Investor Relations Group referred the
Bonaventure Referrals to Yehle. A total of 175 Yehle clients (the "Yehle
Clients") traded Bonaventure of which 145 were the Bonaventure Referrals referred by
The Investor Relations Group.
In early April 1994, The Investor Relations Group discovered that
Lutzke was advising his Clients to sell Bonaventure. The Investor Relations Group
contacted Yehle and advised him that Lutzke was recommending his Clients sell Bonaventure.
The Investor Relations Group offered to recommend that Lutzke's Clients transfer to Yehle,
if Yehle agreed he would not solicit Bonaventure sell orders.
The Investor Relations Group then co-ordinated a movement of Lutzke's
Bonaventure Clients to Yehle. The majority of Lutzke's Bonaventure Clients moved their
accounts from Lutzke to Yehle. Yehle did not solicit any Bonaventure sell orders to his
clients and advised his clients not to sell Bonaventure.
Yehle knew or ought to have known of The Investor Relations Group's
Bonaventure Client coercion and therefore assisted in effecting The Investor Relations
Group market corner. Yehle thereby violated Rule F.2.17.3 and F.2.17.4.
Pacific Failure to Supervise
Rule F.1.01(1)(b), states in part that every member is required to
diligently supervise all accounts handled by his investment advisers.
Pacific, during the Relevant Period failed to diligently supervise
their investment advisers, Katz, Yehle, Ricci, and Lutzke (collectively refereed to as the
"Investment Advisers") and during February 14, 1992 to September 30, 1993 (the
"Caprice Period") failed to diligently supervise their investment adviser, Katz.
Katz’s discipline in relation to Caprice is detailed in NTM #30/98.
Katz was an approved VCT trader and entered orders on behalf of his own
clients and the Katz Inventory Account. VCT traders with a client base require the highest
level of supervision as they have a direct link to the market without the scrutiny of a
desk trader.
Pacific, failed to diligently supervise the Investment Advisers by
failing to detect deceptive and misleading trading patterns in the accounts and the shares
of Bonaventure and Caprice by failing to:
- detect orders by the Investment Advisers for the shares of Bonaventure and Katz for the
shares of Caprice, that resulted in high close trades. Specifically, the Investment
Advisers executed buy orders in the shares of Bonaventure and Katz in the shares of
Caprice, at prices higher than the previous trade or order at which a board lot traded and
there were no subsequent trades or orders that affected the market price of Bonaventure
and Caprice;
- query the price leadership by clients both in the shares of Bonaventure and Caprice;
- appreciate the trading trends where clients, identified on the NCAF as a Bonaventure
referral, would consistently cross Bonaventure shares to The Investor Relations Group
referrals;
- review as required the Katz Client Accounts, and the Katz Inventory Account during the
Caprice Relevant Period or if reviewed, to appreciate the nature of the transactions in
the account;
- appreciate the trading pattern where Katz made a practice of trading opposite his client
in the shares of Caprice; and
- ensure that trades were properly time stamped.
Pacific knew or ought to have known its obligations to act as an
industry gatekeeper as set out in Notice to Members #50/94. The Exchange acknowledges that
Pacific through its supervision identified concerns with respect to The Investor Relations
Group and the Optionee Accounts and that Pacific brought those concerns to the attention
of the Exchange in April 1994. By failing to appreciate the trading patterns earlier,
Pacific failed to meet the supervisory standard expected of a Member Firm.
Pacific thereby violated Exchange Rule F.1.01(1)(b).
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