Settlements

CANACCORD CAPITAL CORPORATION et. al. [Settlement Agrmt.]

BCSECCOM #:
Document Type:
Settlement Agrmt.
Published Date:
2000-06-30
Effective Date:
2000-06-28
Details:


IN THE MATTER OF THE SECURITIES ACT
R.S.B.C. 1996, c. 418

AND

IN THE MATTER OF CANACCORD CAPITAL CORPORATION
AND JOHN BRIAN JOHNSTON

Settlement Agreement

1. The following settlement of issues has been reached between Canaccord Capital Corporation (“Canaccord”) and the Executive Director.

Agreed Statement of Facts

2. As the basis for the undertakings referred to in paragraph 4 of this settlement Canaccord acknowledges the following facts as correct:

2.1 Canaccord is registered under the Securities Act R.S.B.C. 1996, c. 418 (the “Act”) and was at all times material to this settlement a member of both the Vancouver Stock Exchange (now the Canadian Venture Exchange) and the Investment Dealers Association of Canada.

2.2 John Johnston (“Johnston”) is registered as an investment adviser under the Act and has been employed in the securities industry since 1981. He has worked in the Vancouver office of Canaccord since May, 1985.
      2.3 Excell Asset Management Inc. (“Excell Asset”) is or was a company incorporated pursuant to the laws of the Province of British Columbia on January 10, 1994. It is not a reporting issuer under the Act and conducted its business under the name of Excel Asset Management Inc. (“Excel Asset”).
      2.4 Excel International Investment Corporation (“Excel International”) is or was a company incorporated pursuant to the laws of the British Virgin Islands. It is not a reporting issuer under the Act and it had an office located on the Isle of Man. From or about May 28, 1996, to or about June 30, 1997, Excel International operated both Canadian and US dollar brokerage accounts at Canaccord (the “Excel International Accounts”).

      2.5 Diomondmark Investments Limited (“Diomondmark”) is or was a company incorporated pursuant to the laws of the British Virgin Islands and is not a reporting issuer under the Act. Diomondmark had an office in the Cayman Islands and from or about November 1, 1995, to or about July 31, 1997, operated both Canadian and US dollar brokerage accounts at Canaccord (the “Diomondmark Accounts”).

      2.6 Excel Funding Inc. (“Excel Funding”) is or was a company incorporated pursuant to the laws of the Cayman Islands and is not a reporting issuer under the Act. Excel Funding had an office located in the Cayman Islands and from or about September 5, 1996, to or about July 31, 1997, operated both Canadian and US dollar brokerage accounts at Canaccord (the “Excel Funding Accounts”).

      2.7 Gary W. Stanhiser (“Stanhiser”) is a resident of Loma Linda, California, U.S.A., and was the sole director and officer of Excell Asset, and represented himself to be the president of Excel Asset. From or about August 5, 1993, to or about January 31, 1997, Stanhiser operated both Canadian and US dollar brokerage accounts at Canaccord (the “Stanhiser Accounts”).

      2.8 Del L. Knowlton (“Knowlton”) is a resident of British Columbia and worked for Excel Asset. From or about December 13, 1995, to or about January 31, 1998, Knowlton operated a Canadian dollar brokerage account at Canaccord (the “Knowlton Account”).

      2.9 None of Excell Asset, Excel Asset, Excel International, Diomondmark, Excel Funding, Stanhiser, or Knowlton (the “Excel Group”) have ever been registered to trade in or advise in securities under the Act.

      2.10 Johnston was the investment advisor for each of the Excel International Accounts, the Diomondmark Accounts, the Excel Funding Accounts, the Stanhiser Accounts and the Knowlton Account (collectively, the “Excel Group Accounts”).

      2.11 The Commission found, by a decision dated April 28, 1999, dealing with allegations concerning the operations of Excel Asset, that Stanhiser, Knowlton, and others, had operated or participated in an investment scheme (the “Scheme”) by which, among other things:
          2.11.1 client representatives of Excel Asset, including Knowlton and his wife, Linda Knowlton, raised money from clients, which would then be pooled in the Excel Group Accounts;

          2.11.2 in only a handful of cases did a single client invest $97,000 or more;

          2.11.3 once sufficient funds had accumulated, one of the Excel companies, or Stanhiser purchased shares of a company pursuant to a previously negotiated private placement;

          2.11.4 these shares were then allocated to the clients in the records of Excel Asset. In a few cases the clients actually took delivery of their shares; and

          2.11.5 the private placements were purported to be made under the exemptions from the registration and prospectus requirements set out at sections 45(2)(5) and 74(2)(4) of the Act, which require that the aggregate acquisition cost to the purchaser be not less than $97,000.
      2.12 The Commission found that those exemptions were not available for the private placements and, as a result, all of the Excel Group had carried out acts, solicitations, conduct, or negotiations in furtherance of the distributions without being registered, contrary to section 34(1) of the Act and that all of the Excel Group distributed securities without filing and obtaining a receipt for a prospectus, contrary to section 61(1) of the Act.
        2.13 The Commission found that by his participation in the distribution of securities through the Scheme, Stanhiser perpetrated a fraud on persons in British Columbia, contrary to section 57 of the Act, and, as a result of the Scheme, clients of Excel Asset are still owed shares.

        2.14 As well as acting as investment advisor for the Excel Group Accounts, Johnston also acted as investment advisor for over 140 individual Excel Asset investors who personally opened accounts at Canaccord (the “Individual Investors”). Many of the Individual Investors transferred funds into their accounts at Canaccord, which were later transferred to the Excel Group accounts at the clients’ written request and were subsequently used in the Scheme.
          2.15 Johnston purchased securities through the Scheme himself and knew or ought reasonably to have known that a primary purpose of many of the Individual Investors opening their accounts at Canaccord was to participate in the Scheme as well.
      2.16 Johnston did not inform the Excel Group or the Individual Investors that the Scheme was in breach of the Act and did not inform the Individual Investors that their investments could be at greater risk as a result. Johnston did not disclose to Canaccord his knowledge of the Scheme or the investment intentions of the Individual Investors with respect to the Scheme.
          2.17 Canaccord, as Johnston’s employer and as a registrant under the Act, failed to review facts known to it or to follow-up those facts which were available to it and which would have revealed to Canaccord the existence of the Scheme and the role of its employees in the Scheme.
            2.18 Canaccord, as a registrant, is required to establish and apply proper compliance and supervision procedures. With proper procedures in place, and properly applied, Canaccord should have detected the activity in the Excel Group Accounts and the Individual Investor accounts and should have been able to detect the existence and operation of the Scheme.

            BREACHES OF THE ACT AND RULES

            Canaccord
        2.19 By assisting the Excel Group in the collection and payment of monies in the Scheme and by assisting in the physical distribution of securities purchased through the Scheme in the absence of a prospectus or any exemption, Canaccord unwittingly participated in a breach of section 61(1) of the Act.

            2.20 By failing to inquire into and learn about the business operations of Excel International, Diomondmark and Excel Funding, Canaccord breached section 48(1) of the Securities Rules, B.C. Reg. 194/97 (the “Rules”) requiring Canaccord to make inquiries to learn the essential facts relative to every client.

            2.21 Canaccord failed to establish and apply written prudent business procedures for dealing with clients and was in breach of section 44(1) of the Rules, the particulars of which are as follows:

            2.21.1 Canaccord’s compliance department did not undertake reviews, when commissions were between $1000 and $2500 per month, of monthly statements of the Excel Group Accounts, in breach of IDA Policy No. 2 and Exchange Policy Statement CR06 of the Vancouver Stock Exchange (“VSE”) .
                2.21.2 On a number of occasions, the Excel Group instructed Canaccord to move securities from its accounts to the accounts of the Individual Investors, without using the facilities of the Exchange, which Canaccord did without proper control and supervision and without reviewing the transfers, as required by VSE Policy Statement CR04.

                2.21.3 Canaccord issued cheques without proper control and supervision to issuers in order to pay for private placements arranged by the Excel Group. Funds for those cheques were drawn from a number of accounts including the Excel Group Accounts and accounts of Individual Investors. No one at Canaccord made any inquiry concerning these transactions, which inquiry would have indicated the nature of the Scheme.

                2.21.4 Significant amounts of funds were periodically journal- transferred, without proper supervision or control, from Individual Investors’ accounts into one of the Excel Group Accounts. The Individual Investors provided written instructions to Canaccord that clearly indicated they were making the transfers in order to participate in private placements arranged by the Excel Group. No one at Canaccord queried these journal transfers, which indicated the pooling arrangements lying behind the Scheme.

                2.21.5 Multiple cheques from Individual Investors and others were deposited periodically into one of the Excel Group Accounts, without proper supervision and control. No one at Canaccord questioned this activity, which was an indication of the activity underlying the Scheme.

                2.21.6 Canaccord allowed one of its boardrooms to be used by the Excel Group on one occasion for one day, for the promotion of the Scheme or otherwise, without approval of the VSE, in breach of VSE Rule F.2.05.

            2.22 Canaccord failed to supervise its employees adequately and properly and, as a result, failed to deal properly or fairly with its clients, in breach of section 14(1) of the Rules, the particulars of which are set out in paragraph 2.21.

        3. The Executive Director has taken into account the following as factors mitigating the sanctions which would otherwise have applied in the public interest:
            3.1 Canaccord has advised the Executive Director that it was not aware of the Scheme and that Canaccord did not knowingly participate in the Scheme.
            3.2 Canaccord has advised the Executive Director that it has revised its compliance procedures in respect to its cheque writing process and the Compliance Department will in the future review the type of transactions seen in this case.

        4. UNDERTAKING

        4.1 Canaccord undertakes to comply with the Act and Rules.
            4.2 Canaccord represents that it has added to its audit and compliance practices sufficient surveillance tests to ensure compliance with the highest regulatory standards and to ensure that the breaches referred to above could be detected and could not occur again. In order that the Commission may confirm this, Canaccord will cooperate completely with a regulatory/compliance audit directed solely by the Executive Director. The terms of the audit will be set by the Executive Director and will be for the fiscal year from April 1, 1999 to March 31, 2000. Canaccord will pay for all costs pertaining to the audit. The audit report will be sent to the attention of the Executive Director.

        4.3 Canaccord agrees and undertakes to rectify any deficiencies detected by the audit and that the Executive Director reserves the right to order a subsequent audit (or audits) in order to ensure any deficiencies have been properly addressed by Canaccord. Canaccord will be responsible for all costs pertaining to any subsequent audit.
            4.4 Canaccord undertakes and agrees to pay to the Commission the amount of $428,000, $300,000 of which represents an administrative penalty, $45,000 represents costs of the investigation and $83,000 represents disgorgement of commissions, private placement fees and agents fees.
        5. Canaccord waives any right it may have, under the Act or otherwise, to a hearing, hearing and review, judicial review or appeal related to, in connection with, or incidental to this agreement.


        DATED at Vancouver, British Columbia, on June 28, 2000.


        _______“David Mitchell”`____________ )
        Witness Signature )
        )
        _______David Mitchell______________ )
        Witness Name (Please Print) ) ______“Mike Greenwood”_________
        ) FOR CANACCORD
        _______1000 - 840 Howe Street______ )
        Address )
        )
        _______Barrister and Solicitor________ )
        Occupation



        DATED at Vancouver, British Columbia, on June 28, 2000.





        Steve Wilson
        Executive Director
        ©2024 British Columbia Securities Commission