DECISION AND REASONS
IN THE MATTER OF DISCIPLINE PROCEEDINGS PURSUANT TO
BY-LAW 20 OF THE INVESTMENT DEALERS ASSOCIATION OF CANADA
AND IN THE MATTER OF WARREN RANDELL BABB
Page
Preliminary Matters
2
Charges and Particulars
3
Reply of Respondent
9
Evidence of Association
14
Evidence of Respondent
25
Analysis of Panel
32
Conclusions
46
HEARING
On December 6, 7 and 8, 1999, a panel of the Newfoundland District Council of the Investment
Dealers Association of Canada held a hearing concerning charges made by the staff of the
Investment Dealers Association of Canada (the “Association”) against Warren Randell Babb.
The equivalent of a first appearance hearing was set for May, 1999 and at that time the hearing
was scheduled to be heard on August 23rd, 1999. On that date, due to the medically certified
inability of Mr. Babb to appear and for other reasons, this matter was severed from another matter
involving another respondent and was rescheduled to be heard on October 25th, 1999. Due to the
subsequent unavailability of a member of the Panel, the matter was rescheduled for December 6,
1999.
PANEL
The Panel consisted of Kevin Breen, Fred G. Dodd and M. Francis O’Dea, Q.C., Chairperson.
COUNSEL
The Association was represented by Brian K. Awad. Mr. Babb was represented by Douglas
Moores, Q.C. and Mr. Babb appeared in person.
PRELIMINARY MATTERS
At the Hearing, the Parties agreed:
1. There was no objection to any members of the Panel;
2. The Panel was properly constituted and had jurisdiction to deal with the matter;
3. There were no preliminary objections going to the jurisdiction of the Panel;
4. No Preliminary points were being raised.
WITNESSES
1. Vanesa Gardiner;
2. Dr. H.W. Hulan;
3. Warren Randell Babb.
EXHIBITS
The following items were put in evidence by consent:
1. Account Documentation re Dr. H.W. Hulan;
2. Supplement to Suitability Review re Accounts of Dr. H.W. Hulan;
3. Profit/Loss Analysis - Margin account - Richards.Profit/Loss Analysis - RRSP Account Richardson.Profit/Loss Analysis - Margin Account - Midland.Profit/Loss Analysis - RRSP
Account - Midland;
4. Graph-Depicting Return on Investment;
5. A Composite Trading in the Accounts of Dr. Hulan (includes regular/margin and RRSP
accounts);
- 3 6. Periods of time during which Dr. H.W. Hulan was away from St. John’s or otherwise available
for consultation by Mr. W. Bagg from January, 1992 until September, 1997;
7. Re Warren Randell Babb: Profit/Loss analysis - margin - Richardson and Midland;
8. June 30, 1996 letter to Dr. W. Hulan from Richardson Greenshields;
9. Four letters from Midland, Walwyn signed by Warren Babb; dated December 23, 1996, March 7,
1997, April 8, 1997 and September 12, 1997.
10. New Account Application Form with Midland, dated December 18, 1996;
11. May 6, 1992 letter to Dr. H.W. Hulan from John Babb;
12. Handbook: The Conduct and Practices Course of Investment Dealers Association.
CHARGES
The Notice of Hearing and Particulars dated March 23, 1999 together with an affidavit of
services dated March 29, 1999 deposing that the said document was served on Mr. Babb on March
27, 1999 were filed with the Panel.
The Notice of Hearing and Particulars contained eight charges as follows:
1. In or about October, 1993, Warren Randell Babb, at all material times a registered representative
employed by Richardson Greenshields of Canada Limited, a former Member of the Association,
engaged in business conduct or practice which is unbecoming or detrimental to the public
interest by facilitating the opening of an account for a client, Dr. H.W. Hulan, without
completing a new account form or otherwise documenting the essential facts in regards to the
client and the account, contrary to By-law 29.1 of the Association. [This charge was
subsequently withdrawn.]
- 4 -
2. Between March 1992 and October 1996, Warren Randell Babb, at all material times a registered
representative employed by Richardson Greenshields of Canada Limited, a former Member the
Association, failed to use due diligence to ensure that recommendations for the investment
accounts of a client, Dr. H.W. Hulan, were appropriate for the client and in keeping with the
client’s investment objective, contrary to Regulation 1300.1(c) of the Association.
3. Between December 1996 and September 1997, Warren Randell Babb, at all material times a
registered representative employed by Midland Walwyn Capital Inc., a former Member of the
Association, failed to use due diligence to learn the investment objectives of a client, Dr. H.W.
Hulan, contrary to Regulation 1300.1(a) of the Association.
4. Between December, 1996 and September, 1997, Warren Randell Babb, at all material times a
registered representative employed by Midland Walwyn Capital Inc., a former Member of the
Association, failed to use due diligence to ensure that recommendations for the investment
accounts of a client, Dr. H.W. Hulan, were appropriate for the client and in keeping with the
client’s investment objectives, contrary to Regulation 1300.1(c) of the Association.
5. In or about June, 1996, Warren Randell Babb, at all material times a registered representative
employed by Richardson Greenshields of Canada Limited, a former Member of the Association,
engaged in business conduct or practice which is unbecoming or detrimental to the public
interest by failing to follow the instructions of a client, Dr. H.W. Hulan, to sell shares in Pointer
Exploration Corp. held in the client’s account, contrary to By-law 29.1 of the Association.
- 5 -
6. Between June and October, 1996, Warren Randell Babb, at all material times a registered
representative employed by Richardson Greenshields of Canada Limited, a former Member of
the Association, engaged in business conduct or practice which is unbecoming or detrimental to
the public interest by failing to advise his employer of the above conduct and a related dispute
with the client regarding compensation, contrary to By-law 29.1 of the Association.
7. Between December 1996 and September 1997, Warren Randell Babb, at all material times a
registered representative employed by Midland Walwyn Capital Inc., a former Member of the
Association, engaged in business conduct or practice which is unbecoming or detrimental to the
public interest by failing to advise his employer of the above unresolved dispute with the client,
contrary to By-law 29.1 of the Association.
8. Between March and September, 1997, Warren Randell Babb, at all material times a registered
representative employed by Midland Walwyn Capital Inc., a former Member of the Association,
engaged in business conduct or practice which is unbecoming or detrimental to the public
interest by sending unauthorized correspondence to a client, Dr. H.W. Hulan, which misquoted
the value of the client’s account, contrary to By-law 29.1 of the Association.
PARTICULARS
The Association provided a summary of the facts alleged and intended to be relied upon at the
hearing as follows:
- 6 1. The Respondent was first registered in the securities industry in January 1984. At all material
times, the Respondent carried on business in St. John’s, Newfoundland. Beginning in January
1991, the Respondent was approved for employment with Richardson Greenshields of Canada
Limited (“Richardson”) a former Member of the Association. In October, 1996, the Respondent
transferred to Midland Walwyn Capital Inc. (“Midland”) a former Member of the Association.
In October 1998, the Respondent resigned from Midland (by then known as Merrill Lynch
Canada Inc., a present Member of the Association). Since that time, the Respondent has not ben
employed in an approved capacity by a Member of the Association.
2. Dr. H.W. Hulan is a resident of St. John’s, Newfoundland. Dr. Hulan was a client of the
Respondent beginning in December 1991 at Richardson, and then at Midland beginning in
December, 1996 and ending in October, 1997. During that period, the Respondent opened the
following accounts for Dr. Hulan:
Date Account Opened
December, 1991
October, 1993
December, 1996
December, 1996
Firm
Richardson Greenshields
Richardson Greenshields
Midland, Walwyn
Midland Walwyn
Account Type
margin
RRSP
margin
RRSP
At all material times, Dr. Hulan’s investment objectives were to have his capital invested such
that there was an approximately equal balance between (1) safe and income-producing securities,
and (2) growth-oriented securities. At all material times, Dr. Hulan was content to place no
more than five to ten percent of his investment capital in high risk or speculative investments.
3. The actual investment “mix” in the accounts of Dr. Hulan during the relevant time periods is set
out on a month-by-month basis in Appendix A to this Notice.
- 7 -
Charge 1 [conduct unbecoming - inadequate account-opening documentation]: [withdrawn]
4. The Respondent opened the RRSP account for Dr. Hulan at Richardson without completing a
new account form or otherwise documenting the essential facts in regards to the client and the
account.
Charge 2 [unsuitable trading - Richardson period]:
5. While at Richardson, the Respondent failed to use due diligence to ensure that recommendations
for the accounts of Dr. Hulan were appropriate for the client and in keeping with his investment
objectives. The trading in the accounts resulted in an investment mix that was excessively
growth oriented and carried too much risk (see Appendix A).
Charge 3 [failure to “know the client” - Midland account opening]:
6. When the Respondent opened the two accounts for Dr. Hulan at Midland in December, 1996, the
Respondent failed to ascertain Dr. Hulan’s current investment objectives. The Respondent
facilitated the filing of account-opening documentation that indicated that Dr. Hulan was content
that 20% of his capital be invested in speculative securities. This notation was correct and had
no basis in past account documentation, or in any instruction from Dr. Hulan.
Charge 4 [unsuitable trading - Midland period]:
7. The Respondent failed to use diligence to ensure that recommendations for the accounts of Dr.
Hulan at Midland were appropriate for the client and in keeping with his investment objectives.
- 8 The trading in the accounts resulted in an investment mix that was excessively growth oriented
and carried too much risk (see Appendix A).
Charge 5 [conduct unbecoming - failure to execute trade]:
8. In June, 1996, Dr. Hulan instructed the Respondent to sell 10,000 shares of Pointer Explorations
Corp. held in his margin account. The Respondent failed to execute this trade.
Charge 6 [conduct unbecoming - failure to advise employer (Richardson)]:
9. The failure to execute the trade led to a dispute between the Respondent and the client regarding
whether the Respondent would compensate the client, by how much, and when. The Respondent
did not advise Richardson managers of the relevant conduct or the dispute regarding
compensation.
Charge 7 [conduct unbecoming - failure to advise employer (Midland)]:
10. When the Respondent transferred to Midland in late 1996, the dispute regarding compensation
remained unresolved between the Respondent and the client. The Respondent did not advise
Midland managers of the unresolved dispute.
Charge 8 [conduct unbecoming - sending unauthorized correspondence]:
11. In an attempt to resolve the dispute, the Respondent indicated to the client that funds would be
deposited into the client’s account. No such deposit was ever made. However, while at
Midland, between March and September, 1997, the Respondent sent a number of letters to the
client, on Midland letterhead but not authorized by the firm, that quoted a value of the client’s
- 9 margin account as if such a deposit had been made. This correspondence overstated the actual
value of the account.
APPENDIX “A”
Appendix “A” attached to the notice of charges and particulars entitled “Investment mix” is
attached to this Report.
REPLY FILED BY THE RESPONDENT
The Reply filed by Warren Randell Babb (the “Respondent) states as follows:
1. The Respondent does not deny the information set out in paragraph 1 of the Investment Dealers
Association of Canada’s (hereinafter referred to as the “IDA”) Particulars
2. With respect to paragraph 2 of the IDA’s Particulars, the Respondent does not take issue with
Dr. Hulan's residency, nor his status as a former client of Richardson and subsequently Midland
with the accounts as listed in the Particulars. What the Respondent does take exception with,
however, is Dr. Hulan’s characterization of his investment objectives. The Respondent has no
recall of a discussion of a figure of five to ten percent with respect to Dr. Hulan's tolerance for
risk. Additionally, while initially Dr. Hulan wanted to invest in a relatively conservative manner,
over time his approach changed and he became increasingly more oriented towards risk and the
potential for higher profit.
- 10 3. The Respondent does not take exception to the actual investment mix as set out on a
month-by-month basis in Appendix A of the IDA's Notice.
4. It is the Respondent's understanding that charge 1 has been withdrawn and as such paragraph
four need not be addressed herein.
5. The Respondent denies the facts as alleged in paragraph five and states that they are wholly
untrue. The Respondent states that Dr. Hulan was aware of each and every trade which occurred
in his portfolio. The Respondent further states that he and Dr. Hulan spoke regularly with respect
to any and all activity concerning his portfolio. The Respondent would characterize his level of
contact with Mr. Hulan as "high" with telephone conversations and meetings (including many
lunch meetings) occurring on average at least 1-2 times per month for the entire period of their
business relationship.
6. Additionally, the Respondent states that Dr. Hulan was always aware of the risks associated with
each and every transaction. Particularly with respect to the Margin Accounts, there were many
discussions between the Respondent and Dr. Hulan during the course of which trading became
increasingly aggressive. At no time were the actions of the Respondent anything that would even
approach the characterization "unsuitable trading" as noted in Charge 2.
7. The Respondent denies the facts as alleged in paragraph six and states that they are wholly
untrue. As should now be clear by the preceding comments there was no failure to "know the
client" as alleged in Charge 3 and in fact Dr. Hulan's wishes were clearly conveyed to and
- 11 understood by the Respondent. As well, the documentation which indicates Dr. Hulan was
content to have 20% of his capital invested in speculative securities is entirely accurate and a
result of a direct consultation with Dr. Hulan.
8. The Respondent denies the facts as alleged in paragraph seven and states that they are wholly
untrue. There was no "unsuitable trading" as alleged in Charge 4 and paragraph 7 of the
Particulars. While there was an increasing degree of risk associated with Dr. Hulan's trades as
their business relationship progressed, these additional risks were knowingly and willingly
assumed by Dr. Hulan and undertaken at his direction.
9. With respect to paragraph 8 of the Particulars, the Respondent denies that he was instructed by
Dr. Hulan to sell 10,000 shares of Pointer Explorations Corp. held in his margin account. In
actual fact, the situation was discussed in detail by the Respondent and Dr. Hulan, and it was the
suggestion of the Respondent that the shares should be traded. The Respondent does not deny
that he failed to execute the trade but it was a result of an innocent mistake, not an intentional
disregard of an instruction by Dr. Hulan. As such the Respondent takes exception to and denies
the characterization in Charge 5 of his conduct as "unbecoming" in his failure to execute the
trade.
10. With respect to paragraph 9 the Respondent does not deny that his failure to execute the trade led
to a dispute between himself and Dr Hulan, and further that there was a resulting disagreement
with respect to Dr. Hulan's compensation. He also concedes he did not advise Richardson
managers of the situation or the dispute. However, in his defence his motivation was not
self-interest, but an attempt to protect his partners from exposure to his error.
- 12 -
11. Further, the Respondent believed that he could rectify the problem to the satisfaction of all
involved and as such the Richardson managers would not have to be notified. Given the totality
of the circumstances the Respondent believes the characterization of this decision as "conduct
unbecoming" in Charge 6 is harsh and unwarranted. In the alternative, if the conduct is deemed
by the Board to be unbecoming, he asks that the Board consider his motivation and the
inadvertent manner in which the problem arose as mitigating factors in determining his level of
penalization.
12. With respect to paragraph 10 the Respondent does not deny that when he transferred to Midland
in late 1996 he did not advise the Midland managers of the unresolved dispute. Again the
circumstances and explanations given above with respect to paragraph 9 apply equally here and
the Respondent asks the Board to consider the explanations as provided above in determining its
course of action with respect to charge 7.
13. The Respondent acknowledges that he sent unauthorized correspondences to Dr. Hulan to the
effect that the funds missing as a result of his failure to execute the Pointer trade would be
deposited into his account and further, correspondences were sent to the effect that the value of
his margin account was such that the deposit had actually been made. Again the Respondent
concedes in retrospect that this was clearly not the best course of action he could have chosen.
Having said that it can not be denied that this conduct shows a clear concession early in the
process by the Respondent that a mistake has been made with an equally clear message of the
Respondent’s intended course of action: to replace the missing funds. Given the Respondent's
- 13 conciliatory attitude towards resolving this dispute, the Respondent submits that the IDA’s
characterization of his conduct in sending the authorized correspondence as “unbecoming” is
harsh and unwarranted. In the alternative, if the conduct is deemed by the Board to be
“unbecoming” then the Respondent asks that his intent in sending the unauthorized
correspondences be considered in determining its course of action with respect to charge 8.
14. The Respondent would also like to point out for the record that the full amount of money lost as
a result of the Respondent’s failure to execute the Pointer Trade has been replaced and Dr. Hulan
fully compensated as was contemplated in the unauthorized correspondence noted in paragraph
11 of the Particulars.
15. As to all of the Particulars the Respondent again reiterates that he does not deny an increasingly
growth oriented and consequently risky slant which was taken with respect to Dr. Hulan's
portfolio. However, the Respondent adamantly denies that such a stance was taken without the
full knowledge and instruction of Dr. Hulan. Dr. Hulan over the course of the regular discussions
and meetings with the Respondent between 1991 and 1997 requested that an increasingly
aggressive stance be taken with respect to his investments in the hope that he would receive
larger returns on them.
16. The Respondent notes for the record that Dr. Hulan in fact did not lose money as a result of his
investment activities with the Respondent, but in fact averaged an over 12% annual return on his
investment for the whole period of his business relationship with the Respondent.
- 14 EVIDENCE OF ASSOCIATION
Vanesa Gardiner
Ms. Gardiner is presently the manager of Investigations with the Association. In 1997 she was
an investigator. In October 1997, complaints to the Association were made by Dr Hulan, and she
was assigned to investigate the complaint. She completed her field work in March 1998 and she
filed her report with the Association in May 1998 resulting in the March, 1999 charges against the
Respondent.
The complaint was triggered by a failure of the Respondent about June 1996 to sell shares in
Pointer Exploration Corp. held in Dr. Hulan’s account and events that occurred thereafter. It also
included allegations by Dr. Hulan that the Respondent invested in a greater percentage of risk stocks
than he had been authorized resulting in financial losses to Dr. Hula, losses he attributed to the
Respondent.
Dr. Hulan became a customer of the Respondent when he opened an account with him at
Richardson in December 1991. He opened a RRSP account with him in October 1993. When the
Respondent moved to Midland Walwyn in October 1996, the accounts were transferred to Midland.
Ms. Gardiner’s investigation included an interview with Dr. Hulan. One of his complaints was
that he had lost $40,000 in 1994 on Golden Resources Ltd. He advised her that he was a
conservative investor and that he had told the Respondent that he did not wish to invest more than
5% to 10% of his capital in risk investments and he had no or little investment knowledge.
Ms. Gardiner produced an accumulation of every transaction (Exhibit 1) in Dr. Hulan’s two accounts
with both Richardson and Midland from 1991 to September 1997. The new account application
form (NAAF’s) with Richardson (dated December 12, 1991) and with Midland (dated December 18
1996) show the following investment objectives:
- 15 1. At Richardson: 50% security, 10% income and 40% growth. The “risk” category was left blank.
2. At Midland Walwyn: 50% income and 50% growth, with 20% speculation.
Ms. Gardiner then carried out a “suitability review” to determine whether the various
transactions conformed to the investment objectives contained in the NAAF’s and concluded that
many did not. She produced a Suitability Review (exhibit 2) and her conclusion was:
“I have interviewed Dr. Hulan. He claims to have been at all times a conservative investor,
and a novice. Dr. Hulan claims that Warren Babb directed the trades in the accounts. Dr.
Hulan maintains that he did not want to risk more than 5% to 10% of his capital in the
accounts. The client’s conservative orientation is confirmed by the NAAF at Richardson.
The NAAF at Midland (indicating 20% speculation) suggests that Dr. Hulan’s appetite for
risk had increased; however, D. Hulan states that he signed the NAAF in blank and that the
numbers were filled in later.
Accepting the evidence of Dr. Hulan, and having reviewed the trading in the accounts, it is
my opinion that Warren Babb engaged in unsuitable trading in the accounts of Dr. Hulan.
My suitability review reveals that the client’s accounts carried risk at a level that
significantly exceeded the client’s objectives”.
We have already referred to Appendix A of the Notice of Charges and which is attached to our
report. This was prepared by Ms. Gardiner and it shows an “Investment Mix” at end of each month
in both accounts, both for the Richardson period (March 1992 to October 1996) and the Midland
period (January 1997 to September 1997). This demonstrates that the percentage of holdings in the
risk or speculative category exceeds what Dr. Hulan states he was prepared to accept beginning from
March 1994 to September 1997 in the RRSP account and from June 1994 to September 1997 in the
margin accounts.
We would add here that the Respondent does not take exception to or disagree with the actual
investment mix and Ms. Gardiner’s characterization of same as set out in the month-by-month bases
- 16 in Appendix A. This is clear from paragraph 3 of the Respondent’s Reply and confirmed by the
Respondent at the hearing.
Ms. Gardiner also pointed out that another risk factor which she identified which was not
consistent with Dr. Hulan’s stated objectives was the use of a margin account. Using a margin
account means borrowing money from the House to finance purchases, and carrying a debit balance
means using leverage and investing with borrowed money. A margin investor profits only if the
investment increases in value more than the cost of borrowing. If the market moves in the opposite
direction, the investor will be responsible for the full amount of the loss.
Ms. Gardiner testified that the investments up to May 1994 were extremely conservative and in
keeping with Dr Hulan’s stated objectives, but starting in May 1994 the investments became risky.
Added to that, the margin became greater, and in fact in June 1994 the margin was at its highest
when riskier stocks were purchased.
On cross-examination, a number of questions were put to Ms. Gardiner by the Respondent’s
counsel. It was suggested that it would not be unusual for an investor to change his investment
objectives over a period of say five years. Her response was that if that happened, the Respondent
should have amended the form (NAAF’s) to reflect the changes to accord with IDA regulations.
Even if Dr. Hulan had approved all of these transactions, then the Respondent should have
conformed to the IDA regulations, and failure to so do would constitute a violation.
On the question of whether or not Dr. Hulan made a profit or loss, Ms. Gardiner says this is not
relevant per se to her or the IDA. Nevertheless she had prepared a Profit/Loss Analysis for both
accounts and it was introduced as Exhibit 3; however, for reasons unnecessary to state, it proved to
be unhelpful, and she during the hearing produced a new Profit/Loss Analysis and it was introduced
as Exhibit 7. It shows that from the period December 1991 to September 1997 Dr. Hulan had
- 17 deposited a net value of $70,287 in his margin account which as of September 1997 the account
value was $59,561 showing a loss of $10,726. On the other hand, the RRSP account had a net value
deposited of $32,240 and as of September 1997 the account value of $74,521 showing a profit of
$42,281 or a 131% growth.
Dr. Howard Winston (Bud) Hulan:
Dr. Hulan has his Doctorate in Biochemistry and is a Professor in Biochemistry at Memorial
University. He was a member of the House of Assembly from 1993 to 1996 and was a Minister of
the Crown in the Fisheries portfolio. He is married with four daughters and was 50 years old in
December 1991 when he met with the Respondent to open an investment account.
He advised that in December 1991 his assets consisting of a mortgage-free home worth
$200,000, a farm house in Jeffreys on the West Coast of the Province, $120,000 in a savings account
with the Royal Bank, an RRSP worth $15,000 and his wife had an RRSP worth $15,000. He had
never taken any courses in investment nor had he had any investment experience except for the
1986-88 period in Nova Scotia when he had an investment account with a Mr. Phipps at Richardson
Greenshields. While there he bought “ put through” shares for an income tax receipt of $7,000. Mr.
Phipps and he devised a very conservative plan and before any transaction occurred he was
consulted and had to give his consent. He closed out his account in 1988 when Mr. Phipps moved on
and put his money in a savings account. He went to the U.S.A. leaving his money in Canada in the
savings account rather than continue investments in the market.
On his return to the Province, he kept his savings in the Royal Bank. The Bank manager advised
him that he should invest his money. This was in May 1990 and he was so scared and mistrustful of
the market that it took him until December 1991 to finally agree. Mr. Newman, Manager of
- 18 Richardson referred him to the Respondent who met with him at his University office. At this
meeting the Respondent recommended his brother, John because the latter was just getting into the
business but the Respondent assured Dr. Hulan that he would oversee the trading. He stayed with
John only until September 1992 following which he dealt exclusively with the Respondent.
The evidence of Dr. Hulan can be dealt with under several headings:
1. Investment Objectives
He told him what he had to invest and states he was very clear in telling the Respondent that
he wanted a very conservative plan. He insisted that he wanted 80% in conservative stock, 15%
in cash and 5% in low to moderate risk. The plan was for the fund to grow to a retirement
package for his wife. He denies discussing with the Respondent the various categories on the
NAAF form dated December 1991, and where the NAAF form states “good” for client’s
investment knowledge, he states that this was not true because he had none.
With respect to the NAAF dated December 18, 1996 (with Midland) and the stated
investment objectives indicating 20% speculative, he claims that this was filled in after he signed
it and he had no input whatever. He claims that this form was sent to him in a blank state and he
signed it February 14, 1997 (even though it is dated December 18, 1996) and sent it to the
Respondent. His objectives were the same as before; he had not changed his conservative
objectives nor lost his fear of speculative stocks since December 1991. He maintained that
denial even though he received a monthly statement of every purchase and sale including the
purchase and holding of speculative stocks from May 1994 onwards, including the purchase of
warrants. Dr. Hulan claims that he never studied or examined carefully any of the statements he
- 19 received. He claims that it was in September 1997 that he first learned he was involved in high
risk when he spoke to another investor.
2. Consultation and Approval
He claims that despite his clear and repeated instructions to the Respondent, the latter never
consulted him or obtained his approval on any purchase or sale except the sale of Pointer shares
in 1996; in that regard, he says he called the Respondent and told him to sell them but the
Respondent failed to do so on a timely basis. Mr. Awad showed him the 1992 trading
transactions in Exhibit 5 and asked if he had had any input. Dr. Hulan stated he had no input
whatsoever and was never consulted in 1992, 1993 or any other time throughout the relationship.
He would call the Respondent after every monthly statement and ask whether the purchases
were a good investment and he would receive positive assurances. He would speak to the
Respondent twice a month; he would have lunch with the Respondent four to five times a year
but they would never discuss shares, the market or his account but only discuss politics, family
and so on. Yes, he complained many times to the Respondent over the years about purchasing
without his approval and the Respondent would assure him each time that it was a good buy and
he didn’t want Dr. Hulan to miss the opportunity by lapse of time in trying to reach him. Dr.
Hulan says he even threatened to call the supervisor but was thwarted or discouraged.
On cross-examination, the Respondent’s counsel showed Dr. Hulan a letter addressed to him
from John Babb (introduced as Exhibit 11) dated May 6, 1992. This letter purports to remind
him of “our conversation on Monday, May 4, we recommended that the money that matured in T
Bills be invested in quality Canadian and U.S. Equities. The amount of cash in your account is
$71,748.41; your wife’s RRSP is $14,666.31". The letter went on to recommend specific share
- 20 purchases. The purchases that were made in May, 1992 and shown on Exhibit 5 were for the
most part those recommended in his letter. Mr. Moores suggested to him this contradicts his
earlier response to IDA Counsel that he was never consulted about trading transactions. Mr.
Moores suggested to him that this letter confirms that there was a prior consultation on these
purchasers and yet he had testified earlier there was no consultation on the 1992 purchases. Dr.
Hulan’s response was that he could not remember this letter or any consultation ever.
On further cross, he was asked: Why, if the Respondent continued to disobey his instructions
not to conduct transactions without prior approval over five and one-half years, didn’t he put a
stop to him. His response was that the Respondent was always very persuasive when he spoke to
him. He promised on a number of occasions he would not do it again; he convinced him every
time.
It was suggested that he must have been satisfied with the Respondent to have followed him
to Midland. He responded that, no, he still trusted him that everything would turn out alright
even on the heels of the dispute over the mistimed sale of Pointer.
- 21 3. Margin Account
With respect to a margin account, Dr. Hulan states that he never knew he had a margin
account and in fact did not know what a margin account meant. Knowing now what a margin
account is, he would never use it.
Mr. Awad showed him a Customer Trading Agreement dated September 14, 1992 and signed
by Dr. Hulan (contained in Exhibit 1). This is an agreement between Richardson and Dr. Hulan
relating to amongst other matters a margin account and the language therein is replete with
“margin”, “debtor-creditor basis”, “indebtedness” “loan” and minimum interest rates to be
charged. Dr. Hulan stated that he never saw it before and he had no intent to open or borrow
money on a margin account nor were there any discussions of a margin account.
Mr. Moores on cross-examination asked him when he received a statement showing a debit
charge for “interest charges”, what did he think it meant. He responded by saying he thought this
was for interest earned on cash in his account. Mr. Moores questioned the witness, that if he
thought that, would he not think it strange that the interest “earned” was deducted from his
account and not added to the balance.
Mr. Moores put it to Dr. Hulan that where did he think all the money he borrowed come from
if it was not borrowed from his margin account. (Exhibit 3 shows from his margin account about
$60,000 borrowed.) Dr. Hulan insists that the only money he borrowed was $5,000 to send to
one of his daughters. Other than that, he knew of no borrowings and the Respondent always
assured him things were fine.
With respect to the purchase of the warrants, he was asked where he thought the money
come from. His response was that the Respondent told him it would be okay. He stated that he
didn’t know where the money came from.
- 22 On continued cross, he was shown a sample copy (Exhibit 8) of monthly statements he
received entitled “Regarding your Canadian Fund Margin Account” and asked why this did not
indicate to him that it was a margin account. His response was that he had not noticed this and
in any case it would be meaningless to him.
4. Anticipated Earnings
Dr Hulan testified that the Respondent had assured him that the investments would earn him
annual earnings of 15% to 20% over the long haul, say over 7 to 8 years.
On cross-examination, it was suggested that the Respondent would testify that no such
assurance or guarantee was given. But in any case, on the assumption that Ms. Gardiner’s
figures were correct on Exhibit 7 (Profit/Loss Analysis of both the Margin and RRSP Accounts
from December 1991 to September 1997), it was suggested that there was a 15% annual earnings
on his capital investment.
Dr. Hulan’s response was twofold:
(1) that one can not use the RRSP earnings because his complaint only dealt with the other
accounts;
(2) that even if the 15% earnings or the combined account is correct, that would only represent
simple interest and not compound interest.
5. Golden Rule
On cross examination, Dr. Hulan was asked if he had, as one of his complaints to the IDA
stated he had, lost $40,000 on Golden Rule Resources Ltd. He stated he did but that he was
incorrect on that; he had earned about $30,000 on Golden Rule.
- 23 6. Pointer Shares
Dr Hulan testified that in May 1996, the Respondent purchased shares in Pointer Exploration
Corp. without any consultation or approval from him. Exhibit 6 was introduced to show periods
of time during which Dr. H.W. Hulan was away from St. John’s or otherwise unavailable for
consultation by the Respondent from January 1992 until September 1997. This document was
prepared by Dr. Hulan from credit cards and receipts to show where he was at the specified dates
and to indicate why he would be unavailable for contact/consultation with the Respondent from
time to time and more particularly when the Pointer shares were purchased. The purchase was
done on May 27, 1996 for a total of $26,390 when he was away at his Farm house in Jeffreys.
He left St. John’s April 20 and didn’t return until sometime in June. On his return he saw his
monthly statement and saw the Pointer transaction. He knew what Pointer was and called the
Respondent and told him to sell as soon as feasible. That was the start of the end. The shares
went up to $4.50 in July and he failed to sell resulting in a loss. The Respondent promised to
write him a cheque to make up the difference. It never was put on his account in August or
September, 1996. He states the agreed upon loss was $45,000.
He testified he was angry and a meeting was arranged with him and his wife at the Delta
Hotel in St. John’s.
Near Christmas in 1996, he asked the Respondent to give him a letter to show or state his
losses. At this point Exhibit 9 was entered which contained four letters to Dr. Hulan from the
Respondent on Midland stationery. These letters came about as a result of his request/demand to
give him confirmation of the debt. When the money was not forthcoming since September 1996,
“I asked him to give me something”.
- 24 So according to the witness, when he got the first letter of December 23, 1996, he states that
the “Pointer debt” was not stated. He means that his trading account should show an additional
$45,000. The second letter dated March 7, 1997 was generated by again receiving a statement
not showing (in his view) the Pointer debt and Dr Hulan called to complain. The third and
fourth letters dated respectively April 8,1997 and September 12, 1997 each failed to add on or
show the $45,000 “Pointer debt”, in his opinion. He says that in January 1997, he and the
Respondent had met with the Chartered Accountant firm of Doanne Raymond and at that
meeting the Respondent agreed to put $45,000 in his account.
Since September 1997 had come with no money paid on the “debt”, Dr. Hulan says he
demanded a meeting with the Respondent’s supervisor; the Respondent, he says, pleaded with
him not to and ultimately around September 26, 1997 the Respondent went to Jeffreys and spoke
with him and his wife. An agreement was reached that he would purchase the trading account
for $150,000 plus $5,000 interest for a total of $155,000. He said he would put a cheque in his
account by Monday and courier a statement to him. On Tuesday, his wife spoke to the
Respondent who said it was being done in Toronto. In any case, Dr. Hulan met with Mr. Terry
Stack, the manager of Midland on October 1,1999, he was put in touch with the appropriate
officials of the Association and laid his complaints.
On cross examination, he said that he did trust and believe that the Respondent would pay
the “Pointer loss” when in August 1996 the Respondent told him he would pay the loss but when
it wasn’t paid all Fall and into December and then he was given a letter dated December 23,
1996 with “false information”, namely that a separate account existed at Midland, he seems to
say he lost faith.
- 25 With respect to Exhibit 9 and the letter of December 23, 1998 and the reference to a
“Midland Walwyn” account of $30,892, he interpreted that as referring to a Midland account of
$30,982, which account Mr. Stack told him never existed.
EVIDENCE OF RESPONDENT
Warren Rendell Babb
The Respondent received a Bachelor of Commerce from Memorial University in 1981. He was
first registered as a representative in the securities industry in January 1984. He worked for
Richardson Greenshields of Canada Ltd. (“Richardson”) from 1983-86; at Walwyn from 1986-91; at
Richardson from 1991-96 and at Midland Walwyn from 1996-97.
He resigned as a registered representative of the securities industry on November 20, 1998. The
evidence of the Respondent can be dealt with under several headings:
1. Re Charge 5 (failure to sell Pointer)
He admits his failure to sell Pointer on a timely basis in 1996 as per the discussions between
him and Dr. Hulan and he ultimately paid him $45,000 representing the ultimately agreed upon
loss.
He is emphatic however that Dr. Hulan approved the purchase of Pointer stock; that he was
very familiar with Pointer since the company was exploring in an area close to Jeffreys. Dr.
Hulan had been concerned at the time that they were not purchasing enough shares.
With respect to his failure to sell Pointer when he should have, he states that he forgot and
that was his error and for which he immediately accepted responsibility to compensate, and there
- 26 was a resulting disagreement on the amount of loss but this was ultimately resolved and he paid
Dr. Hulan.
2. Re Charge 6 (failure to inform Richardson)
The Respondent admits that he failed to advise Richardson Greenshields.
3. Re Charge 7 (failure to inform Midland)
The Respondent admits that he failed to advise Midland Walwyn.
4. Re Charge 8 (unauthorized correspondence misquoting value)
The Respondent admits writing the four letters on Midland stationery contained in Exhibit 9
and admits that his employer, Midland did not authorize them. He admits that there was a
misquoting of the value of Dr. Hulan’s trading account.
In that regard he reviewed the background for his writing the four letters.
Having met with the solicitors and accountants and Dr. Hulan, he and Dr. Hulan agreed in
August 1996 that the loss was $30,982. He told Dr. Hulan that he would deposit this amount in
his account, but Dr. Hulan kept changing the figures for “interest”.
With respect to the first letter of December 23, 1996, the last lines reads “Midland Walwyn
Inc. $30,982" This was to indicate a special account with the settlement figure agreed to in
August 1996.
With respect to the second letter dated March 7, 1997 and the stated nature of the trading
account (versus RRSP account) the value of $98,868 included the $45,000 amended settlement
figure (up from $30,982). He said that he did it to provide “comfort” to Dr Hulan. Even though
the trading account was in fact about $53,000, by adding on the $45,000 it now read as $98,868.
- 27 The third and fourth letters dated respectively April 8, 1997 and September 12, 1997
followed a similar mind pattern of adding the $45,000 to the actual amount in the trading
discount.
With respect to Dr. Hulan’s evidence that he believed that a separate account had actually
been set up and the money deposited to it, he insisted that Dr. Hulan knew that no money had
been paid in but that he had personally agreed to pay him the additional $45,000 on the “Pointer
loss”; and that the letters were only intended to provide comfort to Dr Hulan.
On cross-examination in response to questions by Mr. Awad, the Respondent confirmed that
he was not permitted to promise to pay Dr. Hulan on the “Pointer loss” without the authorization
of his Firm; Mr. Awad suggested that the reason he failed to inform both managers of the
“Pointer claim” was to keep it hidden. The Respondent said his failure to do so was in part
because his partners had no responsibility for his error, and he felt he could settle the matter
between him and Dr. Hulan.
With respect to the four letters he wrote Dr. Hulan (Exhibit 11), he admits that these letters
misquoted the value of Dr. Hulan’s account and would lead a reader to believe that the money
stated therein was in the account of Midlands; however, he maintains that Hulan knew that the
money was not in the account.
Mr. Awad suggested that the four letters (Exhibit 11) and the Respondent’s conduct were
intended to keep the lid on, to prevent the two managers from finding out about the “Pointer
loss”.
Mr. Award suggested to the Respondent that he kept stringing his client along, providing
inducements to Dr Hulan so he wouldn’t go to the manager.
- 28 The Respondent’s response was that he put no pressure on Dr. Hulan not to go to the
managers; the four letters were only comfort letters to Dr. Hulan, they were demonstrably
inaccurate and Dr. Hulan could have blown the lid earlier if he wanted.
When Dr. Hulan came to St. John’s to meet with Mr. Stack, the Respondent says he set up
the meeting and also tried to reach his compliance officer to report the matter.
5. Re Charges 2, 3, 4 (unsuitable trading and failure to “know the client”)
When the Respondent and his brother, John, met with Dr. Hulan in December 1991, the latter
seemed to speak knowingly about the market and investments. He spoke about his experience in
Nova Scotia with Pudco. He thought he was a sophisticated investor. The Respondent filled in
the N.A.A.F. as 50% security, 10% income and 40% growth; he left the “risk” category blank.
During the first year the Respondent says he kept the account in cash because he did not like
the market. Dr. Hulan kept calling the office dissatisfied with the performance of his account.
The Respondent referred to the letter dated May 6, 1992 (Exhibit 11) as confirming that was
consulted and he approved the purchases recommended, which purchases were made as one can
see in Exhibit 5. Dr. Hulan always had knowledge beforehand of the trades and approved them;
the Respondent would send him research material. The Respondent testified that about mid1994, Dr. Hulan again demanded higher returns. Dr. Hulan called him quite a number of times
asking him to buy specified shares. This was the time he changed his portfolio and wanted to
become more aggressive in the market place. The Respondent recalls Dr. Hulan attending a
seminar given locally by Joseph Shacter who was strongly recommending Golden Rule and the
bill warrants. Dr. Hulan was excited and confident and told him to purchase both, which the
- 29 Respondent did in 1994. (It should be noted here that Dr Hulan testified and denied attending
this or any seminar.)
The Respondent is satisfied that he knew his client and his investment objectives and that
from mid-1994 on, Dr. Hulan wanted increasing higher returns and become more aggressive; the
Respondent advised him that to hope to get higher returns one has to invest in riskier stock. He
was aware of what warrants were and appreciated risk stock as well such as Golden Rule and
was aggressive in suggested purchases.
The Respondent admits that he should have amended the NAAF form in Dr. Hulan’s file to
reflect the changed objectives but he just didn’t do it.
The Respondent testified that everything was just fine between Dr. Hulan and him until he
failed to sell Pointer on a timely basis.
With respect to the investment objectives of Dr. Hulan, he did not distinguish between his
two accounts; they were the same for both accounts.
The assertion by Dr. Hulan, with respect to the NAAF dated December 18, 1996 that it was
not signed until February 14, 1997 and signed in blank, the Respondent states is untrue and
ridiculous. In any case he did not fill it in but someone from Midland did.
With respect to Dr. Hulan’s testimony with respect to offers by the Respondent to write a
cheque to Dr. Hulan, the Respondent states that he knows one day in his office he told him he
would give him cheque for market value of his trading account plus an amount for the Pointer
compensation.
The Respondent states that Dr. Hulan never threatened to or told him he was going to the
supervisor until the time he went there.
- 30 On cross-examination, the Respondent states that the purchase of Pointer may have been
brought up by him. He probably advised Dr. Hulan to purchase it - but Dr. Hulan was very
much familiar with it.
With respect to the four letters, Mr. Awad asked the Respondent whether he thought his
conduct violated the Association’s Code of Ethics, which in The Conduct and Practices
Handbook, p. 10, A reads:
“Reasonable steps should be taken to ensure that all information given to the client
regarding his or her existing portfolio is complete and accurate”?
The Respondent agrees that the information wasn’t accurate but Dr. Hulan knew that the
money was not in the account.
In response to Mr. Award, the Respondent thought in 1991 and still thinks he was correct in
concluding that Dr Hulan was a sophisticated investor. He spoke knowingly about his 1987
losses in Nova Scotia and he understood why; he understood monetary policy; he spoke
knowingly of the market. The meeting was one hour.
Mr. Awad asked whether he thought one hour was sufficient to allow the Respondent to
conclude he was a sophisticated investor. The Respondent responded in turn that the IDA
investigator only spoke to Dr. Hulan one hour to reach her own conclusions.
The Respondent emphasized that we’re dealing with a former minister of the Crown
responsible for a 750 million dollar budget.
The Respondent repeated that Hulan was fully aware of his position in the market. He knew
whether the shares were in a blue chip company and what was risky. He understood the risk of
each investment.
- 31 With respect to consultation and approval of all shares, warrants and swaps, the Respondent
repeated with more detail the consultations and information provided to Dr. Hulan and that he
was aware of the risk involved.
The Respondent was asked whether he complied with The Conduct and Practices Handbook
P. (XIV) - A (I)(III) and answered in the affirmative.
6. Margin Account
The Respondent testified that the margin account was opened in September 1992 because Dr.
Hulan wanted to borrow $5,000 for his daughter. Dr. Hulan, he says, understood what a margin
account was and its purposes; he fully explained it to him and Dr. Hulan knew when the margin
account was to be used on every occasion.
7. Anticipated Earnings
The Respondent denies that he, either in his first meeting or any other time, guaranteed or
assured Dr. Hulan an annual return of 15% to 20%. In fact, he kept the account in cash and T bills
most of the first year so one could not achieve a 15% to 20% with this type of investment, he
suggested.
He claims that he never heard of this assertion until a proceeding in a civil proceeding.
In any case, the Respondent asserts that, as it happened, Dr. Hulan received approximately
15% annually on his investment.
On cross examination, the Respondent repeated his denial of any such guarantee; in fact he
would never promise this return.
- 32 ANALYSIS BY PANEL
1. Onus of Proof
The Association accepts that the burden of proof is on the Association. The question of what
standard is required in disciplinary proceedings where registration of a member is at risk was
discussed in Re George, (1999), 22 Ontario Securities Commission Bulletin at page 717. The
Commission refers to a number of decisions:
(1) In the Matter of Frederick Elliot Rosen, (1991), 14 OSCB 1091 at page 1093.
“The burden of proof - is clearly not the criminal standard of proof beyond a
reasonable doubt, but rather the civil standard of proof upon the balance of
probabilities. It is nonetheless, one of the highest standards to be found outside
the criminal courts. As was succinctly stated by Reid, J. in the Divisional
Court Decision in Re Coates et al v. Registrar of Motor Vehicle Dealers and
Salesman (1988), 65 O.R. (2d) 526 at p. 536:
“This message is clear and has been consistently adopted by this court.
Nothing short of clear and convincing proof based upon cogent evidence
will justify an administrative tribunal in revoking a license to practice
medicine or to gain a livelihood in business.”
(2) Reid, J. in the Coates case went on to note that “the concept that the standard of proof rises
with the gravity of the allegation and seriousness of the consequences” had been recently
affirmed by the Supreme Court of Canada in R. v. Oakes, (1986), 1 S.C.R. 103, 26 D.L.R.
(4th) 200, 24 C.C.C. (3d) 321
(3) Re Bernstein and College of Physicians and Surgeons of Ontario (1977), 15 O.R. (2d) 447 at
pp. 485-486, Garrett, J. in the Divisional Court stated:
- 33 “I hold that the degree of proof required in disciplinary matters of this kind
is that the proof must be clear and convincing and based upon cogent
evidence which is accepted by the tribunal. I agree with Mr. Justice
Schroeder that the burden of proof is to establish the guilt of the doctor
charged by a fair and reasonable preponderance of credible testimony, the
tribunal of fact being entitled to act upon the balance of probabilities. I
think, however, that the seriousness of the charge is to be considered by the
tribunal in its approach to the care it must take in deciding a case which
might in fact amount to a sentence of professional death against a doctor.”
In the same decision at pp.470-1, O’Leary, J. said:
“In my view discipline committees whose powers are such that their
decisions can destroy a man’s or woman’s professional life are entitled to
more guidance from the Courts than the simple expression that “they are
entitled to act on the balance of probabilities” ... The important thing to
remember is that in civil cases there is no precise formula as to the standard
of proof required to establish a fact.
In all cases, before reaching a conclusion of fact, the tribunal must be
reasonably satisfied that the fact occurred, and whether the tribunal is so
satisfied will depend on the totality of the circumstances including the
nature and consequences of the fact or facts to be proved, the seriousness of
an allegation made, and the gravity of the consequences that will flow from
a particular finding. The grave charge against Dr. Bernstein could not be
established to the reasonable satisfaction of the Committee by fragile or
suspect testimony. The evidence to establish the charge had to be of such
quality and quantity as to lead the committee acting with care and caution
to the fair and reasonable conclusion that he was guilty of the charge.”
(4) Re Gregory McGroarty, Gordon Cooper et al (1990), 13 O.S.C.B. 3887, at pp. 3935-6, ViceChairman Salter stated:
“While the point was not discussed by counsel, we think it appropriate to
note that the standard of proof in Commission proceedings will vary with
their subject matter. In some cases a simple preponderance of probability
will suffice. In disciplinary proceedings against registrants the governing
standard of proof is that proclaimed by the Divisional Court in Re
Bernstein and College of Physicians and Surgeons of Ontario (1977), 15
O.R. (2d) 447 and further discussed in Re Coates et al and Registrar of
Motor Vehicle Dealers and Salesmen (1988) 65 O.R. (2d) 526. In the latter
decision the Court, after reviewing and confirming Bernstein, referred with
- 34 approval to the decision of the Supreme Court of Canada in R. v. Oakes
(1986) 1 S.C.R. 103 for the principle that the standard of proof rises with
the gravity of the allegation and the seriousness of the consequences to the
respondent.
In this case, Mr. Awad argues that we are dealing with four charges of conduct
unbecoming and three charges of failed due diligence - charges that are not the high crimes
of the brokerage industry such as theft or misappropriation. We are definitely in the range
where a finding of guilt would be a black mark but would not be a sentence of death
professionally. Therefore, the standard of proof should not be at the high end but near that of
civil standard of proof i.e. upon the balance of probabilities.
Mr. Moores on the other hand argues that we should consider where Mr. Babb lives and
has worked as a registered representative. Given that this jurisdiction is in fact a small
community, a finding of guilt on these charges would in effect have the effect of preventing
him from regaining employment in the industry.
It is our opinion that although Mr. Babb’s registration is not directly at risk in these
proceedings, any attempt by him to re-register in this or other jurisdictions would be in
jeopardy and any employment in this jurisdiction would definitely be at risk. We believe
that the Rosen burden of proof should apply
2. Charges
The Association withdrew charge 1 in May 1999. That leaves three charges of failing to use
due diligence to ensure suitability. This lack of due diligence is outlined in Charges 2, 3 and 4.
There are four charges of conduct unbecoming and these are outlined in charges 5, 6, 7 and
8.
- 35 -
(1) Unsuitability Charges: 2, 3 4
At the end of the evidence, Mr. Awad amended Charge 2 to narrow the offence period
from March 1992 and October 1996 to May 1994 and October 1996.
Essentially, charges 2 and 4 allege that between May 1994 to October 1996 while at
Richardson and between December 1996 and September 1997 while at Midlands, the
Respondent failed to use due diligence to ensure the recommendations for the investment
accounts of Dr. Hulan were appropriate for him and in keeping with Dr. Hulan’s objectives
contrary to Regulation 1300.1(c) of the Association.
Charge 3 alleges that between December 1996 and September 1997, the Respondent
failed to use due diligence to learn the investment objectives of Dr. Hulan, contrary to
Regulation 1300.1(a) of the Association.
Regulation 1300, in part states:
“Each member shall use due diligence:
(a)
to learn the essential facts relative to every customer and to every order or
account accepted;
(c)
to ensure that recommendations for any account are appropriate for the
client and in keeping with his or her investment objectives.”
The Conduct and Practices Handbook for Security Industry Professions provides at page
XIII:
“Suitability
The focus of the RR’s daily business practices hinges on the all-important
matter of suitability of investment recommendations. The RR must make a
concerted effort to understand the financial and personal status and
aspirations of the client. Thus, the RR will invest the client’s funds in
- 36 securities which reflect, to the best knowledge of the RR, these criteria. On
the best efforts basis, the RR will ascertain all relevant information from
the client, such as:
i)
the client’s awareness of risk and return;
ii)
the time horizon for the client investments;
iii) the client’s net worth.
Based on these, and other relevant factors, the RR can objectively decide
on the suitability of investments vis-a-vis the individual client, and thereby
provide superior service to the client. The RR, having provided sound
advice, will therefore be above reproach for potentially unsuitable
purchases and sales of securities for a client if the client does not heed the
RR’s advice.”
The Code of Ethics and Conduct (P. XIV of the Handbook) states in part:
“A. The Registered Representative must display absolute trustworthiness since
the client’s interests must be the foremost consideration in all business
dealings.
I.
Know your client. A diligent and business-like effort must be made
to learn the essential and current financial and personal
circumstances and investment objectives of each client. Relevant
documentation should reflect material information about and any
material changes to the client’s status.
III.
A client entering unsolicited orders which appear unsuitable based
on the client information supplied should receive appropriate
cautionary advice.
V.
Reasonable steps should be taken to ensure that all information
given to the client regarding his or her existing portfolio is complete
and accurate.”
The Code of Ethics and Conduct (P. 3 of the Handbook) states in part:
“STANDARD A
A.
Absolute Trustworthiness
The Registered Representative must display absolute trustworthiness since
the client’s interests must be the foremost consideration in all business
dealings:
- 37 I.
Know Your Client:
A diligent and business-like effort must be made to learn the essential
and current financial and personal circumstances and investment
objectives of each client. Relevant documentation should reflect
material information about and any material changes to the client’s
status.
The Code of Ethics and Conduct (P. 3 of the Handbook) states in part:
“Procedure for Compliance
RRs must act to document any material changes to their clients’ situation. This
includes changes to net worth, income, employment, objectives and marital status.
As well, it should include ownership of the account For example, if a client wants
to change his or her personal account to that of a joint account with his or her
spouse, the change should be fully documented on the New Client Application
Form and a Joint Account Agreement signed by both parties should be obtained. It
is not always sufficient to Know Your Client. An RR must also be able to provide
that he or she does recognize the importance of the Know Your Client rule and does
apply it.”
The Panel was impressed with Mr. Gardiner’s investigation leading to the compilation of the
suitability Review (Exhibit 2). Her evidence in this regard is stated at pp. 14-17 of the Panels’
Decision (for reference purposes) and the Panel is satisfied that she has clearly established (for
the purposes of this proceeding only, given the fact that the Respondent agrees with the
Investment mix contained in Appendix A) that:
“Dr. Hulan’s accounts carried risk that significantly exceeded Dr. Hulan’s investment
objectives as stated in the NAAF dated December 1991 and Dr. Hulan’s statements and
testimony as to his expressed investment objectives to the Respondent.”
The Respondent concedes that point. However, that is not the end of the issue. The issue is:
Did Dr. Hulan change his investment objectives and communicate that to the
Respondent?
- 38 In that regard, we have the contradictory evidence of Dr. Hulan and the Respondent. Dr.
Hulan testified that his investment objectives never changed. The Respondent claims that they
had and were clearly communicated to him. Ms. Gardiner prepared her suitability review on the
assertion of Dr. Hulan that his objectives only allowed 5% to 10% risk stocks and he never
changed this objective. She doesn’t claim to know or even claim to have a right to opine on
what Dr. Hulan communicated to the Respondent with respect to his objectives.
In that regard, the Association has presented:
(1) the lack of procedural compliances by the Respondent.
(2) the evidence of Dr. Hulan;
With respect to the first, it is clear that the Respondent failed to comply with the
requirements of not changing any NAAF document or making any written notations in Dr.
Hulan’s file to reflect that changes were made. It is a requirement that he admittedly did not
follow. This is a substantive and procedural requirement. One purpose of the requirement is to
provide probative corroboration in a case such as this: to document a change in plans by an
investor. Counsel for the Respondent quite correctly submits that the Respondent is not charged
with any violation as a result of this failure.
Counsel for the IDA does not disagree but submits that this obligation to complete an update
and a new NAAF form is an important and prominent items in the Conduct and Practices
Handbook; failure by the Respondent demonstrates tendencies of a laxness in conforming to the
Regulations, policies and procedures and therefore goes to demonstrate a lack of due diligence
generally by the Respondent. This, he suggests, has probative value in determining whether the
- 39 Respondent took sufficient care or used due diligence in ascertaining the client’s investment
goals from time to time and ensuring that the transactions were appropriate and in keeping with
the client’s objectives.
We find that the Respondent’s failure has probative value, the weight of which the Panel
shall deal with later.
In the final analysis, the Panel has to be satisfied that the Association has met its onus of
proof on the evidence.
It ultimately comes down in large part to the evidence of Dr. Hulan and the Respondent and
to the credibility which the Panel ascribes to each. A summary of their evidence is given at
pp.17-31 of this Decision and need not be repeated. The Panel reviews below the evidence given
under the various headings to determine credibility.
(A).
Analysis of Evidence on Investment Objectives
Dr. Hulan insisted that his objectives from beginning to end never changed. They were 80%
in conservative stock, 15% in cash and 5% in low to moderate risk. This is not what the NAAF
form of December, 1991, contains; the latter states they are 50% security, 10% income and 40%
growth with risk blank. Mr. Babb’s counsel also reminded the Panel that this is not what Dr.
Hulan told Ms. Gardner during the 1996 complaint interview and these objectives appeared for
the first time when Dr. Hulan testified at the Hearings. However, in fairness, he did tell Ms.
Gardner that he had made it clear to the Respondent that he did not want to risk more than 5% to
10% of his capital in the accounts. This conservative orientation is confirmed by the NAAF at
- 40 Richardson. Why, however would the Respondent have written in the NAAF form more
conservative objectives than what Dr. Hulan told him?
With respect to the Midland NAAF, Dr. Hulan says that the 50% income and 50% growth
with 20% speculation was put in after he signed it and it did not reflect his investment
objectives. Even though it is dated December 18, 1996 he testified that it was sent to him in
blank and he signed it on February 14th, 1997. One has to question whether a man, who portrays
himself as a very cautious and conservative man when it comes to his capital, would sign this
form in blank and especially at a time when he said he had lost trust in the Respondent. When
speaking about the Pointer dispute, Dr. Hulan was asked by Mr. Moores whether he ever
disbelieved Mr. Babb and he replied that: when Mr. Babb told him in August 1996 that he would
pay him the Pointer loss and it never showed up in his account by December and then he gave
him a letter with “false information”, then he lost all trust in him. He was referring to the letter
dated December 23rd, 1996 (Exhibit 19) from Mr. Babb to Dr. Hulan showing a separate account
at Midland.
In any case, the Respondent states, that with respect to the allegation that the form was
signed in blank in February, 1997, this allegation is untrue and ridiculous and in any case he did
not fill it in; someone at Midland did.
On the question of credibility on the investment objectives, the Panel has been asked to
consider the big question. We are dealing with a very intelligent man with an inquiring mind
who admittedly is concerned about his savings. Everyone agrees that from April - May 1994
trading in his accounts showed holdings in the risk category far beyond 10% and this continued
unabated until September 1997. He received monthly statements clearly outlining each
transaction of sale, purchase or swap from one account to the other and yet he claims that he
- 41 never knew or realized that his holdings were somewhat substantially into risk. One would not
have to be a sophisticated or knowledgeable investor to know that many of the stocks were not
blue chip investments. Dr. Hulan’s response is that he never went through his monthly
statements on a “line by line” basis since Mr. Babb told him everything was “ok” and he trusted
him.
With respect to the year end statement or trading summary, he was asked if he looked at that
to see how his accounts performed for the year, and he answered that he did not. One would
have thought that the year end statement would be essential material for filing income tax
returns.
The Panel agrees that these points raise legitimate concerns about credibility especially given
the evidence of Mr. Babb who testified that he and Dr. Hulan went over all these trades, sent him
research material on the stacks and discussed the risks involved. He testified that about mid
1994, Dr. Hulan who was then involved in Government, changed his investment objectives and
wanted to go more into risk investments to get a higher return.
(B).
Analysis of Evidence on Consultation and Approval
Dr. Hulan’s position is that the Respondent never once consulted him or asked his approval
on any transaction in about six years. He claims this was in contravention of specific
instructions to Mr. Babb right from the beginning and in which he kept repeating to Mr. Babb
from 1992 to 1997. At one time he says that he even threatened to go to his supervisor over the
issue.
- 42 Mr. Moores suggested to the Panel that this cannot be credible. Mr. Babb kept disobeying
clear directions and reminders from Dr. Hulan which he claimed to be so important to him. He
wanted the same arrangement that he enjoyed with Mr. Phipps in Nova Scotia earlier; yet he
never put a stop to these alleged blatant failures of Mr. Babb by just taking the account
elsewhere. He says he didn’t because Mr. Babb always persuaded him it was for the best and he
trusted him.
Mr. Moores questioned him again on this very point and suggested why did he follow Mr.
Babb when he transferred to Midland. Dr. Hulan’s answer was that he trusted him. However, in
his evidence at another point Dr. Hulan had testified that he had lost his trust and belief in Mr.
Babb by December 1996 when he had not yet received his Pointer settlement and when he
received the December 23, 1996 letter (Exhibit 11) with false information.
In furtherance of his position that he was never consulted, Dr. Hulan was referred to the 1992
transactions as seen in Exhibit 5. This was on direct examination. He was led through quite a
number of these 1992 transactions and he confirmed for the record that he was never consulted
before these purchasers. However on cross-examination Mr. Hulan was shown a letter to him
from John Babb (Exhibit 11). This letter purports to remind him of “our conversation on
Monday, May 4. We recommended that the money that matured in T Bills be invested in quality
Canadian and U.S. Equities. The amount of cash in your account is $71,748.40; your wife’s
RRSP is $14,666.31.” The letter went on to recommend specific share purchases. It is quite
clear that the purchases that were made in May 1992 and shown on Exhibit 5 were for the most
part those recommended in his letter. Mr. Moores suggested to the Panel that this is a complete
contradiction to his earlier response to IDA counsel that he was never consulted about trading
transactions and in particular not in 1992. In argument, Mr. Awad quite correctly stated that
- 43 these transactions in 1992 were not in the risk category; however, the letter provides a
documentary objective evidence that contradicts Dr. Hulan’s emphatic testimony that he was
never ever consulted by Mr. Babb before any transactions.
(C).
Analysis of Evidence on Margin Account
Dr. Hulan testified that he never knew he had a margin account and never knew until quite
recently what a margin account was and knowing now what it is, he would never use one.
Yet the evidence established that he signed a Customer Trading Agreement dated September
14, 1992 (contained in Exhibit 1). This agreement with Richardson relates to, amongst other
things, a margin account and the language is clear that it is a margin account and the nature of a
margin account. It refers to an arrangement whereby he will be borrowing money (“loan”) at
stated minimum rates, that a “debtor-creditor” relationship is being created. It is suggested that
it just is not credible for Dr. Hulan to say he doesn’t remember seeing it before and that he had
no intent to borrow money nor were there any discussions of a margin account.
It is suggested that the fact that he borrowed money on this account to pay $5000 to one of
his children indicates he knew what the margin account meant.
Mr. Moores suggested that it is not credible for Dr. Hulan to maintain he didn’t know that he
was borrowing money from his margin account to purchase warrants and stock given the
significant amount of money borrowed and all these borrowings were clearly shown on the
monthly statements.
The monthly statements also showed debit charges for “interest charged”. Dr. Hulan stated
that he thought that this was for interest earned on his account.
- 44 It is suggested that it is incredible that Dr. Hulan could maintain that interest charges
deducted from his account could be interpreted as credit for interest earned on cash in his
account.
It is again suggested that it is not credible that Dr. Hulan did not know he was using a margin
account when he received a monthly statement from October 1992 until September 1997 entitled
“Regarding your Canadian Fund Margin Account.”
(D).
Review of Evidence on Anticipated Earnings
The Panel states for the record that whether or not Dr. Hulan made or lost money on his
accounts is not a concern of the IDA or the Panel. However, the evidence presented in that
regard may be relevant. It is suggested by Respondent’s Counsel that it is relevant.
Dr. Hulan testified that the Respondent had assured him an annual profit of 15% to 20% over
the long haul which is adamantly denied by the Respondent.
Ms. Gardner prepared a Profit/Loss Analysis of both the Margin and RRSP accounts from
December 1991 to September 1997 (Exhibit 7). This shows that there was a loss of $10,726.00
in the margin account on a net value deposited of $70,287.00. However, it shows a net profit of
$42,281.00 in the RRSP account on a net value deposited of $32,240.00.
When it was suggested by Counsel for Mr. Babb that these figures together with the
settlement in the Pointer dispute indicated that Dr. Hulan received a 15% annual earning on his
capital investment Dr. Hulan’s position was that he was not complaining about his RRSP
account and argued that one cannot combine them for this purpose since both were separate
accounts. He refused to acknowledge the legitimacy of looking at the performance of both
- 45 accounts to determine how his investments performed even notwithstanding the constant
intermingling of the two accounts. Dr. Hulan refused to acknowledge that these accounts were
continuously intermingled with swaps made for tax purposes. The Respondent’s Counsel
suggests that Dr. Hulan had to be aware of these swaps which were shown on his monthly
statements and it would be incredible to suggest that he would not be specifically consulted on
such an important matter.
(E).
Review of Evidence on Pointer Trade
Dr. Hulan testified that the Respondent purchased shares in Pointer without any consultation
or approval from him. The shares were purchased on April 27, 1996 for $26,390.00 and as
corroboration that he was not consulted Dr. Hulan prepared and introduced Exhibit 6. This
document was prepared by Dr. Hulan to show where he was at the specified dates and to
indicated why he would be unavailable for contact/consultation with the Respondent from time
to time. In particular, it indicates that around the period the Pointer shares were purchased he
was unavailable for contact. It shows that he was in Kentville, Nova Scotia from April 1st to
April 16th, 1996 and at his farm home in Jeffries from April 17, 1996 to June 15, 1996 where he
had no phone.
The Respondent testified that he discussed this purchase with Dr. Hulan who was very
familiar with Pointer. Pointer was a company exploring for oil near Jeffries and it was a very
speculative stock with a heavy local play. He said that during the time of the Pointer trade Mrs.
Hulan called him from Jeffries before he purchased it and was very happy to purchase it. At the
time, Dr. Hulan even wondered whether he was purchasing enough shares.
- 46 With respect to Dr. Hulan’s assertion that he would not be available for contact during the
Pointer purchase because he had no phone at the Farm, the Respondent’s position and that of his
counsel was that it was naive to suggest that Dr. Hulan would not be able to obtain use of a
phone in the area to discuss trades. It was common for Dr. Hulan to call him from various places
including the U.S.A. He is adamant that Dr. Hulan approved the purchase of Pointer before
hand.
The Respondent’s Counsel submitted to the Board that Dr. Hulan’s unreasonableness with
respect to the interpretation of the four letters from Babb to Hulan contained in Exhibit 11
should not go unnoticed. With respect to the first letter dated December 23, 1996 it states the
operating account at Midland’s to be $50,038.12 and the Midland account to be $30,982.00. The
$30,982.00 according to Mr. Babb represented the figure they had in August, 1996 agreed upon
as the Pointer Loss.
Then in January 1997 at a meeting Mr. Babb agreed to settle for $45,000.00. In the next
letter dated March 7th, 1997 he added the figure of $45,000.00 into the actual operating figure
(which had been $50,038.12 in the December 23, 1996 letter) to make it approximately
$98,000.00. Yet Dr. Hulan insisted that this did not include the $45,000.00 settlement figure. In
other words, it was suggested that he was prepared to intentionally turn a blind eye to the fact
that his trading account had suddenly swelled from the $50,000.00 range to $98,000.00 without
the inclusion of the $45,000.00.
CONCLUSION (Charges 2, 3 and 4)
- 47 With respect to Charges 2, 3 and 4, the central issue is whether or not Dr. Hulan changed his
investment objectives in 1994. If he did it would be a very material change and the Regulations,
and Code of Ethics mandate that all relevant documentation in a client’s file should reflect the
investment objectives of the client and any material changes to these objectives. This is not only
a procedural requirement but a substantive one. It has a number of purposes. One of these
purposes is to ensure that proper supervision of the account can be carried out by the manager of
the branch. Another would be to enable the RR to provide corroboration in a case such as this
when he insists that the client changed his objectives. Failure by the RR to amend the NAAF or
otherwise provide written documentation in the file could lead to the inference that the client had
not changed his objectives.
This would be analogous to a case where it is established that the usual practice of a Doctor
is to document relevant and important medical procedures. In the absence of documentation, one
may justifiably argue that the medical procedure in issue was not carried out.
However, other evidence may be introduced to show that in fact the medical procedure was
carried out and at the end of the day the tribunal must weigh all of the evidence before reaching a
conclusion.
In this particular case, both parties agree that the issue for the most part depends on the
credibility of two witnesses: Dr. Hulan and Mr. Babb, the Respondent. Their evidence is at
complete odds.
In the final analysis, the Panel has grave concern about the many inconsistencies,
contradictions and patent improbabilities of Dr. Hulan’s evidence as already noted.
- 48 On that basis, the Panel finds that it does not have clear and convincing proof based upon
cogent evidence to contradict the evidence of the Respondent that Dr. Hulan did change his
objectives. Indeed, the evidence of Dr. Hulan is found to be so unreliable in most material
particulars that the Panel finds that even, on the civil standard of balance of probabilities, the
onus of proof has not been established.
The Panel therefore concludes that the essentials of the charges are not made out, and
dismisses charges 2, 3 and 4.
CONCLUSION (Charge 5)
This charge alleges that the Respondent “engaged in business conduct or practice which is
unbecoming or detrimental to the public interest by failing to follow instructions of a client, Dr.
H.W. Hulan, to sell shares in Pointer Exploration Corp. held in the client’s account contrary to
By Law No. 29.1 of the Association.
By Law 29.1 reads in part:
“Members and each partner, director, officer, sales manager, branch
manager, assistant or co-branch manager, registered representative,
investment representative and employee of a Member (i) shall observe high
standards of ethics and conduct in the transaction of their business, (ii)
shall not engage in any business conduct or practice which is unbecoming
or detrimental to the public interest, and (iii) shall be of such character and
business repute and have such experience and training as is consistent with
the standards described in clauses (i) and (ii) or as may be prescribed by the
Board of Directors.
For the purposes of disciplinary proceedings pursuant to the By-laws, each
Member shall be responsible for all acts and omissions of each partner,
- 49 director, officer, sales manager, branch manager, assistant or co-branch
manager, registered representative, investment representative and employee
of a member; and each of the foregoing individuals shall comply with all
By-laws, Regulations and Policies required to be complied with by the
Member”
The evidence is quite brief. Dr. Hulan testified that he instructed the Respondent to sell
10,000 shares of Pointer Exploration Corp. held in his margin account and the Respondent failed
to execute on a timely basis.
The Respondent denies that Dr. Hulan instructed him to sell the shares but that it was at his
suggestion. However, the Respondent admits he failed to execute the trade as agreed upon but it
was as a result of neglect, or error and not an intentional disregard of an instruction by Dr.
Hulan.
The Panels was referred to a case involving Colin William Bartlett reported in IDA Bulletin
No. 2310, September 30th, 1996. This was a case of a settlement agreement accepted by the
Manitoba District Council wherein Mr. Bartlett was fined for failing to execute transactions by
two separate clients and then falsified a trade confirmation to deceive the clients.
The Panel has no evidence to suggest that the failure of the Respondent was due to anything
but an error on his part. This may amount to negligence resulting in damages in a civil suit but
does not constitute conduct unbecoming within Regulation 29.1. The law is quite clear that
negligence by a professional, where it may give rise to a civil claim in damages, does not per se
amount to conduct unbecoming.
The Panel dismisses Charge No. 5.
CONCLUSION (Charge 6, 7 and 8)
- 50 -
With respect to Charge 6 and 7, the Respondent admits that he failed to advise his Employer
Richardson of his failure to execute the trade in Pointer as per his client’s wishes and the dispute
he was having with Dr. Hulan regarding compensation. The dispute had been ongoing since
August 1996. Similarly, the Respondent admits that he failed to advise and disclose to Midland
the unresolved claim and dispute when he transferred to Midland in December, 1996. Indeed, he
continued to conceal it from Midland until on October 1st, 1997, Dr. Hulan met with the manager
of Midland to air his complaints.
The Respondent argues in his defence that his motivation was not self interest but an attempt
to protect his partners from exposure to his error and he felt he could rectify the problem without
involving Richardson or Midland.
The Panel indeed finds that his motive was self interest. The Panel does not accept that his
reason was to protect his partners from exposure. If anything the concealment could have
brought greater civil exposure and expense to his employers, in particular Richardsons.
The Panel makes reference to the case involving Peter Frans Denhamer reported in the IDA
Bulletin No. 2349, January 27, 1997. This was a case of a settlement agreement accepted by the
Alberta District Council wherein Mr. Denhamer was fined for failing to report a trade error to
her Branch Manager in a timely manner and failing to advise RBC Dominion of a Complaint
letter from the client respecting same.
The Panel was referred to another case involving Kenneth John Goltfred, reported in IDA
Bulletin No. 2303 September 30th, 1996. This was a case of a settlement agreement accepted by
the Manitoba District Council wherein Mr. Goltfred failed to advise his firm of a trade error and
attempted to rectify the error subsequent to his departure from the Member Firm.
- 51 In both these cases, the conduct was accepted as conduct unbecoming a RR and contrary to
the public interest and in violation of association By-Law 29.1.
In conclusion, the Panel finds that the particulars of Charges 6 and 7 have been proven as per
the Rosen standard and finds that the Respondent engaged in conduct or practice unbecoming a
registered representative and contrary to the public interest contrary to By-Law 29.1 of the
Association.
With respect to Charge 8, the Respondent acknowledges that he sent unauthorized
correspondence to Dr. Hulan which misquoted the value of the client’s account. These are the
four letters contained in Exhibit 9. The Respondent admitted that a reasonable reader of these
letters would have to conclude that these letters misquoted the value of Dr. Hulan’s trading
account at Midland; that it was written on Midland stationary which may or may not have put
Midland to some risk. The Respondent claims that there were given to Dr. Hulan as “comfort”
letters in response to Dr. Hulan’s request to give him something by way of assurance that he
would get this money.
The Panel feels that the Respondent should have provided him with his own personal letter
covenanting to pay the settlement figure. Instead he used Midland stationary to create the fiction
that the money was already paid into Dr. Hulan’s account. The Respondent claims that Dr.
Hulan knew the difference.
The Code of Ethics quoted in The Handbook, Page 3 states:
“A. Absolute Trustworthiness
V. Complete and Accurate Information Relayed to the Client
- 52 Reasonable steps should be taken to ensure that all
information given to the client regarding his or her existing
portfolio is complete and accurate.”
The Panel was referred to the case Re: G.T. Trafford reported in Bulletin No. 1871, March
31, 1992 where the Western Business Conduct Committee of the IDA found the Respondent
guilty of conduct unbecoming by delivering to a customer a portfolio valuation purporting to
show the value of the Customers holdings, which valuation contained material omissions and
misrepresentations.
The Panel finds the Association has proven on the Rosen standard of proof all the essentials
contained in Charge 8 and the Panel therefore finds the Respondent guilty of conduct
unbecoming contrary to By-Law 29.1 of the Association.
PENALTIES
The Panel shall await the wishes of the Parties with respect to submissions on Penalties.
DATED at St. John’s, Newfoundland this 28th day of February, 2000.
________________________
M. FRANCIS O’DEA, Q.C.
________________________
FREDERICK G. DODD
- 53 -
________________________
KEVIN BREEN
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