THE RULES OF THE INVESTMENT INDUSTRY REGULATORY - … › Documents › 2019 ›...
Transcript of THE RULES OF THE INVESTMENT INDUSTRY REGULATORY - … › Documents › 2019 ›...
IN THE MATTER OF:
THE RULES OF THE INVESTMENT INDUSTRY REGULATORY ORGANIZATION OF CANADA AND YONATHAN CHANOCH SHIELDS
STATEMENT OF ALLEGATIONS
Further to a Notice of Hearing dated August 14, 2019, Enforcement Staff make the following
allegations:
PART I – REQUIREMENTS CONTRAVENED
(i) Between February 2016 and February 2018 the Respondent failed to use due
diligence to learn and remain informed of the essential facts relative to certain
clients, contrary to Dealer Member Rule 1300.1(a); and
(ii) Between February 2016 and February 2018, the Respondent failed to ensure
that recommendations were suitable for certain clients, contrary to Dealer
Member Rule 1300.1(q).
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PART II – RELEVANT FACTS AND CONCLUSIONS
Overview
1. Beginning in February 2016, the Respondent, a Registered Representative (“RR”) at R.J.
O’Brien & Associates Canada Inc. (“R.J. O’Brien”) accepted several client referrals from
Shane Dubin (“Dubin”), an IIROC RR employed at the time at Scotia Capital Inc.
(“Scotia”). Dubin was also the Respondent’s client and used his R.J. O’Brien accounts to
engage in high-risk options on futures trading.
2. Dubin was not licensed to trade futures or options on futures. Therefore, Dubin
referred certain of his clients, colleagues, and friends to the Respondent so that they
could employ Dubin’s options on futures trading strategy, which had been profitable for
him.
3. The Respondent accepted the referrals; however, he failed to know these clients: in
some cases, he did not meet or speak to the clients and he did not review or question
the clients’ account opening documents.
4. The Respondent also failed to ensure that Dubin’s options on futures trading was
suitable for these clients. The Respondent largely adopted Dubin’s trading
recommendations for these clients or duplicated the trades made in Dubin’s accounts.
The options on futures trading was not suitable for these clients who had no experience
trading options on futures.
5. In early February 2018, the S&P Index experienced a significant spike in volatility and a
corresponding drop in value that resulted in these clients sustaining significant losses as
a result of the options on futures trading. The Respondent earned commissions of
approximately $54,000 USD as a result of this trading.
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Registration History
6. The Respondent has been a RR since 1995 and has worked at R.J. O’Brien since October
2014.
The Client Referrals and the Strategy
7. The Respondent and Dubin had worked together at Scotia from approximately 2004
until 2010.
8. Beginning in February 2016, the Respondent accepted approximately 18 client referrals
from Dubin, ten of whom are the subject of these allegations (the “Clients”).
9. Dubin had been a futures and options on futures licensed advisor at Scotia until 2016
when the firm discontinued its futures trading business and he forfeited his license.
Shortly thereafter, Dubin contacted the Respondent to advise that he had been trading
an options on futures strategy and wanted to continue to do so with the Respondent.
10. In 2016, the Respondent opened both a personal and corporate account for Dubin at
R.J. O’Brien in which Dubin implemented a high-risk strategy trading uncovered USD
options on futures, including the S&P 500 E-minis, crude oil, natural gas, and gold (the
“Strategy”).
11. The Strategy aimed to identify short-term option writing opportunities, both calls and
puts, within the futures markets and was predominantly focused on S&P 500 E-mini
contracts. The Strategy was expected to return 20% annually by collecting option
premiums with the expectation that the options would expire worthless.
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12. The Respondent knew the Strategy was speculative and should only be used by
investors who understood the risks involved in both trading options on futures and the
use of leverage.
Failure to Know the Clients
13. Between January 2016 and January 2018, Dubin realized significant profits from the
Strategy. In 2016 and 2017, Dubin referred certain of his clients, colleagues, and friends
to the Respondent in order to open accounts with R.J. O’Brien and use the Strategy.
14. Dubin made these referrals to the Respondent by email. The Clients had no prior
experience with the Strategy and the Respondent did not know any of them prior to
opening their accounts.
15. The Clients were asked to complete New Client Application Forms (the “NCAFs”). The
NCAFs were physically delivered or emailed to the Respondent. The investment
information on the NCAFs is indicated in the table below; in addition, some of the NCAFs
included an email address for Dubin as a party who was to receive copies of account
statements.
Client Futures Investment Experience
Equities Investment Experience
Net Worth (CAD)
AM None None $1.7 million JM None 1 year $2.8 million BT None 10 years $3.3 million RF & SF None 5 years $1.8 million
VP 9 years of futures and options-on-futures experience*
10 years equity and option experience* $2 million
PA & SS None 7.5 years equity, options, rights/warrants short sale experience
$6.2 million
MW None None $4.8 million
ED 4 years of futures and options-on-futures*
No specifics on NCAF $3 million
*This experience is overstated on the NCAF; the client in fact had no experience with futures or options.
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16. The Respondent did not review the completed NCAFs. His assistants checked for any
incomplete sections on the forms. The Respondent believed that it was up to the Clients
to ensure that the information provided was accurate.
17. The NCAFs included a section entitled, “Approximate Risk Capital Available for Futures
Trading (Risk Capital refers to the amount you are willing to risk trading)”. The Clients
indicated the following amounts for this section, and in some cases the amounts were
decreased by R.J. O’Brien prior to account approvals:
Client Risk Capital Available for Futures Trading as per Client (USD)
Risk Capital Available for Futures Trading as per R.J. O’Brien Compliance (USD)
AM $150,000 $75,000 JM $100,000 $50,000 BT $100,000 $50,000 RF & SF $100,000 $20,000 VP $300,000 $100,000 PA & SS $250,000 $250,000 MW $100,000 $100,000 ED $100,000 $100,000
18. Several of the Clients used a line of credit to fund the Strategy. The Respondent was not
aware of and did not ask the Clients about the source of their funds, but he understood
that the use of borrowed funds would make the Strategy inappropriate for a majority of
the Clients due to the increased level of risk.
19. The Respondent never met or spoke with RF or VP; he did not meet and may have
spoken only once with ED in relation to a cash withdrawal but not at the time of account
opening.
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20. In the case of VP, the Respondent was aware that the information on her NCAF did not
reflect her own experience or objectives; instead, it reflected those of her husband who
was also a client of the Respondent.
21. The Respondent took the position that VP’s husband was effectively the client on the
account since it was opened in VP’s name for tax purposes.
22. In the case of RF, the Respondent advised her husband, SF, that her NCAF for an
individual account was not acceptable to R.J. O’Brien on the basis that her net worth
and income levels were below what the firm considered “prudent for futures
speculation”, but that a joint account would be considered. The Respondent ultimately
opened a joint account for RF and SF.
23. In the case of JM, the Respondent spoke with him by phone only once for approximately
five minutes and although he suggested they meet to discuss the Strategy, he never
ultimately met JM in person. The Respondent asked JM for his permission to co-
ordinate with Dubin to complete JM’s NCAF documentation.
24. During the phone call, the Respondent went over the Strategy with JM and explained
how he made recommendations. In particular, the Respondent explained that he and
Dubin would discuss the markets and that Dubin would then put on some trades; the
Respondent would then send the client an email with recommendations and ask for
approval from the client to execute a trade.
25. In the case of clients AM, BT, and SF, the Respondent met with these clients only once
for approximately 10-20 minutes each in order to collect their respective NCAF
documents; however, the conversations consisted of general matters and they did not
discuss the NCAFs or the Strategy.
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26. On the basis of the foregoing, the Respondent believed that the Clients fully understood
the Strategy and that they were sophisticated enough to implement it for their
respective R.J. O’Brien accounts.
27. Notwithstanding the Respondent’s assessment of the Clients as sophisticated, R.J.
O’Brien required the Clients to execute an acknowledgment on an “Additional Risk
Disclosure Form” (the “ARDF”) before their accounts were opened.
28. The ARDF indicated that: the Clients were advised to reconsider this investment; that
they did not “meet R.J. O’Brien & Associates Canada Inc.’s… guidelines to open a
commodity futures/futures option account” because “You have no commodity
futures/futures options experience”; that such trading may be too risky; and that they
should therefore carefully consider whether such trading was suitable for them.
29. The Respondent did not bring the ARDF to the attention of the Clients or explain it to
them. The Clients did not understand the significance of the ARDF, but executed the
form on the understanding that it was simply part of the account opening process.
Failure to Make Suitable Recommendations
30. The Respondent made recommendations to the Clients by email. The Respondent and
or Dubin had instructed the Clients to approve the recommendations before a trade
could be executed.
31. An email the Respondent sent to AM on October 30, 2017 demonstrates how
recommendations were made:
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“We have 2 New recommendations for you this morning:
Sell 5 December Can$ 76 puts @ 15 or better
Sell 5 January crude 60 calls @ 17 or better
We also would recommend selling 10 Nov mini S&P 2615 calls @ 2.00
And to sell 10 November mini S&P 2375 puts@ 1.70 or better
Please confirm that you are ok to enter these trades…”
32. In the vast majority of cases, the Clients would respond with an email and accept the
Respondent’s recommendations with a one word answer, (e.g. “Approved”) as they had
been instructed by the Respondent and or Dubin.
33. None of the Respondent’s recommendations included any explanation for the
recommendations, any details as to how the strike price or quantity was determined, or
had any information about the market that was being traded. The Respondent believed
that the Clients were sophisticated and did not need any such explanations.
34. Rather than assessing the suitability of trades for each client, the Respondent made
recommendations on the basis of trading in Dubin’s accounts.
35. Dubin did not have trading authority over the Clients’ accounts. However, the
Respondent nevertheless took recommendations and at times accepted direct
instructions from Dubin for trading in some of the Clients’ accounts.
Client Losses
36. On February 5, 2018, the S&P Index experienced a significant spike in volatility and a
corresponding drop in value. Consequently, the Respondent decided to implement a
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“roll” in the Clients’ accounts; a roll is a series of trades that allow a client to buy time
and create a larger buffer before incurring losses in hopes that the underlying futures
market prices stabilize.
37. On February 5, 2018, the Respondent implemented two rolls for the Clients’ accounts.
He executed the first at approximately 10 a.m. and the second at approximately 2 p.m.,
both of which ultimately failed to protect the Clients from losses in their accounts.
38. The Respondent believed that a roll was the best decision at the time and sent Clients
recommendation emails prior to each roll; however, he did not consult with any of the
Clients beforehand and did not discuss market conditions or advise them in the
recommendation emails that he was implementing a roll. The recommendations were
virtually identical in format to all of the recommendation emails sent to the Clients
previously, as set out above.
39. By approximately 6 or 7 p.m. on February 5, 2018, the market downturn was such that
the Respondent sent a third email to the Clients recommending that they liquidate all
positions in their accounts.
40. The emails to the Clients recommended that their positions be liquidated but did not
explain:
• the nature of the market conditions;
• why they were being advised to liquidate all positions;
• that liquidation would result in a complete realized loss of value in the account, and
in many cases create a debit balance; or
• any alternatives to cover margin call positions prior to the closing of the option
positions.
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41. The Respondent’s view was that because these Clients were sophisticated, they would
have known that the market had declined and that their accounts were in a deficit.
42. All of the Clients’ accounts were liquidated on February 6, 2018, with combined realized
losses of over $1.3 million USD, leaving several of the Clients with the following debit
balances:
Client Amount Invested (CAD) Net Loss (USD) Remaining Balance AM $150,000 ($283,972) ($163,855) USD JM $100,000 ($76,853) $3,286 CAD BT $100,000 ($79,494) ($5,059) USD RF & SF $100,000 ($75,608) $4,853 CAD VP $300,000 ($223,866) $18,979 CAD PA & SS $230,000* ($276,966) ($96,840) USD MW $100,000 ($82,154) ($2,706) USD ED $400,000 ($262,198) ($20,378) USD TOTAL ($1,361,114)
*Consisting of $100,000 CAD together with $100,000 USD converted at the exchange rate on date of deposit
43. Between February 2016 and February 2018, the Respondent earned commissions of
approximately $54,000 USD as a result of implementing the Strategy in the Clients’
accounts.
DATED at Toronto, Ontario this 14th day of August, 2019.