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IN THE MATTER OF:
THE RULES OF THE INVESTMENT INDUSTRY REGULATORY
ORGANIZATION OF CANADA
AND
SHIRLEY LOCKE
STATEMENT OF ALLEGATIONS
Further to a Notice of Hearing dated July 3, 2019, Enforcement Staff of the Investment Industry
Regulatory Organization of Canada make the following allegations:
PART I REQUIREMENTS CONTRAVENED
Contravention 1 Between January 2010 and September 2014, the Respondent failed to use
due diligence to learn and remain informed of the essential facts relative to clients GR, JF, F
Limited and EH, contrary to Dealer Member Rule 1300.1(a).
Contravention 2 Between January 2010 and September 2014, the Respondent failed to use
due diligence to ensure that recommendations made for clients GR, JF and F Limited were
suitable for them, based on their investment objectives and risk tolerance, contrary to Dealer
Member Rule 1300.1(q).
Page 2 of 18
Contravention 3 Between January 2010 and September 2014, the Respondent effected trades
in the accounts of clients EH and AH that were not within the bounds of good business practice,
contrary to Dealer Member Rule 1300.1(o).
Contravention 4 Between January 2010 and September 2014, the Respondent conducted
unauthorized trades in the accounts of clients GR, JF, EH and RC, contrary to Dealer Member
Rule 29.1.
Contravention 5 Between January 2015 and December 2017, the Respondent failed to use due
diligence to learn and remain informed of the essential facts relative to client LG, contrary to
Dealer Member Rule 1300.1(a).
Contravention 6 Between January 2015 and December 2017, the Respondent failed to use due
diligence to ensure that recommendations made for client LG were suitable for her, based on
her investment objectives and risk tolerance, contrary to Dealer Member Rule 1300.1(q).
PART II RELEVANT FACTS AND CONCLUSIONS
Overview
1. Between January 2010 and September 2014 (the “First Material Period”), the
Respondent failed to know clients GR, JF, F Limited and EH, in that account opening
documentation and updates to that documentation did not reflect the clients’ true
investment objectives and risk tolerance.
2. During the First Material Period, a number of high risk securities were purchased and
held in clients GR, JF and F Limited’s accounts, that were not suitable for them, given
their true investment objectives and risk tolerance.
Page 3 of 18
3. The Respondent also effected trades in clients EH and AH’s accounts during the First
Material Period that were outside the bounds of good business practice, given the high
risk nature of the securities purchased and the excessive amount of margin used in
these accounts.
4. During the First Material Period, the Respondent effected various trades in the accounts
of clients GR, JF, EH and RC, without discussing the trades with the clients in advance.
5. In addition, the Respondent failed to know her client LG and made unsuitable
recommendations for this client, between January 2015 and December 2017 (the
“Second Material Period”).
6. Clients GR, JF, EH, AH, F Limited and LG all sustained unrealized losses in their accounts
as a result of the Respondent’s trading activity.
Background
7. The Respondent has been registered in the securities industry since October 1979. From
2009 until the fall of 2011 she was employed by Wellington West Capital Inc.
(“Wellington West”), as a Registered Representative (“RR”), as well as a Branch
Manager.
8. Wellington West was purchased by National Bank Financial Inc. (“NBF”) in October
2011. From October 2011 to October 30, 2014, the Respondent was employed as an RR
and Branch Manager with a NBF branch in Halifax, Nova Scotia.
9. After leaving NBF, the Respondent was employed by Industrial Alliance Securities Inc.
(“IAS”) in Halifax from October 31, 2014 to March 31, 2016 as an RR. She was also
registered as a Supervisor at IAS for part of this time period.
Page 4 of 18
10. The Respondent has been employed since April 1, 2016 as an RR with Aligned Capital
Partners Inc. (“Aligned Capital”) in Halifax, Nova Scotia.
Purchases of High Risk Securities
11. During the First Material Period, the Respondent purchased substantial amounts of two
high risk securities (as well as other high risk securities) in various clients’ accounts.
12. 01 Communique Laboratory Inc. (“01 Communique”) was incorporated under the
Business Corporations Act (Ontario) in 1992. Its business was the development and
marketing of mobile user products such as remote access and support. It was a high risk
security. The December 2013 Auditors’ Report to the Consolidated Financial Statements
indicated that 01 Communique had sustained a substantial loss in the year ended
October 31, 2013 and in recent years, and there was significant doubt in its ability to
continue as a going concern.
13. International Tower Hill Mines Ltd. (“Tower Hill”) was a mineral exploration company
with its head office in Vancouver, British Columbia. It was a speculative, high risk
security. Its Consolidated Financial Statements dated March 16, 2012 indicated that it
had no source of revenue.
Failure to Know GR
14. GR was born in 1938. His wife CR is retired. GR and CR had various accounts with the
Respondent, including GR’s RIF account. Most of the Respondent’s dealings regarding
GR’s RIF account were with CR.
Page 5 of 18
15. Initially GR opened an RSP account with the Respondent. On December 29, 2009, GR’s
RSP account was converted to a RIF account (“GR’s RIF Account”).
16. GR’s RIF KYC reflected 50% medium risk and 50% high risk, however, these percentages
did not accurately reflect GR’s goals or risk tolerance for this account. In actual fact, GR
did not want such a large portion of his holdings invested i n high risk securities. These
percentages remained unchanged in a 2012 KYC update for GR’s RIF Account.
17. Between January 2010 and September 2014, the Respondent failed to know GR in that
the KYC for his RIF Account did not accurately reflect his actual investment objectives
and risk tolerance.
Suitability of GR’s RIF Account
18. Between December 31, 2010 and September 30, 2014, the high risk holdings in GR’s RIF
Account (including 01 Communique and Tower Hill ), ranged between 22% and 61% of
the total Account holdings.
19. This percentage of high risk holdings was not suitable for GR, given his actual investment
objectives and true risk tolerance.
Unauthorized trading in GR’s RIF Account
20. The Respondent did not contact GR for instructions on any of his accounts. Any
discussions the Respondent had about their accounts were with CR, however, only
approximately 20% of the trades in GR’s RIF Account were discussed with CR in advance.
21. The Respondent effected 124 trades in GR’s RIF Account during the First Material
Period.
Page 6 of 18
Losses in GR’s RIF Account
22. GR’s RIF Account sustained a loss of $102,088 during the First Material Period.
Client JF
23. JF was born in 1916. She had a high school education, had been a homemaker and had
limited investment knowledge. JF had been a client of the Respondent for many years.
CR is JF’s daughter.
Failure to know JF
24. In 2004, JF opened a cash account (“JF’s Account”) with the Respondent. JF’s two
daughters were listed as co-account holders on JF’s Account for estate planning
purposes only. The 2004 KYC indicated 25% lower risk, income producing securities, 25%
moderate to higher risk, income producing securities, and 50% moderate risk, growth
oriented securities.
25. JF’s June 2009 KYC update (the “June 2009 KYC”) indicated 100% growth target mix as
well as risk tolerance levels of 50% medium and 50% high. There were no subsequent
updates to JF’s Account.
26. Between June 2009 and September 2014, the Respondent failed to know JF in that the
June 2009 KYC was not accurate, given JF’s circumstances, actual risk tolerance and
goals for her Account.
Page 7 of 18
Suitability of JF’s Account
27. JF relied on the Respondent for all her investment decisions. The Respondent did not
fully explain risk to JF.
28. JF’s Account held various medium and high risk securities (including 01 Communique
and Tower Hill), which were not suitable for her, given her actual investment objectives
and her actual risk tolerance. The percentage of medium and high risk holdings are set
out in the below chart:
As of Date % Medium Risk % High Risk
January 31, 2010 51 37
January 31, 2011 42 50
January 31, 2012 64 26
January 31, 2013 30 41
September 30, 2014 65 8
Unauthorized trading in JF’s Account
29. The Respondent effected 77 trades in JF’s Account during the First Material Period. The
Respondent did not discuss trades with JF in advance.
Losses re JF
30. JF’s Account sustained a loss of $47,083 during the First Material Period.
Failure to Know F Limited
31. F Limited was a family owned forestry company. Company principals GB and NB were
born in 1944 and 1950 respectively. In September 2011, the Bs provided the
Respondent with $25,000 to invest.
Page 8 of 18
32. The September 6, 2011 KYC for F Limited (the “F Limited Account”) indicates 100% high
risk and investment objectives of 100% Aggressive Growth. Investment knowledge was
indicated as limited.
33. While the Bs wanted their investment to grow, the Respondent did not discuss risk in
sufficient detail with them, nor did she explain what aggressive growth meant. The
Respondent told the Bs that she would not let their investment deteriorate.
34. The Respondent did not explain to the Bs that they could lose all or some of their money
with a 100% high risk portfolio.
35. Between September 2011 and September 2014, the Respondent failed to know F
Limited as 100% high risk tolerance and 100% aggressive growth objectives did not
accurately reflect the actual objectives or actual risk tolerance for the F Limited Account.
Suitability of F Limited Account
36. High risk securities (including 01 Communique and Tower Hill) made up 70% to 99% of
the account holdings in the F Limited Account at various times between September 30,
2011 and September 30, 2014.
37. These high risk holdings were not suitable for the Bs ’ circumstances or their goals for
the F Limited Account.
Losses in F Limited Account
38. The F Limited account sustained a loss of $16,250 between September 2011 and
September 30, 2014.
Page 9 of 18
Client RC
39. RC was born in 1944. He opened an account with the Respondent in February 2011.
(“RC’s Account”).
Unauthorized trades in RC’s Account
40. In February 2011, the Respondent effected purchases of three securities in RC’s account
which were not discussed in advance with him. These securities were:
20,000 shares of 01 Communique at a cost of $43,434;
25,000 shares of Petro Uno Resources Ltd. at a cost of $20,890; and
6,000 shares of Tower Hill at a cost of $59,904.
41. When RC discovered that the above shares had been purchased, he called the
Respondent to complain.
Client EH
42. EH was born in 1943. He was a pharmacist. EH opened a cash account with the
Respondent in July 2010 (“Cash Account”), which account was transferred to a new
margin account in March 2011 (“Margin Account”). He also opened an RSP account in
March 2011 (“RSP Account”).
Failure to Know EH
43. In the summer of 2010, EH told the Respondent that he was planning to open an
account with her that would be funded with $900,000. He wanted $500,000 of this
Page 10 of 18
amount to be invested in low risk securities and the balance to be invested in higher risk
securities.
44. Subsequently, in October, 2010, $900,000 was deposited into EH’s Cash Account.
45. EH’s July 2010 and March 2011 Know Your Client Forms for his Cash/Margin Accounts
and his RSP Account all indicated that his investment objective was aggressive growth
and that his risk tolerance was 100% high risk.
46. Between March 2011 and September 2014, the Respondent failed to know EH as 100%
high risk tolerance and aggressive/maximum growth investment objectives did not
accurately reflect EH’s actual risk tolerance, nor did they reflect his objectives for the
Margin and RSP Accounts.
Transactions outside the bounds of good business practice in EH’s Margin Account
47. The Respondent did not adequately explain margin to EH. Nor did she give him
adequate advice about managing the level of debt which was occurring in his Margin
Account between March 2011 and September 2014.
48. The Respondent also failed to advise EH that continuing monthly withdrawals of funds
would encroach upon the capital which he wished to maintain for his retirement.
Excessive margin debt and interest paid by EH
49. EH’s margin debt was excessive, particularly between August 31, 2011 and September
30, 2014, when it ranged between $130,805 and $298,463 every month end during this
time period. The margin as a percentage of account value ranged between 21% and 46%
Page 11 of 18
every month between August 31, 2011 and September 30, 2014, as seen in the chart
attached as Schedule A to the Statement of Allegations.
50. EH paid $32,986 in interest on the margin debt between April 16, 2011 and September
16, 2014.
51. Between March 2011 and September 2014, the trading activity which resulted in high
debit balances and large interest payments in EH’s Margin Account was outside the
bounds of good business practice.
Unauthorized trading in EH’s Accounts
52. Generally the Respondent effected trades in EH’s Accounts without discussing
particulars in advance with him. Other than an initial purchase of 8,000 shares of 01
Communique in July 2010 and a purchase of 3,000 shares of Crombie REIT Parts in
October 2010, most of the trades effected by the Respondent in EH’s Accounts were not
authorized by him in advance.
53. The Respondent effected over 200 trades between July 19, 2010 and October 15, 2014
in EH’s Accounts.
Losses in EH’s Accounts
54. Between February 25, 2011 and September 30, 2014, EH’s Margin Account and RSP
Account had sustained overall losses as follows, which include the 01 Communique and
Tower Hill losses:
EH Account Overall Loss 01 Communique Loss Tower Hill Loss
Margin $239,861 $65,571 $41,264
RSP $82,065 NA $57,546
Page 12 of 18
Client AH
55. AH was born in 1937. He was a commercial building developer and retired in 2001. In
June 2009 he opened three accounts with the Respondent: a margin account (“AH
Margin Account”), a RIF account (“RIF Account”) and a corporate margin account (“O
Limited Margin Account”).
56. The 2009 KYCs and subsequent updates for AH’s three Accounts all indicated investment
objectives of aggressive growth and 100% high risk tolerance. At the time the Accounts
were opened, AH transferred in approximately $2 million divided among the three
Accounts.
57. While AH was comfortable with some risk he did not want 100% high risk. The
Respondent assured him that he would be able to realize 8% return on his investments
while still making withdrawals from his Accounts.
Transactions outside the bounds of good business practice in AH’s Accounts
58. The transactions set out below were outside the bounds of good business practice.
59. Frequent trading by the Respondent of 01 Communique and Tower Hill (in particular)
between January 2010 and September 2014 in AH’s Margin Account resulted in a
substantial margin debit as indicated in detail below.
Debit balance in AH’s Margin Account
60. There was excessive use of margin in AH’s Margin Account. This Account was in a
substantial debit position every month from January 2010 to September 2014. With the
exception of one month, (December 2011 where the debit balance was almost
Page 13 of 18
$191,000), the debit balance in AH’s Margin Account was over $200,000 every month
from January 2010 to July 2014 inclusive.
61. The Respondent failed to take positive steps to reduce the margin. In January 2013,
shares valued at $51,300 were transferred from the RIF Account to AH’s Margin
Account. Moreover, up until February 2013, trading in AH’s Margin Account continued
as the debit increased.
Margin as a Percentage of Account Value
62. When the market value of securities held is compared to the margin debit balance, the
margin in AH’s Margin Account, as a percentage of account value, was at excessive
levels.
Concerns raised by the trading in AH Margin Account
63. Cross guarantees existed between the AH Margin Account and the O Limited Margin
Account, however, the existence or use/non use of cross guarantees is not
determinative of the issue as to whether or not there was excessive trading and/or a
high debit balance in the AH Margin Account.
64. Regardless of any cross guarantees, the trading in AH’s Margin Account was outside the
bounds of good business practice. The excessive high risk trading and high margin debit
in AH’s Margin Account should have been acted upon sooner and with more diligence
by the Respondent.
Page 14 of 18
Interest Paid in AH’s Margin Account
65. During the First Material Period, AH paid $90,245.00 in interest on the debit balance in
his Margin Account.
Concentration in AH’s RIF Account
66. AH’s RIF Account held 450,000 shares of 01 Communique between February 2013 and
June 2014. The share price declined significantly during this period.
AH RIF account Feb-13 Mar-13 Apr-13 Jun-14
Quantity 450,000 450,000 450,000 450,000
$ price 1.16 0.265 0.24 0.24
$ MV 522,000 119,250 108,000 108,000
% of MV 43% 20% 24% 28.1
The O Limited Margin Account
67. The margin as a percentage of account value ranged between 30% and 45% between
January 31, 2010 and July 31, 2010 in the O Limited Margin Account.
68. During the First Material Period, AH paid $20,775. in interest on the O Limited Account’s
debit balance.
Losses in AH’s Margin, RIF and O Limited Accounts
69. AH’s Margin Account had losses as follows (which include the 01 Communique and
Tower Hill losses:
AH Margin Account Date Losses
Overall January 1, 2010 to September 30, 2014 $371,633
01 Communique January 1, 2010 to September 30, 2014 $84,695
Tower Hill January 1, 2010 to September 30, 2014 $150,100
Page 15 of 18
70. AH’s RIF Account had unrealized losses as follows which includes the 01 Communique
and Tower Hill losses:
AH RIF Account Date Losses
Overall January 1, 2010 to September 30, 2014 $525,434
01 Communique August 20, 2009 to September 30, 2014 $313,489
Tower Hill January 1, 2010 to September 30, 2014 $190,799
71. The O Limited Margin Account had a loss of $128,767 during the First Material Period.
Commission
72. Gross commission for the February 2011 trades discussed above re RC was $1,140.
Gross commission for trades during the First Material Period in the accounts of clients
AH, EH, GR RIF and JF was approximately as follows:
AH Margin $59,000
AH RIF $67,000
AH O Limited $19,000
EH cash
EH margin
EH RSP
$18,000
$41,000
$3,000
GR RIF $34,000
JF $17,000
Client LG
73. LG was a client of the Respondent at NBF, IAS and Aligned Capital . LG operated a B & B
in New Brunswick until December 2017.
Page 16 of 18
Failure to Know LG
74. The Respondent never met LG in person. The Respondent sent account opening
documentation and any updates to LG for signature after telephone discussions.
75. LG opened a cash account at IAS (“IAS Account”). LG’s November 21, 2014 KYC at IAS
indicated one investment objective: growth/high risk. Although this categorization is
initialed on the form, LG did not initial it.
76. LG opened a cash account at Aligned Capital (“Aligned Capital Account”). LG’s April 23,
2016 KYC at Aligned Capital indicated investment objectives of growth and risk
tolerance of 50% medium, 30% medium high and 20% high.
77. The Respondent failed to know LG at both IAS and Aligned Capital during the Second
Material Period as the above KYC documentation did not reflect LG’s actual investment
objectives and risk tolerance.
Suitability of LG’s Accounts
78. During the Second Material Period, the Respondent made unsuitable recommendations
for LG, including various high risk securities. These high risk securities were not sui table
for LG, given her actual investment objectives and risk tolerance.
Losses in LG’s Accounts
79. When LG’s IAS Account was transferred to IAS from NBF in January 2015, it was valued
at $53,376. Just over a year later, as of March 31, 2016, it was valued at $37,214. There
were no withdrawals. Between January 16, 2015 and March 31, 2016, LG’s IAS Account
sustained a loss of $16,161.
Page 17 of 18
80. When LG’s Aligned Capital Account was transferred to Aligned Capital, it was valued at
$39,177. When it was closed approximately 1.5 years later, it had a value of $18,225.
There were no withdrawals. Between May 4, 2016 and December 31, 2017, LG’s Aligned
Capital Account sustained a loss of $20,964.
DATED at Toronto, Ontario this 3rd day of July, 2019.
Page 18 of 18
Schedule A
EH Margin Account Chart-quarterly basis
Date
EH Market Value
of Securities ($
CDN)
EH Margin Debit
Balance ($ CDN)
EH Margin as % of
account Market
Value
30-Apr-11 802,638.45 (15,082.23) 1%
31-Jul-11 712,883.53 (106,218.00) 14%
31-Oct-11 683,959.21 (195,115.73) 28%
31-Jan-12 839,749.82 (291,678.71) 34%
30-Apr-12 777,730.59 (233,984.12) 30%
31-Jul-12 679,021.80 (188,349.91) 27%
31-Oct-12 680,038.53 (211,445.25) 31%
31-Jan-13 730,568.15 (236,674.83) 32%
30-Apr-13 601,789.25 (245,539.32) 40%
31-Jul-13 566,832.91 (240,247.28) 42%
31-Oct-13 598,765.63 (236,723.91) 39%
31-Jan-14 632,070.18 (259,573.76) 41%
30-Apr-14 673,010.41 (298,463.30) 44%
31-Jul-14 622,513.15 (290,667.05) 46%
Notice of HearingStatement of Allegations