The brokerage arm of Canadian Imperial Bank of Commerce has agreed to pay a $700,000 fine and change the way it supervises clients who have direct market access accounts.
The agreement is part of a settlement approved yesterday between CIBC World Markets Inc. and Market Regulation Services Inc., or RS, over allegations the brokerage failed to stop alleged manipulative trading by a pair of clients. Two Toronto-based CIBC World Markets employees, Scott Mortimer and Carl Irizawa, also agreed to pay fines of $50,000 and $20,000 respectively.
The firm and the two individuals will also pay an additional $115,000 to cover the costs of the investigation.
The case involved trading by two CIBC clients who had numerous accounts at the brokerage, including direct market access accounts, which allowed them to trade on the stock market without going through a broker. The clients and their companies, which also had special direct access privileges, allegedly engaged in a series of suspicious trades in 2002 that "had the appearance of manipulative and deceptive trading," according to a statement of allegations.
The clients are not named in the documents but are described as wealthy former brokers who engaged in complex arbitrage and hedging strategies. They traded so actively, RS said, that their monthly account statements ran into the hundreds of pages.
Mr. Mortimer served as an investment adviser to the clients, who accounted for 40 per cent of his overall income. Mr. Irizawa was his sales assistant.
In the statement of allegations, RS highlighted 16 sets of trades in stocks and warrants listed on the TSX and TSX Venture exchanges. The clients earned nearly $7-million in total profit from the trades and one of their companies incurred an equivalent loss, which RS believes was done for tax purposes.
According to RS, the trades generated enough red flags that CIBC World Markets and its two employees should have stepped in. CIBC World Markets "did not have adequate supervisory systems and procedures in place to detect manipulative and deceptive trading, which is one of the top risks to market integrity," Maureen Jensen, a vice-president at RS, which regulates trading on Canadian stock markets, said in a news release.
As part of the settlement, CIBC World Markets has agreed to centralize trading in direct market accounts and bolster supervision "with better tools and training to recognize and act upon red flags generated by potentially deceptive and manipulative trading."
In addition, the brokerage said "policies and procedures will be enhanced across the firm to enable employees to recognize and act upon red flags," the agreement added.
The agreement was approved yesterday by an RS panel after a brief hearing.
Michael Penny, a lawyer representing CIBC World Markets, told the hearing that the 16 suspicious trades occurred within a context of a huge volume of trading by the clients, which made it harder to detect. He also said the brokerage firm has terminated its relationship with the clients.
The clients' activity is now under investigation by Ontario Securities Commission, RS said.
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