IDA fines Research Capital and CEO

It has been a busy week for the IDA’s enforcement division. Since Monday, it has doled out more than $400,000 in fines and a total of seven years in suspensions, as well as one lifetime ban.

The latest in a string of disciplinary actions came Friday when the IDA fined Research Capital and its CEO Patrick Walsh $160,000 plus an additional $40,000 in costs for failing to properly supervise employees and for failing to correct compliance shortcomings.

This wasn’t the only disciplinary action linked to this firm this week. On Thursday, the IDA announced that Darrell Osadchuk, a one-time employee at the Calgary office of Research Capital, was prohibited from ever working in a registered capacity with the IDA again and was hit with a $40,000 fine, plus $10,000 in costs. Osadchuk admitted to unauthorized trading in the accounts of two of his clients and to creating false and misleading documents as to the holdings in their accounts.

“The Osadchuk case does not directly relates to this particular settlement with Research Capital, but it is some of the types of activity that gave us rise to concerns about their supervisory system,” says Alex Popovic, vice-president of enforcement at the IDA.

The IDA is also concerned about another employee at Research Capital known only as ‘T’ (he is not named because he is due to appear before a disciplinary hearing of his own). According to the settlement agreement with the firm and its CEO, ‘T’ had been fined and suspended in 1997 by the Ontario Securities Commission for improper activities as a registered representative, and was, at the time he was hired by Research Capital, under investigation by the brokerage industry association.

The IDA alleges ‘T’ engaged in several inappropriate actions including opening accounts and serving clients outside of his jurisdiction and failing to carry out his role as a ‘gatekeeper’ and facilitated questionable trading activity by certain clients.

The IDA says “this employee’s overall pattern of business conduct should have raised concerns and this business should therefore have been subject to closer scrutiny and tighter control.”

Walsh has admitted to two counts detrimental to the public’s interest. First, he failed to ensure a registered representative was properly supervised. The firm and its CEO also failed to provide assurances that IDA standards governing compliance and supervision were met between 2002 and June 2004.

However, Research Capital has since retained outside help to evaluate their compliance program and to make recommendations to the board to address these issues at a cost of $100,000. Without this mitigating factor, the IDA says the penalty assessed would have been much higher.

While the cluster of IDA penalties this week is unusual, Popovic says brokers shouldn’t read too much into it. “We roll out matters as they are completed,” he said. “This just happened to be a period of time where there was a multiplicity of hearings coming out at the same time.”

So far this year the IDA has levied about $4 million in fines.

Filed by Mark Brown, Advisor.ca, mark.brown@advisor.rogers.com

(11/25/05)