IIROC reopens Taub proceedings

IIROC has wasted little time in reopening its case against, Stephen Taub, after a recent Ontario Court of Appeal decision said it’s OK for the regulator to penalize members who have left the industry.

Stephen Taub is the most well-known case. Taub, a former stockbroker, stalled enforcement action for more than four years, claiming that IIROC has no legal means to pursue him.

For a time the strategy worked. Taub, who formerly worked as a broker with the Toronto branches of Brant Securities, had relinquished his membership in the fall of 2004, before enforcement proceedings were formally brought against him. In July 2008, three Ontario Divisional Court Justices decided that his exit from the securities industry did not allow the IIROC — then the IDA — to pursue him any further. The decision overturned a 2007 Ontario Securities Commission decision that upheld the jurisdiction of the IDA over former members.

IIROC vigorously appealed the decision, and won a reversal of the Divisional Court at the Ontario Court of Appeal in at the end of August.

A key point of contention had been with the wording of section 21.1 (3) of the Ontario Securities Act, which states, “A recognized self-regulatory organization shall regulate the operations and the standards of practice and business conduct of its members and their representatives in accordance with its bylaws, rules, regulations, policies, procedures, interpretations and practices.”

There is no mention of “former” members in the wording of that section.

In the decision, Justice Feldman of the Ontario Court of Appeal wrote:

“The essential argument of the respondent is that s. 21.1(3) of the Act, which refers to the obligation of the IDA to regulate the business conduct of its members, effectively limits the jurisdiction of the IDA to discipline members for such misconduct only while they continue to be members, but not after they have resigned. In my view, this argument does not withstand scrutiny,” Justice Feldman said.

Justice Feldman added later in the decision, “Even if s. 21.1(3) did limit the IDA’s jurisdiction to regulate and discipline only current members, it is not clear that such a limitation refers to the timing of discipline, as opposed to the timing of the misconduct. In other words, as long as the discipline relates to misconduct that occurred while the person was a member, that may be sufficient to comply with any limits that could be said to be imposed by the provision.”

According to Jeff Kehoe, director of enforcement at IIROC, the Court of Appeal decision opens the door for the regulator to start enforcement proceedings against Taub and about “another dozen” former registrants who gave up their membership.

Kehoe outlined what does remain a challenge is how the regulator can actually collect fines. Registrants who are fined but remain in the industry will be required to pay the fine to stay in business. There are few enforcement tools to collect fines from those out of the industry. Alberta has given IIROC the jurisdiction to get fines from it’s members, but for other provinces, getting the levied penalties become more or less a civil court matter.

Taub hearing set

For Taub, enforcement proceedings are underway. IIROC has set a hearing for September 29 to hear allegations that between November 1998 and June 2003, Taub engaged in trading activity for certain clients “that appeared to be or was consistent with market manipulation or deception and improper control block distributions.”

In a notice of hearing from 2005, it is alleged that Taub helped facilitate what appeared to market manipulation activities on shares of company’s controlled by small group of clients.

In one example, IIROC says Taub helped clients move physical certificates which represented anywhere from 35% to 45% of the issued and outstanding shares of a company to other accounts at Brant or other member firms. The shares were essentially all controlled by the same individuals. The transfers would take place by way of journal entries or buy-sell transactions. Investors looking at those transactions would think there was a high volume of proportional trades on a company between different investors.

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• Advisor.ca » OSC, IIROC to appeal Taub decision

(09/25/09)