Sunday, July 28, 2019

Case study: Excessive leveraged trading in IPO’s in fee based account generated huge trading commissions while supervisor watched

Kevin Frederick Price (Settlement) – Toronto, Ontario

Over a two-year period, Price recommended to a client that she use significant margin, which was unsuitable. Price also earned significant compensation by engaging in a short-term trading strategy for the client. This short-term trading was not within the bounds of good practice.

The client was retired [born in 1948] with limited investment knowledge and just under $1 million in assets. She opened four accounts with Price, all of which were fee-based and required the client to pay a percentage fee based on the market value of the securities held. The client required regular income from her portfolio for living expenses. Since inception, Price purchased securities on margin, which increased the income generated but also increased the risk, which eventually exceeded her risk tolerance.

Price recommended a significant number of trades in new securities. Over a two-year period, he purchased $4.1 million of new issues, representing approximately 71 percent of all securities bought. These purchases were also part of a short-term trading strategy that, overall, was not profitable for the client. However, the new issue purchases generated additional commissions, which were paid by the issuers, for the firm and Price. Over the same period, he earned approximately $40,000 from the new issues, in addition to the account fees paid directly by the client. The underlying new issues were not unsuitable and consistent with her investment objectives.

The client lost approximately $369,000 in her accounts.

Price paid an internal discipline fine of $21,000 to his employer, completed the Conduct and Practices Examination, and was subject to strict supervision for six months. He also contributed $55,000 towards compensating the client for her losses. Price agreed to pay a fine of $15,000 and costs of $5,000


2017 IIROC Enforcement report.

Questions: Does anyone believe Supervision was robust, that the fine was fair and proportionate and that general deterrence has been achieved?  The really good news? Mr. Price is now registered as a Dealing representative in Ontario, BC and Alberta with Mackie Research with no terms or conditions on his registration.This case demonstrates the value of checking IIROC registration (?}.😉 It might be wiser for clients to assess their trade confirmations, account statements and performance reports. Note the elegance of the IPO strategy is that the commissions won’t show up in the fee based account statement. We urge IIROC to provide rules and guidance re fee based accounts/ reverse churning and sanction deficient supervisors, branch managers, compliance staff and firms with uncharacteristic vigour. 

IIROC Settlement Agreement


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