The findings of a hearing panel that resulted from a three year long investigation into the now-dismissed allegations of wrong-doing against industry veteran and Hampton Securities CEO Peter Deeb have some questioning whether a new oversight process ought to be implemented when it comes to the investigations that are performed by the Investment Industry Regulatory Organization of Canada, better known as the IIROC.
IIROC initiated an investigation into allegations that were brought forth solely as a result of anonymous letters allegedly authored by two individuals who were ultimately identified as estranged employees of Hampton Securities. One of alleged authors had been barred for life by IIROC for misappropriating over a million dollars from Deeb and his firm; the other is being sued along with his wife for tax fraud and misappropriation in a related matter, and is the focus of an SEC investigation into a $5million fraud against a US mutual fund. Throughout the investigation, IIROC refused to hand over copies of the alleged “Complaints’ until the hearing panel issued as decision ordering IIROC to do so.
When all was said and done, the allegations against Deeb were dismissed as meritless, but millions of dollars in legal costs had been expended and are not recoverable by either Deeb or his firm. Member firms are speaking out about this unfairness and even the panel Chair took note of this as a problem, saying that this case was one which, “Made him very uncomfortable about Hearing Panels not being able to award costs to respondents (like Deeb), and only in favor of IIROC.”
IIROC claims to be empowered solely by its contract with its member firms which they interpret as giving the regulator and its staff ‘Blanket Immunity’ from liability arising even from IIROC’s own misconduct. Deeb challenged this by way of a legal action brought against IIROC and took it as far as the Ontario Court of Appeals, which ultimately claimed Deeb’s application was premature, but left the door open for a “Breach of Contract” claim which Deeb and others are considering. The Deeb victory before the panel, comes on the heels of another high-profile defeat of IIROC by former Scotiabank trader David Berry, who spent much the past decade and reportedly $7million in legal fees to clear his name following what he claimed was an attempt by his employer to use the IIROC enforcement process as a lever to breach his employment contract with the bank. IIROC doesn’t seem to be in a hurry to write Berry a cheque either.
Member firms are now questioning the fairness of the contract that exists between them and IIROC. There is active discussion as to whether the current process is vulnerable to abuse by IIROC staff or even mischievous members of the public. Some are going so far as to suggest that there be some sort of an oversight panel established to review the merits of Enforcement cases, so that staff don’t run off on an expensive tangent or to prevent a situation where IIROC staff members pursue allegations against an individual without appropriate evidentiary support as in the Deeb and Berry cases?
As Deeb can attest, these allegations can cause the IIROC member to experience significant, irreparable damage to their professional reputation and individuals are apt to incur significant, unrecoverable expenses. Therefore, it stands to reason that additional oversight measures could benefit IIROC members and ultimately lead to improving the recently strained relationship between IIROC and its members.
Deeb is a former Chairman of the Ontario District Counsel of IIROC and Chairman of Hampton Securities; one of Canada’s leading independent investment dealers. What unfolded was a drawn-out series of hearings and investigations, which ultimately failed to turn up any evidence to support the allegations of wrong doing fabricated by IIROC.
But one wonders how, with the credibility of the two “anonymous” letter writers being rather questionable, and the fact that IIROC audits failed to turn up any evidence to support the claims of wrong-doing, these horrible allegations were allowed to be made? What's more, not a single one of Deeb's clients came forward to allege wrong-doing or to report losses – a telling and very significant fact.
During the hearing IIROC put forward a number of hypothetical trade calculations and based on these transactions, assessed each client's loss at approximately $150 – a claim that was not supported by any of the evidence. The panel found that none of Deeb's clients suffered any harm; in fact, they benefited from the co-mingling. Despite this fact, Deeb had made an offer in good faith to provide a $150 credit to each of the 4 or 5 clients IIROC identified, as a settlement of the matter. But in a telling move, the IIROC declined the offer which would have benefited the clients whom they claimed were victims. Instead, they demanded a cash payment of $150,000. This sum would have been made payable to IIROC instead of to the alleged victims, who would have received no compensation if Deeb had accepted the settlement.
Deeb refused the settlement on principal – an act that's relatively uncommon in the industry, especially since defendants risk expending millions of dollars on their legal defence. Many others who are subjected to IIROC investigations typically agree to pay hefty settlements in an effort to make the case disappear. But Deeb remained steadfast and fought the allegations. And he's not alone. So did former Scotiabank trader David Berry, who was cleared of the allegations that prompted his firing from the firm. Berry is now pursuing a wrongful dismissal lawsuit against Scotiabank, seeking $100 million in damages.
In late 2012, the IIROC had tried to obtain $75,000 in fines from Deeb, in addition to a sum of $15,000 to cover the costs of the proceedings. The panel ultimately dismissed the IIROC's requests for the fine, and, as mentioned previously, a no costs order was deemed appropriate.