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Reasons For Decision

Re:

Reasons For Decision


Reasons for Decision
File No. 201216



IN THE MATTER OF A DISCIPLINARY HEARING
PURSUANT TO SECTIONS 20 AND 24 OF BY-LAW NO. 1 OF
THE MUTUAL FUND DEALERS ASSOCIATION OF CANADA


Re: Alex Khodorkovski


Heard: October 23, 2012 in Edmonton, Alberta
Reasons for Decision: November 20, 2012

REASONS FOR DECISION

Hearing Panel of the Prairie Regional Council:

Daniel Ish, Q.C.
Chair

Patricia Kloepfer
Industry Representative

Barbara Shourounis
Industry Representative

Appearances:

Shari L. Boyd
)
For the Mutual Fund Dealers Association of

) Canada

Alex Khodorkovski
)
Self-Represented

)

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A.
THE ALLEGATIONS

1.
The Mutual Fund Dealers Association of Canada (“MFDA”) alleged a violation of an
MFDA Rule by Mr. Khodorkovski (the “Respondent”). The allegation was set out in a Notice of
Hearing dated June 29, 2012 as follows:

Allegation #1: In April 2011, the Respondent failed to observe high standards of
ethics and conduct in the transaction of business by falsifying signatures of 3
clients on 5 account documents, contrary to MFDA Rule 2.1.1 (b).

B. AGREED FACTS AND POSITIONS

2.
At the outset of the hearing the parties provided the Panel with an Agreed Statement of
Facts that was jointly signed. In addition to setting out the facts that were agreed upon, the
Respondent in the document admitted that his actions constituted misconduct and were a breach
of Rule 2.1.1(b). Also, he indicated that he did not oppose the penalty recommended by the
MFDA staff.

3.
The pertinent portions of the agreed statement of facts are the following:
III.
ADMISSIONS AND ISSUES TO BE DETERMINED

4.
The Respondent has reviewed this Agreed Statement of Facts and admits
the facts set out in Part IV herein. The Respondent admits that the facts in Part IV
constitute misconduct for which the Respondent may be penalized on the exercise
of the discretion of a Hearing Panel pursuant to s. 24.1 of MFDA By-law No. 1.

5.
Subject to the determination of the Hearing Panel, Staff submits, and the
Respondent does not oppose, that the appropriate penalty to impose on the
Respondent is:

• A prohibition from conducting securities related business while in the
employ of, or associated with, any MFDA Member for 12 months from the
date of the final order in this matter, pursuant to s. 24.1.1(e) of MFDA By-
law No. 1; and

• A cost award in the amount of $2,500 pursuant to section 24.2 of MFDA
By-law No. 1.

6.
The Respondent claims to be impecunious and unable to pay any amount
towards either a fine or costs.
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IV. AGREED
FACTS

7.
Staff and the Respondent agree that submissions made with respect to the
appropriate penalty are based only on the agreed facts in Part IV and no other
facts or documents. In the event the Hearing Panel advises one or both of Staff
and the Respondent of any additional facts it considers necessary to determine the
issues before it, Staff and the Respondent agree that such additional facts shall be
provided to the Hearing Panel only with the consent of both Staff and the
Respondent. If the Respondent is not present at the hearing, Staff may disclose
additional relevant facts, at the request of the Hearing Panel.

8.
Nothing in this Part IV is intended to restrict the Respondent from making
full answer and defence to any civil or other proceedings against him.

Registration History

9.
The Respondent was registered in Alberta as a mutual fund salesperson
with BMO Investments Inc. (“BMO”) from October 29, 2009 until May 3, 2011,
at which time the Respondent resigned as a result of the events herein described.

10.
The Respondent is not currently registered in the securities industry in any
capacity.

11.
The Respondent has not previously been the subject of disciplinary
proceedings.

Facts

Allegation #1 – Falsification of Client Signatures

CLIENT AR

12.
At all material times, AR was a client of BMO whose account was
serviced by the Respondent.

13.
On March 24, 2011, the Respondent opened an RESP account for client
AR and submitted the required account opening documents for approval.

14.
On March 24, 2011, the Respondent’s Branch Manager returned the file
for client AR’s RESP account application to the Respondent because the Alberta
Centennial Education Saving Grant (the “ACESG”) application form was not
signed by AR and the mutual fund holdings in the account were not in accordance
with the documented risk tolerance on client AR’s Know-Your-Client (“KYC”)
form.

15.
On April 27, 2011, the Respondent re-submitted client AR’s RESP
account application for approval, including a signed ACESG form, an updated
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KYC form, and a Canada Savings Education Grant and Canada Learning Bond
(the “CESG”) application form.

16.
On April 27, 2011, the Branch Manager contacted client AR by telephone
and confirmed that client AR had not attended the branch since March 24, 2011
when the RESP account was opened.

17.
On April 27, 2011, the Branch Manager questioned the Respondent
regarding when client AR signed the updated KYC form, which was dated April
26, 2011. The Respondent initially asserted that client AR had attended at the
branch to sign the KYC form at some point prior to April 26, 2011 and that he
(the Respondent) had inserted the April 26, 2011 date on the form. When the
Branch Manager pointed out to the Respondent that the KYC form had been
printed on April 26, 2011, the Respondent admitted that client AR had not
attended at the branch since March 24, 2011 and that the Respondent had falsified
client AR’s signature on the KYC form.

CLIENT JLC

18.
At all material times, JLC was a client of BMO whose account was
serviced by the Respondent.

19.
On April 28, 2011, the Respondent’s Assistant Branch Manager forwarded
the file for client JLC to the Branch Manager. The file had previously been
reviewed and returned to the Respondent to correct deficiencies. The Assistant
Branch Manager reviewed the file after the deficiencies had purportedly been
addressed by the Respondent and notice that the signature of client JLC on the
KYC form appeared irregular.

20.
On April 28, 2011, the Branch Manager questioned the Respondent
regarding the apparent irregularity in client JLC’s signature on the KYC form.
The Respondent admitted to falsifying the client’s signature on the KYC form.

MEMBER REVIEW AND INVESTIGATION

21.
On April 28, 2011, BMO suspended the Respondent with pay pending its
review of the matter.

22.
On May 3, 2011, BMO Corporate Security interviewed the Respondent
regarding the irregular client signatures on the account documents for AR and
JLC. During the interview the Respondent was shown and admitted to falsifying
the client signatures on the following documents:

• Client AR: KYC form and ACESG form; and

Client
JLC:
KYC
form.

23.
On May 3, 2011, the Respondent submitted his resignation after the
interview with BMO Corporate Security.

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24.
On May 24, 2011, the Respondent provided a written statement to MFDA
Staff in which he acknowledged falsifying the clients’ signatures on the account
documents. The Respondent stated that he had not falsified client signatures on
any other occasions.

25. BMO
contacted
clients
AR and JLC to have the documents properly
executed. MFDA Staff determined that the documents on which the Respondent
falsified the clients’ signatures contained the same information as the documents
that were later executed by the clients. The client did not suffer any financial loss
as a result of the Respondent’s conduct. None of the clients have complained that
there is no evidence of unauthorized or discretionary trading in the clients’
accounts.

Misconduct Admitted

26.
By engaging in the conduct described above, the Respondent admits that
he:

(a) In April 2011, failed to observe high standards of ethics and conduct
in the transaction of business by falsifying the signatures of 2 clients on 4
account documents, contrary to MFDA Rule 2.1.1(b).

C. THE PARTIES’ SUBMISSIONS

4.
The Agreed Statement of Facts indicates that the parties agreed both on liability with
respect to breach of MFDA Rule 2.1.1(b) and on appropriate penalty. In addition, the parties
made submissions to the Panel. The MFDA submissions were both written and oral and the
Respondent’s submissions were only oral.

5.
The MFDA submitted that the falsification of a client’s signature on documents must
always be considered serious. Reference was made to Re Peters, MFDA File No. 201120 (March
28, 2012) where the Panel said at paragraph 20:

Once having taken a step of “dishonesty” in a seemingly innocuous matter…it
becomes easier to continue this kind of activity, inevitably involving matters
which do have consequences to the clients….

6.
The MFDA also made reference to Re Mason, MFDA File No. 201138 (April 20, 2012)
where at paragraph 28 the Panel said:

Before concluding the Panel wishes to make it clear that such acts of signing
another person’s name constitutes forgery, a very serious offence, with potentially
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harmful consequences to oneself, to clients, to the Member firm and the securities
industry as a whole. It shows the lack of honesty required of a professional in the
securities industry.

7.
The MFDA focused on paragraph (b) of Rule 2.1.1 which refers to the obligation of each
Member and Approved Person to “observe high standards of ethics and conduct in the
transaction of business”. This provision, it was submitted, encompasses “the most fundamental
obligations of all registrants in the securities industry.” (Re Breckenridge, MFDA File No.
200718 (November 14, 2007), at page 20). It was submitted that where an Approved Person has
falsified a client’s signature on documents, as was done by the Respondent in this case and
acknowledged by him, the required standard of conduct has not been met and therefore such
conduct clearly constitutes a contravention of MFDA Rule 2.1.1.

8.
The MFDA proposed that the appropriate penalty for the breach by the Respondent was a
prohibition from conducting securities related business for a period of 12 months and an order to
pay costs in the amount of $2,500. The proposed penalty did not include a fine.

9.
In support of its penalty proposal the MFDA referred to numerous previous court
decisions and decisions of tribunals dealing with breaches of rules and regulations of regulatory
bodies, including the MFDA. Reference was made to the decision of the Supreme Court of
Canada in Pezim v. British Columbia (Superintendent of Brokers), [1994] 2 S.C.R. 557. In the
Pezim decision the Court underscored that the primary goal of securities regulation is the
protection of the investing public, in addition to ensuring market efficiency and maintaining
public confidence in the system as a whole. Reference was made to Re Arnold Tonnies, MFDA
File No. 200503 (June 27, 2005) where the Panel said:

…[S]anctions imposed in the securities regulatory context should be protective
and preventative, intended to be exercised to prevent likely future harm to the
capital markets. (at p. 21)

Reference was also made to Cartaway Resources Corp., [2004] 1 S.C.R. 672 where the Supreme
Court of Canada discussed in some detail the role of general and specific deterrence in
determining an appropriate sanction for infraction of securities regulations.

10.
The MFDA also made reference to the penalties imposed by hearing panels in previous
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MFDA decisions where the facts were similar to the ones before us. We will address these
decisions below.

11.
The Respondent made oral submissions to the Hearing Panel. He confirmed that he
understood his acknowledgment both of the breach of Rule 2.1.1(b) and the penalty being
proposed. His main concern was that he did not have the financial capacity to pay costs in the
amount of $2,500.

D.
ANALYSIS AND DECISION

12.
The Respondent acknowledged that he did breach MFDA Rule 2.1.1(b) when he falsified
the signatures of two clients on four separate documents. Independent of his acknowledgment,
we find that the evidence as attested to in the Agreed Statement of Facts clearly establishes that
the Respondent did not observe high standards of ethics and conduct in the transaction of
business as an Approved Person. The falsification of client signatures falls well below the ethics
and conduct expected of all registrants in the securities industry. Thus, it is our conclusion that
the Respondent in April 2011 breached MFDA Rule 2.1.1(b).

13.
The Panel has carefully considered the appropriate penalty to be imposed for the admitted
breach. In agreement with numerous other decisions dealing with the falsification of documents
or signatures, we are of the view that it is a serious offense even when it falls short of causing
actual harm. On its face it is a dishonest act which not only diminishes the integrity of a
registrant but of the securities industry as a whole. However, we do agree with the decision in Re
Bell (2005 CarswellNat 7227) where an Investment Dealers Association panel distinguished
between more and less egregious examples of falsification of documents. In some cases the
seriousness of the acts is aggravated because of factors such as misappropriation of funds, or
concealment of unauthorized trades or some benefit flowing to the registrant who falsifies the
signatures.

14.
In the present case, a careful review of the facts discloses that there are virtually no
aggravating factors and that there are some factors which operate in favour of the Respondent.
There was no client complaint filed and the Respondent had not previously been the subject of
any MFDA disciplinary proceedings, although his time in the industry was relatively short. In
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addition, he did not receive any benefit by the falsification of the signatures. However, the Panel
is left with a little doubt concerning whether the Respondent accepts responsibility for his
misconduct.

15.
The Panel has reviewed three MFDA decisions to determine the range of penalties that
have been previously ordered for similar conduct. In Re Mason, MFDA File No. 201138 (April
10, 2012), the Panel accepted a Settlement Agreement which required the Respondent to pay a
fine of $2,500, costs of $2,500 and a six-month suspension on his authority to conduct securities
related business. In Mason the approved person falsified the signatures of five clients on no
fewer than ten documents, compared to the present situation where the signatures of two clients
were falsified on four documents.

16.
In Re Peters, MFDA File No. 201120 (March 28, 2012), the Hearing Panel accepted a
settlement where the Respondent admitted to falsifying the signature of a client on an account
opening document and interfered with the ability of the Member to conduct an investigation by
initially providing a false response to the Member. The approved penalty was a two-year
suspension on his authority to conduct securities related business and costs of $1,000. When
compared to the current facts, the interference with the investigation is a serious aggravating
factor that is not present before us.

17.
In Re Mammone, MFDA File No. 201113 (March 12, 2012) the Hearing Panel accepted a
settlement in which the Respondent admitted to having falsified the signature of four clients on
six account documents. The Respondent was ordered to pay a fine in the amount of $5,000, costs
in the amount of $1,500 and was subject to a six-month suspension. Compared to the facts before
us, the number of incidents were greater, there was a fine but the costs and the suspension were
less than what is being proposed.

18.
It is clear that when a hearing panel considers an appropriate penalty it must take into
account all elements of the penalty including any suspension, fine and costs. When past decisions
are reviewed, there will be variants among these three factors, but so long as the balance of them
fall within a range, they are useful for precedential value.

19.
After carefully considering the facts before us, the previous authorities which outline
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appropriate factors to take into account in determining penalties, and the penalties imposed in
previous decisions for similar conduct, this Panel is satisfied that the penalty proposed by the
MFDA, and not opposed by the Respondent, is an appropriate one.

E.
SUMMARY AND CONCLUSION

20.
We find that the allegation as set out in the Notice of Hearing has been proved and that
the Respondent in April 2011 failed to observe high standards of ethics and conduct in the
transaction of business by falsifying the signatures of two clients on four account documents,
contrary to MFDA Rule 2.1.1 (b). Therefore, at the conclusion of the hearing on October 23,
2013, we ordered that:

(a) the Respondent shall be prohibited from conducting securities related business while
in the employ of, or associated with, any MFDA Member for 12 months commencing
October 23, 2012, pursuant to section 24.1.1(e) of MFDA By-law No. 1; and
(b) the Respondent shall pay costs in the amount of $2,500 pursuant to section 24.2 of
MFDA By-law No. 1.

DATED this 20th day of November, 2012.

“Daniel Ish”
Daniel Ish, Q.C.,

Chair

“Patricia Kloepfer”
Patricia Kloepfer,

Industry Representative

“Barbara Shourounis”
Barbara Shourounis,

Industry Representative

Doc 319206
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