RBC Dominion Securities Inc. and two of its brokers have reached a settlement agreement with Canada's brokerage industry regulator over their role in the Earl Jones fraud, admitting they failed to question his withdrawal of funds from client accounts.
A settlement released Monday by the Investment Industry Regulatory Organization of Canada said RBC DS will pay a fine of $500,000 while Jean-Pierre Ménard, 67, and Serge Leclaire, 60, will pay $100,000 each and face a six-month suspension from working in the industry.
In the agreement, the firm and its two brokers admitted they failed to "adequately perform their roles as gatekeepers to the capital markets" by allowing Mr. Jones to hold multiple trading authorizations for multiple unrelated clients, and by not questioning some withdrawals of funds from accounts for which he had trading authorization.
The settlement agreement said the two men still work as investment advisers at the Place Ville Marie branch of RBC DS in Montreal. The men manage 400 client accounts with assets of about $350-million.
Mr. Jones pleaded guilty to two charges of fraud in 2010 related to a Ponzi scheme he masterminded between 1982 and 2009 that saw 100 clients defrauded of $50-million. He was sentenced to 11 years in prison.
Earlier this year, Royal Bank of Canada paid $17-million to settle a class action lawsuit brought on behalf of victims of the fraud.
The IIROC settlement said Mr. Ménard became the primary contact for Mr. Jones while he was then working at Scotia McLeod, and handled the day-to-day administration of most of the accounts of clients referred by Mr. Jones. That role continued after Mr. Ménard moved to RBC DS in 2003, with about 39 clients also switching their accounts to RBC.
The regulator said Mr. Ménard knew Mr. Jones was not registered to trade securities and could not offer investment advice to his clients.
IIROC said RBC DS should have inquired about the significant number of accounts that Mr. Jones had trading authorization over, and should have questioned the "financial interest or role he might have in the clients' accounts."
Between 2003 and 2008, RBC earned gross commissions of $390,000 on the accounts for which Mr. Jones held trading authorization.
IIROC said that between 2004 and 2007, a total of $3.7-million was withdrawn from 16 client accounts after Mr. Jones convinced clients to withdraw their funds to be invested in a special fund outside of RBC DS. Instead, Mr. Jones defrauded clients of the money.
IIROC said the withdrawals were not questioned even though they were for large amounts that included liquidations of the accounts, they were all accounts over which Mr. Jones had trading authorization and the clients' cheques for the withdrawals were sent to Mr. Jones or one of his employees.
IIROC said Mr. Ménard and Mr. Leclaire were unaware of the fraud, but also failed to contact the 16 clients whose funds were being withdrawn, and failed to discover that the money was being put into a special account outside of RBC.
IIROC also acknowledged that Mr. Leclaire stopped a client from liquidating her account in 2008 when she explained she wanted to invest funds in a "tax shelter" managed by Mr. Jones.
The regulator said mitigating factors in the case included the fact that no clients ever complained to the brokers about Mr. Jones, Mr. Leclaire stopped the client from withdrawing her funds, and Mr. Leclaire reported Mr. Jones to his branch manager when he suspected Mr. Jones was improperly giving investment advice to clients when not registered to do so.
IIROC said the men also co-operated with regulators in their investigation and had no other disciplinary history over their long careers.