Securities Law & Instruments

IN THE MATTER OF

THE SECURITIES ACT

R.S.O. 1990, C. S.5, AS AMENDED

AND

IN THE MATTER OF

CIBC WORLD MARKETS INC.

 

ORDER

(Section 127 and 127.1)

WHEREAS on January 27, 2003 the OntarioSecurities Commission issued a Notice of Hearing pursuant tosections 127 and 127.1 of the Securities Act, R.S.O.1990 c.S.5, as amended (the "Act") in respect of CIBCWorld Markets Inc.;

AND WHEREAS CIBC World Markets enteredinto a settlement agreement with Staff of the Commission datedFebruary 12, 2003 (the "Settlement Agreement") inwhich they agreed to a proposed settlement of the proceeding,subject to the approval of the Commission;

AND UPON reviewing the Settlement Agreementand the Statement of Allegations of Staff of the Commission,and upon hearing submissions counsel for CIBC World Marketsand from counsel for Staff of the Commission;

AND WHEREAS the Commission is of theopinion that it is in the public interest to make this Order;

IT IS ORDERED THAT:

(1) the Settlement Agreement dated February12, 2003 attached to this Order is hereby approved;

(2) pursuant to clause 4 of subsection 127(1)of the Act, CIBC World Markets is hereby required to submitto a review of its practices relating to the disclosureof potential conflicts of interest in its equities researchreports and to institute such changes as may be orderedby the Commission, in accordance with the procedure outlinedin paragraph 49(a) of the Settlement Agreement; and

(3) pursuant to clause 6 of subsection 127(1)of the Act, CIBC World Markets is hereby reprimanded bythe Commission.

February 27, 2003.

"Theresa McLeod"                    "DerekBrown"                    "RobertDavis"

IN THE MATTER OF

THE SECURITIES ACT,

R.S.O. 1990, c S.5, as amended

AND

IN THE MATTER OF

CIBC WORLD MARKETS INC.

 

SETTLEMENT AGREEMENT

I INTRODUCTION

1. In a Notice of Hearing issued January 27,2003, the Ontario Securities Commission (the "Commission")announced that it proposes to hold a hearing to consider whether,pursuant to sections 127(1) and 127.1 of the Securities Act,R.S.O. 1990, c. S.5, as amended (the "Act"), itis in the public interest for the Commission to make an order:

(a) approving this agreement;

(b) requiring that CIBC World Markets Inc.submit to a review of its practices relating to the disclosureof potential conflicts of interest in its equities researchreports and institute such changes as may be ordered bythe Commission;

(c) administering a reprimand to CIBC WorldMarkets; and

(d) requiring CIBC World Markets to makea single payment of $100,000 towards the costs of the jointinvestigation in this matter, to be allocated between theCommission and the Commission des valeurs mobilièresdu Quebec ("CVMQ").

II JOINT SETTLEMENT RECOMMENDATION

2. Staff of the Commission agree to recommendsettlement of the proceeding initiated in respect of CIBCWorld Markets by the Notice of Hearing in accordance withthe terms and conditions set out below. CIBC World Marketsconsents to the making of an order against it in the formattached as Schedule "A" on the basis of the factsset out below.

III STATEMENT OF FACTS

3. CIBC World Markets is a corporation registeredwith the Commission as an Investment Dealer. It carries onbusiness as an investment dealer in the Province of Ontario,as well as in other provinces of Canada.

4. CIBC World Markets is a wholly-owned subsidiary,and thus an affiliate, of Canadian Imperial Bank of Commerce("CIBC").

5. Shoppers Drug Mart Corporation is a NewBrunswick corporation which operates a chain of drug storesand pharmacies across Canada. Shoppers completed an initialpublic offering of common shares in November, 2001 (the "IPO").

6. CIBC World Markets acted as the lead underwriterof the IPO. The IPO closed on November 21, 2001.

7. At the time of the IPO, and as disclosedin the IPO prospectus, CIBC Capital (SD Holdings) Inc., anaffiliate of CIBC World Markets, held 7,000,000 shares ofShoppers. CIBC World Markets purchased a further 450,000 sharesof Shoppers pursuant to the IPO. CIBC World Markets and CIBCCapital continued to hold these shares during the period betweenNovember 21, 2001 and February 8, 2002 (the "MaterialPeriod").

8. During the Material Period, and as disclosedin the IPO prospectus, Shoppers was indebted to CIBC. Theamount of outstanding indebtedness varied from $59.51 millionto $67.39 million during the Material Period.

The Research Reports

9. During the Material Period, CIBC WorldMarkets published five equity research reports recommendingthe purchase of securities of Shoppers. The five reports weredated December 17, 2001, December 18, 2001, December 19, 2001,January 10, 2002 and February 8, 2002 (the "ResearchReports"), and were intended for general circulation,being distributed both internally at CIBC World Markets andto its institutional and retail clients located throughoutCanada, including the Provinces of Ontario and Quebec, uponrequest.

10. The Research Reports all stated that sharesof Shoppers were rated as a "strong buy".

11. On January 15, 2002, CIBC World Marketspublished an equity research report concerning shares of JeanCoutu Group Inc., a competitor of Shoppers, and the only othercompany in this market sector followed by CIBC World Marketsanalysts. In this report, CIBC World Markets downgraded itsrating of the shares of Jean Coutu from a "strong buy"to a "hold".

Failure to Disclose Interests

12. In the Research Reports, CIBC World Marketsfailed to adequately disclose the full nature of the relationshipbetween itself and its affiliated companies and Shoppers.CIBC World Markets thus failed to adequately disclose thepotential conflicts of interest inherent in its recommendationof the purchase of Shoppers shares. Specifically:

(a) in the Research Reports, CIBC WorldMarkets failed to adequately disclose that it had assumedan underwriting liability to Shoppers during the past 12months, contrary to section 41 of the Act;

(b) in the Research Reports, CIBC WorldMarkets failed to adequately disclose that, along with itsaffiliate, it owned 7,450,000 shares of Shoppers; and

(c) in the Research Reports, CIBC WorldMarkets did not disclose that Shoppers was indebted to CIBC.

13. The obligation to make full disclosurein the Research Reports was important in a period when CIBCWorld Markets was changing its recommendation concerning theshares of Shoppers' major competitor.

14. Staff make no allegation of improprietyconcerning the formulation of CIBC World Markets' recommendationsregarding the purchase of shares of Shoppers or Jean Coutuduring the Material Period.

First Report - December 17, 2001

15. In the 46 page research report dated December17, 2001, CIBC World Markets stated that "CIBC WorldMarkets, or one of its affiliated companies, has performedinvestment banking services for this company".

16. This report also contained the statement:

[a] CIBC World Markets company may have actedas initial purchaser or placement agent for a private placementof any of the securities of any company mentioned in thisreport, may from time to time solicit from or perform financial,advisory, investment banking or other services for such company,or have lending or other credit relationships with the same.

17. This report also contained the statement:

[a] CIBC World Markets company or its shareholders,directors, officers and/or employees, may have a long or shortposition or deal as principal in the securities discussedherein, related securities or in options, futures or otherderivative instruments based thereon.

18. The latter two statements were printedin type less legible than that used in the body of the report.

19. These statements failed to adequatelydisclose the fact that CIBC World Markets had assumed an underwritingliability with respect to securities of Shoppers within theprevious twelve months.

20. This report incorrectly stated the numberof shares of Shoppers held by CIBC World Markets and its affiliates,disclosing only the 7,000,000 shares held by CIBC Capital.

21. This report did not disclose the factthat Shoppers was indebted to CIBC.

Second Report - December 18, 2001

22. The two page research report dated December18, 2001 contained the statement:

[a] CIBC World Markets company may have actedas initial purchaser or placement agent for a private placementof any of the securities of any company mentioned in thisreport, may from time to time solicit from or perform financial,advisory, investment banking or other services for such company,or have lending or other credit relationships with the same.

23. This report also contained the statement:

[a] CIBC World Markets company or its shareholders,directors, officers and/or employees, may have a long or shortposition or deal as principal in the securities discussedherein, related securities or in options, futures or otherderivative instruments based thereon.

24. Both of these statements were printedin type less legible than that used in the body of the report.

25. These statements failed to adequatelydisclose the fact that CIBC World Markets had assumed an underwritingliability with respect to securities of Shoppers within theprevious twelve months.

26. These statements failed to adequatelydisclose the fact that CIBC World Markets and its affiliatesowned 7,450,000 shares of Shoppers.

27. These statements did not disclose thefact that Shoppers was indebted to CIBC.

Third Report - December 19, 2001

28. The four page research report dated December19, 2001 contained the statement:

[a] CIBC World Markets company may have actedas initial purchaser or placement agent for a private placementof any of the securities of any company mentioned in thisreport, may from time to time solicit from or perform financial,advisory, investment banking or other services for such company,or have lending or other credit relationships with the same.

29. This report also contained the statement:

[a] CIBC World Markets company or its shareholders,directors, officers and/or employees, may have a long or shortposition or deal as principal in the securities discussedherein, related securities or in options, futures or otherderivative instruments based thereon.

30. Both of these statements were printedin type less legible than that used in the body of the report.

31. These statements failed to adequatelydisclose the fact that CIBC World Markets had assumed an underwritingliability with respect to securities of Shoppers within theprevious twelve months.

32. These statements failed to adequatelydisclose the fact that CIBC World Markets and its affiliatesowned 7,450,000 shares of Shoppers.

33. These statements did not disclose thefact that Shoppers was indebted to CIBC.

Fourth Report - January 10, 2002

34. The five page research report dated January10, 2002 contained the statement:

[a] CIBC World Markets company may have actedas initial purchaser or placement agent for a private placementof any of the securities of any company mentioned in thisreport, may from time to time solicit from or perform financial,advisory, investment banking or other services for such company,or have lending or other credit relationships with the same.

35. This report also contained the statement:

[a] CIBC World Markets company or its shareholders,directors, officers and/or employees, may have a long or shortposition or deal as principal in the securities discussedherein, related securities or in options, futures or otherderivative instruments based thereon.

36. Both of these statements were printedin type less legible than that used in the body of the report.

37. These statements failed to adequatelydisclose the fact that CIBC World Markets had assumed an underwritingliability with respect to securities of Shoppers within theprevious twelve months.

38. These statements failed to adequatelydisclose the fact that CIBC World Markets and its affiliatesowned 7,450,000 shares of Shoppers.

39. These statements did not disclose thefact that Shoppers was indebted to CIBC.

Fifth Report - February 8, 2002

40. The six page research report dated February8, 2002 contained the statement "CIBC World Markets,or one of its affiliated companies, managed or co-manageda public offering for securities for Shoppers Drug Mart withinthe last three years".

41. This report also contained the statement:

[a] CIBC World Markets company may have actedas initial purchaser or placement agent for a private placementof any of the securities of any company mentioned in thisreport, may from time to time solicit from or perform financial,advisory, investment banking or other services for such company,or have lending or other credit relationships with the same.

42. This report also contained the statement:

[a] CIBC World Markets company or its shareholders,directors, officers and/or employees, may have a long or shortposition or deal as principal in the securities discussedherein, related securities or in options, futures or otherderivative instruments based thereon.

43. All of these statements were printed intype less legible than that used in the body of the report.

44. These statements failed to adequatelydisclose the fact that CIBC World Markets had assumed an underwritingliability with respect to securities of Shoppers within theprevious twelve months.

45. These statements failed to adequatelydisclose the fact that CIBC World Markets and its affiliatesowned 7,450,000 shares of Shoppers.

46. These statements did not disclose thefact that Shoppers was indebted to CIBC.

Cooperation with Staff

47. CIBC World Markets has cooperated withStaff of the OSC and the CVMQ in the course of the joint investigationof this matter.

IV RESPONDENT'S POSITION

48. CIBC World Markets states that, sincethe Material Period, it has enacted additional policies andprocedures to better ensure disclosure of potential conflictsof interest in its equities research reports.

V TERMS OF SETTLEMENT

49. CIBC World Markets agrees to the followingterms of settlement:

(a) the Commission will make an order undersubsection 127(1)(4) of the Act requiring CIBC World Marketsto submit to a review of its practices relating to the disclosureof potential conflicts of interest in its equities researchreports.

The purpose of the review will be to ensurethat CIBC World Markets adopts industry best practices withregard to the identification and disclosure of potentialconflicts of interest in such reports, including the conflictsof interest identified in section III of this agreement.

The review will be conducted by AssetRiskAdvisory at CIBC World Markets' expense. AssetRisk Advisorywill identify industry best practices in this area, assesswhether CIBC World Markets' current practices meet thisstandard, and propose improvements, if required.

AssetRisk Advisory will provide a reportsummarizing its review and recommendations in draft formto both Staff of the Commission and CIBC World Markets.Both Staff and CIBC World Markets will have an opportunityto comment on the report in its draft form. AssetRisk Advisorywill then prepare a final report.

The AssetRisk final report will be submittedto the Commission for its approval. Representatives of bothCIBC World Markets and Staff will have the opportunity tomake representations to the Commission regarding the improvements,if any, proposed in the final report. The Commission maythen order CIBC World Markets to implement any or all ofthe recommended improvements pursuant to section 127(1)(4)of the Act.

If the Commission makes such an order, sixmonths following the date of the order, AssetRisk will conducta further review of CIBC World Markets' practices to ensurethat any required changes have been implemented. This furtherreview will be conducted at CIBC World Markets' expense,and a copy of the resulting report will be provided to CIBCWorld Markets and to Staff of the Commission.

(b) the Commission will make an order undersubsection 127(1)(6) of the Act that CIBC World Marketsbe reprimanded; and

(c) CIBC World Markets agrees to make asingle payment in the amount of $100,000 in respect of aportion of the costs of the joint investigation of thismatter.

The proceeds of this payment will be allocatedbetween the Commission and the CVMQ as mutually agreed betweenthe Staffs of the Commission and of the CVMQ.

VI STAFF COMMITMENT

50. If this agreement is approved by the Commission,Staff will not initiate any complaint to the Commission orany other proceeding under the Act, or request that the Commissionhold a hearing or issue any other order in respect of theconduct or alleged conduct of CIBC World Markets in relationto the facts set out in section III of this agreement.

VII PROCEDURE FOR APPROVAL OF SETTLEMENT

51. The approval of this agreement shall besought at a joint public hearing held before the Commissionand the CVMQ scheduled for a date to be agreed by Staff andCIBC World Markets (the "Settlement Hearing"), inaccordance with the procedures set out in this agreement andthe Commission's Rules of Practice.

52. Staff and CIBC World Markets agree thatif this agreement is approved by the Commission, it, alongwith copies of the Research Reports, will constitute the entiretyof the evidence to be submitted regarding CIBC World Marketsin this matter, and CIBC World Markets agrees to waive itsrights to a full hearing and appeal of this matter.

53. Staff and CIBC World Markets agree thatif this agreement is approved by the Commission, neither partyto this agreement will make any public statement inconsistentwith this agreement.

54. If, at the conclusion of the SettlementHearing, and for any reason whatsoever, this agreement isnot approved by the Commission, or an order in the form attachedas Schedule "A" is not made by the Commission:

(a) this agreement and all negotiationsleading up to it shall be without prejudice to Staff andCIBC World Markets and each of Staff and CIBC World Marketswill be entitled to all available proceedings, remediesand challenges, including proceeding to a hearing of theallegations contained in the Notice of Hearing and Statementof Allegations, unaffected by this agreement or the settlementnegotiations; and

(b) CIBC World Markets agrees that it willnot, in any proceeding, refer to or rely upon this agreementor the negotiation or process of approval of this agreementas the basis for any attack on the Commission's jurisdiction,alleged bias, alleged unfairness or any other remedies orchallenges that may otherwise be available.

VIII DISCLOSURE OF AGREEMENT

55. Counsel for Staff or for CIBC World Marketsmay refer to all or part of this agreement and the ResearchReports in the course of the Settlement Hearing. Otherwise,this agreement and its terms will be treated as confidentialby both parties until the commencement of the Settlement Hearing.

IX EXECUTION OF SETTLEMENT AGREEMENT

56. This agreement may be signed in one ormore counterparts which together shall constitute a bindingagreement and a facsimile copy of any signature shall be aseffective as an original signature.

February 7, 2003.

"Brian Shaw"
CIBC World Markets Inc.
Per: Brian Shaw
 
"Jacqueline Moss"
CIBC World Markets Inc.
Per: Jacqueline Moss

February 12, 2003.

"Michael Watson"
Staff of the Ontario Securities Commission
Per: Michael Watson