IN THE MATTER OF
THE SECURITIES ACT,
R.S.O. 1990, c. S.5, as amendedAND
THE COMMODITY FUTURES ACT,
R.S.O. 1990, c. C.20, as amended
IN THE MATTER OF
PHOENIX RESEARCH AND TRADINGCORPORATION,
RONALD MOCK AND STEPHEN DUTHIE
(Sections 127 and 127.1 ofthe Securities Act and
sections 60 and 60.1 of theCommodity Futures Act)
WHEREAS on March 11, 2003, the OntarioSecurities Commission (the "Commission") issued anAmended Amended Notice of Hearing pursuant to section 127 ofthe Securities Act, R.S.O. 1990, c. S.5, as amended (the"Act") and section 60 of the Commodity FuturesAct, R.S.O. 1990, c. C.20 respecting Ronald Mock ("Mock")and others;
AND WHEREAS Mock entered into a SettlementAgreement in which he agreed to a proposed settlement of theproceedings, subject to the approval of the Commission;
AND UPON reviewing the Settlement Agreementand the Statement of Allegations of Staff of the Commissiondated June 11, 2002 and upon hearing submissions from counselfor Mock and from Staff of the Commission;
AND WHEREAS the Commission is of theopinion that it is in the public interest to make this Orderpursuant to sections 127 and 127.1 of the Act and sections 60and 60.1 of the Commodity Futures Act;
IT IS ORDERED THAT:
1. the attached Settlement Agreement is approved;
2. pursuant to subsection 127(1), paragraph1 of the Act and subsection 60(1), paragraph 1 of the CommodityFutures Act, the registrations of Mock are terminated;
3. pursuant to subsection 127(1), paragraph8 of the Act and subsection 60(1), paragraph 8 of the CommodityFutures Act, Mock is prohibited from becoming or actingas a director or officer of any issuer for six years commencingon the date of this Order;
4. pursuant to subsection 127(1), paragraph6 of the Act and subsection 60(1), paragraph 6 of the CommodityFutures Act, Mock is reprimanded; and
5. pursuant to section 127.1 of the Act andsection 60.1 of the Commodity Futures Act, costs ofthe investigation in the amount of $45,000 are payable byMock.
April 9, 2003.
IN THE MATTER OF
THE SECURITIES ACT,
R.S.O. 1990, c. S.5, as amendedand
IN THE MATTER OF
THE COMMODITY FUTURES ACT,
R.S.O. 1990, c. C. 20, asamended
IN THE MATTER OF
PHOENIX RESEARCH AND TRADINGCORPORATION,
RONALD MOCK AND STEPHEN DUTHIE
SETTLEMENT AGREEMENT BETWEENSTAFF OF
THE ONTARIO SECURITIES COMMISSIONAND
1. By Amended Amended Notice of Hearing datedMarch 11, 2003 (the "Notice of Hearing"), the OntarioSecurities Commission (the "Commission") announcedthat it proposed to hold a hearing against Ronald Mock ("Mock")to consider, among other things:
(a) whether pursuant to sections 127 and127.1 of the Securities Act, R.S.O. 1990, c. S.5(the "Act"), it is in the public interest forthe Commission to make an order:
(i) that the registration of Mock be terminatedor restricted or that terms and conditions be imposedon his registration;
(ii) that trading in any securities byMock cease permanently or for such period as specifiedby the Commission;
(iii) that Mock be prohibited from becomingan officer or director of any issuer permanently or forsome other time specified by the Commission;
(iv) reprimanding Mock;
(v) requiring Mock to pay the costs ofthe Commission's investigation and the hearing; and
(vi) encompassing such other terms andconditions as the Commission may deem appropriate; and
(b) whether, pursuant to sections 60 and60.1 of the Commodity Futures Act, R.S.O. 1990, c.C.20 it is in the public interest for the Commission tomake an order:
(i) that Mock's registration be terminatedor restricted or that terms and conditions be imposedon his registration;
(ii) that the exemptions contained inOntario commodity futures law do not apply to Mock permanentlyor for such period as specified by the Commission;
(iii) reprimanding Mock;
(iv) requiring Mock to pay the costs ofthe Commission's investigation and the hearing; and
(v) encompassing such other terms andconditions as the Commission may deem appropriate.
II. Joint Settlement Recommendation
2. Staff of the Commission ("Staff")agrees to recommend settlement of the proceeding initiatedin respect of Mock by the Notice of Hearing in accordancewith the terms and conditions set out below. Mock consentsto the making of an order against him in the form attachedas Schedule "A" based on the facts set out in PartIII of this Settlement Agreement.
III. Statement of Facts
3. Solely for the purposes of this proceeding,and of any other proceeding commenced by a securities regulatoryagency, Staff and Mock agree with the facts set out in paragraphs4 through 41.
4. Mock became registered with the Commissionpursuant to the Act on October 22, 1987 as a salesperson,on September 3, 1987 as a director and salesperson and onFebruary 3, 1994 as a portfolio manager.
5. Commencing March 6, 1995, Mock was PhoenixResearch and Trading Corporation's registered SupervisoryProcedures Officer pursuant to the Act.
6. Pursuant to the Commodity FuturesAct, Mock was registered with Phoenix Research Tradingand Corporation ("Phoenix Canada"), an advisorin the category of Commodity Trading Manager, as an advisingofficer from March 7, 1995 to May 30, 2000.
7. Mock's registrations under the Act andCommodity Futures Act were suspended on May 30, 2000due to Phoenix Canada's inability to meet the conditionsfor registration renewal namely to file audited financialstatements and maintain insurance.
(b) The Phoenix Group
8. The Phoenix Group was a hedge fund managementgroup. The Group was structured as a master/feeder fundarrangement. Unitholders invested in the "feeder"funds. In turn, the feeder funds (and other investors) purchasedunits in the "master" funds. The Phoenix FixedIncome Arbitrage Limited Partnership ("PFIA LP")was a hedge fund and one of the Group's "master"funds.
9. Phoenix Canada was established in 1994as a specialty hedge fund asset manager. Phoenix Researchand Trading (Bermuda) Limited ("Phoenix Bermuda")is a wholly-owned subsidiary of Phoenix Canada. Commencingin or about late 1995, and pursuant to an arrangement betweenPhoenix Bermuda and Phoenix Canada which ultimately wasformalized in a Services Agreement dated June 15, 1999 (the"Services Agreement"), Phoenix Canada providedinvestment advisory and portfolio management services to,among others, the Phoenix Group's feeder and master funds,including PFIA LP.
10. The Phoenix Hedge Fund Limited Partnershipwas a hedge fund listed on the TSE in or about July 1997(the "Phoenix TSE fund"). Phoenix Canada providedportfolio management services to the Phoenix TSE fund. ThePhoenix TSE fund purchased, among other things, units ofPFIA LP.
11. Mock was Phoenix Canada's CEO and Presidentand the company's registered supervisory procedures officerfor fixed income activity. Mock was responsible for allPhoenix Canada's fixed income business, including that ofPFIA LP.
12. During the material time, Phoenix Canadacomprised fourteen individuals, nine of whom were involvedin PFIA LP's fixed income activities. In heading PFIA LP,Mock managed the operations group comprising the CFO, theoperations manager and the settlement clerk. The fixed incometraders, including Stephen Duthie ("Duthie"),and the Research and Risk Manager reported to Mock. Duthiehas never been registered with the Commission.
13. PFIA LP was established to provide investorswith professionally managed market neutral and arbitrageinvestment trading strategies generally designed to minimizeexposure to market direction investment.
14. In this regard, the Services Agreementenumerated PFIA LP's approved fixed income trades, investmentrestrictions and risk control guidelines. Pursuant to suchAgreement, at the end of each business day Phoenix Canadawas obliged to review the positions taken and the assetsheld by PFIA LP to ensure compliance with the investmentguidelines/restrictions and risk control guidelines. Mockfailed to fulfill this obligation on behalf of Phoenix Canada.
15. In the spring of 1998, Duthie becamethe trader for PFIA LP's U.S. portfolio under the directsupervision of Mock. At this time, Duthie had less thanone year's experience as a fixed income arbitrage trader.
16. In late 1998 and throughout 1999, PFIALP (through trading by Duthie) held long positions in variousU.S. benchmark treasuries (the "UST Notes") including6% U.S. treasury notes due August 15, 2009. All the USTNotes were confirmed and settled by Phoenix Canada's backoffice operations staff.
17. Duthie's trading in the UST Notes wasdirectional, unhedged and contravened PFIA LP's investmentparameters (in concentration, size, length of time heldand value at risk). The UST Notes were highly unsuitableinvestments for PFIA LP and other Phoenix Canada clients.
18. PFIA LP's long position in 6% U.S. treasurynotes due August 15, 2009 (the "August 2009's")increased from US$181 million on August 12, 1999 to US$3.3billion on December 31, 1999. By mid-November 1999, theAugust 2009's represented PFIA LP's entire U.S. portfolio.By December 31, 1999, the August 2009's constituted approximately80% of PFIA LP's total assets.
19. The Bank of New York informed PhoenixCanada on January 4, 2000 that the latter was in an overdraftposition in excess of US$50 million. The August 2009's causedthe overdraft. Phoenix Canada liquidated all of PFIA LP'sassets. PFIA LP collapsed when it sustained a loss in excessof US$125 million.
20. All Phoenix unitholders who had a directinvestment in PFIA LP, and the TSE Phoenix fund shareholders,were detrimentally impacted by PFIA LP's collapse.
(c) Mock's Misconduct
21. From the fall of 1998 through the endof 1999, on the face of the on-line trading screens anddaily trade blotters reviewed regularly by Mock, Duthiewas engaged in directional and unhedged trading of U.S.treasuries which fell well outside PFIA LP's investmentparameters.
22. By mid-November 1999, the size, concentrationand value at risk ("VAR") of the August 2009'sgreatly exceeded PFIA LP's investment parameters. As atDecember 31, 1999, the position was seven times the allowableVAR and had directional exposure in excess of US$2 millionper basis point.
23. Further, Phoenix Canada's December 1999trade blotters showed the purchase of US$108 million worthof long bonds which were held several days despite beingcoded on the blotters as intra-day trades. These bonds contravenedPFIA LP's investment parameters.
24. The UST Notes and the August 2009'swere never marked to market. Because of the misstated pricesattributed to the August 2009's, as at November 30, 1999,PFIA LP's U.S. portfolio was overvalued by almost US$47million. As at December 31, 1999, the inaccurate pricingresulted in PFIA LP's U.S. portfolio being overvalued bymore than US$80 million. Mock never checked Duthie's inputtedprices.
25. Mock's failure to supervise Duthie inany meaningful way resulted in Duthie's trading of the USTNotes and accumulation of the August 2009's. This failurewas material to the collapse of PFIA LP.
26. Mock takes the position and representsto Staff that, between the fall of 1998 and December 1999,he believed that Duthie was engaged in a matched book tradingstrategy of repurchase agreements ("repos") andopen reverse repos such that the UST Notes were reverserepo'd in bonds rather than outright bond purchases (the"purported open reverse repos").
27. Mock takes the position and representsto Staff that his belief was based on oral representationsmade by Duthie. Mock's belief was contrary to the booksand records of Phoenix Canada.
28. Notwithstanding Mock's belief, his supervisionof Duthie, a trader with just over one year of fixed incomearbitrage trading experience, was wholly inadequate. Thenature of Duthie's trading activities should have been readilyascertainable by Mock.
29. Further, Mock permitted and acquiescedto the generation of books and records that were contraryto his belief. The purported open reverse repo transactionswere recorded/reported as outright bond purchases in PhoenixCanada's:
(a) back office computer system (Alydia);
(b) daily trade blotters;
(c) settlement reports;
(d) VAR reports;
(e) collateral reports;
(f) trial balances;
(g) profit and loss statements;
(h) general ledger accounts; and
(i) net asset value reports.
30. Mock did not check the existence ofany of the purported open reverse repos. He never askedfor, nor reviewed, a "Bloomberg" or any otherthird party source document respecting the purported openreverse repos. This was so even in the face of a November1999 collateral report which indicated that Duthie couldnot have been engaged in a matched book strategy of reposand open reverse repos to the extent Mock says he believedhe was.
31. Mock permitted and acquiesced in theimplementation of unreliable controls and procedures andinadequate segregation of duties relating to the purportedopen reverse repo transactions.
32. With Mock's approval, the VAR reportsand the profit and loss ("P & L") statementswere manually adjusted. Mock failed to ensure that the manualadjustments were confirmed or supported by third party sourcedocumentation. Since Mock had no way to validate the existenceof the purported open reverse repos, the repo rate and theinterest income accrual, the VAR reports and P & L statementswere fundamentally flawed and unreliable. Accordingly, Mock'sreliance on these documents was inappropriate.
33. Further, based on Mock's belief, theP & L, trial balances and general ledgers misstatedDuthie's position and the related income.
34. The safeguards typically afforded bythe confirmation and settlement processes were renderedineffective since Mock did not ensure that the operationsmanager and settlement clerk were aware of his belief concerningthe UST Notes. They had no knowledge of the purported openreverse repo transactions.
35. If Mock had walked once through theprocess respecting a purported open reverse repo transactionto ensure that the trade capture, trade confirmation, tradesettlement, risk assessment and accounting processes inplace were appropriate and reliable, the $3.3 billion longbond position would not have accumulated.
36. After being informed of the overdraftposition, it took Mock little time to determine that theAugust 2009's were a long bond position and not open reverserepo transactions as he states he had believed.
37. By failing to ensure that Duthie compliedwith PFIA LP's investment objectives and restrictions, Mockdid not act in the best interests of PFIA LP and other PhoenixCanada clients.
38. Mock further compromised the interestsof PFIA LP and other Phoenix Canada clients by allowingthe reporting of information concerning PFIA LP's tradingactivities that was inaccurate and misleading (based onhis belief) to unitholders, Phoenix Bermuda and the Bankof Bermuda. Accordingly, the Bank of Bermuda (Phoenix Canada'sadministrator and custodian) was hindered from fulfillingproperly its role as a "check and balance" forPhoenix Canada.
39. Duthie, in advising PFIA LP respectingthe investing in and the buying or selling of securities,was engaged in registerable activity. Mock failed to takesteps to ensure that Duthie was so registered with the Commission.
40. Mock's conduct was contrary to Ontariosecurities law and the public interest.
41. Mock promptly reported the impendingcollapse of PFIA LP to the Commission and co-operated withStaff throughout its investigation.
IV. MOCK'S POSITION
42. Mock takes the position and representsto Staff that:
(a) He believed that Duthie's inputted priceswere being independently checked by the operations groupand the Bank of Bermuda. Mock acknowledges that he did notverify that this was being done;
(b) Phoenix Canada's CFO and its Researchand Risk Manager believed that Duthie was engaged in a matchedbook trading strategy of repos and reverse repos such thatthe UST Notes were reverse repo'd in bonds rather than outrightbond purchases. With the approval of Mock and based onlyon the oral representations of Duthie, the Risk Managermanually adjusted the VAR reports by assigning the symbol"USTDS" to the UST Notes and assessing their riskas short term notes; and
(c) He and his family suffered serious financiallosses as a result of the collapse of PFIA LP and the wind-upof Phoenix Canada.
V. TERMS OF SETTLEMENT
43. Mock agrees to the following terms ofsettlement:
(a) The making of an Order:
(i) approving this Settlement Agreement;
(ii) terminating Mock's registrationsunder the Act and the Commodity Futures Act;
(iii) prohibiting Mock from becoming oracting as a director or officer of any issuer for 6 years;
(iv) reprimanding Mock; and
(v) requiring Mock to pay investigationcosts in the amount of $45,000.
(b) Mock will undertake to the Commissionin writing that he will not apply for registration underthe Act or the Commodity Futures Act in any capacityfor 5 years;
(c) Mock will undertake to the Commissionin writing that he will not hold any position which entailssupervising a registrant within the meaning of the Act for6 years;
(d) Within one year prior to applying forregistration with the Commission, Mock will write and passthe Partners, Directors and Officers (PDO) Examination;and
(e) If Mock becomes registered with theCommission, he agrees to be subject to supervision for oneyear as a term and condition of his registration.
VI. STAFF COMMITMENT
44. If this Settlement Agreement is approvedby the Commission, Staff will not initiate any proceedingunder Ontario securities law respecting any conduct or allegedconduct of Mock in relation to the facts set out in Part IIIof this Settlement Agreement subject to the provisions ofparagraph 45 below.
45. If the Settlement Agreement is approvedby the Commission and at any subsequent time Mock fails tohonour the undertakings contained in subparagraphs 43(b),(c) and (d) above, Staff reserves the right to bring proceedingsunder Ontario securities law against Mock based on the factsset out in Part III of the Settlement Agreement and the breachof the undertakings.
VII. APPROVAL OF SETTLEMENT
46. Approval of the settlement set out inthis Settlement Agreement shall be sought at the public hearingof the Commission scheduled for April 9, 2003 or such otherdate as may be agreed to by Staff and Mock (the "SettlementHearing") in accordance with the procedures describedin this Settlement Agreement. Mock will attend the SettlementHearing in person.
47. Counsel for Staff or for Mock may referto any part, or all, of this Settlement Agreement at the SettlementHearing. Staff and Mock agree that this Settlement Agreementwill constitute the entirety of the evidence to be submittedat the Settlement Hearing.
48. If this settlement is approved by theCommission, Mock agrees to waive his rights to a full hearing,judicial review or appeal of the matter under the Act.
49. Staff and Mock agree that if this settlementis approved by the Commission, neither Staff nor Mock willmake any public statement inconsistent with this SettlementAgreement.
50. If, for any reason whatsoever, this settlementis not approved by the Commission, or an order in the formattached as Schedule "A" is not made by the Commission;
(a) this Settlement Agreement and its terms,including all discussions and negotiations between Staffand Mock leading up to its presentation at the SettlementHearing, shall be without prejudice to Staff and Mock;
(b) Staff and Mock shall be entitled toall available proceedings, remedies and challenges, includingproceeding to a hearing of the allegations in the Noticeof Hearing and Statement of Allegations of Staff, unaffectedby this Settlement Agreement or the settlement discussions/negotiations;
(c) the terms of this Settlement Agreementwill not be referred to in any subsequent proceeding, ordisclosed to any person except with the written consentof Staff and Mock, or as may be required by law; and
(d) Mock agrees that he will not, in anyproceeding, refer to or rely upon this Settlement Agreement,the settlement discussions/negotiations or the process ofapproval of this Settlement Agreement as the basis of anyattack on the Commission's jurisdiction, alleged bias orappearance of bias, alleged unfairness or any other remediesor challenges that may otherwise be available.
VIII. DISCLOSURE OF SETTLEMENT AGREEMENT
51. Subject to paragraph 47 above, this SettlementAgreement and its terms will be treated as confidential byStaff and Mock until approved by the Commission, and foreverif, for any reason whatsoever, this settlement is not approvedby the Commission, except with the written consent of Staffand Mock, or as may be required by law.
52. Any obligations of confidentiality shallterminate upon approval of this Settlement Agreement by theCommission.
IX. EXECUTION OF SETTLEMENT AGREEMENT
53. This Settlement Agreement may be signedin one or more counterparts which together shall constitutea binding agreement.
54. A facsimile copy of any signature shallbe as effective as an original signature.
April 7, 2003.
April 8, 2003.