IN THE MATTER OF:

THE RULES OF THE INVESTMENT INDUSTRY REGULATORY ORGANIZATION OF CANADA AND YONATHAN CHANOCH SHIELDS

STATEMENT OF ALLEGATIONS

Further to a Notice of Hearing dated August 14, 2019, Enforcement Staff make the following

allegations:

PART I – REQUIREMENTS CONTRAVENED

(i) Between February 2016 and February 2018 the Respondent failed to use due

diligence to learn and remain informed of the essential facts relative to certain

clients, contrary to Dealer Member Rule 1300.1(a); and

(ii) Between February 2016 and February 2018, the Respondent failed to ensure

that recommendations were suitable for certain clients, contrary to Dealer

Member Rule 1300.1(q).

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PART II – RELEVANT FACTS AND CONCLUSIONS

Overview

1. Beginning in February 2016, the Respondent, a Registered Representative (“RR”) at R.J.

O’Brien & Associates Canada Inc. (“R.J. O’Brien”) accepted several client referrals from

Shane Dubin (“Dubin”), an IIROC RR employed at the time at Scotia Capital Inc.

(“Scotia”). Dubin was also the Respondent’s client and used his R.J. O’Brien accounts to

engage in high-risk options on futures trading.

2. Dubin was not licensed to trade futures or options on futures. Therefore, Dubin

referred certain of his clients, colleagues, and friends to the Respondent so that they

could employ Dubin’s options on futures trading strategy, which had been profitable for

him.

3. The Respondent accepted the referrals; however, he failed to know these clients: in

some cases, he did not meet or speak to the clients and he did not review or question

the clients’ account opening documents.

4. The Respondent also failed to ensure that Dubin’s options on futures trading was

suitable for these clients. The Respondent largely adopted Dubin’s trading

recommendations for these clients or duplicated the trades made in Dubin’s accounts.

The options on futures trading was not suitable for these clients who had no experience

trading options on futures.

5. In early February 2018, the S&P Index experienced a significant spike in volatility and a

corresponding drop in value that resulted in these clients sustaining significant losses as

a result of the options on futures trading. The Respondent earned commissions of

approximately $54,000 USD as a result of this trading.

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Registration History

6. The Respondent has been a RR since 1995 and has worked at R.J. O’Brien since October

2014.

The Client Referrals and the Strategy

7. The Respondent and Dubin had worked together at Scotia from approximately 2004

until 2010.

8. Beginning in February 2016, the Respondent accepted approximately 18 client referrals

from Dubin, ten of whom are the subject of these allegations (the “Clients”).

9. Dubin had been a futures and options on futures licensed advisor at Scotia until 2016

when the firm discontinued its futures trading business and he forfeited his license.

Shortly thereafter, Dubin contacted the Respondent to advise that he had been trading

an options on futures strategy and wanted to continue to do so with the Respondent.

10. In 2016, the Respondent opened both a personal and corporate account for Dubin at

R.J. O’Brien in which Dubin implemented a high-risk strategy trading uncovered USD

options on futures, including the S&P 500 E-minis, crude oil, natural gas, and gold (the

“Strategy”).

11. The Strategy aimed to identify short-term option writing opportunities, both calls and

puts, within the futures markets and was predominantly focused on S&P 500 E-mini

contracts. The Strategy was expected to return 20% annually by collecting option

premiums with the expectation that the options would expire worthless.

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12. The Respondent knew the Strategy was speculative and should only be used by

investors who understood the risks involved in both trading options on futures and the

use of leverage.

Failure to Know the Clients

13. Between January 2016 and January 2018, Dubin realized significant profits from the

Strategy. In 2016 and 2017, Dubin referred certain of his clients, colleagues, and friends

to the Respondent in order to open accounts with R.J. O’Brien and use the Strategy.

14. Dubin made these referrals to the Respondent by email. The Clients had no prior

experience with the Strategy and the Respondent did not know any of them prior to

opening their accounts.

15. The Clients were asked to complete New Client Application Forms (the “NCAFs”). The

NCAFs were physically delivered or emailed to the Respondent. The investment

information on the NCAFs is indicated in the table below; in addition, some of the NCAFs

included an email address for Dubin as a party who was to receive copies of account

statements.

Client Futures Investment Experience

Equities Investment Experience

Net Worth (CAD)

AM None None $1.7 million JM None 1 year $2.8 million BT None 10 years $3.3 million RF & SF None 5 years $1.8 million

VP 9 years of futures and options-on-futures experience*

10 years equity and option experience* $2 million

PA & SS None 7.5 years equity, options, rights/warrants short sale experience

$6.2 million

MW None None $4.8 million

ED 4 years of futures and options-on-futures*

No specifics on NCAF $3 million

*This experience is overstated on the NCAF; the client in fact had no experience with futures or options.

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16. The Respondent did not review the completed NCAFs. His assistants checked for any

incomplete sections on the forms. The Respondent believed that it was up to the Clients

to ensure that the information provided was accurate.

17. The NCAFs included a section entitled, “Approximate Risk Capital Available for Futures

Trading (Risk Capital refers to the amount you are willing to risk trading)”. The Clients

indicated the following amounts for this section, and in some cases the amounts were

decreased by R.J. O’Brien prior to account approvals:

Client Risk Capital Available for Futures Trading as per Client (USD)

Risk Capital Available for Futures Trading as per R.J. O’Brien Compliance (USD)

AM $150,000 $75,000 JM $100,000 $50,000 BT $100,000 $50,000 RF & SF $100,000 $20,000 VP $300,000 $100,000 PA & SS $250,000 $250,000 MW $100,000 $100,000 ED $100,000 $100,000

18. Several of the Clients used a line of credit to fund the Strategy. The Respondent was not

aware of and did not ask the Clients about the source of their funds, but he understood

that the use of borrowed funds would make the Strategy inappropriate for a majority of

the Clients due to the increased level of risk.

19. The Respondent never met or spoke with RF or VP; he did not meet and may have

spoken only once with ED in relation to a cash withdrawal but not at the time of account

opening.

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20. In the case of VP, the Respondent was aware that the information on her NCAF did not

reflect her own experience or objectives; instead, it reflected those of her husband who

was also a client of the Respondent.

21. The Respondent took the position that VP’s husband was effectively the client on the

account since it was opened in VP’s name for tax purposes.

22. In the case of RF, the Respondent advised her husband, SF, that her NCAF for an

individual account was not acceptable to R.J. O’Brien on the basis that her net worth

and income levels were below what the firm considered “prudent for futures

speculation”, but that a joint account would be considered. The Respondent ultimately

opened a joint account for RF and SF.

23. In the case of JM, the Respondent spoke with him by phone only once for approximately

five minutes and although he suggested they meet to discuss the Strategy, he never

ultimately met JM in person. The Respondent asked JM for his permission to co-

ordinate with Dubin to complete JM’s NCAF documentation.

24. During the phone call, the Respondent went over the Strategy with JM and explained

how he made recommendations. In particular, the Respondent explained that he and

Dubin would discuss the markets and that Dubin would then put on some trades; the

Respondent would then send the client an email with recommendations and ask for

approval from the client to execute a trade.

25. In the case of clients AM, BT, and SF, the Respondent met with these clients only once

for approximately 10-20 minutes each in order to collect their respective NCAF

documents; however, the conversations consisted of general matters and they did not

discuss the NCAFs or the Strategy.

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26. On the basis of the foregoing, the Respondent believed that the Clients fully understood

the Strategy and that they were sophisticated enough to implement it for their

respective R.J. O’Brien accounts.

27. Notwithstanding the Respondent’s assessment of the Clients as sophisticated, R.J.

O’Brien required the Clients to execute an acknowledgment on an “Additional Risk

Disclosure Form” (the “ARDF”) before their accounts were opened.

28. The ARDF indicated that: the Clients were advised to reconsider this investment; that

they did not “meet R.J. O’Brien & Associates Canada Inc.’s… guidelines to open a

commodity futures/futures option account” because “You have no commodity

futures/futures options experience”; that such trading may be too risky; and that they

should therefore carefully consider whether such trading was suitable for them.

29. The Respondent did not bring the ARDF to the attention of the Clients or explain it to

them. The Clients did not understand the significance of the ARDF, but executed the

form on the understanding that it was simply part of the account opening process.

Failure to Make Suitable Recommendations

30. The Respondent made recommendations to the Clients by email. The Respondent and

or Dubin had instructed the Clients to approve the recommendations before a trade

could be executed.

31. An email the Respondent sent to AM on October 30, 2017 demonstrates how

recommendations were made:

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“We have 2 New recommendations for you this morning:

Sell 5 December Can$ 76 puts @ 15 or better

Sell 5 January crude 60 calls @ 17 or better

We also would recommend selling 10 Nov mini S&P 2615 calls @ 2.00

And to sell 10 November mini S&P 2375 puts@ 1.70 or better

Please confirm that you are ok to enter these trades…”

32. In the vast majority of cases, the Clients would respond with an email and accept the

Respondent’s recommendations with a one word answer, (e.g. “Approved”) as they had

been instructed by the Respondent and or Dubin.

33. None of the Respondent’s recommendations included any explanation for the

recommendations, any details as to how the strike price or quantity was determined, or

had any information about the market that was being traded. The Respondent believed

that the Clients were sophisticated and did not need any such explanations.

34. Rather than assessing the suitability of trades for each client, the Respondent made

recommendations on the basis of trading in Dubin’s accounts.

35. Dubin did not have trading authority over the Clients’ accounts. However, the

Respondent nevertheless took recommendations and at times accepted direct

instructions from Dubin for trading in some of the Clients’ accounts.

Client Losses

36. On February 5, 2018, the S&P Index experienced a significant spike in volatility and a

corresponding drop in value. Consequently, the Respondent decided to implement a

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“roll” in the Clients’ accounts; a roll is a series of trades that allow a client to buy time

and create a larger buffer before incurring losses in hopes that the underlying futures

market prices stabilize.

37. On February 5, 2018, the Respondent implemented two rolls for the Clients’ accounts.

He executed the first at approximately 10 a.m. and the second at approximately 2 p.m.,

both of which ultimately failed to protect the Clients from losses in their accounts.

38. The Respondent believed that a roll was the best decision at the time and sent Clients

recommendation emails prior to each roll; however, he did not consult with any of the

Clients beforehand and did not discuss market conditions or advise them in the

recommendation emails that he was implementing a roll. The recommendations were

virtually identical in format to all of the recommendation emails sent to the Clients

previously, as set out above.

39. By approximately 6 or 7 p.m. on February 5, 2018, the market downturn was such that

the Respondent sent a third email to the Clients recommending that they liquidate all

positions in their accounts.

40. The emails to the Clients recommended that their positions be liquidated but did not

explain:

• the nature of the market conditions;

• why they were being advised to liquidate all positions;

• that liquidation would result in a complete realized loss of value in the account, and

in many cases create a debit balance; or

• any alternatives to cover margin call positions prior to the closing of the option

positions.

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41. The Respondent’s view was that because these Clients were sophisticated, they would

have known that the market had declined and that their accounts were in a deficit.

42. All of the Clients’ accounts were liquidated on February 6, 2018, with combined realized

losses of over $1.3 million USD, leaving several of the Clients with the following debit

balances:

Client Amount Invested (CAD) Net Loss (USD) Remaining Balance AM $150,000 ($283,972) ($163,855) USD JM $100,000 ($76,853) $3,286 CAD BT $100,000 ($79,494) ($5,059) USD RF & SF $100,000 ($75,608) $4,853 CAD VP $300,000 ($223,866) $18,979 CAD PA & SS $230,000* ($276,966) ($96,840) USD MW $100,000 ($82,154) ($2,706) USD ED $400,000 ($262,198) ($20,378) USD TOTAL ($1,361,114)

*Consisting of $100,000 CAD together with $100,000 USD converted at the exchange rate on date of deposit

43. Between February 2016 and February 2018, the Respondent earned commissions of

approximately $54,000 USD as a result of implementing the Strategy in the Clients’

accounts.

DATED at Toronto, Ontario this 14th day of August, 2019.