Statement of Allegations

Transcription

1 Statement of Allegations September 24, APPENDIX A IN THE MATTER OF THE UNIVERSAL MARKET INTEGRITY RULES AND IN THE MATTER OF CREDIT SUISSE FIRST BOSTON CANADA INC. STATEMENT OF ALLEGATIONS I. REQUIREMENTS CONTRAVENED 1. Market Regulation Services Inc. ( RS ) is of the opinion that Sections 2.1(1), 6.4 and of the Universal Market Integrity Rules ( UMIR ) have been contravened. 2. The text of the relevant Requirements is set out at Schedule A. II. THE FACTS RELIED UPON A. General Overview 3. Credit Suisse First Boston, a global investment bank, is a member of the Credit Suisse Group, serving institutional, corporate, government and high net worth

2 clients. Credit Suisse First Boston s businesses include securities underwriting, sales and trading, investment banking, private equity, financial advisory services, investment research, venture capital and asset management. 4. The corporate headquarters for Credit Suisse First Boston are located in New York ( CSFB LLC ), London ( CSFBEL ) and Zurich. It has offices worldwide, including Toronto and it employs 18,000 people worldwide. Credit Suisse First Boston Canada Inc. ( CSFB ) is an investment dealer with 70 employees. 5. On April 15, 2003, CSFB won a bid to purchase as principal 9,047,092 BCE Inc. ( BCE ) shares at $27.73 per share from Ameritech Canada Business Trust ( Ameritech or SBC ), an entity related to SBC Communications Inc. Ameritech is a non-canadian entity. The term sheet for the transaction indicates a trade date of April 16, The TSX closing price for BCE shares on April 15, 2003 was $ The total cost to CSFB for the BCE shares purchased was $250,875, CSFB s purchase as principal will be referred to as the take-on trade. 8. On April 16, 2003, CSFB sold as principal the 9,047,092 BCE shares at $27.90 per share as follows: 7,701,000 BCE shares to Canadian accounts through CSFB; 1,286,092 shares to CSFB LLC and 60,000 shares to CSFBEL. CSFB LLC and CSFBEL bought the shares as principal for resale to their clients. The sale of the BCE shares will be referred to as the unwinding trade. 9. On the morning of April 16, 2003, BCE shares traded on the TSX between $28.05 and $ CSFB earned a profit of $1,538, on the overall transaction. CSFB s profit on the sale to Canadian clients was $1,309, The unwinding trade to Canadian clients did not print on a consolidated tape in Canada or in the United States. 2

3 CSFB personnel Duncan Donald Webb ( Webb ) 12. Webb is the Chief Financial Officer, Chief Administrative Officer and Chief Compliance Officer at CSFB. He reports to Tom Barber ( Barber ), Chairman, President and Chief Executive Officer in Canada, and to Frank D. DeCongilio at CSFB LLC. Webb is one of two Alternate Designated Persons ( ADP ) at CSFB. 13. Webb is also the Senior Control Officer for Canada and assists Barber in looking out for reputational issues, regulatory risk and legal entity issues. 14. Webb has been employed with CSFB since September He has been involved in the securities industry since From January 1997 to May 2000, he was the Chief Financial Officer at CT Securities Inc. Michael Raptopulos ( Raptopulos ) 15. Raptopulos is the Compliance Officer and a Vice President at CSFB. He reports to Webb in Canada and to Matt Connolly, a Director in Legal and Compliance at CSFB LLC. 16. Raptopulos has been in the securities industry since he was previously employed as a Compliance Officer at BMO Nesbitt Burns. Inc. Dwayne Barrington Nash ( Nash ) 17. Nash was re-located from CSFB LLC to CSFB approximately ten months ago. He is currently a senior institutional block trader and head trader at CSFB. 18. Nash reports to Louis Anthony De Jong in Canada and Michael Clark, Global Head of Equities, at CSFB LLC. 19. Prior to coming to Canada, Nash had been employed in the securities industry in the United States since 1983, having been an institutional block trader at CSFB LLC from 1986 to September

4 Louis Anthony De Jong ( De Jong ) 20. De Jong has been employed with CSFB since December He became the Head of Canadian Equities in He has been in the securities industry since He is the other ADP for CSFB. Thomas Kehoe ( Kehoe ) 22. Kehoe has been employed with CSFB since April 1, He is a trading officer. He has been in the securities industry since CSFB LLC personnel Frank Preite ( Preite ) 23. Preite is a lawyer employed in the Legal and Compliance area of CSFB LLC. David Hermer ( Hermer ) 24. Hermer is employed in Equity Capital Markets at CSFB LLC. Matt Connolly ( Connolly ) 25. Connolly is the Director of Legal and Compliance for CSFB LLC. Lenny Stripeikis ( Stripeikis ) 26. Stripeikis is a trader for Canadian products at CSFB LLC. CSFBEL personnel Autumn Bradley-Cole ( Cole ) 27. Cole is employed as the Director - Sales at CSFBEL. She is a trader of U.S. stock in Europe. 4

5 Background to the trades 28. As stated, Ameritech had approximately 9,000,000 shares of BCE available to sell as of April 15, Prior to April 16, 2003, several investment dealers bid for the opportunity to purchase the shares. CSFB was one of them. 30. CSFB LLC was involved on behalf of CSFB in the negotiations with SBC for the sale of the BCE shares. Ultimately, on April 15, 2003, a bid at C$27.73 per share was made by CSFB for 9,047,092 BCE shares. 31. At the time it bid, CSFB estimated that it could sell between 5 and 5.5 million of the BCE shares. CSFB considered selling the shares as a block trade across the Toronto Stock Exchange ( TSX ), believing that CSFB would have sufficient BCE shares in inventory to satisfy any displacement requirements. 32. In addition, CSFB contacted James Twiss ( Twiss ), a senior policy lawyer at RS, just after 2:00 p.m. on April 15, 2003 to enquire about a regulatory exemption under Section 6.4(b) of UMIR to conduct the trade other than on a marketplace at a price below where BCE was trading on the TSX. Twiss advised that such an exemption would not be granted and advised that CSFB might consider conducting the trade as a wide distribution under TSX Rules. Twiss referred CSFB to the TSX for additional information. 33. Shortly thereafter, CSFB contacted the TSX (a voic message was left) concerning the possibility of conducting the trade as a wide distribution. 34. Just after the close of the market on April 15, 2003, the TSX contacted CSFB to advise that a wide distribution could not be done that day, given the time. CSFB was told to call back in the morning about the possibility of conducting a wide distribution. 5

6 35. Shortly after 5:00 p.m. on April 15, 2003, CSFB LLC advised CSFB that it had won the bid. 36. After winning the bid, CSFB began contacting Canadian clients for the purchase of the shares. By approximately 8:30 p.m. on the evening of April 15, 2003, CSFB sales traders had received total indicated interest for 4,700,000 shares at $27.90 per share. CSFB confirmed the purchase of 4,500,000 BCE shares to the clients that evening, with the remaining 200,000 BCE shares being entered into the CSFB book for allocation the following morning. 37. On the morning of April 16, 2003, CSFB, CSFB LLC and CSFBEL sales personnel continued to line up purchasers for the shares. The CSFB book for the shares closed at 8:45 a.m. The indicated interest was for 15,632,700 shares (including the 4,500,000 shares committed to the previous night). 38. As such, CSFB faced a significantly oversubscribed book. 39. CSFB did not own BCE shares prior to the purchase from Ameritech. Displacement of BCE shares on the TSX and on other marketplaces became a significant issue for CSFB. 40. At approximately 8:23 a.m., CSFB spoke with Twiss. CSFB advised that it had won the bid and was seeking direction on conducting a wide distribution. Twiss directed CSFB to the TSX as the details would have to be worked out with it. 41. At approximately 8:45 a.m., CSFB contacted the TSX and was advised that a wide distribution would more difficult to conduct at the market s opening because the TSX would not halt trading or freeze the TSX book on the BCE shares at that time. The TSX suggested that CSFB enter a sell order large enough to move the stock price down to its agreed-upon sale price to clients, at which point a cross could be executed. 42. After discussion with the TSX, Hermer, Preite, Webb, Raptopulos and Nash participated in a conference call. To avoid the displacement obligations 6

7 associated with conducting the trade as a block trade on the TSX and on other markets, and to avoid waiting until closer to the close of trading on April 16, 2003 to conduct a wide distribution on the TSX, Nash suggested CSFB consider an off-marketplace transaction. 43. At approximately 9:10 a.m. on April 16, 2003, Webb contacted the TSX and advised that CSFB had come up with an alternative of possibly printing (meaning the trade) on the third market in the States. Webb was referred to RS. 44. At approximately 9:11 a.m, Webb, Raptopulos and Nash spoke with Twiss. The call lasted just over 2 minutes. 45. Twiss was directly involved in the creation and drafting of UMIR. 46. Twiss states that during the telephone call, he was told by CSFB that it intended to conduct the take-on trade for the BCE shares on London and the unwinding trade on a market connected to Nasdaq. 47. Twiss also states that he read Sections 6.4(d) and (e) of UMIR to the CSFB personnel involved in the telephone call and that he told them the proposed trades must satisfy the requirements in these sections. CSFB asked no questions about public dissemination of the trades. 48. The CSFB personnel involved in this telephone call state that Nash used the term Nasdaq OTC or third market, or words to that effect, when describing the proposed unwinding trade to Twiss. 49. Twiss states that the term OTC (meaning over the counter) was not used by CSFB in the conversation, nor did CFSB state that either of the trades was going to be conducted before the opening of the markets. 50. After the Twiss telephone conversation, Webb, Raptopulos and Nash, in conjunction with Preite, Connolly and Hermer at CSFB LLC, discussed how CSFB should transact the trades. 7

8 51. Part of the discussions included the concept of regulatory risk. Sections 6.4(d) and (e) of UMIR were reviewed. 52. The decision was then made to execute the take-on trade through the OTC market in London and the unwinding trade in the OTC market in the United States. B. Trades in violation of Section 6.4 of UMIR Take-on trade through London 53. Section 6.4(e) of UMIR provides for an exception to the general requirement that a Participant acting as principal or agent may not trade nor participate in a trade in a security by means other than the entry of an order on a marketplace unless the trade is as principal with a non-canadian account or as agent if both the purchaser and seller are non-canadian accounts provided such trade is reported to a marketplace or to a stock exchange or organized regulated market that publicly disseminates details of trades in that market. 54. CSFB has taken the position with RS that the take-on trade for the BCE shares was conducted in accordance with Section 6.4(e) of UMIR. RS states that it was not conducted within this exception and as such, it was a trade conducted off a marketplace in violation of Section 6.4 of UMIR. 55. At 5:26 p.m. on April 16, 2003, Webb and Raptopulos, on behalf of CSFB, represented in a telephone call with the Market Surveillance division of RS that the take-on trade for the shares of BCE had been conducted before the opening of the market that morning and that the take-on trade had been printed in London, England. 56. As will be noted below, this was a misrepresentation to RS. 57. Pursuant to a request from the Market Surveillance division of RS for details of the BCE transactions, CSFB provided RS with a letter dated April 22,

9 58. The letter states that the trade between CSFB and Ameritech was crossed through CSFBEL and CSFB then sold to various non-u.s. buy-side clients through CSFB LLC. 59. This letter also represented that the cross through CSFBEL was conducted on the morning of April 16, 2003 before the market opened. 60. As will be noted below, these were also misrepresentations by CSFB. 61. The take-on trade through London was not crossed through CSFBEL until at least 5:08 p.m. Toronto time on April 16, 2003, after the unwinding trade was conducted in the United States. 62. At Nash s suggestion, Cole prepared two buy and two sell tickets to reflect the transaction in the 9,047,092 BCE shares at $ During the course of the investigation, RS was provided with one buy and one sell ticket showing a time stamp of 22:08 (London time) which is 5:08 p.m. Toronto time. 63. The preparation of the trade tickets at 5:08 p.m. was preceded by six telephone calls among CSFB, CSFB LLC and CSFBEL personnel, including internal and external legal counsel on some of the calls, as follows (times are Toronto time): 2:25 p.m. (48 seconds), 2:45 p.m. (24:12 minutes), 3:25 p.m. (3:33 minutes), 4:29 p.m. (42 seconds), 5:03 p.m. (4:02 minutes) and 5:07 p.m. (56 seconds). 64. These telephone calls began after CSFB LLC personnel determined that the take-on trade in London had not been transacted. 65. CSFB has claimed solicitor-client privilege over four of the six telephone calls held with CSFBEL. 66. The CSFBEL representative on each of the calls was Cole. 67. As of the call at 2:45 p.m, Cole was not prepared to initiate the trade process for the cross through CSFBEL until she obtained approval from the necessary Compliance personnel at CSFBEL. 9

10 68. An excerpt of the call between Nash and Cole at 3:25 p.m. Toronto time, over which privilege is not claimed, is as follows: That s how f-- pissed off I am right now. So, who didn t do what they were supposed to do? Well, they re trying to say I didn t, but that wasn t what happened. This whole morning we re trying to figure out where we re going to trade the Canada selling to the Canadian customers portion. Right. All we re talking about. Yeah. So I m on the phone with Frank Preite and David Hermer and, you know, these same guys that were in a room, and I said to them is the SBC, you know, the CSFB Canada, is that taken care of, and they re like yes, that s taken care of. So that doesn t have to print anywhere? No, it doesn t have to print anywhere. I m like okay, fine. And so then we finally figured out how we were going to do the CSFB Canada to the Canadian customer portion and it s 9:20 and I m like okay I m going to go take care of this and they re like do you have any connection with the U.K. and I said no. He said David, do you? He says, Yeah, I know somebody, I m like okay. As so I said I ll go, and he Dwayne you go take care of New York. And go take care of New York means go put on the third market trade for, you know, the part that we re selling to the Canadian customers. Right. And that s what I went to do. And I m assuming that the other part s taken care of. I don t know, I mean-- Do you have it on tape? No. But, you know, I don t care. We ve had these f-- things since 9 o clock, they knew there was a p-- an op-- I mean since Monday at 11 o clock, there was the opportunity to do this trade. Why didn t they figure out where the h-- they were going to trade it? Why did it have to, it s the trade date, in the evening, they were still trying to figure out legally where they can actually do this. It s f-- bizarre. Why this morning-- Well just cover your a-- pal-- Yeah. 10

11 On that. You know what I mean? Because don t you go taking the f-- rap for the screw up. I mean I m sure you won t, but I m just... you know. It pissed me off. So. I hope somebody s going to put, I mean I ll do whatever they want and I ll stay here til whenever, it doesn t bother me, I have some other stuff to do anyway. I was -- going to get them to do it in New York because I don t want, you know, why should I drag you into this? But the point is, you know, I ll do whatever they tell me to do, but I just want documentation what they told me what to do. Do you know what I mean? Right. So I mean I m here to put on the time stamp, but I want documentation that they told me to do so. [laughing] That s fine. Which I m sure won t be a problem. Okay. Well hopefully they ll reach this whoever this is in umm. Yeah, I m sure we can do it as of, that s not a problem, I mean everybody can ask people to do as of trade. I m sure that won t be an issue, as long as it is all documented. Yeah. What s frustrating is that it s getting to this point where it s embarrassing. Yeah, because it is embarrassing. Yeah, but it s seamless to the client base and the client base won t know. That s what we hope. You know. Exactly, that s what we hope. All right, honey. Because the Canadians will do it in the paper if it s not done correctly, it ll go over the f-- papers and that won t be seamless to the clients. Okay, well hopefully it won t be. Anyhow. Okay, see you later. Bye. Bye. 11

12 69. An excerpt of the call between Nash and Cole at 5:07 p.m. Toronto time, over which privilege is not claimed, which precedes the preparation of the trade tickets, is as follows: Hey, is Dwayne there? It s Autumn, The buy side is CSFB Canada and the sell side is Ameritech Canada Business Trust? Right. But I would leave that information under a separate note and just let Jack fill it in. I mean-- Okay. So as long as I time stamp em and put it in then I ll let Jack do that. You want to time stamp two buys and two sells just in case he f-- one up. Very good idea.... I like the way you re thinking The tapes of these conversations were provided by CSFBEL. As noted below, Nash s line was taped but the tapes of these calls were not preserved by CSFB after learning of RS s preliminary investigation. 71. The fact that the take-on trade was transacted after the unwinding trade in the United States is evidenced by CSFB s trading blotter for these transactions, as follows: Buyer Canadian client accounts $27.90 Facilit C$ D. Nash - CSFB Principal pro account $27.90 Account long 9,047,092 ISM 5397 Seller Facilit C$ D. Nash CSFB Principal pro account $27.90 (This account was flat BCE shares before the purchase from Ameritech) CSFB Corp Clients - US $27.90 Account short 9,047,092 ISM

13 Buyer CSFB Corp Clients - US $27.90 Account flat ISM 5398 CSFBEL $27.73 Account long 9,047,092 ISM 5399 Facilit C$ D. Nash - CSFB $27.73 Principal pro account Account flat ISM 5400 Facilit C$ D. Nash - CSFB Principal pro account $27.73 Account long 9,047,092 ISM 5401 Seller Facilit C$ D. Nash CSFB Principal pro account $27.90 Account flat ISM 5398 Facilit C$ D. Nash CSFB Principal pro account $27.73 Account short 9,047,092 ISM 5399 CSFBEL $27.73 Account flat ISM 5400 Ameritech Canada $27.73 Account flat ISM On April 17, 2003, CSFBEL reported the following details of the BCE transaction to the Financial Services Authority ( FSA ) in London, England: CSFBEL bought and sold 9,047,092 shares in BCE at 14:22 London time (9.22 a.m. Toronto time) on April 16, The price of both trades was C$27.73 and the counterparty to both crosses was CSFB. As principal, CSFBEL purchased the BCE shares from CSFB who was acting as agent for one of its customers. CSFBEL sold the shares back to CSFB acting as principal. CSFBEL showed the market as ISE, which is an international order book of the London Stock Exchange. CSFBEL later explained to the FSA that the designation of the market as the ISE occurred as it had set the field to LON to indicate that the trades 13

14 were executed in London. As the FSA system did not recognize the code, LON, the system defaulted to the ISE. 73. A copy of this report was provided to CSFB by CSFBEL within days of submission to the FSA. 74. It should be noted that the representation to the FSA that CSFBEL was acting as principal on both sides of this transaction is different from the representation made to RS by CSFB in its letter of April 22, The letter stated the following: The trade to CSFB was crossed through our European affiliate, Credit Suisse First Boston (Europe) Limited ( CSFBEL ) and reported to the FSA in the UK pursuant to FSA SUP and in accordance with UMIR Rule 6.4(e). CSFBEL acted as agent on the purchase for CSFB from Ameritech and as agent for Ameritech on the sale to CSFB. 75. The FSA contacted CSFBEL on May 12, 2003 by asking that it confirm the details of the trade including the time of the trade and the fact that the trade was conducted as principal. The was forwarded to CSFB on May 22, No correction to the time of the trade or to the principal designation of the trade was made. 76. The FSA does not publish any transaction reports. 77. Trades reported to the FSA are not subject to any regulatory scrutiny. 78. The FSA is not a marketplace, stock exchange or an organized regulated market that publicly disseminates details of trades in that market. 79. CSFB has failed to establish that the take-on trade was conducted in accordance with the exception in Section 6.4(e) of UMIR because: It was not reported to a marketplace, stock exchange or organized regulated market that publicly disseminates details of trades in the market. 14

15 The take-on trade was not approved by CSFBEL Compliance and crossed through CSFBEL until at least 5:08 p.m. Toronto time, hours after the purported unwinding trade in the United States. The trade was reported to the FSA as having occurred at 14:22 London time (9:22 Toronto time) when it was not actually transacted until at least 20:08 London time (5:08 Toronto time). 80. CSFB also acted contrary to just and equitable principles of trade in violation of Section 2.1(1)(b) of UMIR by failing to correct the misrepresentation to the FSA concerning the time of the trade. CSFB (and CSFBEL) were fully aware that the take-on trade was not transacted through CSFBEL at 14:22 London time; this was not done until at least 22:08 London time (5:08 Toronto time). 81. RS alleges that the 14:22 London time (9:22 a.m. Toronto time) was chosen in order to make it appear that the take-on trade was transacted before the unwinding trade in the United States, which is purported to have occurred at either 9:25 a.m. or 9:28 a.m. 82. Because the exemption in Section 6.4(e) of UMIR pertains to a Participant acting as principal with a non-canadian account or as agent if both the purchaser and seller are non-canadian accounts (that is, there are no Canadian clients involved), the exemption requires that the trade need only be reported to one of the following entities: a marketplace or a stock exchange or an organized regulated market that publicly disseminates details of trades in that market. 83. RS has information sharing arrangements with such entities through the Inter Market Surveillance Group ( ISG ). The significance of reporting the trade to such an entity is to ensure that RS can directly access information relating to the trade for review and investigative purposes. 84. The FSA is not an ISG member or affiliate. RS does not have an information sharing arrangement with the FSA. As such, RS was unable to directly obtain 15

16 information pertaining to the take-on trade from the FSA. Such request to the FSA had to be made through the Ontario Securities Commission on behalf of RS. 85. RS could have obtained this information directly and more efficiently if the takeon trade had been reported to the London Stock Exchange or another market described in Section 6.4(e) of UMIR. 86. It is important to the integrity of the capital markets that RS have direct access to the audit trail for such trades and that the audit trail information reported be accurate. Unwinding trade in the United States 87. Section 6.4(d) of UMIR provides an exception to the general requirement that a Participant acting as principal or agent may not trade nor participate in a trade in a security by means other than the entry of an order on a marketplace. The exception provides that a trade may be conducted on another exchange or organized regulated market that publicly disseminates details of trades in that market. 88. CSFB has taken the position that the unwinding trade for the BCE shares was conducted in accordance with Section 6.4(d) of UMIR. RS states that CSFB s sale of 7,701,000 BCE shares to Canadian clients was not conducted in accordance with this exception and as such, this portion of the unwinding trade was conducted off a marketplace in violation of Section 6.4 of UMIR. 89. In Section 6.4(d) of UMIR, publicly disseminates means that details of the trade are printed publicly in real time in a manner such as on a consolidated tape. 90. As of April 2003, CSFB was very familiar with Section 6.4(d) of UMIR and that the public dissemination requirement meant printing details of the trade in question in a manner such as on a consolidated tape in real time. 91. CSFB conducts 50-70% of its business according to the exemption in Section 6.4(d) of UMIR. For example, whenever a stock listed on Nasdaq or the NYSE 16

17 (but not listed in Canada) is purchased for a Canadian client by CSFB, the trade would be conducted on Nasdaq or the NYSE pursuant to Section 6.4(d) of UMIR. The trade would be printed on a consolidated tape in real time. 92. In addition, RS conducted a trade desk review ( TDR ) at CSFB in the fall of 2002 which identified three off-marketplace trades that were conducted in violation of Section 6.4 of UMIR. The TDR findings were also sent to Nash, Raptopulos and Barber. RS directed CSFB to address the issue internally. 93. Sometime just prior to 9:30 a.m. on April 16, 2003 (the opening of the markets in Toronto and New York), Nash contacted Stripeikis at CSFB LLC in New York and asked him to execute and print the unwinding trade on a consolidated tape through the Nasdaq ACT System. ACT stands for Automated Confirmation Transaction Service. 94. Stripeikis attempted to execute and print the trade in that fashion and immediately reported back to Nash that the trade would not print. 95. Nash then spoke with Hermer who advised Nash that a trade conducted prior to the opening of the markets would not be printed on a consolidated tape. 96. Nash was further advised by Hermer that if the trade was conducted prior to the opening of the markets, it was only required to be reported on a T+1 basis to the NASD and the NYSE. 97. During the course of this investigation, it was also confirmed by counsel for CSFB, Stikeman Elliot, that CSFB became aware prior to the opening of the market that the unwinding trade would not be reported in real time to the NASD or the NYSE. In this context, would not be reported in real time can only mean not printed. 98. Subsequent to Nash being advised that the unwinding trade would not be printed in a manner such as on a consolidated tape, discussion ensued amongst CSFB and CSFB LLC concerning the public dissemination (that is, printing) requirement of Section 6.4(d) of UMIR and whether the T+1 reporting of such a trade 17

18 complied. Internal and outside legal counsel partook in this discussion. No attempt was made to contact Twiss in this regard. 99. In this discussion, the decision was made not to execute the unwinding trade in a manner that would result in it being publicly disseminated; that is, printed in a manner such as on a consolidated tape In making this decision, CSFB put its business interests ahead of its obligation to comply with regulatory requirements to ensure the trade to the Canadian clients was printed. In so doing, CSFB assumed the risks associated with such noncompliance CSFB LLC then filed three different reports with the NYSE under NYSE Rule 410B. Two of the 410B reports were corrections to the original 410B report filed on April 17, The original 410B report made on April 17, 2003 reported an agency OTC cross of 9,047,092 BCE shares with a trade date of April 16, 2003 and a trade time of 9:25 a.m. CSFB LLC erroneously showed the price as US$19309 per BCE share, with no decimal point shown The second report was filed on April 30, 2003 to correct the price to US$ No other changes were made On June 12, 2003, CSFB LLC filed a further amendment to the original 410B report. This amended report changed the number of shares transacted as agency from 9,047,092 to 7,761,000. The 7,761,000 represented the 7,701,000 sold as principal by CSFB to Canadian clients and 60,000 shares sold as principal by CSFBEL to European clients. CSFB LLC purchased the remaining 1,286,092 shares as principal at $ Of this total, CSFB LLC sold 1,145,000 shares as principal to U.S. clients at $27.90 and 141,092 BCE shares as principal in Canada at an average price of $ per share In addition, pursuant to NASD Rule 6420, on April 17, 2003, CSFB LLC reported details of the unwinding trade to the NASD through ACT. The trade was reported 18

19 as a principal transaction at US$ The execution time was reported as 9:25 a.m. on April 16, To date, no change has been made to the filing to the NASD to correct the time or the principal designation to indicate that the purchase was partially as agent and partially as principal As will be noted below, the audit trail for this trade is deficient There was one trade ticket stamped at 9:28 a.m. on April 16, 2003 for the 1,145,000 shares that were bought from CSFB for CSFB LLC s inventory account for sale to CSFB LLC clients The tickets prepared by CSFB LLC (showing an agency purchase and sale of 9,047,092 BCE shares at $27.90) were not time stamped until April 21, 2003 at 12:21 p.m, five days after the purported trade CSFB LLC did not time stamp its U.S. client tickets CSFB did not properly time stamp the majority of tickets to its Canadian clients As such, CSFB has failed to establish that the unwinding trade to Canadian clients was conducted in accordance with the exception set out in Section 6.4(d) of UMIR because: Conducting a trade to Canadian clients in the OTC market in the United States outside market hours and reporting the trade the following day to the NYSE and to the NASD does not constitute execution of a trade on another exchange or organized regulated market that publicly disseminates details of trades in that market. Neither the NASD nor the NYSE publicly disseminated details of the unwinding trade to Canadian clients in real time; i.e., the trade was not printed in a manner such as on a consolidated tape Simply put, CSFB did nothing more than journal trade entries between accounts. 19

20 114. Section 6.4(d) of UMIR is designed to ensure that the trading in securities remains transparent and that there is a level playing field for market participants. These are the cornerstones to maintaining the integrity and fairness of the capital markets CSFB deliberately executed the unwinding trade to Canadian clients before the opening of the market knowing that there would be no public dissemination of the trade. This resulted in a transaction that completely lacked both transparency and a level playing field, thereby harming the integrity and efficiency of the capital markets By depriving the public of timely information about the unwinding trade to Canadian clients, CSFB s actions also disregarded certain rights of other market participants. The fairness and integrity of the capital markets is dependent upon rules relating to pricing, execution and displacement of existing orders. Compliance with Section 6.4(d) of UMIR would have exposed CSFB to the risk that such rules might prevent it from completing the BCE transaction on the terms agreed to with its clients. By conducting the unwinding trades to Canadian clients before the opening of the market, thereby avoiding the prompt public dissemination of the details of the trades and possible regulatory interference, CSFB sought to insulate itself from such risk, to the detriment of the market at large. It placed business expediency concerns above market integrity. C. Other off-marketplace transactions Off-marketplace transaction for Client X 117. Prior to 8:00 a.m. on April 16, 2003, Client X advised De Jong that it was interested in buying 500,000 of the BCE shares being purchased from Ameritech De Jong had been prospecting Client X for sometime prior to April 16, The account for Client X was opened on April 16, 2003 to accommodate the purchase of the BCE shares. 20

21 119. Just after 8:00 a.m., Client X called De Jong back to increase the order to 1,000,000 shares At approximately 9:45 a.m., De Jong advised Client X that it had been allocated 400,000 BCE shares at $ Subsequently, Client X expressed dissatisfaction to De Jong concerning the allocation After discussion with Nash, at approximately 11:00 a.m., De Jong ed the client and asked that the client contact him: It will be worth your while, stated De Jong in the Client X contacted De Jong. De Jong advised that a further 100,000 shares were available at $ The client agreed to purchase the shares at this price At 11:03:31 a.m., CSFB, through Nash, executed a trade for 100,000 BCE shares on the TSX at $28.13, which CSFB purports to be a trade to Client X However, based upon a decision by Nash and De Jong, these 100,000 shares were actually sold to Client X at $28.00 per share BCE never traded at $28.00 on the TSX on the morning of April 16, 2003 up to the time the sale was confirmed to Client X The trade to Client X at $28.00 was not executed on the TSX or pursuant to an exception or exemption under Section 6.4 of UMIR and hence, was conducted by CSFB in violation of Section 6.4 of UMIR A CSFB error account was also improperly used to transact this off-marketplace trade and to account for CSFB s loss on the shares Nash oversaw and approved the use of the error account in this regard, with De Jong s knowledge and approval. 21

22 Client Y 130. Kehoe was the sales trader assigned to the account for Client Y. He brought this account with him when he started at CSFB on April 1, Client Y was considered to be an important account to Kehoe On the morning of April 16, 2003, Client Y placed an order to purchase 500,000 of the BCE shares. Subsequently, Client Y increased its order to 700,000 BCE shares Sometime before 9:30 a.m., Kehoe confirmed a purchase to Client Y of 250,000 BCE shares at $27.90 from the shares purchased from Ameritech Client Y was dissatisfied with this allocation and expressed this to Kehoe As a result, Kehoe spoke to De Jong At approximately 10:00 a.m., Client Y was allocated an additional 25,000 at $27.90 from the shares purchased from Ameritech, bringing its total to 275,000 BCE shares Client Y was still upset about its allocation and expressed this to Kehoe At 9:45:11 a.m., CSFB had purchased 25,000 shares of BCE, as principal, on the TSX at $ These 25,000 shares were sold by CSFB to Client Y at $ BCE never traded at $27.90 on the TSX on the morning of April 16, 2003 up to the time the sale was confirmed to the client This trade was not executed on the TSX or pursuant to an exception or exemption under Section 6.4 of UMIR and hence, was conducted by CSFB in violation of Section 6.4 of UMIR A CSFB error account was also improperly used to transact this off-marketplace trade and to account for CSFB s loss on these shares. 22

23 142. Nash oversaw and approved the use of the error account in this regard With respect to the transactions with Clients X and Y, CSFB allowed its book for this transaction to become oversubscribed. Then, when it could not deliver these clients anticipated allocation, CSFB conducted these off marketplace trades in violation of UMIR. In making this business decision to appease its clients, CSFB assumed the risks of its regulatory non-compliance. D. Audit trail violations 144. Section 10.11(1) of UMIR sets out the order and trade record requirements for trading conducted pursuant to UMIR. It incorporates Part XI of the Trading Rules under National Instrument The Trading Rules require, among other things, the following: 11.2(1)(j) Immediately following the receipt or origination of an order for securities, a dealer shall record specific information relating to that order including the date and time the order is first originated or received by the dealer. 11.2(2)(b) Immediately following the transmission of an order for securities to a dealer, a dealer shall add to the record of the order maintained specific information relating to that order including the date and time the order is transmitted. 11.2(3)(a)&(d) Immediately following the variation, correction or cancellation of an order for securities, the dealer shall record the date and time such variation, correction or cancellation was originated or received and entered. 11.2(4)(b) Immediately following the execution of an order for securities, the dealer shall add to the record maintained specific information relating to the date and time of the execution of the order. Inventory trades 145. There were five manual trade tickets and five electronic trade tickets prepared for the inventory crosses between CSFB and CSFBEL and between CSFB and CSFB LLC for the purchase of BCE shares by CSFB from Ameritech. 23

24 146. Only one of the manual tickets was time stamped, with a time of 4.58 p.m on April 16, None of the electronic tickets were properly time stamped - they bear times between 5:27:14 p.m. and 5:29:22 p.m. on April 16, The tickets were not time stamped in accordance with UMIR and the Trading Rules, and thus impaired the audit trail for this transaction This also demonstrates the lack of care with which this transaction was carried out. Trade tickets prepared by CSFB for sales to Canadian clients 149. CSFB failed to prepare manual trade tickets for the majority of the sales of the BCE shares to Canadian clients Only one sales trader prepared manual trade tickets. The trade tickets contained the following information: April 15, five trade tickets time stamped between 5:32 p.m. and 6:10 p.m., presumably the time the orders were received. The tickets show the client names, the quantity and the fill information. April 16, five trade tickets time stamped between 7:38 a.m. and 8:26 a.m., presumably the time the orders were received. The tickets show the client names, the quantity and the fill information No other manual tickets were prepared for the approximately 34 other client accounts which bought shares There is no second time stamp on any of the manual tickets to show the order execution time or, in the case where the clients requested allocation could not be filled and was varied by CSFB, the time of such variance. 24

25 153. Electronic tickets were created for the sales to Canadian clients from the CSFB inventory account. They show time stamps on April 16, 2003 between 12:10:46 and 16:36: CSFB had advised that these time stamps do not reflect when the trades occurred but when the input operator entered the trade into the trade system In summary, the above ticketing to the clients by CSFB failed to comply with the applicable provisions of UMIR and the Trading Rules because there were either no time stamps or incorrect time stamps on the manual and electronic tickets for the inventory trades. In the case of client tickets, manual tickets were prepared for only 10 of 44 clients. The 10 that were prepared contain only the time stamp for when the order was received from the client and not when it was executed or when requested allocations were varied. The electronic tickets for the clients were not time stamped until times well into the afternoon of April 16, 2003 and apparently evidence nothing other than when these trades were imputed into the trade system The state of these records impaired the audit trail for this transaction and frustrated the investigation The state of the audit trail also demonstrates the lack of care with which this transaction was carried out. Tickets prepared by CSFB LLC 158. CSFB LLC supplied the following tickets and confirmation slips in response to RS s request for trade tickets on the BCE transaction: A buy and a sell ticket, which show an agency purchase and sale of 9,047,092 BCE shares at $27.90 by CSFB LLC, were time stamped on April 21 at 12:21 p.m. A handwritten notation on each of the tickets shows the trade date as April 16, The place of the trade was initially shown as OTC and then changed to Nasdaq. 25

26 A ticket for the purchase of 1,145,000 shares at $27.90 from CSFB. There was no indication on the ticket to show whether the transaction was executed as principal or agent. The ticket was time stamped on April 16 at 9:28 a.m. The confirmation slip shows a principal purchase by CSFB LLC of 1,145,000 BCE shares at $ Eight tickets to clients. None show a time stamp. In total, CSFB LLC sold 1,145,000 BCE shares at $27.90 to US clients. CSFB LLC sent 30 confirmation slips to U.S. clients, all showing the principal sale of BCE shares at $ A ticket for the principal purchase by CSFB LLC of 141,092 BCE shares at $ There is no time stamp on the ticket. The confirmation slip shows a principal purchase by CSFB LLC of 141,092 BCE shares at $ While CSFB LLC is not under the jurisdiction of RS, it is RS s position that where CSFB is purporting to rely on an exception under Section 6.4 of UMIR to conduct an off-marketplace transaction, it has an obligation to ensure the trade is fully and properly documented in all jurisdictions CSFB LLC was obliged to time stamp the tickets above at the time of execution. CSFB s failure to ensure compliance by CSFB LLC with its regulatory requirements constitutes a breach of just and equitable principles of trade, contrary to Section 2.1(1) of UMIR. Client confirmation slips 161. Certain clients were sent electronically confirmation slips on April 16, The confirmation slips for these clients read: This is to confirm you purchased the following on the Toronto Stock Exchange In addition, confirmation slips were mailed to Canadian clients containing the following trailers: As agents, we confirm the following purchase for your account 26

27 over-the-counter-toronto for settlement in your account. Further down, the same confirmation slip identified: we acted all/part as principal The foregoing evidences the lack of care with which this transaction was carried out. The trade blotters 164. The blotter entries for these transactions are out of sequence. As noted in the chart above, the purchase from Ameritech is shown as the last entry when logically, it should be the first. The blotters also show accounts selling short when they were not short. The state of the blotter further frustrated the investigation Prior to the purchase of the shares from Ameritech, CSFB made arrangements with the Investment Dealers Association to ensure that CSFB has sufficient capital to cover the purchase. It bought and sold the shares as principal. E. Misrepresentations by CSFB to RS 166. Pursuant to Sections 10.11(2) and (3) of UMIR, CSFB was required to provide RS with accurate and non-misleading details relating to the take-on and unwinding trades purported to be have been conducted off a marketplace At 4:24 p.m. on April 16, 2003, Mike Prior ( Prior ) of the Market Surveillance division of RS contacted Raptopulos to ask if CSFB had traded the 9,047,092 BCE shares An excerpt of that call is as follows: Prior: Raptopulos: Good thanks. Were you guys involved in the BCE/SBC thing? Ummm. Prior: Like SBC announced that they sold the 9,000,000 and we never saw a print, so I want to make sure everything is okay. I'm guessing that you guys were involved in the trade somehow? 27

28 Raptopulos: Prior: Raptopulos: Prior: Raptopulos: Prior: Raptopulos: Prior: Raptopulos: Prior: Raptopulos: Prior: Yeah, yeah. Ummm. Okay. How are you structuring that? You've taken in a chunk of stock I guess into your inventory? Right. What are you going to do, hold the position overnight or something? Ummm, you know what, maybe if I can some, get some, you know some of the other people ummm, ummm-- Okay. --- you know because, let me call you back Mike? Okay. Now we didn't expect to see the print of the firm taking it into inventory; I am assuming you are doing that as a foreign OTC exemption? Right. But there is a requirement to report that trade by the close of business tomorrow to the TSX, right? Right. And then there is the other piece, is the selling the position to all these so-called clients that was supposed to pop up, and those trades we would expect to see printed and we were just concerned that we haven't seen anything and we wondered what the plan is? Raptopulos: Yeah. The first ones, the first one we did print out on the, you know, at the, at the in London. Prior: Oh. Raptopulos: --- in London, right? Prior: Okay, so it is printed on, all right. Raptopulos: Yeah. And then the -- let me get everybody. Prior Okay. Well the client trades we need to see printed on the exchange, right? Raptopulos: Yeah, you do. Prior: Okay, so I take it they haven't --- yet. Raptopulos: Or another exchange eh? Prior: Exactly. Raptopulos: Like either the NYSE or some. Prior: Yeah, as long as they are printed somewhere; that is all we care about as regulators. 28

29 Raptopulos: Prior: Yeah. I think, you know, we are looking at doing it like a 410, 410(b) reporting. Well, whatever, okay. Let us know. We just want to make sure everything is done properly. [emphasis added] 169. The statement by Raptopulos that the take-on trade had been printed in London was a misrepresentation by CSFB to RS. The trade was never printed in London and Raptopulos knew this as of the time of this conversation At 5:26 p.m., Webb and Raptopulos called Prior back to discuss the transaction. An excerpt from the transcript of that conversation is as follows: Prior: Right. We were just curious. We knew that some trades occurred, and I mean the questions are coming in to us. We haven't seen any prints, so we are just curious where are those trades, if they were being printed properly and that sort of thing? Webb: Yeah, we did the trades off exchange in a third party market, in a third market. Prior: Both the take-on and the sale to all the clients? Webb: That's right, before the open. Prior: Before the open. Webb: Yeah. Prior: You mean this morning. Webb: This morning. Raptopulos: This morning. Prior: Okay. So you printed the take-on on the London, I understand? Webb: That's right. Raptopulos: Yeah. [emphasis added] 171. As evidenced by the sequence of events concerning the take-on trade set out above, the answers provided to RS by Webb and Raptopulos that the take-on trade had been conducted before the opening of the market and that it had been printed in London were misrepresentations. 29

30 172. Both Webb and Raptopulos knew the statements were misrepresentations when they were made RS then requested that CSFB provide further details concerning the take-on and unwinding trades in writing At 5:04 p.m. on the afternoon of April 22, 2003, Webb ed Prior a letter purporting to summarize the BCE transaction. This letter was received after several telephone requests between April 17 and April CSFB advised that the letter was prepared with the assistance of legal counsel and that there were 11 drafts which preceded it. Solicitor-client privilege has been claimed on the drafts The letter was reviewed by Webb, Connolly, Preite, outside legal counsel, Raptopulos, Nash and, possibly De Jong before it was sent to RS The letter states that the trade to CSFB was crossed through CSFBEL and CSFB then sold to various non-u.s. buy-side clients. [emphasis added] The letter also referred to the trades as having occurred before the market opened on April 16, The sequence of trades is incorrect and misleading. It is clear from the evidence that the London take-on trade was not crossed through CSFBEL before the unwinding trade to clients in the U.S. and Canada nor was it crossed before the opening of the market CSFB provided this letter to RS knowing it contained these misrepresentations These misrepresentations were intended to impede RS and cause RS not to investigate this matter any further. Oral and written attempts to spin a situation in such a way as to misrepresent the facts will not be tolerated by RS and will be viewed as a serious failure to cooperate. 30

31 181. These misrepresentations constitute a violation of Sections 10.1(2) and (3) of UMIR or, alternatively, constitute conduct inconsistent with just and equitable principles of trade contrary to Section 2.1(1) of UMIR. F. Failure to preserve evidence 182. The traders telephone lines at CSFB are taped. According to CSFB, such tapes are recycled after two weeks In a telephone call on April 24, 2003, Prior left Webb a voic message advising receipt of the April 22, 2003 letter. Prior also advised Webb that the letter had been sent RS s preliminary investigations people and that there was concern that the reporting of trades on the Nasdaq third market situation was not in line with UMIR exemption 6.4(d). Prior also indicated that this matter had to be looked at further and that it would probably take a few weeks. Prior also advised that Webb could contact Prior to discuss any matters further Despite the information in this voic message, neither Webb nor anyone else at CSFB took any steps to preserve these tapes. The tapes for April 15 and 16 were overwritten on April 29 and 30, respectively The tapes that were recycled would have contained, at a minimum, the key conversation between Nash and Stripeikis concerning the attempt to print the unwinding trade and the key conversation between Nash and Hermer concerning the T+1 reporting. These tapes would have also established the time of these conversations and whether either or both of them occurred before the opening of the market at 9:30 a.m RS expects a Participant to be responsive and cooperative when it is advised that it is being investigated, whether on a preliminary basis or otherwise. CSFB s conduct described above constitutes the impeding of and interference with an RS investigation and is contrary to just and equitable principles of trade in violation of Section 2.1(1)(b) of UMIR. 31