The Investment Industry Regulatory Organization of Canada (IIROC) announced it has fined former registered representative Edward Ho Rha $150,000 and has ordered Rha to pay costs in the amount of $15,000 after it was found that he both borrowed money from a client, and engaged in excessive trading that was unsuitable and inconsistent with good business practices.
“The respondent engaged in a pattern of excessive and unsuitable trading for two sets of clients while generating significant commissions. He also borrowed $95,000 from another client, which he never repaid,” IIROC states in its penalty decision document.
The regulator adds that throughout 2016 and 2017 Rha had been experiencing personal, professional and financial difficulties: “The respondent’s firm placed him on close supervision for a period of no less than 12 months, primarily because of the respondent’s inability to maintain adequate margin in his personal account, which had lost approximately $3,000,000 over the previous five years.” In May 2017 the firm also expressed concerns that Rha had only one tactical trading strategy that was being applied across a number of client accounts. The client accounts were not benefitting, all while Rha was earning commissions. That same month, Rha changed firms.
Borrowed $95,000 from a client
In October 2017 Rha then borrowed $95,000 from a client, which was deposited to his margin account. He left the industry shortly thereafter. The loan was never repaid and the client passed away in 2019.
A review of the accounts where Rha is accused of excessive trading shows that one account turned over 7.21 times in 2016, while another turned over 12.35 times during the same period. The couple reportedly paid $36,554 or 21.5 per cent of their combined average portfolio value in commissions while the portfolio declined in value by 61.4 per cent. In 2017, two other accounts turned over 1.83 times and 2.19 times. The client’s combined portfolio declined 15 per cent, of which, $97,894 or 3.9 per cent was the result of transactional commissions.
Rha is also being sanctioned for failing in his know-your-client obligations after he concentrated the second couple’s holdings in energy sector holdings, despite having lower risk tolerances stated on their new client application forms filled out when Rha changed firms.
Misguided faith in his tactical trading strategy
“The panel agrees with enforcement council’s submission that the respondent’s most significant contravention was borrowing $95,000 from his client,” IIROC states. “In this case, the panel views the loan as a reflection of the respondent’s desperate and misguided faith in his tactical trading strategy, which was also the root cause of the other contraventions.”
IIROC also stopped short of accusing Rha of churning. “In this case, the commissions were not the motive – they were merely a by-product of the respondent’s tactical strategy, and his misguided but evidently sincere belief in the strategy. The excessive and unsuitable trading here stemmed from the respondent’s inability to recognize defects in his strategy. The respondent was not so much putting his own interests ahead of his clients’ as he was combining their interest – albeit in a misguided way.”
In addition to the $150,000 penalty and costs (broken down, the fine is a disgorgement of the loan, a portion of his commissions and a fine of $20,000 for the contraventions themselves), Rha is also suspended from acting in a registered capacity for 12 months, will be under close supervision for 12 months if he does re-register, and must successfully rewrite the Conduct and Practices Handbook exam.