One of the most outspoken members of Winnipeg’s financial services community has been fined $25,000 and given a five-year suspension for violating regulatory restrictions.

Under the order, Patrick Cooney, CEO, chairman and majority shareholder of Jory Capital Inc. , will not be able to perform any managerial or supervisory functions for the Winnipeg-based brokerage, effective this month. The penalties were imposed in January by the Investment Dealers Association of Canada.

Cooney plans to appeal the decision prior to the mid-February deadline. If he does, he will be able to continue operating the company until all appeals are exhausted.

The sanctions relate to a $10,000 advance made to Cooney by Jory Capital in June 2004. In allowing the advance, Jory Capital failed to comply with “early-warning restrictions” placed on it by the IDA.

(The early-warning system measures a member’s risk-adjusted capital against certain arithmetical benchmarks to detect the risk of insolvency of a member. If a member fails any of these tests, or if a member’s condition is unsatisfactory for any reason, the member may be designated in Early Warning Level 1 or Level 2. such a designation does not indicate the public is at risk.)

In its decision, an IDA hearing panel described Cooney as “practically ungovernable in relation to financial compliance.”

Warren Funt, the IDA’s vice president of member regulation for Western Canada, says it is not the amount of money that most influenced the panel but the fact that Cooney had been disciplined in 2004 for a similar infraction.

“It’s like speeding away from the cop who has given you a speeding ticket,” Funt says. “It’s about the requirements that are imposed and the expectation that those requirements will be followed. It’s a matter of honour and trust; we make sure firms are complying with what we ask.”

Cooney, an 18-year industry veteran, says the penalty is too severe compared with fines levied for other corporate misdoings. He notes CIBC had to pay $2.4 billion to compensate victims for its part in the Enron Corp. scandal.

“And I get a nuclear missile aimed at me over this? [My wrongdoing] is a technical error,” he says.

Cooney has long believed that North American stock markets are significantly overvalued, even given the bear market that followed the bursting of the technology bubble in 2001. His contrarian views are traditionally opposite those of the majority of market pundits.

Dan Hallett, president of Dan Hallett & Associates Inc. , a mutual fund research firm in Windsor, Ont., says failing to adhere to IDA early-warning restrictions can put client assets at risk.

“You hear lots of decisions about people who stole their clients’ money. But you’re putting that money at risk if you don’t have the proper financial controls in place. If you go down, a lot of your clients are going to get hurt, too,” he says.

Hallett adds that, although Cooney’s five-year sentence is a few steps removed from some harsher ones handed down by the IDA, it is nonetheless substantial and could result in tough sledding for Jory.

Competitive environment

“It’s such a competitive environment that when you get this kind of bad publicity, it creates an uphill battle — particularly for regional firms,” Hallett says.

The IDA also imposed penalties on Rees Jones, Jory’s chief financial officer, who was fined $5,000 for allowing the $10,000 cheque to be written, and Jory itself, which was fined $25,000.

Funt says the IDA made a distinction between Jones’s passive role and Cooney’s “chronic violations” of financial compliance rules.

“[Jones] was put in a difficult situation. Unfortunately for him, he didn’t prevent the cheque from being issued. He was one of the checks and balances, and the check didn’t work,” he says.

Funt says Cooney can continue in his CEO and other roles until appeals are exhausted. “The appeals process could go on for many months. The ultimate appeal is to the Manitoba Securities Commission,” Funt says, noting that at no time were the assets of Jory clients at risk.

Funt says Jory will have to implement a backup plan and put a new leader in place if Cooney’s penalties are upheld. Cooney could still be available to the interim CEO and other managers for consulting on an ad hoc basis, but he would not be allowed to impose his will on the company’s operations, Funt says.

@page_break@“If he breached the terms of the decision, that would be frowned upon — to put it mildly,” he adds, noting the penalties do not apply to Cooney’s ability to advise clients.

Colin Ryan, chairman of the IDA’s Manitoba district council and managing partner of the BMO Nesbitt Burns Inc. office in Winnipeg, says investors should appreciate that the regulator is doing its job.

“One of the IDA’s roles is to ensure the integrity of the marketplace and protect investors. The IDA has rules and regulations in place for companies. It reviews the activities of advisors and firms on an ongoing basis to make sure they are complying with the rules,” he says.

Funt says it is uncommon for the IDA to fine financial services firms. Last year, only 13 fines were levied across Canada. Forty-two individuals were called on the carpet in 2005, he says.