OCMT 2004

The Ontario Securities Commission approved a settlement agreement with Mark Edward Valentine, former chair of Thompson Kernaghan & Co. Valentine pleaded guilty to securities fraud in the US and admitted to creating a culture of conflict of interest and noncompliance in Ontario.

The Commission found the settlement, which included a permanent director/officer ban, a 15-year cease-trade order, termination of registration, and a $100,000 costs payment, to be in the public interest.

Staff of the Ontario Securities Commission brought a motion for an order authorizing the disclosure of certain documents for a hearing on the merits.

The receiver of Philip Services Corp. claimed solicitor-client privilege over the documents.

The Commission found that privilege over the documents was waived when they were disclosed to the company's auditors, who were acting as third parties rather than agents for the purpose of obtaining legal advice.

The Commission also found that the company failed to take reasonable steps to protect the privilege and had put the legal opinions in issue.

The motion was granted, and the documents were ordered to be disclosed.

The applicant, Kwok Yuen Ho, brought a motion for an order requiring Staff of the Ontario Securities Commission to produce the working file of the investigator responsible for the insider trading investigation against him.

The applicant argued that the file was necessary to make full answer and defence, as the investigator would be a key witness at the hearing.

The Commission dismissed the motion, distinguishing between evidence obtained during an investigation (which must be disclosed) and materials created by an investigator (which need not be disclosed unless the investigator is giving expert opinion evidence).

As the investigator was only being called as a fact witness, the working file was deemed irrelevant and not subject to disclosure.

The applicant brought a motion requesting the Hearing Panel reconsider a prior panel's decision dismissing a motion to strike certain words from the Statement of Allegations.

The Hearing Panel found it had no jurisdiction to review the prior decision under section 144 of the Securities Act, Rule 9 of the Rules of Practice, or the common law doctrine of functus officio.

Even if jurisdiction existed, the panel would have dismissed the motion, finding that the inclusion of the words 'and contrary to the public interest' did not impair the applicant's right to know the case to meet.

The applicant, a respondent in an insider trading proceeding, brought a pre-hearing motion seeking a ruling that the Commission could not make a public interest order against her under section 127 of the Securities Act if Staff failed to prove the specific allegation of insider trading under section 76(1).

A prior panel had dismissed the same motion as premature.

The Hearing Panel agreed with the prior panel, holding that it was inappropriate to tie the hands of the decision-makers before hearing the evidence and closing submissions.

The motion was dismissed as premature.

Following a decision on the merits where the respondents were ordered to pay the costs of the Commission's investigation and hearing, a costs hearing was held to determine the quantum.

The respondents sought an adjournment, arguing that staff's disclosure of costs was insufficient, but the motion was dismissed as out of time.

Staff submitted a bill of costs for $32,332.60, supported by dockets that grouped tasks under generic descriptions.

The Commission found the docket entries insufficiently detailed to justify the full amount claimed and applied a substantial discount, fixing the quantum of costs at $20,000.00 to be paid jointly and severally by the respondents.

The applicant, a registered trader, sought a hearing and review of a decision by the hearing panel of Market Regulation Services Inc. (RS) finding him guilty of frontrunning contrary to Rule 4-204(1) of the Rules of the Toronto Stock Exchange.

The applicant argued he was denied procedural fairness, that the RS Panel erred in law by finding that risk and disadvantage to the client were not elements of the offence, and that the RS Panel overlooked evidence suggesting the trade was meant to facilitate a client order.

The Commission affirmed the RS Panel's decision, holding that the applicant had notice of the case to meet, that risk and disadvantage are not elements of Rule 4-204(1), and that the applicant's proposed inference was unsupported speculation.

The sanctions, including a $15,000 fine and a one-month suspension, were confirmed.

Staff of the Ontario Securities Commission alleged that the respondents, including Leslie and Douglas Brown, engaged in unregistered trading and illegal distribution of securities related to 'F.E.D.I. desks' at an investment seminar.

The Browns had invited friends to the seminar and introduced the main speaker, but did not receive compensation or act on behalf of the promoter.

The Commission found that the Browns' actions did not constitute acts in furtherance of a trade, as they were not acting to promote the sale on behalf of the seller.

The allegations against the Browns were dismissed.

Credit Suisse First Boston Canada Inc. (CSFB) applied for a hearing and review of a decision by the hearing panel of Market Regulation Services Inc. (RS) that disqualified its counsel, Stikeman Elliott, from acting in an RS proceeding.

RS alleged that Stikeman Elliott was in a conflict of interest because it had previously advised the Toronto Stock Exchange (TSE) on the creation of RS, and was now raising defences on behalf of CSFB that attacked the very regulatory structure it helped create.

The Ontario Securities Commission upheld the disqualification, finding that Stikeman Elliott owed a subsisting duty of loyalty to RS as a former client and possessed relevant confidential information with a risk of misuse.

The Commission concluded that permitting the law firm to repudiate its own prior legal advice would undermine public confidence in the administration of justice.

The Ontario Securities Commission approved a settlement agreement concerning the respondents' involvement in an 'overtrade' of Bioscrypt Inc. shares.

Paradigm Capital Inc., acting as an agent for a private placement, facilitated secondary market trades for a mutual fund manager who had been solicited for the private placement.

This resulted in shares being sold by persons with knowledge of an undisclosed material fact to persons without such knowledge.

The Commission found this conduct contrary to the public interest, reprimanded the respondents, imposed trading restrictions, and ordered settlement payments and costs.

The Ontario Securities Commission held a hearing regarding a former branch manager at a registered dealer.

The respondent was alleged to have provided inaccurate 'Proof of Funds' letters to a client to facilitate a high-yield investment program.

The letters misrepresented the funds in the accounts, falsely stated funds would be held, and attested to the legitimacy of funds without due diligence.

The respondent did not attend the hearing.

The Commission found the respondent's conduct contrary to the public interest, noting his failure in his gatekeeper role as a registrant and branch manager.

The respondent's registration was terminated for 10 years, he was permanently banned from supervisory roles, reprimanded, and ordered to pay $126,938.50 in costs.

Following a finding that the respondents traded in securities without registration in relation to a high-yield investment program, the Ontario Securities Commission held a sanctions hearing.

The Commission ordered that the corporate respondents cease trading for 15 years, and the individual respondent cease trading for 10 years with carve-outs for personal accounts.

The individual respondent was also banned from acting as a director or officer of an issuer for 15 years, reprimanded, and ordered to pay $150,000 in costs.

Following his criminal conviction for insider trading, the Ontario Securities Commission held a hearing to determine whether to impose public interest sanctions against the respondent under s. 127 of the Securities Act.

The respondent, while an officer and director of a reporting issuer, had sold shares with knowledge of undisclosed material negative assay results, avoiding significant losses.

The Commission found his conduct egregious and a breach of fiduciary duty.

To protect the capital markets, the Commission ordered a 15-year cease trade order and a 15-year ban on acting as a director or officer of any reporting issuer, with limited carve-outs for personal trading.

The Ontario Securities Commission held a hearing to determine whether the respondents breached section 25(1)(a) of the Securities Act by trading in securities without being registered.

The respondents had accepted approximately US $21 million from investors for a "high yield program" involving bank guarantees and medium-term bank notes.

The Commission found that the high yield program constituted an investment contract and therefore a security under the Act.

The Commission further held that the respondents' actions, including accepting funds and providing proof of funds letters, constituted acts in furtherance of trades.

As the respondents were acting as market intermediaries in Ontario, they were not exempt from registration.

The Commission concluded that the respondents traded in securities without registration contrary to the Act, with a subsequent hearing to determine sanctions.

The Ontario Securities Commission held a hearing to consider a settlement agreement between Staff and the respondent regarding allegations of illegal insider trading.

The respondent admitted to receiving undisclosed material information from a close friend who was a managing director at a securities firm, and using that information to trade in the securities of two reporting issuers, realizing a profit of approximately $1.9 million.

The Commission approved the settlement agreement as being in the public interest, noting the respondent's cooperation with Staff, his agreement to a permanent cease trade order and director/officer ban, a voluntary payment of $1.9 million, and $25,000 in costs.

The applicant, a group retirement plan administrator registered as a mutual fund dealer and portfolio manager, sought an exemption from the requirement to become a member of the Mutual Funds Dealers Association (MFDA).

The applicant argued its business model, which included discretionary trading, was incompatible with MFDA rules and that restructuring would be costly and confusing to clients.

The Commission denied the exemption, emphasizing that investor protection and the benefits of MFDA oversight outweighed the administrative and financial burdens of restructuring.

A temporary exemption was granted to allow the applicant time to apply for MFDA membership.

Staff of the Ontario Securities Commission sought to extend a temporary order suspending the respondent's registration and cease trading his securities pending a hearing on the merits.

The respondent did not oppose the registration suspension but sought to vary the cease trade order to allow trading in NASDAQ and over-the-counter markets.

The Commission found that the existing permissible trading areas covered a substantial proportion of North American securities and declined to expand them.

The temporary order was extended on its existing terms until July 31, 2004, or the commencement of the hearing.

The applicants brought an application under sections 104 and 127 of the Securities Act regarding an alleged issuer bid by Technovision Systems Inc. The respondents and Commission staff brought preliminary motions to stay or dismiss the application.

The Commission found that the applicant Urquhart had previously litigated the same issues in British Columbia and Ontario courts, where her claims were dismissed or stayed.

The Commission held that section 104 is intended for ongoing bids, not completed ones, and section 127 cannot be used to remedy private harm.

The application was dismissed as frivolous, vexatious, and an abuse of process against Urquhart, and permanently stayed against the other applicants, as the matter was a private dispute properly suited for civil courts.

Staff of the Ontario Securities Commission alleged that the respondents engaged in unregistered trading and advising, and distributed securities without a prospectus, in relation to an 'Asset Securitization Management Portfolio' promoted on their website.

The Commission found that the Trading Program was an investment contract and therefore a security.

The Commission held that offering the program on the internet constituted an act in furtherance of a trade, and that the respondents held themselves out as being in the business of advising.

Given the individual respondent's past criminal convictions for fraud and the highly questionable nature of the investment scheme, the Commission ordered permanent cease trade and director/officer bans.

The Staff of the Investment Dealers Association of Canada applied for a hearing and review of a District Council decision regarding a registered representative who traded for a client attempting to manipulate the market price of a security.

The District Council had dismissed the allegation that the respondent facilitated the business of an unregistered entity and imposed a penalty without a fine or disgorgement.

The Ontario Securities Commission found that the District Council misapprehended the evidence of facilitation and the public interest in strong sanctions for willful market manipulation.

The Commission set aside the dismissal, imposed a fine of $128,504.55 (including disgorgement of commissions), and suspended the respondent's approval for seven years.