Blueport Capital Corp. and John Hare - Opportunity to be Heard
In the Matter of Staff’s Recommendations
to Suspend the Registrations
of Blueport Capital Corp. and John Hare
Opportunities to be Heard by the Director
under Section 31 of the Securities Act
1. My decision is that the registration of each of Blueport Capital Corp. (formerly Right Side Capital Corporation) (Blueport) and John Hare (collectively, the Applicants) is suspended effective December 13, 2011. My decision is based on the:
- verbal arguments of Mark Skuce, Legal Counsel, Compliance and Registrant Regulation Branch, for Staff of the Ontario Securities Commission (OSC), and Hare, on behalf of himself and Blueport, and
- evidence provided at the opportunity to be heard (OTBH).
Registration history of Blueport and Hare
2. Blueport was initially registered as a limited market dealer in early 2009. By operation of law, Blueport became registered as an exempt market dealer (EMD) in September 2009.
3. Hare is the Chief Compliance Officer (CCO), Ultimate Designated Person (UDP), a dealing representative, and currently the 80% shareholder of Blueport.
Suspension letter to Blueport and Hare
4. By letter dated October 19, 2011, Staff advised the Applicants that it had recommended to the Director that Blueport’s registration as an EMD and Hare’s registration as UDP, CCO, and as a dealing representative of Blueport be suspended. Pursuant to section 31 of the Securities Act (Ontario) (Act), Blueport and Hare are entitled to an OTBH before a decision is made by me, as Director. The joint OTBH occurred on December 13, 2011.
Bases for Staff’s recommendations to suspend Hare’s and Blueport’s registrations
5. Staff’s recommendations were based on six bases – numerous significant deficiencies identified during a compliance field review of Blueport, inappropriate uses of investor proceeds, significant negative excess working capital, no collection of know your client (KYC) information, trades with clients who are not accredited investors, and conducting registerable activity without registration. Staff submits that these bases establish a pattern of non-compliance with Ontario securities law by Blueport and Hare. Each of these bases is described below.Numerous significant deficiencies identified during a compliance field review of Blueport
6. Staff performed a compliance field review of Blueport which covered the period from January 20, 2009 to December 31, 2010. The numerous significant deficiencies (Alleged Significant Deficiencies) identified were set out in a letter dated October 17, 2011 to Hare and Blueport. Many of these Alleged Significant Deficiencies are linked to other bases for Staff’s recommendations discussed in these reasons. Some of the Alleged Significant Deficiencies were:
- Inadequate compliance system and CCO and UDP not adequately performing responsibilities
- Inappropriate uses of client funds
- Negative excess working capital
- No collection and documentation of KYC information
- Improper trades with clients who are not accredited investors
- Individuals trading without registration
- Books and records not readily available, and
- Incomplete books and records.
7. Staff alleges that of the $262,000 raised by Right Side Generational Wealth Limited Partnership 1 (LP) (a real estate issuer related to Blueport), $17,562 was paid to Right Side Realty Corporation (RSRC), $60,000 was paid to Knightscrest Capital Corp. (Knightscrest), and $20,000 was paid to “FS”. Staff alleges that these uses of investor proceeds were not disclosed in the offering memorandum for the LP and were not consistent with the intended uses of investor proceeds disclosed in that document.
8. RSRC is a related company, also owned by Hare. The payment of $17,562 was described as being an overpayment resulting from an accounting error. However, rather than correcting the overpayment (and making the LP “whole”), the decision was made to net this amount off against possible future payments by the LP to RSRC. This, in my view, was not appropriate.
9. The agreement dated October 7, 2009 entered into between Blueport and Knightscrest (and signed by Hare on behalf of Blueport) was “to create and implement a referral campaign focusing on introducing [Blueport] to [a] target group of potential investors”. The agreement resulted in payment by the LP to Knightscrest in the amount of $60,000. Few, if any, services were provided under this agreement. And, all of the investors in the LP invested before this agreement was signed. In my view these expenses, even if appropriate expenses for the LP, should have been paid by Blueport and not the LP.
10. $20,000 was paid by the LP to FS as repayment for a personal loan from a former 50% shareholder of Blueport. Hare signed the promissory note on behalf of the LP. The promissory note is not collectable (because the debtor is bankrupt). In my view, the repayment of a promissory note of a former owner of a registrant is not an expense that should have been paid by the LP.Significant negative excess working capital
11. Staff alleges that Blueport’s excess working capital was less than zero in October and November 2010. Blueport did not notify Staff of this capital deficiency until March 2011. Following the period covered by the compliance review, Staff alleges that Blueport was again deficient in its excess working capital in January, February, March, and April 2011, but did not report any of these deficiencies to Staff until June 6, 2011.
12. At the OTBH I was advised (and this was confirmed by Hare) that the working capital deficiency was significant and currently in excess of $100,000, primarily due to large, uncollectable, related party accounts receivable. Mr. Hare advised Staff (through counsel) that the inter-company accounts receivable “could be convertible into cash within three months based on [Hare’s] understanding of the business activities of the other companies”. However, on direct questioning by me at the OTBH, Hare confirmed that these related companies – one of which is owned by him (RSRC) - currently are not operating and therefore the inter-company accounts receivable will not be convertible into cash within three months as he previously advised Staff. Nor was Hare able to advise me when these inter-company accounts receivable might reasonably be converted into cash. These conflicting responses by Hare raised serious credibility and integrity concerns in my mind regarding Hare.No collection of KYC information
13. Staff alleges that KYC information was not collected for four of the eight (non-related) Blueport clients in the LP – “MH”, “LK”, “TP”, and “JS”. Although Hare questioned (for various reasons) during the OTBH whether he was required to collect KYC information for these clients, I was provided with a written confirmation from Hare dated September 30, 2008 to the OSC where he acknowledged that he had read OSC Staff Notice 11-758 – Review of Limited Market Dealers and that the “Firm will address the issues raised in the Notice where applicable”. The notice clearly sets out that it “is the dealer’s obligation to collect and document KYC information and assess the suitability of client trades”.Trades with clients who are not accredited investors
14. Staff alleges that, contrary to section 53(1) of the Act, securities were distributed to the following Blueport clients without a prospectus and under circumstances where no exemption from the prospectus requirements was available –“PH”, TP, JS, and a numbered company. In some cases, no KYC was collected. In other cases, the KYC information provided places great doubt on how these clients could possibly be accredited investors.Conducting registerable activity without registration
15. Staff alleges that the KYC form for PH and the numbered company were completed (and dated) before Blueport obtained registration as an EMD in Ontario. Staff provided the signed KYC forms during the OTBH clearly evidencing that Blueport, Hare and the other original 50% shareholder of Blueport were conducting registerable activity prior to being registered.
Summary of Staff’s arguments
16. Staff argued that in light of the allegations contained in the six bases identified above, Hare and Blueport should be suspended. Staff argued that Hare did not adequately perform his responsibilities as CCO, UDP, and as a dealing representative of Blueport, and that Blueport does not have an adequate compliance system in place. As a result, Staff has fundamental concerns with regard to the integrity and proficiency of Hare and the integrity, proficiency and solvency of Blueport. As well, the allegations contained in the six bases call into question whether Blueport’s operations are being conducted with the requisite integrity, proficiency and solvency of securities professionals.
17. Staff also argued that section 28 of the Act permits me, as Director, to suspend the registration of each of the Applicants on the basis that the each of the Applicants is not suitable for registration, has failed to comply with Ontario securities law or that each of their registrations is otherwise objectionable.
Decisions on the suspensions of the Applicants
18. My decision is to suspend the registration of Blueport and Hare as of December 13, 2011. My decision was communicated verbally to Hare, both in his own capacity and in his capacity as CCO, UDP, dealing representative and shareholder of Blueport, at the OTBH on December 13, 2011.
19. My decision was made as a result of the allegations outlined in the six bases above – all of which were proven by Staff during the OTBH. In my view, Blueport’s and Hare’s conduct clearly demonstrates a pattern of non-compliance with Ontario securities law. As I said in Carter Securities Inc., Re (2010), 33 OSCB 8691:
“In conclusion, in my view the evidence in this case supports my decision that Carter’s registration should be suspended. In concur with staff’s assessment that Carter has engaged in a pattern of conduct – through its individual registrants – that demonstrates that it lacks the integrity required of registered firms under the Act.”
20. Blueport has had a very significant (and ongoing) capital deficiency for some time – most of which resulted from the significant and largely uncollectable accounts receivable on Blueport’s balance sheet. I was also very concerned about the only proposal discussed at the OTBH to rectify this significant capital deficiency which was a large infusion of cash from Blueport’s current 20% minority shareholder. I was advised that this shareholder knows little – if anything – about Blueport’s significant and ongoing capital deficiency and other ongoing issues. It was for this reason primarily that I decided to immediately suspend the registration of Blueport and Hare.
21. I was also very concerned about the improper uses of investor proceeds as outlined above under “Inappropriate uses of investor proceeds” and the apparent registerable activity carried on by Hare prior to his and Blueport’s registration. In my view, this conduct clearly demonstrates that both Blueport and Hare are unsuitable for registration and that their ongoing registrations would be objectionable. On this basis alone, my decision would have been to suspend the registrations of both Blueport and Hare.
22. I also want to comment on Hare’s responses to a number of detailed questions by me. I was surprised that Hare was not able to – or did not respond completely to – some of my questions which should have been relatively easy to respond to if Hare was actually fulfilling his responsibilities as CCO and UDP of Blueport. For example, I asked him how he became aware of Knightcrest and about the significant dollar value of services that Blueport purchased from them. Hare’s response was “honestly I can’t remember”. The responses to these questions, together with the responses to the capital deficiency questions described above, raised serious concerns in my mind regarding Hare’s credibility and integrity.
23. Lastly, although no submissions on the “terms” of the suspensions of Blueport or Hare were made at the OTBH, in my view both suspensions should be permanent. Very serious – and proven – allegations were made by Staff during the OTBH. In my view, the nature of these allegations, and the seriousness of the allegations, leads me to conclude that neither Blueport nor Hare should be permitted to again be a registrant under Ontario securities law.
“Marrianne Bridge”, FCA
Deputy Director, Compliance and Registrant Regulation Branch
Ontario Securities Commission
January 12, 2012