Trafalgar Associates Limited - Opportunity to be Heard
by Trafalgar Associates Limited
Opportunity to be Heard by the Director
Section 31 of the Securities Act
|Date of decision:
|February 1, 2010
|Marrianne Bridge, FCA
Ontario Securities Commission (OSC)
|Verbal arguments by:
|Robert Kohl, Senior Legal Counsel, Registrant Legal
Services and Michael Denyszyn, Legal Counsel, Registrant
Legal Services for the staff of the OSC
Michael B. Miller and Julia Dublin of Aylesworth LLP for
Trafalgar Associates Limited (TAL)
1. On November 4, 2009, OSC Registrant Regulation staff advised TAL that they had recommended to the Director that the application for registration of TAL as an exempt market dealer (EMD) be refused. If TAL’s registration is granted, staff’s understanding is that Ms. Zych will be designated as chief compliance officer and that Mr. Olsthoorn will be designated as ultimate designated person (UDP) of TAL. Both positions are registerable positions. As a result, if TAL’s registration is refused, Mr. Olsthoorn’s application for registration will also be refused. The registration application of Ms. Zych was not a subject matter of the opportunity to be heard (OTBH).
2. Pursuant to section 31 of the Securities Act (Ontario) (Act), TAL and Mr. Olsthoorn are entitled to an OTBH before a decision is made by the Director. TAL and Mr. Olsthoorn requested a verbal OTBH, which occurred on January 8, 2010.
3. My decision is based on staff counsel’s arguments, the applicants’ counsel’s arguments, the testimony of various witnesses on behalf of TAL and Mr. Olsthoorn, and my reading of the documentary evidence referred to at the OTBH.
4. I have set out staff’s recommendation first, set out the general requirements for registration, analyzed each of staff’s reasons for recommending refusal of TAL’s and Mr. Olsthoorn’s registration (together with the applicants’ arguments on each point), and concluded with my decision and reasons for each of TAL and Mr. Olsthoorn.Staff’s recommendation to the Director
5. Staff recommended that TAL’s registration as an EMD (and thus Mr. Olsthoorn’s registration as UDP of TAL) be refused for three primary reasons – the past conduct of Mr. Furtak and TAL, the class action suit against TAL and others, and the conduct of Mr. Olsthoorn in completing registration applications.
6. Each of these reasons is discussed separately below. Staff argued that the three reasons, in their totality, are sufficient for me to find that TAL’s registration and Mr. Olsthoorn’s registration should be refused.The Law
7. Section 25 of the Act generally requires that any person or company that trades in securities, advises others in securities investments or acts as an investment fund manager, be registered in the relevant category. A registrant is in a position to provide valuable services to the public, both in the form of direct services to individual investors and as part of the larger system that provides the public with the benefits of fair and efficient capital markets. A registrant also has a corresponding capacity to do material harm to investors and to the public at large. Determining whether an applicant should be registered is thus an important component of the OSC’s public interest mandate. As well, as noted in numerous decisions by the Commission, other securities commissions and the courts, registration is a privilege, not a right.
8. Subsection 27(1) of the Act states that, on application by a person or company, the Director shall register the person or company unless it appears to the Director that the person or company is not suitable for registration or that the proposed registration is otherwise objectionable. Therefore, the question for me to determine as Director in this matter is whether TAL and/or Mr. Olsthoorn are suitable for registration and/or whether their registration is otherwise objectionable.
9. Subsection 27(2) of the Act provides that in determining whether a person or company is suitable for registration, the Director shall consider whether the person or company has satisfied the requirements prescribed in the regulations relating to proficiency, solvency and integrity, and such other factors as the Director considers relevant. The criterion at issue here is integrity.
10. The purposes of the Act (as set out in section 1.1) are to provide protection to investors from unfair, improper or fraudulent practices and to foster fair and efficient capital markets and confidence in capital markets.
11. Prior Commission decisions have held that registration is “otherwise objectionable” if it is determined, with reference to the purposes of the Act, that it is not in the public interest for the person or company to be registered. For example, in Re Mithras Management Ltd., (1990) 13 OSCB 1600, the Commission held that:
The role of this Commission is to protect the public interest by removing from the capital markets… those whose conduct in the past leads us to conclude that their conduct in the future may well be detrimental to the integrity of those capital markets… We are here to restrain, as best we can, future conduct that is likely to be prejudicial to the public interest by having capital markets that are both fair and efficient. In so doing we must, of necessity, look to past conduct as a guide to what we believe a person’s future conduct might reasonably be expected to be…”
Reasons for staff recommending refusal of TAL’s registration
Past conduct of Mr. Furtak and TAL
12. The first issue relates to the past conduct of Mr. Furtak (who together with Mr. Olsthoorn own TAL).
13. In May, 2003, the Commission approved a settlement agreement between staff of the Commission, TAL and Mr. Furtak. In the settlement agreement, TAL and Mr. Furtak agreed that they had participated in a distribution which contravened Ontario securities laws. As part of the settlement discussions, TAL repaid all investors impacted. Mr. Furtak was prohibited from trading for six months and TAL undertook that it would not apply for registration with the Commission for four months.
14. Using the test described in Mithras above, staff argues that I, as Director, must necessarily place a strong reliance on Furtak’s and TAL’s past behaviour in assessing TAL’s current fitness for registration.
15. Although I agree that the position set out in Mithras applies in this case, I do not agree with staff’s conclusion that TAL’s registration should be refused because of the 2003 settlement agreement.
16. My reading of the transcript to the settlement hearing shows that:
a. Mr. Furtak and TAL recognized their misconduct and agreed to the suggested sanctions, thus saving staff the necessity of bringing a more lengthy and expensive proceeding,
b. All of the investors impacted were “made whole” by TAL and any financial benefit to either Mr. Furtak or TAL was disgorged,
c. Mr. Furtak took full responsibility before the hearing panel for his misconduct, and
d. the panel itself struggled with the terms of the settlement agreement. To quote the Chair of the panel: “With a number of concerns, and I must say with much hesitation on the part of some of us, we are going to approve this settlement. We are troubled by a number of facts which we feel have not been fully set out and which makes our decision [to approve the settlement agreement] difficult… We have to determine these matters in the public interest, and we have to determine that these matters are… contrary to the Act… and we have to determine that there [are] facts that enable us to do that. This barely meets that requirement.”
17. In my view, absent any information or evidence to the contrary in the seven year period since the date of the settlement agreement, Mr. Furtak should not continue to be penalized for conduct which occurred approximately seven years ago and for which he was sanctioned by the Commission. The panel itself in the settlement hearing was troubled by the terms of the settlement agreement. In my view, staff cannot now use this settlement agreement as evidence that TAL is not currently suitable for registration. If the past conduct of Mr. Furtak was more egregious or if there was any evidence presented by staff that Mr. Furtak or TAL hadn’t “learned their lesson” in the approximately seven years since the settlement agreement was entered into, I would have come to a different conclusion.Class action suit against TAL
18. The second issue related to the class action suit against TAL and others. I was provided with a copy of the statement of claim against TAL, Mr. Olsthoorn, Mr. Furtak and others dated September 18, 2008. The class action suit has not been certified. As well, one of the witnesses in the hearing advised that the statement of claim had now been withdrawn against Mr. Olsthoorn and Mr. Furtak and that it was expected to be withdrawn against TAL shortly.
19. Staff argued that, while it was difficult to assess the impact of this issue on TAL’s application for registration, it was an issue that I should consider in making my decision on whether TAL should be registered.
20. I decided not to place any weight on this issue in making my decision. Many statements of claim never get certified and, even if certified, the evidence before me is that none of Mr. Furtak, Mr. Olsthoorn or TAL is now expected to be named in any resulting class action suit.Conduct of Mr. Olsthoorn
21. The last issue before me was the conduct of Mr. Olsthoorn in completing various registration documents. This was the issue that troubled me the most. There were several types of issues identified.
22. The first related to Mr. Olsthoorn’s use of his legal second name in one registration application form (Gerardus) and the use of the anglicized version of his second name (Gerald) in another registration application form. (As an aside, I’d note that in his testimony, Mr. Olsthoorn indicated that if asked what his middle name was he would usually say “Gerard”.) In my view, these errors are, at best, careless errors on the part of Mr. Olsthoorn in completing his registration forms.
23. The second type of misconduct was of more concern to me. Mr. Olsthoorn initially filed an application to be approved as an officer and director (non-trading, resident) of TAL. As above, staff’s understanding is that Mr. Olsthoorn is to become the UDP of TAL.
24. In the TAL registration application, Mr. Olsthoorn fails to disclose that he was previously registered in British Columbia as a mutual fund salesperson from 1995 to 1999 and, in Ontario, as a mutual fund and limited market dealer (LMD) salesperson from 2000 to 2001. Mr. Olsthoorn subsequently filed a second application for registration for a second firm, White Capital Corporation. In the White Capital application for registration, Mr. Olsthoorn includes his previous registrations in British Columbia and Ontario. But in his testimony, there is still some lack of clarity on Mr. Olsthoorn’s registration as an LMD salesperson in Ontario. Our records show that he was registered as an LMD salesperson from 2000 to 2001. However, when asked a direct question when he was in the witness box, Mr. Olsthoorn states definitively that he was not previously registered as a LMD salesperson in Ontario.
25. One of the most important pieces of information for staff in assessing whether to register a firm or an individual is whether the applicant has been previously registered, in what capacity, and what their regulatory history is. While staff may have identified Mr. Olsthoorn’s previous registrations in British Columbia and Ontario on its own, the differences in second name in Mr. Olsthoorn’s registration applications may have hindered this process.
26. There were also other inconsistencies identified between the two registration forms completed by Mr. Olsthoorn which related to the description of his current employment.
27. All of these issues combined led me to consider whether Mr. Olsthoorn is suitable for registration as the UDP of TAL and/or whether his registration was otherwise objectionable.
28. At the OTBH, TAL’s counsel argued that it was not inappropriate for Mr. Olsthoorn to have two applications for registration before OSC staff at the same time. Mr. Olsthoorn cannot, however, be registered with two different firms at the same time. While I agree with this technical legal argument, my view is that Mr. Olsthoorn should have indicated to staff that he had two registration applications before them.
29. TAL’s counsel also argued that the registration application process is iterative and that only errors or omissions in the “finalized” registration application form should be considered. With respect, I do not agree. Registrants and applicants for registration file certified documents with staff. These documents should be complete and correct when filed and registrants and applicants for registration should not look at the registration process as an opportunity to perfect their registration applications.Decision and reasons
30. After having heard the arguments of staff and TAL’s counsel and the evidence of the TAL witnesses, it is my decision that the registration of TAL should be granted. In my view, the so called “red flags” discussed at the OTBH and as summarized in this decision as they relate to TAL do not provide a sufficient and reasonable basis to deny the registration of TAL.
31. The next question for me was whether I should grant Mr. Olsthoorn’s application for registration. While I ultimately decided to grant his application as UDP for TAL, Mr. Olsthoorn (and TAL) should be aware that I seriously considered alternative courses of action including
a. refusing TAL’s application for registration (and thus Mr. Olsthoorn’s application for registration)
b. approving TAL’s registration and not approving Mr. Olsthoorn’s application, or
c. approving TAL’s registration and requiring Mr. Olsthoorn to take prescribed courses before registering him (which would have required TAL either to hire someone else on at least an interim basis that staff considered appropriate as a UDP or delaying its registration application until Mr. Olsthoorn was registered).
32. I was somewhat troubled by the lack of care that Mr. Olsthoorn took in completing his registration forms for both TAL and White Capital. Although I ultimately decided that Mr. Olsthoorn should be registered and that there was not a sufficient and reasonable basis to deny his registration, I was not entirely convinced that the errors described above relating to prior registrations were simple mistakes, nor was I entirely convinced that the errors related to the spelling of his second name or the description of his current employment were entirely unintentional.
33. In my view these errors demonstrate a lack of care by Mr. Olsthoorn in completing registration forms and, by extension, a lack of focus on his obligations as an applicant for registration. Given that Mr. Olsthoorn intends to be UDP for TAL, it was appropriate for staff to raise these concerns for consideration by a Director. My sincere hope is that Mr. Olsthoorn, once registered, takes his ongoing obligations as a registrant more seriously than he took in completing his application for registration with TAL or White Capital.
34. For this reason, I am also recommending that staff of the Compliance team of the Compliance and Registrant Regulation branch complete a review of TAL’s operations over the next twelve months in order to determine whether TAL and Mr. Olsthoorn are fulfilling their ongoing registration obligations.
Marrianne Bridge, FCA,
Manager, Compliance, Ontario Securities Commission