White Capital Corporation and Matthew White - Opportunity to be Heard
An application for a hearing and review of this decision was made to the Commission pursuant to section 8 of the Securities Act (Ontario), and all notices, orders, and decisions relating to that application can be found in ‘OSC Proceedings’.
In the Matter of Staff’s Recommendation
to Suspend the Registrations of White Capital
Corporation and Matthew White
Opportunity to be Heard by the Director
under Section 31 of the Securities Act
1. My decision is that the registrations of each of White Capital Corporation (White Capital) and Matthew White (collectively, the Applicants) are hereby suspended. My decision is based on the:
- verbal arguments and written submissions of Michael Denyszyn, Senior Legal Counsel, Compliance and Registrant Regulation Branch (CRR) for Staff of the Ontario Securities Commission (OSC), and Jordan Glick on behalf of the Applicants
- testimony of Kelly Everest (CRR), Carlin Fung (CRR), Albert Ciorma (Enforcement Branch, OSC), Matthew White, Keith Bullen, and David Gilkes. I have not relied on the testimony of Mrs. B or Mr. B. Due to a number of inconsistencies in their evidence, I did not find it credible and have therefore given it no weight, and
- evidence provided at the opportunity to be heard (OTBH).
2. Applicants’ counsel made numerous submissions concerning the fairness of the OTBH process in the suspension context and also made very serious allegations concerning the conduct of Staff in the course of this OTBH. I am of the view that the OTBH process in this case was entirely fair and that the allegations with respect to Staff’s conduct were unsubstantiated and without merit.
3. This decision outlines the primary bases for my decision to suspend the Applicants’ registrations. Although numerous other matters were discussed as part of the OTBH, in my opinion, the primary bases outlined below provide a sufficient and clear basis for me to conclude that neither White Capital nor Matthew White is suitable for registration and that each of their ongoing registrations is otherwise objectionable.
Registration history of the Applicants
4. White Capital was initially registered as a limited market dealer in 2004. By operation of law, White Capital became registered as an exempt market dealer (EMD) in September 2009.
5. Matthew White is the ultimate designated person (UDP), Chief Compliance Officer (CCO), and one of the dealing representatives of White Capital. Matthew White owns 100% of White Capital.
Suspension letter to the Applicants
6. By letter dated June 7, 2012, Staff advised the Applicants that it had recommended to the Director that:
- White Capital’s registration as an EMD, and
- Matthew White’s registration as UDP, CCO and a dealing representative be suspended. The letter summarized Staff’s primary reasons for its recommendation. Pursuant to section 31 of the Securities Act (Ontario) (Act), the Applicants are entitled to an OTBH before a decision is made by me, as Director. Verbal submissions occurred on November 1, and 2, 2012. Both counsel subsequently provided me with written submissions.
7. Staff argued that the Applicants lack the requisite integrity, proficiency, and solvency and their registrations should be suspended. Staff also argued that section 28 of the Act permits me, as Director, to suspend the registrations of the Applicants on the basis that the Applicants are not suitable for registration, have failed to comply with Ontario securities law, or that their registrations are otherwise objectionable.
Primary bases for my decision$75,000 advance and the conflict with Canyon
8. The banking records of White Capital show that $75,000 was transferred into White Capital’s bank account in September 2010 directly from a bank account associated with Canyon Acquisitions, LLC (Canyon). An equal amount was then immediately transferred out of the account to purchase a guaranteed investment certificate (GIC). The stipulated facts include a stipulation substantially to this effect.
9. In written closing submissions, White Capital submitted that there were two $75,000 transfers from Canyon. The first transfer occurred in July 2010 and it was described as being a personal loan to Matthew White. The second transfer occurred in September 2010 and it was described as being a commission advance to White Capital. White Capital submitted that it was the monies from the first transfer in July 2010 that were used to purchase the GIC from White Capital’s bank account in September 2010. I don’t find this explanation to be plausible and, in my opinion, neither White Capital’s books and records nor its banking records reflect the flow of monies in this manner either.
10. As well, there was a lot of contradictory evidence and statements made about the two transfers of $75,000 from Canyon including by Matthew White under oath in May 2011, in correspondence with Staff in November 2011, in a submission from Applicants’ counsel in July 2012, in the stipulated facts, and in Matthew White’s testimony on November 2, 2012.
11. Two additional amounts were also paid by Canyon to White Capital - $40,000 in each of October and November 2010. The two additional payments were also included as stipulated facts. I was also provided with contradictory evidence about these amounts as well.
12. In my view, Matthew White’s testimony and his various conflicting statements (including statements through his counsel) on the transfers of monies from Canyon lacked credibility. As a result, Matthew White impugned his integrity.
13. White Capital was obligated to provide conflict disclosure under section 13.4 of National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) about the nature and extent of conflicts. I agree with Staff’s submissions that White Capital did not meet this obligation solely by disclosing in a statement of policies that White Capital is “an advisor to the underlying entities of Placencia Capital Trust”, a Canyon issuer, particularly since a majority of the commissions earned by White Capital during the relevant periods were from sales of Canyon products.
14. I also want to address the argument from the Applicants that conflict concerns were diminished by the pre-payment of commissions by Canyon to White Capital. In my view, this argument is wholly incorrect. Matthew White and White Capital were in clear conflict with Canyon whether they were paid in advance or at the time of individual trades.Know your client and suitability of client trades
15. There was a lot of debate at the OTBH regarding whether the clients of White Capital were, in fact, accredited investors (AIs). Staff points to its multiple reviews of White Capital’s books and records, which on their face, raise significant questions regarding whether a number of clients were AIs.
16. White Capital points to questionnaires sent to a number of its clients as indicating that the clients were AIs. I had a number of difficulties with the White Capital questionnaires because they did not, in my mind, clearly address whether the clients were AIs. If the questionnaires had asked more detailed questions regarding the clients’ financial assets (and net assets), they might have been much more useful in determining whether the clients were, in fact, AIs.
17. An example to illustrate. The KYC form for Client X indicated that she had a total net worth of approximately $1.8 million, including real estate of $1.2 million. Her income was shown as being between $100,000 and $125,000. Based solely on White Capital’s books and records as provided to Staff, Client X is not an AI based either on the net income test, the financial assets test, or the net assets test. In her affidavit, Client X indicates that she had over $1 million in assets, not including her personal residence. However, no breakdown was provided of her assets. Also, in an interview with Staff, Client X indicated that most of her assets consisted of real estate holdings (a statement which supports her KYC form). As a result, I have significant doubts as to whether Client X was an AI.
18. White Capital also raised an argument about the need for Staff to essentially “look behind” the books and records to assess suitability of client trades. White Capital also questioned Staff’s approach to the review of suitability, in that Staff were by the very nature of the compliance field review process, forced to “look back” to assess suitability. While Staff recently started calling clients to confirm suitability and know your client information, it is a registrant’s sole responsibility to ensure that its books and records are complete and that they accurately and fully reflect the registrant’s assessment of know your client and suitability of client trades.
19. I concur with Staff that White Capital’s books and records were not sufficient for White Capital to claim that they knew their clients or that the trades made for them were suitable. As well, I do not agree with White Capital’s submission that these KYC and suitability issues were “record keeping issues” and that they should not, and do not, have an impact on White Capital’s suitability for registration.
20. White Capital also argued that Staff should have provided registrants with more guidance on its expectations on the AI exemption (particularly the definitions of “financial assets” and “net assets”). Registrants were subject to a suitability requirement long before the introduction of NI 31-103 in the fall of 2009. As a registrant since 2004, White Capital should have been well aware of its registration requirements, including one of the most fundamental of registration requirements – the requirement to know your clients so that trades made to them are suitable.
Substantial non-compliance with Ontario securities law
21. Staff submits, and I agree, that the Applicants failed to comply with Ontario securities law. The following are some of the examples provided by Staff. In my view, I was provided with sufficient clear proof of each of these failures to comply with Ontario securities law:
- The requirement to keep such books, records and other documents as are necessary for the proper recording of business transactions and financial affairs (subsection 19(1) of the Act and section 11.5(1)(a) of NI 31-103)
- The requirement to maintain records to demonstrate the extent of the firm’s compliance with applicable requirements of securities legislation (paragraph 11.5(1)(b) of NI 31-103)
- The requirement to provide books, records and documents required to be kept to Staff in a timely manner (subsection 19(3) of the Act)
- The requirement to take reasonable steps to ensure that the firm has sufficient KYC information on its clients (section 13.2 of NI 31-103)
- The requirement to take reasonable steps to ensure that purchases of securities are suitable for clients (section 13.3 of NI 31-103)
- The requirement that the UDP of a registered firm appropriately supervise the activities of the firm (and individuals acting on its behalf), and to promote compliance by the firm (and individuals acting on its behalf) with securities legislation (section 5.1 of NI 31-103), and
- The requirement that the CCO of a registered firm monitor and assess compliance by the firm, and individuals acting on its behalf, with securities legislation (paragraph 5.2(b) of NI 31-103).
22. There was some debate during the OTBH whether the significant books and records issues were sufficient to suspend the Applicants. In my view, the extent and pervasiveness of the issues in White Capital’s books and records were more than sufficient for me to suspend the Applicants’ registration. However, as set out above, these were not the only serious issues facing the firm.
23. As well, I was advised in Staff’s closing submissions that White Capital’s audited financial statements (which were due at the end of November) were not filed on a timely basis, due to “reasons outside our control and outside the control of our auditors” and later because “several key account confirmations [were] outstanding”. Given the Applicants’ recent OTBH and the fact that White Capital had recently hired an external consultant to assist it in meeting its regulatory responsibilities, I would have expected the Applicants to be extra diligent in meeting their regulatory responsibilities.
Decision on the suspension of the Applicants
24. My decision is to suspend the registration of each of the Applicants.
25. My decision was made as a result of the primary bases outlined above – all of which were proven by Staff. In my view, the Applicants’ conduct clearly demonstrates a fundamental lack of understanding regarding Ontario securities law and 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. I 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.”
26. I was also asked to consider why terms and conditions suggested by the Applicants, and not suspension, was not the appropriate remedy for the misconduct identified in this decision. In my view the test in Jaynes, Re (2000), 23 OSCB 1543 is appropriate here. That decision stated that “[w]hile terms and conditions restricting registration may be appropriate in a wide variety of circumstances, they should not be used to shore up a fundamentally objectionable registration”. In my view, the use of terms and conditions in this case would be shoring up fundamentally objectionable registrations and the comments I made in Carter are equally applicable here:
“Following the completion of a compliance field review, staff has a number of “tools” available to it from issuing a deficiency report (for identified issues that staff believes can be relatively easily remedied) up to and including the relatively new Director suspension power. In the majority of cases, a deficiency report is issued. However, faced with possible registrant misconduct, staff’s approach is to assess the possible misconduct and determine the appropriate tool to deal with the misconduct. In some cases, staff determines that terms and conditions on registration are the appropriate remedy. Other possible staff remedies are to refer the issue(s) to the OSC’s Enforcement Branch for further investigation and possible litigation, or do to as staff did in these circumstances and recommend suspension of registration.”
27. I’d like to comment on the question of acceptable evidence in an OTBH and whether the nature of that evidence is different depending on the size or nature of operations of the registrant. Again, as in Carter, I had no difficulty in accepting the books and records of White Capital or correspondence between Staff and White Capital or its registered representatives as proper hearsay evidence without any viva voce evidence being presented. In this case, the primary bases described above were substantiated, where possible, by documents or affidavit evidence. Where records were missing from the Applicants’ books and records, I had no difficulty concluding that the books and records were not being maintained as required. With respect to the second question, there is no requirement that the standard of evidence be higher because White Capital employs a number of dealing representatives. Nor do I think the argument for a higher standard of evidence makes sense. I agree with Staff’s submissions that all “registered firms must have a chief executive officer (or equivalent) who is a suitable [UDP]. An unsuitable UDP does not insulate himself or herself from appropriate regulatory action by maintaining a sales force.”
28. I’d also like to comment on the documents provided by the Applicants with metadata indicating that the documents had recently been created. While an explanation was provided to me during the OTBH for the recent metadata date, I want to warn registrants and their advisors that the re-creation of documents for provision to Staff – even if they are being reformatted or presented in a more readable form – is generally a dangerous practice. When books and records are requested by Staff, registrants are expected to provide the books and records in their original form.
Fairness and other considerations
29. The Applicants made extensive submissions about the fairness of this OTBH specifically and OTBHs generally. They also made very serious allegations with respect to the conduct of Staff in this matter. Some of the fairness submissions related to whether:
- a higher duty of fairness was required because the OTBH involved potential suspension of the Applicants
- the Applicants were afforded a fair opportunity to respond to issues raised by Staff
- there should be a difference between how OTBHs were conducted and how hearings and reviews before the Commission under section 8 of the Act were conducted, and
- Staff was fair to the Applicants by subjecting the Applicants to a number of oversight reviews over a relatively short period of time.
30. Even though this proceeding involved a recommendation of suspension for the Applicants, in my view the OTBH was conducted in a fair manner and the Applicants were provided with ample opportunity both during the verbal part of the OTBH and in lengthy written submissions to respond to the issues identified by Staff.
31. Despite the Applicants’ submissions an OTBH is not meant to be a formal hearing. This point is made abundantly clear in the Procedures for Opportunities to be Heard made under the Statutory Powers Procedure Act which provide that:
“An appearance before the Director will generally be an informal proceeding. The Ontario Securities Commission Rules of Practice and the Rules of Civil Procedure do not apply… At the appearance, the Director may ask any question and admit any evidence which he or she sees fit… Witnesses may be called, examined and cross-examined with the consent of the Director. The applicant and any witnesses may give evidence under oath or affirmation.”
I also reinforced this point with Applicants’ counsel during the course of the OTBH.
32. In the event that the Director issues an adverse decision, an applicant then has the opportunity under subsection 8(2) of the Act for a full hearing and review of the matter. This is treated by the Commission as a hearing de novo, which provides an applicant with a fresh consideration of all of the issues.
33. With respect to the Applicants’ serious and repeated allegations of misconduct by Staff, it is sufficient to say that these were entirely unsubstantiated and in my view completely without merit.
34. In my view, neither White Capital nor Matthew White are suitable for registration and, for the reasons provided, their registrations are suspended.“Marrianne Bridge”, FCPA, FCA
Deputy Director, Compliance and Registrant Regulation Branch
Ontario Securities Commission
January 11, 2013
ADDENDUM – JOINT RECOMMENDATION BY STAFF, WHITE CAPITAL CORPORATION AND MATTHEW WHITE
TO MARRIANNE BRIDGE IN HER CAPACITY AS DIRECTOR
Staff (“Staff”) of the Ontario Securities Commission (“OSC”), White Capital Corporation (“White Capital”) and Matthew White (“White”) jointly recommend that in light of your decision in the capacity of Director dated January 11, 2013 (the “Director’s Decision”), the appropriate terms and conditions subsequent to the suspensions the Director imposed are that:
(i) White Capital's registration shall be suspended immediately and will continue to be suspended until such time as the Director accepts White Capital's application for the surrender of its registration and revokes White Capital's registration.
(ii) White Capital shall apply forthwith for the surrender of its registration.
(iii) White shall be permanently prohibited from seeking reinstatement of registration in the individual categories of ultimate designated person or chief compliance officer.
(iv) White shall not become a permitted individual of a new sponsoring firm for a period of 5 years from the date hereof.
(v) White shall be prohibited from applying for reinstatement of registration as a dealing representative for a period of 18 months from the date of the Director’s Decision.
(vi) White shall be prohibited from applying for reinstatement of registration as a dealing representative until he successfully passes the Conduct and Practices Handbook examination, and until he furnishes Staff with evidence of the successful completion of this examination.
(vii) Subject to items (v) and (vi), Staff shall not recommend that an application by White for registration as a dealing representative with an appropriately registered firm be refused unless Staff becomes aware after the date of this joint recommendation of conduct impugning White's integrity, proficiency or solvency or conduct which would make his registration objectionable.
(viii) Should White apply for reinstatement of registration as a dealing representative, Staff will recommend that upon the reinstatement of White's reinstated registration he be subject to strict supervision by his sponsoring firm for a period of 1 year, beginning with the date of reinstatement of registration. White would accept these terms and conditions on his reinstated registration.
(ix) If the Director accepts this joint recommendation, White Capital and White will immediately withdraw their application dated January 16, 2013 for a hearing and review of the Director’s Decision.
(x) If the Director accepts this joint recommendation, White Capital and White agree to waive all rights to a review of this matter.
(xi) If the Director accepts this joint recommendation, a copy of the Director’s decision accepting this joint recommendation may be published on the OSC website and in the OSC Bulletin.
(xii) If the Director accepts this joint recommendation, none of the parties will make any public statement that is inconsistent with this joint recommendation.
(xiii) If the Director does not accept this joint recommendation, all discussions and negotiations between Staff, White Capital and White in relation to this matter, and the joint recommendation itself shall be without prejudice to the parties.
(xiv) Whether or not the Director approves this joint recommendation, neither White Capital nor White will use, in any proceeding, this joint recommendation or the negotiation or process of approval of this joint recommendation as the basis for any allegation of bias or unfairness or any other remedies or challenges that may otherwise be available.
Respectfully jointly submitted by,
|" Erez Blumberger "
Erez Blumberger, Deputy Director,
Compliance and Registrant Regulation on behalf of
Staff of the Ontario Securities Commission
|April 26, 2013
|" Matthew White "
Matthew White on behalf of himself
and White Capital Corporation
|April 26, 2013
|In my capacity as Director, I hereby accept the joint recommendation.
|" Marrianne Bridge "
Marrianne Bridge, Deputy Director,
Compliance and Registrant Regulation Branch
|April 26, 2013