Decisions

KERRY WAYNE GIBBONS, et. al. [Decision]

BCSECCOM #:
Document Type:
Decision
Published Date:
1998-03-06
Effective Date:
1998-03-02
Details:


COR#98/052

IN THE MATTER OF THE SECURITIES ACT
R.S.B.C. 1996, c. 418

AND

IN THE MATTER OF KERRY WAYNE GIBBONS AND
DOUGLAS RUSSELL STICKLEY

AND

IN THE MATTER OF VANTAGE SECURITIES INC.


HEARING


PANEL:JOYCE C. MAYKUT, Q.C.VICE CHAIR
ADRIENNE R. WANSTALLMEMBER
DATE:FEBRUARY 9, 1998
APPEARING:DWIGHT HARBOTTLEFOR COMMISSION STAFF
ROBERT J. KINGFOR DOUGLAS RUSSELL
A. NORMAN BARBOURSTICKLEY
CATHARINE ESSONFOR VANTAGE
SECURITIES INC.

DECISION


1. INTRODUCTION

This is an application by Douglas Russell Stickley for better particulars and further disclosure of Commission staff’s case against him.

On April 23, 1997, Vantage Securities Inc., Kerry Wayne Gibbons and Stickley were given notice that a hearing would be held before the British Columbia Securities Commission to determine whether certain regulatory orders under section 161(1) of the Securities Act, R.S.B.C. 1996, c. 418, should be made against any or all of them. The notice stated that the Commission would be asked to consider the following facts and allegations in making its determination:
      Background

      1. Gibbons is a registered mutual funds sales person;

      2. Vantage is, and was at all material times hereto, a registered securities dealer, incorporated as a body corporate in British Columbia pursuant to the Company Act, R.S.B.C. 1996 c. 62 (the "Company Act");

      3. CIG Consumers Investment Group Ltd. ("CIG") is a body corporate incorporated on June 27, 1991, pursuant to the Company Act;

      4. Gibbons was at all material times the majority shareholder and president of CIG;

      5. in August, 1991, following meetings and discussions between Gibbons and Jonathan Mara, the President of Vantage, Vantage agreed to license mutual fund sales persons to operate out of the offices of CIG in exchange for a fixed fee;

      6. in August of 1991, Gibbons became registered as a mutual fund sales person through Vantage;

      7. in November of 1991, Gibbons hired Stickley to operate from the CIG offices in Prince George and at that time Stickley became registered as a mutual fund sales person through Vantage;

      8. in June of 1992, Gibbons hired John Mark Cox and Ronald Raymond Siemens to operate from the CIG offices in Prince George and at that time Cox and Siemens became registered as mutual fund sales people through Vantage;

      9. while registered through Vantage, Gibbons directed the affairs and operations of CIG without adequate supervision from Vantage;
      Gibbons
      10. Gibbons created a leveraged investment strategy (the "Scheme") and promoted and recommended it to clients of Vantage and CIG. Gibbons explained and taught the Scheme to Cox, Siemens and to a lesser degree Stickley, for the purpose of promotion to clients;

      11. typically the Scheme recommended by Gibbons to clients involved the client:
          (a) borrowing money against equity in real property owned by the client (usually secured by a long term mortgage);

          (b) in some cases, using a portion of the borrowed funds to consolidate and pay outstanding credit card balances or other debts;

          (c) using the borrowed funds (the full amount or the remaining funds after payment of debts) to purchase a mutual fund secured by Government of Canada Treasury Bills ("Money Market Mutual Fund") which provide an investment return at a rate of interest lower than the interest paid on the funds borrowed;

          (d) treating all of the interest expense and other carrying charges relating to the purchase of the mutual fund as being tax deductible;

          (e) completing an L-18 form, thereby reducing tax deducted at the source and increasing the client's cash flow; and

          (f) utilizing interest income from the Money Market Mutual Fund returns to contribute to an RRSP;

      12. Gibbons generally advised clients to invest in the AGF Money Market Fund;

      13. the Scheme is such that there is always an option that provides the client with a better investment return with less risk, that option being a monthly contribution strategy;

      14. the Scheme resulted in Gibbons earning fees or commissions and the initial commissions earned by Gibbons from the clients who invested in the Scheme were higher than those that he would have earned had he recommended a monthly contribution strategy;

      15. while two commission payment options were available under the AGF Money Market Fund, Gibbons advised his clients to choose payment on the deferred sales charge basis instead of on the front end load basis. This resulted in the maximum commissions for Gibbons, and reduced the clients' long term returns;

      16. the interest income tax deduction investors claim under the Scheme may not be a deduction they are legally entitled to claim;

      17. in or about August, 1994, Gibbons terminated his arrangement with Vantage and registered CIG with the Commission as an independent dealer. CIG was registered and operated as a mutual fund dealer until September, 1996;

      18. after August 1994, Gibbons continued to recommend and offer the Scheme to clients. Approximately 125 of Gibbons’ clients have organized their affairs and invested pursuant to the Scheme;

      19. Gibbons provided information to clients about the Scheme that was misleading, confusing, and falsely demonstrated the advantages of the Scheme without fully discussing the disadvantages and risks associated with the Scheme. He did not explain to clients that the Scheme was such that there is always an option that provides a better return with less risk;

      20. Gibbons failed to provide the NIN 87-67 disclosure statement to his clients in violation of the requirements of the Commission that this statement be provided to prospective purchasers of leveraged mutual funds;

      21. Gibbons failed to act fairly, honestly, and in his clients' best interests when recommending the Scheme and the payment option in the AGF Money Market Fund;

      22. the Scheme, as recommended by Gibbons, is an unsuitable investment strategy;

      23. Gibbons failed to act in accordance with the public interest in recommending the Scheme;

      24. on or about August 23, 1995, and after discussions with a representative of the Commission, Gibbons agreed to cease recommending the Scheme as an investment option to clients until the Commission had completed an investigation and, if necessary, held a Hearing;

      Stickley
      25. while registered by Vantage and working at CIG, Stickley recommended an investment strategy which was a variation of the Scheme (the "Program") as an investment option to his clients, pursuant to which he advised clients to borrow money in order to purchase equity funds, bond funds, asset allocation funds and a significant component of money market funds in order to (in his words) add "a conservative element" to the portfolio;

      26. the Program, as recommended by Stickley, involved high risk leveraging which was unsuitable for his clients;

      27. Stickley did not explain to clients that the Program involved excessive leveraging;

      28. Stickley provided misleading information to clients, and in particular used misleading calculations to convince clients that if they followed the Program they would achieve a positive cash flow;

      29. Stickley failed to provide the NIN 87-67 disclosure statement to his clients in violation of the requirements of the Commission that this statement be provided to prospective purchasers of leveraged mutual funds;

      30. Stickley failed to act fairly, honestly, and in his clients' best interests when recommending the Program and encouraging such investments;

      31. the Program Stickley recommended to investors was an unsuitable investment strategy for his clients;

      32. Stickley failed to act in accordance with the public interest in recommending the Program;

      33. Stickley was dismissed by Gibbons in March, 1994 for unrelated reasons;

      Vantage
      34. Vantage reviewed the Scheme before entering into the arrangement with Gibbons and sponsoring his registration for mutual fund sales from the offices of CIG in Prince George, British Columbia;

      35. contrary to Section 40 of the Securities Regulation, B.C. Reg. 270/86 (now section 44 of the Securities Rules 479/95), Vantage failed to establish prudent business procedures for dealing with clients and did not properly supervise its affairs and sales persons registered through Vantage in Prince George;

      36. Vantage was responsible for ensuring that the business activities of their registered mutual fund salespeople complied with Vantage's requirements; and

      37. Vantage failed to act in accordance with the public interest.

In June 1997, Commission staff produced copies of 1,446 pages of documents to the respondents relating to the Commission’s case against them. On October 14, 1997, Stickley’s counsel requested Commission staff to produce further particulars and further disclosure of documents. The request for particulars, which referred to the notice of hearing, stated as follows:
      (1) Paragraph 25: do you allege that Mr. Stickley recommended the Program, in the manner described in paragraph 25, to all of his clients and the manner described therein? Or only to some - if so, particularize the clients to whom such recommendations were made and the characteristics of the class of clients which so identifies them as a group, if any.

      (2) Paragraph 26: against what threshold, or on what basis, do you characterize the Program as “high risk’? Please particularize the characteristics of the Program which constitute it as having been “high-risk”.

      (3) Paragraph 26: do you allege the Program to have been “unsuitable” because it involved “high risk”? Or because it involved “leveraging”? Or both? Or are you alleging it to have been “unsuitable” for other reasons - if so, please particularize.

      (4) Paragraph 26: quantify the amount of risk involve in the Program.

      (5) Paragraph 26: For which of Mr. Stickley’s clients do you allege the Program to have been unsuitable - all of those who accepted the Program? Or only some of them? - please particularize who those clients are, as referred to in this paragraph.

      (6) Paragraph 27: against what threshold, or on what basis, do you characterize the Program as having involved “excessive” leveraging” Please particularize the characteristics of the Program which you allege constitutes the level of leveraging as having been “excessive”.

      (7) Paragraph 27: do you allege that Mr. Stickley did not so explain, to all of his clients who accepted the Program - Particularize who they are - Or to only some? - if so, please particularize those to whom you say Mr. Stickley did not so explain.

      (8) Paragraph 27: do you allege that Program involved excessive leveraging with all clients, generally? Or do you allege that the Program involved excessive leveraging with only some specific clients - if so, please particularize those specific clients with respect to whom you so allege.

      (9) Paragraph 27: quantity the extent of the alleged excess in leveraging that you say the Program involved.

      (10) Paragraph 28: particularize the information and the calculations which you allege to have been misleading. Particularize the manner in which you allege them to have misleading.

      (11) Paragraph 28: do you allege that Mr. Stickley provided misleading information to all clients? Or only all clients who invested in the Program? Or only some particular clients who invested in the Program - if so, please particularize who those clients are.

      (12) Paragraph 30: Particularize the alleged acts of unfairness and of dishonesty. Particularize the clients for whom you say Mr. Stickley failed to act “fairly, honestly, and in his clients’ best interests”. Particularize how the Program failed to correspond with the said clients’ “best interests”. Particularize what you allege those “best interests” were, that you say Mr. Stickley failed to act in accordance with.

      (13) Paragraph 30: Particularize the acts that you say would have represented the “best interests” of Mr. Stickley’s clients.

      (14) Paragraph 31: Are you alleging the Program to have been an “unsuitable investment strategy” for all investors? For all clients? Or for only some investors? Or only some clients? - if so, please particularize. How many of the clients who receive Mr. Stickley’s recommendation so accepted the recommendation?

      (15) Paragraph 31: Please particularize the facets and aspect of the Program which you say renders it an “unsuitable investment strategy”.

      (16) paragraph 32 - What is meant by the “public interest”, as used in this paragraph.

      (17) Paragraph 32 - In which of the following ways do you allege Mr. Stickley to have failed to act in accordance with the public interest:
          (i) the Program involved leveraging?

          (ii) the Program involved high-risk leveraging?

          (iii) the Program involved excessive leveraging?
          (iv) the Program was unsuitable for all of Mr. Stickley’s clients?

          (v) the Program was unsuitable for some of Mr. Stickley’s clients?

          (vi) Mr. Stickley provided misleading information and calculations to all of his clients?

          (vii) Mr. Stickley failed to act fairly, honestly, and in his clients’ best interests when recommending the Program and encouraging such investments?
      (18) Paragraph 32 - Are you alleging that Mr. Stickley failed to act in accordance with the “public interest” in an way other than those listed in paragraph 17 above? If so, please particularize such additional acts of Mr. Stickley, if any, which you allege to be contrary to the public interest.

      (19) Generally: Please particularize the losses incurred by any of Mr. Stickley’s clients as a result of any of the alleged improprieties which you are alleging against Mr. Stickley in having recommended the Program - broken down on a case-by-case basis, and in total.

The further documents sought by Stickley included any complaints made against him concerning his conduct, any records or transcripts of interviews with witnesses or potential witnesses and all documents relating to, including the entire file of, the expert witness Commission staff intended to call at the hearing.

On December 10, 1997, Commission staff made available to Stickley two additional boxes of documents, which included the names and statements of Commission staff witnesses. On January 30, 1998, Commission staff counsel responded to Stickley’s request for further particulars, in part, as follows:
      …I do not see the need to further particularize the Notice of Hearing.

      I consider the requests in your letter of October 14, 1997 not to be a request for particulars but some indication of the evidence that I expect to call. I will respond to those requests in the same order as they are asked in your letter:

      1. We are unaware whether he advised all clients. The manner of the advice is as generally set out. The witnesses are disclosed in the information available to you in the information Mr. Porges has had for you since December 10, 1997;

      2. The whole program;

      3. It was high risk because of the leveraging;

      4. No answer;

      5. We now expect to call the witnesses disclosed in the information available to you. We are not saying there will not be more witnesses nor that his actions are only limited to these witnesses. If more witnesses are to be called, you will be given a list and their statements.

      6. No answer;

      7. See statements;

      8. Answered previously - see statements;

      9. No answer

      10. See client files and statements;

      11. Previously answered above;

      12. Previously answered above;

      13. No answer;

      14. Previously answered above;

      15. See description in Notice of Hearing;

      16. No answer;

      17. No answer;

      18. No answer;

      19. No answer.

Not finding this response adequate, Stickley brought his request before the Commission. In particular, Stickley asked the Commission to order that:

1. the notice of hearing be dismissed against him in whole, or in part; or

2. the Commission be prohibited from proceeding on the allegations as set out in the notice of hearing; or

3. Commission staff deliver further and better particulars as requested in Stickley’s letter of October 14, 1997; and

4. Commission staff make further and better disclosure of documents; and

5. the hearing presently scheduled to begin on April 27, 1998, be adjourned and rescheduled following the production of particulars and documents; and

6. Stickley be awarded costs of this application.

In this application, Commission staff counsel represented, among other things, the following:

1. that the allegations against Stickley relate to his conduct regarding five of his clients, Miles Clyne, Dallas Martineau, Bill and Cathy Christensen, Greg and Judy Gunderson and Lyle Gelinas, each of whom will be called as a witness;

2. that the documents disclosed to Stickley for each of these clients consists of the client’s complaints to the Commission, including any letters, staff notes of interviews and a witness statement, and any documents relating to the clients’ financial background;

3. that in the witness statements, the clients disclose “what their objects were, what the risks were, what their position was, what they got, what they thought they were going to get, whether they were going to have a cash flow in accordance with paragraph 28” in the notice of hearing;

4. that Stickley recommended to Clyne, Martineau and the Christensens a tailored investment strategy or program, (as alleged in paragraph 25 of the notice) which was a variation of the scheme developed by Gibbons, as an investment option to his clients, pursuant to which Stickley advised these clients to borrow money in order to purchase equity funds, bond funds, asset allocation funds and a significant component of money market funds in order to (in his words) add "a conservative element" to the portfolio;

5. that although the program recommended to Clyne, Martineau and the Christensens had a possibility of making something beyond the clients’ costs of borrowing, the program recommended was nonetheless high risk and involved excessive leveraging for their stated desires and purposes;

6. that the investment advice recommended by Stickley to Gelinas and the Gundersens was not a tailored investment strategy or Program as described in paragraph 25 of the notice, but was similar to the Scheme recommended by Gibbons to his respective clients, in that Gelinas and the Gundersens were advised to invest only in a money market fund that earned a rate of return lower than the borrowed cost; that the investment advice recommended to Gelinas and the Gundersens was also high risk and involved excessive leveraging for their stated desires and purposes; that the expert evidence Commission staff is intending to call with respect to the Gibbon’s investment Scheme will also be tendered for the purpose of establishing that the investment advice recommended by Stickley to Gelinas and the Gundersens was “sub-optimal” in that there was always another option that provided a better return with less risk; that the expert opinion focuses on the Gibbon’s Scheme and that the expert did not consider the specific cases of Gelinas and the Gundersens in preparing his opinion;

7. that the investment advice recommended by Stickley to the five clients referred to above was unsuitable for each of them;

8. that the misleading information Stickley provided to his clients consisted of misleading calculations that indicated that if they followed the investment advice they would achieve a positive cash flow; that Commission staff will pursue this allegation only against those clients of Stickley where the documents, including witness statements, specifically indicate that a client was provided with misleading calculations or a statement that a positive cash flow would result;

9. that other than the losses or costs incurred and specifically referred to in the witness statements, no calculations showing that Stickley’s clients lost or made money will be tendered by Commission staff; and

10. that the ‘public interest’ consideration concerning Stickley is simply whether Stickley ought to be registered under the Act considering the fact that he provided unsuitable investment advice to each of these five clients.

2. DECISION

The issue in this application concerns the extent of disclosure required to be made by Commission staff to Stickley. Commission staff have a duty to provide a level of disclosure that ensures a respondent is fully informed of the case to be made against him so as to provide him with a reasonable opportunity to put forward his own position and correct or contradict any statement or evidence that is prejudicial to his position. In Re Simon Fraser Resources et al., [1996] 47 B.C.S.C. Weekly Summary 25, the Commission stated that this duty requires Commission staff to disclose:
      1. the particulars of the case against the respondents;

      2. the evidence that will be tendered, including any statements made against the respondents; and

      3. any exculpatory evidence of which staff is aware, or ought reasonably to be aware, the omission of which would result in a miscarriage of justice.

We have described in some detail the allegations, Stickley’s requests for particulars and Commission staff’s responses, including those made at this application. We direct staff to identify the misleading information provided by Stickley to clients and the clients to whom the misleading information was given as part of the particulars. In our view, with these further particulars, Stickley will have the information and documentation to be fully informed of the case to be made against him so as to provide him with a reasonable opportunity to put forward his own position. The remainder of Stickley’s application for better particulars and further documents is dismissed.

In our view, the applications made by Stickley for the dismissal of all or part of the notice of hearing and the prohibition against proceeding are without merit and we dismiss them accordingly. Stickley also applied for an order for costs of this application. The Commission’s jurisdiction to award costs in this hearing is set out in section 174 of the Act. The Act does not give the Commission the authority to award costs to a respondent. Although we dismiss Stickley’s application for costs of this application, we have determined that in the circumstances Commission staff should not be allowed to claim the costs of this application.

This matter is scheduled to commence April 27, 1998. In our view, there is no reason why this matter cannot proceed at that time. Accordingly, we dismiss Stickley’s application for an adjournment and we confirm that the hearing in this matter will commence at 10:00 am on April 27, 1998.


DATED at Vancouver, British Columbia, on March 2, 1998.

FOR THE COMMISSION







Joyce C. Maykut, Q.C.Adrienne R. Wanstall
Vice ChairMember
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