Decisions
FREDERICK GEORGE ORR [Decision]
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BCSECCOM #:
2001 BCSECCOM 1106
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Document Type:
Decision
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Published Date:
2001-11-26
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Effective Date:
2001-11-23
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Details:
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2001 BCSECCOM 1106
COR#01/123
IN THE MATTER OF THE SECURITIES ACT
R.S.B.C. 1996, c. 418
AND
IN THE MATTER OF FREDERICK GEORGE ORR
PANEL
Brent W. Aitken
John K. Graf
Roy Wares
DATE OF HEARING
November 6, 2001
DATE OF DECISION
November 23, 2001
APPEARING FOR COMMISSION STAFF
Kristine M. Mactaggart
APPEARING FOR FREDERICK GEORGE ORR
H. Roderick Anderson
DECISION
[para 1]
This is a hearing under section 161(1) of the Securities Act, R.S.B.C. 1996, c. 418 under a notice of hearing dated May 7, 2001. Commission staff is seeking orders that the respondent, George Frederick Orr:
(a) be denied the use of the exemptions under the Act,
(b) be prohibited from acting as a director or officer of any issuer,
(c) pay an administrative penalty, and
(d) pay the costs of the hearing.
BACKGROUND
[para 2]
The facts are not in dispute and are set out in an agreed statement of facts. In a nutshell, Orr, through procrastination, failed to file reports for trades he made during a five-year period ending February 2000 in the shares of three public companies of which he was an insider. Orr brought the delinquent filings to the Commission’s attention, bulk filed his reports in August 2000 and paid $1,850 in late filing penalties. Orr says that since then he has filed his insider trading reports on time.
[para 3]
The three companies were Grande Portage Resources Ltd., Great Western Gold Corp. and War Eagle Mining Company Inc. All are reporting issuers listed on the Canadian Venture Exchange. During the relevant periods, Orr was a director of Grande Portage, an officer of Great Western and both a director and an officer of War Eagle.
[para 4]
Orr has been a Chartered Accountant since 1988 and since 1992 has provided administrative and accounting services to various public companies, including these ones. Orr has no disciplinary history with the Commission.
[para 5]
Until mid-1995 Orr filed insider trading reports relating to the three companies on time. From then until early 2000, he filed no insider trading reports. He acknowledges that he was well aware of the obligation to file insider trading reports on time and says he procrastinated in filing the reports, primarily because of the infrequency of his trades.
[para 6]
From November 1995 through April 1998, Orr sold 62,500 shares of Grand Portage in 12 trades. He acquired these shares by exercising stock options also held or acquired during this period (40,000 options expired unexercised). Orr also made a gift of 220,804 shares.
[para 7]
From June 1995 through January 1999, Orr purchased 23,500 and sold 3,500 shares of Great Western in seven trades. Orr also held or acquired 150,000 stock options during this period (50,000 options were cancelled).
[para 8]
From May 1995 through February 2000, Orr purchased 39,000 and sold 128,000 shares of War Eagle in 73 trades. He acquired some of these shares by exercising stock options held during this period (115,000 options expired unexercised).
[para 9]
Orr’s trading represented an insignificant fraction of the shares traded in each of the companies during the relevant periods. There is no allegation that Orr’s trading manipulated the market in any way or that it was his intention to do so.
DISCUSSION
[para 10]
The facts agreed, the parties’ submissions concentrated on what, if any, orders the Commission ought to make in these circumstances.
[para 11]
In Re Eron Mortgage Corp., [2000] BCSC Weekly Summary 22, the Commission set out a non-exhaustive list of factors to be considered when making orders under section 161 of the Act. They include:
1. the seriousness of the respondent’s conduct,
2. the harm suffered by investors as a result of the respondent’s conduct,
3. the damage done to the integrity of the capital markets in British Columbia by the respondent’s conduct,
4. the extent to which the respondent was enriched,
5. factors that mitigate the respondent’s conduct,
6. the respondent’s past conduct,
7. the risk to investors and the capital markets posed by the respondent’s continued participation in the capital markets of British Columbia,
8. the need to demonstrate the consequences of inappropriate conduct to those who enjoy the benefits of access to the capital markets,
9. the need to deter those who participate in the capital markets from engaging in inappropriate conduct, and
10. orders made by the Commission in similar circumstances in the past.
[para 12]
Orr argues that items 8 and 9 are no longer appropriate factors for the Commission to consider in making orders. As authority, he cites Committee for Equal Treatment of Asbestos Minority Shareholders vs. Ontario (Securities Commission), [2000] S.C.J. No. 38 (S.C.C.). In that case, Iacobucci J., writing for the court, said the following about the Ontario Securities Commission’s public interest jurisdiction under section 127 of the Securities Act (Ontario), a provision similar to section 161 of our Act:
“41. However, the public interest jurisdiction of the OSC is not unlimited. . . . Two aspects of the public interest jurisdiction are of particular importance . . . . [First, the] jurisdiction is animated in part by both of the purposes of the Act described in s. 1.1, namely ‘to provide protection to investors from unfair, improper or fraudulent practices’ and ‘to foster fair and efficient capital markets and confidence in capital markets’. Therefore, in considering an order in the public interest, it is an error to focus only on the fair treatment of investors. The effect of an intervention in the public interest on capital market efficiencies and public confidence in the capital markets should also be considered.
“42. Second, it is important to recognize that s. 127 is a regulatory provision. In this regard, I agree with [the lower court] that ‘[t]he purpose of the Commission's public interest jurisdiction is neither remedial or punitive; it is protective and preventative, intended to be exercised to prevent likely future harm to Ontario's capital markets‘. . . .
“43. Furthermore, the above interpretation is consistent with the scheme of enforcement in the Act. . . . the purpose of an order under section 127 is to restrain future conduct that is likely to be prejudicial to the public interest in fair and efficient capital markets. The role of the OSC under section 127 is to protect the public interest by removing from the capital markets those whose past conduct is so abusive as to warrant apprehension of future conduct detrimental to the integrity of the capital markets: Re Mithras Management Ltd. (1990), 13 O.S.C.B. 1600. In contra distinction, it is for the courts to punish or remedy past conduct under ss. 122 and 128 of the Act respectively: See D. Johnston and K. Doyle Rockwell, Canadian Securities Regulation (2nd ed. 1998), at pp. 209-11.
. . .
“45. In summary, pursuant to s. 127(1), the OSC has the jurisdiction and a broad discretion to intervene in Ontario capital markets if it is in the public interest to do so. However, the discretion to act in the public interest is not unlimited. In exercising its discretion, the OSC should consider the protection of investors and the efficiency of, and the public confidence in, capital markets generally. In addition, s. 127(1) is a regulatory provision. The sanctions under the section are preventative in nature and prospective in orientation. Therefore, s. 127 cannot be used merely to remedy Securities Act misconduct alleged to have caused harm or damages to private parties or individuals.”
[para 13]
This interpretation applies to this Commission’s public interest jurisdiction under our Act: Johnson v. B.C. Securities Commission, 2001 BCCA 597.
[para 14]
Orr argues that Asbestos requires the Commission, in determining what orders to make, to confine its consideration to the threat represented to the market by the respondent whose conduct is in question. He says that under Asbestos, the Commission ought not, in making its orders, seek to demonstrate to others the consequences of inappropriate conduct or to deter others from engaging in that conduct.
[para 15]
We disagree. The court’s decision in Asbestos is a useful re-articulation of the Commission’s public interest jurisdiction, but it does not fundamentally change the characterization of that jurisdiction as defined that court in previous decisions. Those decisions make it clear that the purpose of orders made under section 161 is to protect the integrity of the securities markets in the public interest, not to punish those who have contravened the legislation or acted contrary to the public interest.
[para 16]
In making orders within this public interest framework, we consider whether the individual respondent’s past conduct raises sufficient concern to warrant orders restricting that individual’s future conduct in order to protect the market. Our responsibility to protect the public interest does not end there, however. As Asbestos makes clear, our responsibility is to make orders “for the protection of investors, and the efficiency of, and the public confidence in, capital markets generally”. This requires consideration of all the factors enumerated in Eron.
[para 17]
Commission staff seeks orders denying Orr the use of the exemptions under the Act for a period of 18 months, prohibiting him from being a director or officer of any issuer until the later of 18 months from now and the date he completes a course on the responsibilities of directors and officers of public companies. Staff also asks us to order Orr to pay an administrative penalty of $5,000 and to pay the costs of the hearing.
[para 18]
Orr suggests that nothing more than an order to comply with the legislation is an appropriate sanction, but if the Commission wishes to consider other orders, an order to deny exemptions should be no longer than three months, and to prohibit Orr from acting as a director or officer should be no longer than the later of nine months and the date he completes the course. He says the administrative penalty, if ordered, should not exceed $5,000 and that he should not be ordered to pay costs. He asks that if the Commission is inclined to consider costs that he be heard further on that issue.
[para 19]
The Commission has repeatedly stressed the importance to the market of timely disclosure of insider trading. For example, in Re Seven Mile High Group Inc. [1991] 47 BCSC Weekly Summary 7 the Commission said (at p. 36):
“The information provided by insider trading reports is important market information, as it discloses to market participants the trading activities of the persons most closely connected to, and therefore in a position to be most knowledgeable about, a reporting issuer. Timely reporting is particularly important where, as in this case, the insider is an active trader.”
[para 20]
A failure to file reports when required can be presumed to have some deleterious effects on other investors and the market, even in the absence of evidence of actual harm.
[para 21]
Commission staff cited several past cases in which the Commission sanctioned individuals who failed to file insider trading reports when required: Re Lloyd [1996] 8 BCSC Weekly Summary 76, Re Rhodes [1996] 8 BCSC Weekly Summary 85, Re Skimming [1996] 8 BCSC Weekly Summary 89, and Re Slavik [1990] 90 BCSC Weekly Summary 28. In addition, Orr cited five settlements entered into by the Executive Director related to the failure to file insider trading reports: Tildesley 2001 BCSECCOM 888, Hobkirk [1999] 26 BCSC Weekly Summary 226, Smithson 2001 BCSECCOM 335, Pfeffer 2000 BCSECCOM 304, and Ellis 2001 BCSECCOM 961.
[para 22]
The results of these decisions and settlements are as follows. Exemptions were denied in all cases and ranged from six to 24 months (Lloyd, a case with aggravating factors, was five years). Prohibitions against acting as a director or officer were applied in five of the nine cases. When applied, the prohibition ranged from six to 24 months (Lloyd was five years). The course requirement was applied in four of the nine cases. Administrative penalties were applied in eight of the nine cases and ranged from $1,500 to $5,000 (Lloyd was $20,000, Pfeffer $15,000). Costs were ordered in all but three cases (one of the settlements did not separate the penalty from the costs).
[para 23]
Having reviewed these decisions and settlements, it appears that the Commission and the Executive Director consider the following factors to be particularly relevant in cases of this type:
· the volume of shares in the unreported trades compared to total trading in the stock,
· the number of unreported trades,
· the duration of the non-compliance,
· whether the respondent disclosed and rectified the deficiencies voluntarily,
· the respondent’s subsequent conduct,
· the respondent’s previous disciplinary history,
· the respondent’s cooperation with the Commission staff investigation, and
· the presence of any aggravating factors.
[para 24]
In this case, we have the following:
· The number of Orr’s trades and the volumes of shares involved were insignificant relative to the general market activity in the shares of the three companies.
· Orr’s non-compliance went on for 5 years.
· Orr came forward voluntarily to disclose and rectify the situation.
· Orr has apparently remained in compliance since rectifying his past defaults.
· Orr has no previous disciplinary history with the Commission.
· Orr cooperated fully with the staff’s investigation.
· There are no aggravating factors, such as enrichment or market manipulation or evidence of actual harm to the public.
[para 25]
Orr’s conduct falls toward the lower end of the range of seriousness in cases of this type. He does not appear to be a major threat to the market nor manifestly unsuitable to be a director or officer of an issuer. Through his professional qualifications and his occupation he is clearly aware of the responsibilities of directors and officers, so there seems little to be gained by compelling him to take a course on that subject.
[para 26]
Having said that, Orr’s conduct cannot be condoned and orders are appropriate.
[para 27]
Therefore, considering it to be in the public interest to do so, we order:
1. under section 161(1)(c) of the Act, that the exemptions in sections 44 to 47, 74, 75, 98 or 99 do not apply to Orr for a period of six months, except that Orr may rely on section 45(2)(7) to trade for his own account, and
2. under section 162, that Orr pay an administrative penalty of $3,000.
[para 28]
We reserve our decision on the matter of costs pending further submissions of the parties on that issue. We direct Commission staff, if it wishes to pursue the matter of costs, to file its submissions, including a bill of costs, with the Commission Secretary and deliver them to Orr by December 7. We direct Orr to file his response with the Commission Secretary and deliver it to Commission staff by December 14. If either of the parties wish an oral hearing, they should notify the Commission Secretary by December 14.
[para 29]
November 23, 2001
FOR THE COMMISSION
Brent W. Aitken, Commissioner
John K. Graf, Commissioner
Roy Wares, Commissioner