Catherin Sloan, for the Superintendent of Brokers.

Dale G. Sanderson, for Paul Kevin Groat.

James Morris Durward on his own behalf.

DECISION AND REASONS:-- This matter was brought before the Commission by the Superintendent of Brokers through a notice of hearing under section 145 of the Securities Act (the "Act"), dated October 14, 1988. The notice was issued in connection with activities alleged to have been carried on by Morgan-Taylor International Inc. ("Morgan-Taylor") under the direction of Paul Kevin Groat ("Groat") and James Morris Durward ("Durward"). The notice indicated that the Commission would be asked to determine whether it is in the public interest:

1.		to make an order under section 145 of the Act that all or any of the exemptions described in sections 30 to 32, 55, 58 and 81 of the Act do not apply to either Groat or Durward or both of them;
2.		to make an order under section 154.2 of the Act that Groat and Durward pay for the costs of or related to the hearing that are incurred by or on behalf of the Commission or the Superintendent; and
3.		to make any other order as may be appropriate and necessary under the circumstances.

Morgan-Taylor was incorporated under the Company Act and, in December 1987, carried on business at 340 - 580 Hornby Street in Vancouver. Prior to 1987 the company had been known as Taylor, Morgan International Inc., but in that year it was renamed and activated by Groat and Durward as a jointly owned company to work on business acquisitions. Groat and Durward had previous experience in the investment business in Vancouver and elsewhere.

Some time in 1987, Morgan-Taylor entered a contract to provide public relations services for Pan World Ventures Inc. ("Pan World"), a company whose shares were listed on the Vancouver Stock Exchange. According to Groat, Pan World was attempting to raise $27 million to finance a take over of a company listed on the Toronto Stock Exchange. Morgan-Taylor's responsibility under the contract was to contact financing companies to assist in the fund raising efforts and to contact brokers in order to get information on Pan World out to the public. Groat and Durward hired Paul Cromien ("Cromien"), whom Groat had known since 1981, to assist with the promotion of Pan World. Cromien hired seven individuals on behalf of Morgan-Taylor to make telephone calls and worked with Groat and Durward to prepare "tout sheets" for the callers to use in promoting Pan world.

Morgan-Taylor was having difficulties in getting brokers to respond to the promotional efforts and carry the message to their clients. Fortuitously, Groat, Durward and Cromien were waiting for an elevator one day, when the elevator door opened to reveal boxes of discarded trading records from a brokerage firm. They took the boxes back to Morgan-Taylor's office, where they decided to use the names of the brokerage firm's clients from the trading records in order to make promotional calls for Pan World directly to investors. They used the client names, together with residential telephone numbers obtained from the directory white pages, to compile computerized lists of individuals for the Morgan-Taylor employees to call. Groat and Durward subsequently collected discarded brokerage firm records from garbage dumpsters. These were used to compile additional lists of individuals for the Morgan-Taylor employees to call.

On or about December 10 or 11, 1987, employees of Morgan-Taylor began calling the individuals named on the lists, using tout sheets as scripts for the calls. Several forms of tout sheets were entered in evidence. The one identified by Cromien as being similar to those actually used described Morgan-Taylor as being involved in mergers and acquisitions and named Pan World as a company listed on the Exchange that was about to engage in a take over of a large "blue chip" company listed on the Toronto Stock Exchange.

Calling took place for two to three hours each evening and carried on for about 10 days. Cromien estimated that about 100 people were called each night. The calling was then stopped, according to Groat, because Morgan-Taylor was receiving complaints from brokers about the calls to their clients and because "it began to seem like less and less of a good idea".

Both Cromien and Groat testified that the calls were not for the purpose of selling Pan World shares. They said that the callers were told not to solicit purchases of shares or to make unrealistic claims about Pan World, but to refer to brokers any clients who showed interest.

Cromien said that he was aware that brokers were prohibited from making "cold calls" but thought that the prohibition did not apply to the Morgan-Taylor callers, as they "were not acting as brokers". He said that the question had been discussed but that he had felt there was no problem since one of Pan World's directors was a lawyer who, presumably, would have advised if the calling were illegal.

Groat testified that it had never occurred to him that the calling was illegal. He had sought no legal advice on this question before the calling commenced.

Unfortunately for Morgan-Taylor and its principals, one of the individuals called during that period in mid December was Gunnar Wasmund, an investigator with the Commission's Compliance and Enforcement department, who testified as to the following sequence of events.

At 8:45 PM on December 16, 1987, Wasmund received a telephone call at his residence from a person who identified himself as Gary Killeen. He was told a story about Pan World and its involvement in a planned takeover of a company listed on the Toronto Stock Exchange. He was advised that this was "a rare opportunity to get in on something good" and that, when the deal went through, Pan World's stock would "go out of sight". He was then given the telephone number of Morgan-Taylor and told that he could call that number during the daytime to receive more information and order a package of written materials. Wasmund testified that he had never previously heard of Pan World, Morgan-Taylor or Killeen and had never met or heard of Groat or Durward.

The following morning, Wasmund called the number given to him by Killeen. The call was answered as Morgan-Taylor and Wasmund was referred to a person named Scott Emerson, who confirmed the information given by Killeen. Emerson advised Wasmund not to buy Pan World at that time because short sales were hurting the market. He took Wasmund's name and telephone number and said he would call Wasmund in January when it was time to buy.

Four days later, on December 21, 1987, Wasmund received a package of printed material on Morgan-Taylor and Pan World at his home. The package, accompanied by a cover letter on Morgan-Taylor letterhead signed by Emerson, consisted of crude promotional literature dealing with mergers and acquisitions in general and a proposed acquisition by Pan World in particular. The general description of mergers and acquisitions suggested that this field of activity had generated large profits for "wealthy individuals and aggressive corporations" but that the "investing public" had not participated in this bounty. The material indicated how this could be rectified. "It will take only one successful acquisition to dramatically increase Pan Worlds (sic) size. In all likelihood this will be reflected by higher stock prices. We at Morgan-Taylor International feel that Pan World Ventures stock should be purchased in the speculative-growth portion of the investors (sic) portfolios."

On December 22, 1987, Wasmund obtained an investigation order from the Commission to investigate the affairs of Morgan-Taylor and Pan World. At 4:30 PM on January 12, 1988, he visited Morgan-Taylor's office, accompanied by two other members of the Compliance department. They were met by a person named Jean-Luc Lesage, whom they asked to direct them to the principals of Morgan-Taylor. Lesage advised them that Groat and Durward jointly ran Morgan-Taylor as far as he knew and he agreed to call them. Groat and Durward later arrived at the office and showed Wasmund and his colleagues around. Wasmund obtained from the Morgan-Taylor office tout sheets, computer phone lists, and brokerage firm records, all of which were entered as evidence at the hearing. Wasmund was unable to verify which, if any, of the tout sheets he had seized was used in the call he had received at his residence.

Groat advised Wasmund that he and Durward were the directors of Morgan-Taylor, although Durward was not officially a director on paper yet. This was subsequently confirmed by Groat on two or more occasions. Durward never advised Wasmund whether he was a director but he was present when Groat advised Wasmund they were both directors and did not contradict this statement.

Wasmund subsequently checked the records of the Commission and was unable to find any evidence that Morgan-Taylor was registered under section 20 of the Act to trade in securities or exempted under section 34(5) of the Act from the prohibition on cold calling.

DECISION

Ms. Sloan, counsel for the Superintendent, directed us to section 34(2) of the Act, which states that, "No person shall ... telephone from within the Province to any residence within or outside the Province for the purpose of trading in a security." She also noted section 34(4), which deems a person to have telephoned where an officer, director or salesman of the person telephones on the person's behalf. She submitted that this case involved a clear violation of section 34(2).

There is no dispute that Morgan-Taylor employees made telephone calls from within the province to residences. The question is whether the calls were made for the purpose of trading in a security.

The term trade is defined in section 1 of the Act to include "a disposition of a security for valuable consideration", "the receipt by a registrant of an order to buy or sell a security" and "any act, advertisement, solicitation, conduct or negotiation directly or indirectly in furtherance of" these activities. This is a very broad definition, intended to encompass a wide range of activities related to the selling of securities. Ms. Sloan argued that the telephone calls were intended to generate interest among individual investors in acquiring Pan World shares and were therefore for the purpose of trading.

Mr. Sanderson, counsel for Groat, argued that the evidence presented by the Superintendent was insufficient to establish that the calls were made for the purpose of trading in a security. He suggested that the Superintendent had no reliable evidence that the Morgan-Taylor employees were promoting the shares or making representations as to future price increases. He stated that there were no shares offered to the individuals called and no prices quoted, but that the callers simply provided information about Pan World and its proposed takeover.

We find that the calls were indeed made for the purpose of trading in a security. It is clear from the evidence that the primary motivation of the calls was to induce in the individuals called an interest in purchasing Pan World shares. Whether or not specific offers to sell or specific representations as to the future price were made is irrelevant. The callers were clearly conveying a message that this was a company about to do something that would increase the value of its shares and that investors could profit from this opportunity by purchasing Pan World shares through their brokers. This message was an act or solicitation that was at least indirectly in furtherance of an order to a registered dealer to buy a security.

It therefore falls squarely within the meaning of the term "trade" as defined in the Act.

This finding leads directly to a conclusion that Morgan-Taylor violated section 34(2). For misconduct of this type by a company, the directors must be held responsible. The evidence presented by the Superintendent, although somewhat murky, indicated that Groat and Durward were the directors of Morgan-Taylor, and they made no attempt to suggest otherwise.

In determining the appropriate penalty for this violation, we recognize that the cold calling activity lasted only a short time and appears not to have had a fraudulent intent. However, we must also take into account that both Groat and Durward had experience in the investment business and ought to have been aware that securities trading is closely regulated. Despite this they made no effort to determine whether their proposed calling activity would violate any laws or regulations. We consider a removal of their trading exemptions necessary to protect the public and to demonstrate that this type of behaviour is not acceptable in this jurisdiction.

We order, under section 145(1) of the Act, that the exemptions described in sections 30 to 32, 55, 58 and 81 do not apply to Groat or Durward for a period of one year from the date of this decision.

We also order, under section 154.2 of the Act, that Groat and Durward pay administrative costs of the hearing in the amount of $2,000, to be divided equally between them.

D.M. HYNDMAN, Chairman
M.S. JAWL, Member