2005 BCSECCOM 197

Panel	Adrienne Salvail-Lopez	Vice Chair
	Robin E. Ford	Commissioner
	Neil Alexander	Commissioner
Dates of Hearing	September 13 and 14, 2004
Date of Decision	March 31, 2005
Appearing
Ralph H. Sahrmann	For the Executive Director

Client	Redemption Amount	Redemption Date	Amount of Cheque to Conservative	Cheque Deposit Date
Halls	$9,612.06	February 19, 1998	$ 5,000.00	February 25, 1998
Halls	$5,000.00	March 29, 1999
Halls	$5,000.00	March 29, 1999
Halls	$5,000.00	March 29, 1999	$10,000.00	April 12, 1999

Q Why did Mr Halls write cheques to Conservative Investment?
A He wanted to support Conservative.
Q Did he know what Conservative was?
A I can’t recall, no.
Q What did you tell Mr Halls about the company?
A Well, he knew about the branch and he liked that.
Q The DPM branch?
A Mm-hmm.
Q What did he like about it?
A He liked the people there, and liked the …
Q Did you show Mr Halls any pro formas or financial analysis of any kind?
A No, I did not.
Q Did Mr Hall know the company was not incorporated?
A No, he did not.
Q Did he know the company was not audited?
A No.
Q What were the terms of the loan? …
…
A Well, we didn’t have terms to the loan.
Q And what loan documentation was executed?
A We did not have any.
Q And how was this loan a suitable investment for Mr Halls?
A At the time I thought it was, but in retrospect I see it is not.
Q We have a copy of his NCAF here. We can see he was 70-per-cent income, 30-per-cent growth with a risk tolerance of medium. And at the time you thought that a loan to your company was suitable based on this information?
A Obviously it was wrong.
Q Why did you think it was suitable at the time?
A We thought the business would do—would pay him an income.
Q What sort of an income?
A We didn’t come to that yet. In other words, we didn’t know that yet.
Q When was that to be determined?
A When we -- our thoughts -- my thoughts are when we were -- became more profitable.
Q And you would determine how he was to earn the income at that time?
A That’s correct.
Q Did you ever repay Mr Halls any of the money?
A No.
…
Q Did you alert his estate to the money you’ve had owing to him?
A No.
Q Why not?
A I should have done that. I didn’t know that.
Q You didn’t know what?
A I should have done that, I should say. No, I never thought of that.

Client	Redemption Amount	Redemption Date	Amount of Cheque to Conservative	Cheque Deposit Date
Smithers			$ 3,000.00	May 14, 1998
Smithers			$ 5,000.00	October 23, 1998
Smithers			$ 4,000.00	January 6, 1999
Smithers			$ 5,100.00	May 17, 1999
Smithers			$ 3,000.00	August 25, 1999
Smithers			$ 4,000.00	December 6, 1999
Smithers			$ 3,000.00	March 28, 2000
Smithers			$ 5,000.00	July 28, 2000
Smithers			$ 5,000.00	November 23, 2000
Smithers			$ 6,000.00	January 26, 2001
Smithers	$1,000.00	February 7, 2001
Smithers	$2,000.00	February 7, 2001
Smithers	$2,000.00	February 7, 2001	$ 5,000.00	February 20, 2001

Q And why did Ms Smithers make cheques payable to Conservative Investment?
A The -- she wanted to -- she was lending money to Conservative, and she thought that was good.
Q Why did she think that was good?
A She was -- wanted to put money into the company. She thought that was a good idea.
Q A good idea financially?
A She wanted to support the company. So that’s -- I guess that’s what she …
Q Why did she want to support the company?
A She liked the company, and she liked me. So, that’s why she wanted to do it.
…
Q … what did you tell Ms Smithers about the company?
A … I can’t remember.
Q Did you show her pro formas?
A Not -- she saw our offices and she saw the -- well, I would say, no, I didn’t show her the pro forma …
Q Did you show her any historical financial statements?
A No.
Q A cash-flow analysis?
A No, I did not.
Q Just a P&L, something to show your revenue and expenses?
A No, I did not.
Q Did Ms Smithers know that the company was not incorporated?
A No she would not have known.
Q Did she know the company wasn’t audited?
A No, she didn’t.
…
Q Okay, why was a loan to your company in line with Ms Smithers’ objectives?
A Well, I think this is where I -- I could see that I -- at the time I thought it was good, but now I see it’s -- wasn’t that good, so.
Q Why did you think it was good at the time?
A I thought that my business was going to do well, and so that’s why I thought it was good. But in retrospect it was not the right thing to do.
Q What made you think your business was going to do well? Had you had some type of pro forma done?
A We just had reached our goals in the branch and …
Q Who sets the goals?
A Me. I would set the goals along with my manager or whoever would help me to do the goal setting.
Q The manager of what?
A Of -- if it was DPM, whoever my manager would be at the time.
Q So, you mean the branch office of DPM had met its goals?
A Right.
Q Not Conservative Investments?
A No.
Q Did Conservative Investments have financial goals?
A No, they did not.
Q But the investment was made in Conservative Investments?
A That’s correct.
Q What were the terms of the loan between Conservative Investments and Ms Smithers?
A We didn’t have terms of the loan.
Q What loan documentation was executed?
A I didn’t have any.
Q Did you ever repay any of the loaned money to Ms Smithers?
A I can’t recall.

Client	Redemption Amount	Redemption Date	Amount of Cheque to Conservative	Cheque Deposit Date
Townsley	$15,000.00	April 3, 1998	$15,000.00	April 9, 1998
Townsley	$12,000.00	May 13, 1998	$12,000.00	May 22, 1998
Townsley	$12,000.00	July 2, 1998	$10,000.00	July 8, 1998
Townsley	$11,000.00	September 10, 1998	$10,000.00	September 16, 1998
Townsley	$10,000.00	January 11, 1999	$10,000.00	January 20, 1999
Townsley	$ 6,000.00	April 5, 1999
Townsley	$ 8,000.00	August 11, 1999
Townsley	$ 5,000.00	August 11, 1999
Townsley	$ 5,000.00	August 11, 1999	$14,000.00	September 10, 1999
Townsley			$ 6,000.00	January 19, 2000
Townsley	$ 6,500.00	January 28, 2000	$ 6,500.00	February 1, 2000
Townsley	$10,000.00	June 6, 2000	$10,000.00	June 16, 2000
Townsley	$ 7,000.00	October 3, 2000	$ 7,000.00	November 17, 2000

A We talked about investing into the company, and she thought that was what she wanted to do.
Q Investing into what company?
A Into Conservative Investment at that time.
Q As a shareholder?
A No, it was a loan. So, it was not an investment, it was a loan.
Q Were there any loan documents written up?
A No, there was not.
Q No promissory notes?
A No. No.
Q What were the terms of the loan?
A I was going to pay her out when the company has sufficient funds with a good return.
Q What’s a good return?
A In ’96 I can’t recall what it was, but it was -- it would be a better than average return.
Q And that’s what you told her?
A Correct, yeah.
Q Did she get a better than average return?
A No. I told her she would get a good return.
Q Did you give her any sort of time frame in terms of when you expected her to be repaid?
A No, I did not.
…
Q For this loan were there any restrictions on how you could use the funds?
A No.
…
Q … Mrs Townsley, over the period of years, has paid to Conservative just over $205,000. What was that money for?
A That was to keep the -- running the business and that was -- that was about it, running the business.

33. And later (Ex 6, page 45, line 18 to page 46, line 1):

Q … Can you explain to me how an investment or loan to Conservative fits in with her investment objectives?
A … Well, the -- for a few years there, the company was doing well, and over the -- I guess the feeling I’d have is, it was probably not the right investment in retrospect now. …

Q … And some of these cheques in the memo space on the left-hand bottom corner states, for example, Mrs Smithers, her cheque, tab 40 states “For Investment”.
A Yeah.
Q Is the money from all these people to Conservative, an investment in the company?
A Correct.
…
Q … What were they investing in, like what was it?
A So, the money was in the company, and that we would use to make more money to -- and that’s what they would put their money in for.

1. subjective knowledge of the prohibited act; and

2. subjective knowledge that the prohibited act could have as a consequence the deprivation of another (which deprivation may consist in knowledge that the victim’s pecuniary interests are put at risk).

64. McLachlin J also cited with approval (at 23) the words of Taggart JA who stated in R v. Long (1990), 51 BCLR (2d) 42, 61 CCC (3d) 156 at 174:

... the mental element of the offence of fraud must not be based on what the accused thought about the honesty or otherwise of his conduct and its consequences. Rather, it must be based on what the accused knew were the facts of the transaction, the circumstances in which it was undertaken and what the consequences might be of carrying it to a conclusion. [underlining added]

65. The actus reus of fraud is clear. O’Connor made the false statement that Conservative would provide a good return. He also made the false statement that the funds would be used to support the business, when he was using the funds advanced to Conservative for business and personal purposes. He deceived the Clients by failing to inform them that the business was not doing well. (R v. Cuerrier, [1998] 2 SCR 371, 162 DLR (4th) 513, 127 CCC (3d) 1 confirms that dishonest concealment of material facts can amount to fraud.) He failed to provide the Clients with any information or documentation about Conservative’s financial position and the real risks associated with the transactions. He converted funds to his own use. In the result, the Clients lost all or most of their money.

66. The BC Court of Appeal in Anderson (cited above) went on to say:

Fraud is a very serious allegation which carries a stigma and requires a high standard of proof. While proof in a civil or regulatory case does not have to meet the criminal law standard of proof beyond a reasonable doubt, it does require evidence that is clear and convincing proof of the elements of fraud, including the mental element.

67. We must base our finding of the mental element of fraud on our findings as to what O’Connor actually knew. The evidence must be clear and convincing. We have found that O’Connor must have known that the statements to the Clients were false and the omissions were deceitful. We also found that he knowingly deceived the Clients by converting the funds to his own use. Accordingly, we find that O’Connor had subjective knowledge of the falsehood and deception of the Clients.

68. By 1998, the business was not doing well and bank records show that both repayment of capital and returns on the loans or investments would have been difficult, if not impossible. Payments out of the Conservative account relied almost entirely on the Clients’ money. The accounts also show significant sums being drawn from the Conservative and POFP accounts to pay O’Connor’s personal expenses and O’Connor personally. It follows that O’Connor must have known that the prohibited acts described in the previous paragraph would put the Clients’ pecuniary interests at risk. In our view, the evidence provides clear and convincing proof that both aspects of the mental element were present.

69. Accordingly, we find that O’Connor breached section 57(b) when he knowingly made false statements and failed to provide important information to induce the Clients to redeem mutual fund holdings for the purpose of funding the issue of cheques to Conservative and, further, by converting the proceeds to his own use.

Section 14(2) of the Rules
70. Section 14(2) provides that:

A registered

(a) salesperson,
…
of a dealer or adviser must deal fairly, honestly and in good faith with the clients of the dealer or adviser.

71. We find that O’Connor, a registered salesperson, breached section 14(2) in that the behaviour which we have found was to breach section 57(b) of the Act was also not to deal fairly, honestly and in good faith with the Clients.

Section 48(1) of the Rules
72. Section 48(1) provides:

A registrant … must make enquiries concerning each client

(a) to learn the essential facts relative to every client, including the identity ... of the client …, and
(b) to determine the general investment needs and objectives of the client, the appropriateness of a recommendation made to that client and the suitability of a proposed purchase or sale for that client.

73. In advising the Clients to redeem mutual funds and invest in or lend to Conservative, O’Connor made inappropriate recommendations and advised the Clients to make a purchase or sale that was unsuitable. There is evidence that O’Connor made some enquiries to learn the essential facts relative to the Clients and to determine their general investment needs and objectives. However, the recommendations that he made to redeem mutual funds and issue cheques to Conservative were so clearly inappropriate and the proposed purchases or sales so obviously unsuitable that we have concluded he could not have made the enquiries required by section 48(1)(b).

74. Accordingly, we find that O’Connor breached section 48(1) of the Rules.

Conduct contrary to the public interest
75. We find that O’Connor’s conduct which we have found breached section 57(b) of the Act and sections 14(2) and 48(1) of the Rules was contrary to the public interest.

Orders
76. Staff ask that orders be made against O’Connor as follows:

1. under section 161(1)(b) of the Act, that O’Connor cease trading in any securities or exchange contracts and be prohibited from purchasing any securities or exchange contracts;

2. under section 161(1)(c) of the Act, that all of the exemptions described in sections 44 to 47, 74, 75, 98 and 99 of the Act do not apply to O’Connor;

3. under section 161(1)(d) of the Act, that O’Connor resign any position he may hold, and be prohibited from becoming or acting, as a director or officer of an issuer;

4. under section 161(1)(d) of the Act, that O’Connor be prohibited from engaging in investor relations activities;

5. under section 162 of the Act, that O’Connor pay an administrative penalty; and

6. under section 174 of the Act, that O’Connor pay the prescribed fees or charges of or related to the hearing.

77. Re Eron Mortgage Corporation, [2000] 7 BCSC Weekly Summary 22 contains a non-exhaustive list of factors we may take into account in assessing sanctions.

78. Staff presented evidence to us concerning O’Connor’s conduct prior to February 1998. Staff say, and we agree, that conduct prior to the period relevant to the allegations raised in the notice of hearing may be taken into account in making orders and setting penalties (see Diianni 2001 BCSECCOM 918). We have taken into account the fact that, in 1993, Walywn terminated O’Connor with cause for conflict of interest.

79. Staff say that the orders should be even more stringent than those imposed in Rast 2003 BCSECCOM 609 in which the Commission ordered that paragraphs (a) to (d) above should apply to Rast for 30 years, a penalty of $200,000, and the payment of prescribed fees or charges.

80. Rast is in many respects on all fours with O’Connor. Making the case particularly egregious, he was a registrant who breached his obligations to deal with clients fairly, honestly and in good faith. He knowingly diverted funds and enriched himself by fraudulent conduct over a period of time at the expense of more than one client. Rast took more money (net amount approximately $476,000) from more people and also pleaded guilty to securities related criminal conduct.

81. On the other hand, unlike Rast, O’Connor has not cooperated with the Commission. He has shown no remorse, he concealed his conduct, and there is no evidence that he has voluntarily repaid or intends to repay any money or in any other way accept the consequences of his misconduct.

82. In addition, the Clients were particularly vulnerable (due to their age and lack of knowledge and experience); they trusted him (so much that he was able to avoid documenting the transactions); they relied substantially on his judgment and advice. O’Connor violated the trust placed in him by targeting and exploiting the Clients as he did and concealing his behaviour. He did not tell the compliance officer at Assante that the Clients were funding Conservative.

83. Both the courts and the Commission have recognized on many occasions that the Act is aimed at regulating the market and protecting the public. A cornerstone of the regulatory structure established by the Act is the requirement that people advising on and involved in trading in securities be registered and comply with the legislative requirements. This is intended to ensure that the investing public receives expert advice from competent and ethical people, whose activities are governed by appropriate standards and subject to regulatory scrutiny. See for example: Brosseau v. Alberta Securities Commission, [1989] 1 SCR 301.

84. O’Connor wilfully ignored securities requirements, put his own interests in front of those of his Clients, showed complete disregard for his regulatory duties, and lied to the Clients. His conduct damaged the integrity of the securities markets in British Columbia.

85. It seems to us unlikely that O’Connor will change his character or learn from his mistakes. We think O’Connor’s continued participation in the capital markets would pose a significant threat to investors. He is clearly unfit to hold a position of trust such as a registrant or a corporate director and officer.

86. We have concluded that it is in the public interest to impose substantial sanctions on O’Connor to keep him out of the market and deter future misconduct. In addition, following Re Cartaway Resources Corp, [2004] 1 SCR 672, we think it right to take into account general market deterrence. Therefore, considering it to be in the public interest, we order:

1. under section 161(1)(b) of the Act, that O’Connor cease trading in and be prohibited from purchasing any securities or exchange contracts permanently;

2. under section 161(1)(c) of the Act, that all of the exemptions described in the Act do not apply to O’Connor permanently;

3. under section 161(1)(d)(i) of the Act, that O’Connor resign any position he holds as a director or officer of any issuer;

4. under section 161(1)(d)(ii) of the Act, that O’Connor be prohibited from becoming or acting as a director or officer of any issuer permanently;

5. under section 161(1)(d)(iii) of the Act, that O’Connor be prohibited from engaging in investor relations activities permanently; and

6. under section 162 of the Act, that O’Connor pay an administrative penalty of $200,000.

87. It is the Commission’s usual practice to award costs against an unsuccessful respondent under section 174 of the Act and Securities Regulation, BC Reg. 196/97, section 22, item 28. O’Connor was given notice that staff would seek costs of the hearing. The allegations outlined in the notice of hearing have in our view been substantially proved.

88. We therefore order that O’Connor pay the prescribed fees or charges of or related to the hearing in the amount of $48,368.25.

89. March 31, 2005

90. For the Commission




Adrienne Salvail-Lopez
Vice Chair




Robin E. Ford
Commissioner




Neil Alexander
Commissioner