Decisions
Eugenio Sirianni, Francesco Sirianni and Montreux Development Corp. [Decision]
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BCSECCOM #:
BCSECCOM
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Document Type:
Decision
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Published Date:
2016-06-27
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Effective Date:
1991-10-04
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Details:
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IN THE MATTER OF The Securities Act, S.B.C. 1985, c. 83
AND IN THE MATTER OF Eugenio Sirianni and Francesco Sirianni
AND IN THE MATTER OF Montreux Development Corp.
Reasons: October 4, 1991
COUNSEL:
Mark Skwarok, Catherine Sloan, for the Superintendent of Brokers.
William B. Smart, for Eugenio Sirianni.
DECISION AND REASONS:--
1. INTRODUCTION
This hearing resulted from a notice of hearing (the "Notice") issued by the Superintendent of Brokers on October 25, 1989. The Notice advised that the Commission would be asked to determine whether it is in the public interest to make orders under sections 145 (now 144(1)(c)), 145.1 (now 144(1)(d)) and 154.2 of the Securities Act, S.B.C. 1985, c. 83, (the "Act") against Eugenio (Eugene) Sirianni and Francesco (Frank) Sirianni (the "Respondents").
The Notice outlined allegations of the Superintendent concerning the conduct of the Respondents with respect to trading in the shares of Montreux Development Corp. ("Montreux") during the period between December 4, 1988, and January 27, 1989 (the "Relevant Period").
The Superintendent alleged that during the Relevant Period each of the Respondents
1. |  | had been insiders of Montreux and had failed to file insider reports, contrary to section 70 of the Act; | |
2. | | had failed to comply with sections 80, 93, 94 and 96 of the Act (as it then was) with respect to the acquisition of shares of Montreux; and | |
3. | | had participated in a scheme involving purchases and sales of shares of Montreux when they knew or ought reasonably to have known that the transactions created or resulted in a misleading appearance of trading activity. | |
The hearing was originally scheduled for December 11, 1989 but was adjourned until February 1, 1990, at the request of Eugene Sirianni, and over the opposition of Frank Sirianni to enable Eugene to instruct counsel. Eugene requested and was granted a further adjournment until February 21 because he was ill and had been unable to retain counsel. By February 21, he had retained counsel but his counsel was not available for the dates set aside for the hearing. The Commission granted a further adjournment and imposed temporary orders under section 144(2) of the Act removing the Respondents' exemptions under the Act and prohibiting them from becoming or acting as directors or officers of any reporting issuers until the hearing was held and this decision rendered. The hearing finally began on June 27, 1990.
Frank Sirianni did not attend the hearing. By letter dated March 19, 1990, he advised the Commission that he had left Canada and would not appear.
2. BACKGROUND
2.1 The Respondents
The Respondents are brothers who grew up, attended university and began their working lives in Australia.
Eugene Sirianni obtained a bachelors degree in economics in Australia and worked in the investment business there for several years. In 1985 he moved to Vancouver and incorporated FSL Financial Strategy Ltd. ("FSL"). He became involved with public companies in providing public relations services, acting as a financier and finding profitable business opportunities. He invested in the companies he was assisting, taking a control position in some. He saw an opportunity in the Vancouver market "to make some really serious money".
In early 1987, Eugene invited his younger brother Frank to come to Vancouver and work with him. Frank had obtained bachelors and masters degrees in economics but had, according to Eugene, little work experience outside the academic field. Frank became Eugene's personal accountant and joined FSL as a director and its administrator.
Eugene testified that, in early 1988, he decided to discontinue the public relations function of FSL in order to concentrate on finding companies, restructuring them and arranging financing for them. He testified that he had considered the public relations function unprofitable, but that Frank had disagreed with his opinion. In March and April 1988, Frank set up two companies, I.C.L. Financial Communications Inc. and I.G.C. Interglobe Communications Ltd. (collectively "Interglobe"), to assume the public relations function that had been carried on by FSL. Eugene testified that he held no interest in Interglobe and that FSL and Interglobe were separate and very distinct businesses. However, he admitted that Frank continued to be his personal accountant, as well as a director and the administrator of FSL. FSL and Interglobe shared premises, jointly occupying a full floor in an office building with a common reception area. They shared expenses and many of their their employees did work for both businesses.
Eugene also conceded that he had introduced companies he was involved with to Interglobe as a way of assisting Frank, and that he was a director of most of Interglobe's client companies.
Eugene acknowledged that both he and Frank dealt with the same offshore banks. He claimed that there was an important distinction in their roles because he was involved in arranging financing while Frank was trying to find investors. He explained that someone arranging a financing would approach the corporate finance department while someone seeking investors would approach any broker. He admitted that in some cases the same individual might act as a corporate finance officer and a broker, in which case he and Frank would deal with the same person, but claimed that he went through an entirely different process than Frank.
2.2 Montreux
Montreux was incorporated under the Company Act of British Columbia in April 1987. It is a reporting issuer whose shares were listed on the Vancouver Stock Exchange (the "Exchange") on July 4, 1988 and traded on the floor of the Exchange until trading was halted on January 26, 1989. The Chairman, founder and principal shareholder of Montreux was one Lorne W. Camozzi of Revelstoke.
Eugene Sirianni had become involved with Camozzi in March 1986 when Camozzi loaned him about $200,000 at an interest rate of 5 per cent per month (a nominal rate of 60 per cent per year). Eugene testified that he had never seen any paper work for the loan and he was unable to explain what the money was used for. He testified that he had intended to pay the loan off quickly but that it was still outstanding at the date of the hearing. The amount outstanding was in dispute but it was, according to the transcript of an interview with Eugene prior to the hearing, between $400,000 and $600,000 in June 1989.
Sometime after the loan was made, Eugene was approached by Camozzi's son-in-law, Keith Sheedy, a broker at McDermid St. Lawrence, with a request that Eugene and Frank and their staff become involved in Montreux. Eugene testified that he agreed to become involved as a favour to ingratiate himself to Camozzi, because of his debt to Camozzi, and not because of any inherent value in Montreux's property. Indeed, he knew nothing about the property and did not check into it, and he knew that Camozzi had never run a mine. Nevertheless, he advised the staff of FSL and Interglobe to purchase shares from Montreux's initial public offering on the basis, he testified, of the tax advantages of the flow through shares being offered.
Interglobe entered into an agreement with Montreux, dated July 1, 1988, under which Interglobe was to "develop, implement and maintain an ongoing Corporate Relations System with the general objective of expanding stockbroker awareness of the client's activities, and hence a commensurate interest in the Client's stock". Interglobe's fee under the agreement was $60,000, to be paid at a rate of $5,000 per month, plus expenses.
FSL had no written agreement with Montreux but, according to Eugene Sirianni, there was an understanding that he would help Montreux raise money for projects he introduced to Montreux and would be reimbursed for his costs incurred in doing so. He indicated that the benefit to him from the financing activities was indirect, through any finder's fee for properties he introduced and through any appreciation in the value of his share holdings in Montreux.
The prospectus for Montreux's initial public offering, dated June 23, 1988, described Montreux as being "in the business of the acquisition, exploration and development of resource properties". At the date of the prospectus Montreux had an interest in only one mineral property, called the DVB property, under an option agreement permitting Montreux to earn a 50 per cent interest in the property.
Prior to its initial public offering, Montreux raised $165,000 from the sale of shares. At the date of the prospectus, Montreux had $45,000 remaining in working capital.
The initial public offering involved the issuance of 400,000 shares of Montreux at 45 cents per share, for net proceeds after the agent's commission, of $162,000. The use of proceeds section of the prospectus identified expenditures of $150,000 on the DVB property.
Following the initial public offering, Montreux had 1,780,001 shares outstanding, including 750,000 escrow shares held by Camozzi. Based on the offering price of 45 cents per share, the market capitalization of Montreux was $800,000 or, excluding the escrow shares, $463,500.
During the six months between the initial public offering and January 26, 1989, when trading in its shares was halted by the Exchange, Montreux issued six news releases, as follows:
| - On September 29, 1988, Montreux announced that it had ceased drilling on one set of claims on the DVB property but would continue work on other claims. | |
| - On November 1, 1988, Montreux announced that it had negotiated the acquisition of a property in South Dakota called the Keystone-Holy Terror Gold Mine. The news release indicated that a finder's fee would be paid in connection with the acquisition. | |
| - Eugene Sirianni had been introduced to this property in September 1988. He testified that he had advised Camozzi to acquire the property to build Montreux because it was a more substantial property than the DVB property, which he described as a grass roots exploration property. The finder's fee was to be 100,000 shares of Montreux and was to be paid to FSL. | |
| - On November 7, 1988, Montreux announced the issuance of director and employee stock options. | |
| - On November 8, 1988, Montreux announced completion of a formal option agreement for the purchase of the Keystone-Holy Terror Gold Mine. The agreement required Montreux to pay a down payment of $25,000 U.S., a further $75,000 U.S. within sixty days, $5,000 U.S. per month until commencement of production or until the final payment, and a final payment of $500,000 U.S. upon production or after five years. | |
| - Montreux's financial statements for the year ended January 31, 1989, showed that the $25,000 U.S. down payment was made on October 27, 1988, the $75,000 U.S. payment was due on December 26, 1988, and the $5,000 U.S. monthly payments were due to commence on January 31, 1989. At January 31, 1989, Montreux was in default for the $75,000 U.S. payment and for the first monthly payment. | |
| - On November 28, 1988, Montreux announced the resignation of its president, Elmer T. Lonergan, and the appointment of a new president, Lance P. Runa. The news release also advised that there had been no material changes in Montreux's affairs since the November 8 news release. | |
| - On December 21, 1988, Montreux announced an agreement with Canarim Investment Corporation Ltd. for a brokered private placement of 150,000 units at a price of $2 per unit. Each unit consisted of one share and one non-transferable warrant to purchase a further share within one year at $2.20. The news release also announced that Montreux's directors had decided that no further funds would be spent on the DVB property and that Montreux had given notice of termination of its option agreement for the property. | |
| - Eugene Sirianni negotiated the agency agreement for the private placement with Canarim on behalf of Montreux. He also conducted negotiations for the private placement with Charterhouse Bank. The private placement was never completed. | |
The statements also showed expenditures for the year totalling $286,652, of which $153,817 was for administrative costs, including $73,696 for "Shareholder Relations", presumably under the contract between Montreux and Interglobe.
2.3 Analyser
The Superintendent presented reports showing an analysis of the Respondents' trading during the Relevant Period in shares of Montreux. These reports were produced by a computer program called Analyser. Analyser was developed by John Forbes, a Vice President of the Exchange.
Analyser correlates buyers and sellers of shares of an issuer traded on the Exchange. It uses information from two sources: trading surveillance reports maintained by the Exchange and blotters maintained by each member firm of the Exchange.
For each trade on the floor of the Exchange, a three part ticket was prepared. Copies of the ticket were retained by the selling member firm and the buying member firm, and the third copy was given to the Exchange.
On receipt of the ticket, the Exchange time-stamped it and entered the trade data from the ticket into the Exchange's computer.
The trade data was used to produce clearing reports for member firms at the end of each day. The Exchange administered a procedure for correcting the trade data based on claims made by member firms on the morning following the trade. The trade data was updated by the morning of the second day following the trade. The trade data was then used to produce a daily trading surveillance report, which listed each trade, the buying and selling member firms, the number of shares, the price, and the time at which the trade data was entered into the computer. Historical records of trading surveillance reports are retained on magnetic media and can be extracted for analytical purposes.
Each member firm entered information from its copy of the ticket and the relevant order form into its computerized accounting system. This information was used to produce the client's confirmation slip for the trade and the particulars of the trade included in client's monthly account statement. The same information was used to produce a daily record of all trades by the firm for each issuer's shares, called a blotter, which firms are required to maintain under Exchange rules. For each trade, the blotter shows the broker, the client, the number of shares, the price, and whether the trade was a buy or sell. Historical records of blotter data are retained on magnetic media and can be extracted for analytical purposes.
Analyser produces a report that shows the buying and selling clients for each trade in the shares of an issuer. Some clients may have an asterisk or a G, or both, beside them.
Analyser places an asterisk beside the client in circumstances where it can allocate a client (from the blotter data) to a particular trade (from the trading surveillance report) with certainty. There are two circumstances where this will occur.
One circumstance is where there is a unique trade, that is, only one trade by a particular member firm at a particular price on one side of the market on a particular day. The other circumstance is where there is more than one trade by a member firm at a particular price on one side of the market on a particular day, but where all of those trades were for the same client.
If there is an asterisk beside the clients on both sides of a trade, it can be said with certainty that those clients traded the shares.
Analyser can also identify trades by clients who are members of a group defined for the purpose of the report. Where all of the trades by a member firm at a particular price on one side of the market on a particular day are by clients who are members of the group, Analyser places a "G" beside each client to indicate that it is certain that a member of the group was on one side of the market on those trades. If Analyser places a "G" beside the clients on both sides of a trade, it can be said with certainty that the shares were traded between members of the group.
In some cases where there are trades on both sides of the market by members of a group, Analyser cannot indicate with certainty that members of the group were on both sides of any particular trades. In these cases, it may be possible, through inspection of the Analyser report, to identify a minimum volume of shares in such trades which must have been traded between members of the group.
Analyser also produces a report that analyzes overall trading activity rather than individual trades. This report shows the total number of shares bought and sold by a group, and the group's percentages as a buyer and as a seller of the total number of shares traded, at each price for each day. If the sum of the percentage of buying and percentage of selling by the group for a particular price and date combination exceeds 100, it can be said with certainty that there must have been some shares traded between members of the group. The minimum percentage of the total number of shares traded for a price and date combination between members of the group is equal to the amount by which the combined percentage of buying and selling exceeds 100.
2.4 The Trading
The Superintendent presented a considerable amount of evidence concerning the trading by the Respondents in Montreux shares during the Relevant Period. There was testimony by Forbes, in which he introduced his Analyser reports, expert testimony by David Hooper, in which he verified the accuracy of certain of the information in the reports, and expert testimony by Dean Holley, in which he introduced his report reviewing the trading. The documentary evidence also included trading surveillance reports, blotters and monthly account statements.
Eugene Sirianni exercised trading authority over 32 accounts at 13 member firms. Frank Sirianni exercised trading authority over 19 accounts at 8 member firms. Together they had 51 accounts (the "Accounts") at 15 member firms.
The table below shows for each of the Respondents alone, and for both Respondents together, for certain dates during the Relevant Period, the number of Montreux shares in respect of which they had direct or indirect beneficial ownership or control, and the percentages those shares represented of both the total number of shares outstanding and the number of free trading shares (excluding shares held in escrow).
| | % of Total | % of Free | |
| Date | Shares Held | Outstanding | Trading | |
| Eugene Sirianni | | | | |
| December 5 | 209,200 | 10.38 | 16.53 | |
| December 26 | 206,300 | 10.24 | 16.31 | |
| January 27 | 189,900 | 9.42 | 15.00 | |
| Frank Sirianni | | | | |
| December 5 | 203,000 | 10.07 | 16.04 | |
| December 26 | 248,300 | 12.32 | 19.62 | |
| January 27 | 291,100 | 14.45 | 23.01 | |
| Respondents | | | | |
| December 5 | 412,200 | 20.46 | 32.58 | |
| December 26 | 454,600 | 22.56 | 35.94 | |
| January 27 | 481,000 | 23.87 | 38.02 | |
David Hooper, a partner in the accounting firm Ernst & Young, gave expert evidence concerning the accuracy of the Analyser reports on trading in Montreux shares by the Accounts during the Relevant Period. Hooper manually compared the Analyser report with the trading surveillance reports and the blotters for the Relevant Period, as well as selected monthly account statements for the Accounts.
Hooper identified a few trades where the blotters showed trades on incorrect dates and had these corrected. With these corrections, he expressed the opinion that the blotters accurately reflected trading in Montreux shares by the Accounts during the Relevant Period.
Dean Holley, Deputy Superintendent, Compliance and Enforcement, on the Commission staff, gave expert evidence on the trading in Montreux shares by the Accounts during the Relevant Period.
Holley described the trading by the Accounts as "pervasive" and presented the following statistics based on his review of the Analyser reports:
| - The Accounts included 51 different accounts at 15 different brokerage firms in the names of 12 different entities. Trades of Montreux shares were made by 39 of the Accounts during the Relevant Period. | |
| - The Accounts traded Montreux shares on 36 of the 37 trading days during the Relevant Period and both bought and sold Montreux shares on 32 of those days. | |
| - The Accounts participated as buyers or sellers at 123 (69.5 per cent) of the 177 different price/date combinations at which Montreux shares traded. At 45 of those price/date combinations the Accounts both bought and sold. | |
| - Of the 626,585 Montreux shares traded during the Relevant Period, the Accounts bought 269,500 shares (43 per cent) and sold 216,200 shares (34.5 per cent). | |
| - At least 81,700 shares were traded between the Accounts. These shares were traded in 54 floor trades at 30 different price/date combinations, accounted for 13 per cent of the trading volume during the Relevant Period and represented a trading value of $224,418. | |
| - As at December 5, 1988, the beginning of the Relevant Period, the Accounts held 412,200 Montreux shares, representing 20.45 per cent of the shares outstanding and 32.6 per cent of the shares outstanding other than escrow shares. | |
Holley also examined the position of the Accounts before and after the trades. He noted that, for every one of the 54 trades between the Accounts, the selling Account was in a debit position on the day prior to the sale. In 15 cases the sale was made to an Account that had a zero balance or a small credit balance. In some cases, sales were made to other Accounts that were in a significant debit position. Holley suggested that the fact that the brokers executed these purchases indicates that they were willing to provide further credit to the Respondents.
Holley expressed the opinion that "the most viable explanation for the 54 trades between the Accounts is that they were made to kite debits from one brokerage account to another in order to maintain control of a large block of shares in Montreux which the Accounts would have otherwise been unable to pay for." Holley described debit kiting as a practice whereby a person uses the delayed Settlement procedure in the securities market as a means of obtaining credit. He noted that the large number of the Accounts would make the detection of debit kiting very difficult.
In an interview on June 30, 1989, Frank Sirianni admitted to trading in certain cases for the sole purpose of transferring shares that he could not pay for. Eugene Sirianni denied that he debit kited intentionally, but admitted on cross-examination that he traded in some instances simply to move a debt from one account to another.
In attempting to explain his trading activities, Eugene stated that he found trading annoying and that he "did not keep close tabs" on his trading. Although he admitted that all of FSL's income came from trading, he claimed that his interest was in investing for the longer term in order to realize profits from building a company. He described Montreux as being an undervalued company, based on the Status Report by Wright Engineers Limited on the South Dakota property, and suggested that he and Frank had both come to this conclusion independently.
Eugene claimed to have been astonished when he learned of Frank's trading during the Relevant Period. In particular, he said, he was surprised by the volume of trading, the number of matched trades and the number of occasions when his own accounts were on the other side. He suggested that the three matched trades between his own accounts were inadvertent.
Eugene was unable, however, to provide a sensible explanation of the frequent instances where he both bought and sold Montreux shares on the same day, paying the same or a higher price for the purchase compared with the price received on the sale. Under cross-examination on the trading in his accounts during the Relevant Period, he claimed that trading decisions were made with a focus on the individual accounts not on the market. He described orders as being placed following discussions with brokers, and described specific trades as being done, variously, as market making transactions, to generate commissions as a favour for brokers, or to clear debits from accounts.
Holley's report considered whether the trading activity of the Accounts in Montreux shares could properly and consistently be described as market making. Holley described market making as a pattern of trading conducted with the intention of adding liquidity to the market for a security, through the market maker's willingness to buy and sell securities at the current bid and ask prices, and of stabilizing the market price by reducing the effects of short term excesses of supply or demand.
Holley stated that "a large number of the trades by the Accounts were inconsistent with the fundamental principles of market making as they did not add any actual liquidity to the market, did not tend to have a stabilizing influence on the market, and may have contained an element of price leadership adding to the short-term volatility of the market price."
3. EVIDENTIARY ISSUES
We have identified five key evidentiary issues in these proceedings:
1. | | The admissibility of a spreadsheet showing share holdings of accounts of Eugene and Frank Sirianni, which, it was admitted by the Superintendent for the purpose of determining admissibility, was stolen from Frank Sirianni by an employee of Interglobe and given to the staff of the Commission; | |
2. | | The use against Eugene Sirianni of the spreadsheet and transcripts of interviews of Frank Sirianni with staff of the Commission on June 30 and August 28, 1989; | |
3. | | The use against Eugene Sirianni of a letter from Mr. Andy Katz, a broker with Pacific International Securities Inc., advising that he had received instructions from both Frank and Eugene Sirianni in respect of trades through an account controlled by Frank Sirianni; | |
4. | | The admissibility of expert evidence given by Dean Holley, Deputy Superintendent, Compliance and Enforcement, concerning analysis of trading in securities and concerning the trading policies and practices of the Exchange; and | |
5. | | The use of Analyser reports as evidence of trading activity. | |
The issue arose of whether the receiving by the Commission's staff of a spreadsheet belonging to Frank Sirianni from, and with the consent of, a person who had taken it from Frank without his consent, violated section 8 of the Canadian Charter of Rights and Freedoms, and if so whether the spreadsheet should be excluded as evidence in this hearing under section 24(2) of the Charter.
Sections 8 and 24(2) of the Charter read as follows:
8. | | Everyone has the right to be secure against unreasonable search or seizure. | |
| 24(2). Where, in proceedings under subsection (1), a court concludes that evidence was obtained in a manner that infringed or denied any rights or freedoms guaranteed by this Charter, the evidence shall be excluded if it is established that, having regard to all the circumstances, the admission of it in the proceedings would bring the administration of justice into disrepute. | |
Mr. Smart argued that the receiving of the spreadsheet by the Commission's staff without Frank Sirianni's consent was a seizure under section 8, that it was an unreasonable seizure because it had been stolen and that its admission in evidence would bring the administration of justice into disrepute.
Mr. Smart relied on the Supreme Court of Canada's judgment in Regina v. Dyment (1988), 45 C.C.C. (3rd) 244 as support for his argument.
The facts in Dyment were as follows. Following a motor vehicle accident, the accused was taken to a hospital for treatment of a head wound. At the time, the wound was bleeding profusely and the physician held a vial under the free-flowing blood and collected a sample. The physician did not have the accused's consent to take the blood sample. The physician took the sample for medical purposes as he thought the accident might have been caused by a medical problem. Shortly afterwards, however, the accused told him he had consumed a beer and some antihistamine tablets which explained to the physician why the accident happened. A police officer who had attended at the accident scene later had a conversation with the physician. He did not request a blood sample from the accused and did not know that the physician had taken one. However, at the end of the conversation with the police officer, the physician handed the sample to the officer. The officer did not have the accused's consent to take the sample and did not have a search warrant. The sample was later analyzed and showed a blood-alcohol level exceeding the legal limit prescribed by former section 236 of the Criminal Code. The accused was convicted but his conviction was overturned on appeal.
On an appeal by the Crown to the Supreme Court of Canada, the Court found that the taking of the accused's blood sample from the physician by the police officer violated section 8 of the Charter and that the evidence should be excluded as evidence under section 24(2) of the Charter in proceedings against the accused. Six of the Justices took part in the judgment. Mr. Justice McIntyre dissented.
Five of the Justices, for the reasons given by Mr. Justice LaForest, found that there had been a seizure within the meaning of section 8. Mr. Justice Lamer, as he then was, with two of the other Justices concurring, went on to find that the seizure was unlawful and it followed that it was an unreasonable one. Mr. Justice LaForest, with one other Justice concurring, found that whether or not the seizure was illegal it was clearly unreasonable.
Mr. Justice LaForest observed at page 253 that "From the earliest stage of Charter interpretation this Court has made it clear that the rights it guarantees must be interpreted generously, and not in a narrow or legalistic fashion."
He went on to review the history of the Court's interpretation of section 8 beginning with Hunter v. Southam Inc. (1984), 14 C.C.C. (3d) 97. That case established that the protection of the privacy of the individual is a major purpose of the constitutional protection against unreasonable search and seizure under section 8. Mr. Justice LaForest pointed out that that right must be interpreted in a broad and liberal manner so as to secure the citizen's right to a reasonable expectation of privacy against governmental encroachments.
Mr. Justice LaForest, in dealing with the case before him, stated at page 257 "As I see it, the essence of a seizure under s. 8 is the taking of a thing from a person by a public authority without that person's consent ... the focus of inquiry must be on the circumstances in which the police officer obtained the sample. However, the circumstances under which it was obtained by the doctor are by no means irrelevant."
Both Mr. Justice Lamer and Mr. Justice LaForest based their findings that there had been a seizure on the fact that the physician held the accused's blood subject to a duty. Mr. Justice Lamer described it as a duty to respect the accused's privacy and Mr. Justice LaForest described it as a duty to respect the dignity and privacy of the accused. Regardless, that duty arises because of the confidentiality of the doctor-patient relationship. Mr. Justice LaForest discussed this relationship and at page 258 stated
| This goes back as far as the Hippocratic Oath. The Code of Ethics of the Canadian Medical Association sets forth, as item 6 of the ethical physician's responsibilities to his patient, that he "will keep in confidence information derived from his patient, or from a colleague, regarding a patient and divulge it only with the permission of the patient except when the law requires him to do so". | |
Mr Justice LaForest concluded at page 260 stating:
| Indeed, the doctor, in extracting the blood, placed himself in a situation where, pursuant to professional ethics and likely to hospital management regulations as well, he was charged with a duty to use the blood only for medical purposes. Under these circumstances, the sample was surrounded by an aura of privacy meriting Charter protection. For the state to take it in violation of a patient's right to privacy constitutes a seizure for the purposes of s. 8. | |
We know that David Lepp took the spreadsheet from Frank without Frank's consent. However, the Commission staff had no involvement in the taking of the spreadsheet. Lepp simply showed up at the interview with the spreadsheet and gave it to Martin Eady.
The question raised by Dyment is whether Lepp held the spreadsheet subject to a duty to respect Frank's dignity and privacy. In our view, Lepp did not hold the spreadsheet subject to any professional ethics or law where he was charged with a duty to use it in a particular way and not to give it to a public authority.
The most that could be said about the relationship between Lepp and Frank is that Lepp was an employee of Frank's company, Interglobe. In our view that relationship does not give rise to a duty to respect Frank's privacy such that the spreadsheet would be surrounded by an aura of privacy meriting Charter protection. Consequently, the Commission staff were simply gathering evidence when Lepp handed over the spreadsheet at the interview. We find that there was no seizure under section 8 of the Charter and, therefore, that there was no violation of section 8. Under the circumstances, there is no need to deal with the issue of whether the evidence should be excluded under section 24(2) of the Charter.
3.2 The Admission of Hearsay Evidence
The issue arose of whether the spreadsheet and Frank Sirianni's transcripts with respect to the spreadsheet, which was hearsay evidence, should be admitted as evidence for the purpose of making findings against Eugene Sirianni.
Frank gave sworn testimony to the staff of the Compliance and Enforcement Department of the Commission in interviews on June 30 and August 28, 1989. Sometime after Frank appeared before the panel on December 11, 1989, he left Canada. The panel admitted the spreadsheet, which had been prepared by Frank, and the transcripts of Frank's interviews in the hearing. The spreadsheet and Frank's transcripts were put to Eugene by both his counsel and the Superintendent's counsel. Both counsel provided the panel with arguments as to the weight that the evidence should be given by the panel in making their findings.
Section 154.1(c) of the Act states that the person presiding at a hearing "is not bound by the rules of evidence".
In Clarke v. Superintendent of Brokers, Insurance and Real Estate (1985), 67 B.C.L.R. 294, Mr. Justice Hutcheon, in dismissing an application for leave to appeal a decision of the Commercial Appeals Commission, reviewed section 17 of the Commercial Appeals Commission Act under which the commission could admit anything relevant to the subject matter of the appeal, whether or not that thing was admissible as evidence in a court. At page 296, he stated
| No doubt the intention behind the section is to remove from the hearing of the appeal the technicalities that are thought to surround the rules of evidence and in particular hearsay evidence. In place of technicalities, the commission is expected to receive what is tendered as evidence and to weigh the significance of that evidence. | |
| The Board may receive and accept such evidence and information on oath, affidavit or otherwise, as in its discretion it considers proper whether or not the evidence is admissible in a court of law. | |
| It is, therefore, open to the Board to receive and accept hearsay evidence. | |
| Further, or more specifically, it may give it such weight as it chooses, it may prefer it against oral testimony which is not hearsay. | |
Based on these authorities, therefore, hearsay is clearly admissible before the Commission. No doubt, in admitting it, the Commission must observe the rules of natural justice, but this does not mean that it must be tested by cross-examination.
In T.A. Miller, Ltd. v. Minister of Housing and Local Government and Another, [1968] 2 A11 E.R. 633, Lord Denning, M.R., speaking for the majority of the Court of Appeal in England, found that a tribunal which was the master of its own procedure was able to admit hearsay evidence where the tribunal observed the rules of natural justice. He stated at page 634 that "this does not mean that it must be tested by cross-examination. It only means that the tribunal must give the other side a fair opportunity of commenting on it and of contradicting it. The inspector here did that. Mr. Fogwill's letter of Nov. 19, 1964, was put to the witnesses and they contradicted it. No application was made for an adjournment to deal further with it. In these circumstances I do not see that there was anything contrary to natural justice in admitting it."
The British Columbia Court of Appeal looked at this issue in Four Star Mgmt. Ltd. v. B.C. (Securities Comm.), 46 B.C.L.R. (2d) 195.
Four Star was an appeal of the Commission's decision In the Matter of O.E.X. Electromagnetic Inc. et al December 22, 1989, British Columbia Securities Commission Weekly Summary in which the Commission issued enforcement orders against a number of persons. At the hearing, the Commission accepted as evidence the sworn depositions of 9 persons. Only one of the deponents was called to give viva voce evidence. The respondents objected to the admission of the depositions on the ground that they were effectively denied the opportunity to cross-examine 8 of the 9 deponents and that this was a denial of natural justice. Leave to appeal was granted. The ground for appeal was whether the admission and consideration of the deposition evidence constituted a breach of fundamental justice. The Court described the issue as whether the practical denial of cross-examination of the deponents leads to the conclusion that the appellants were denied a fair hearing or were denied natural justice.
The Court reviewed the viva voce and documentary evidence and came to the opinion that that evidence was sufficient to support the Commission's findings of factual matters of substance and was satisfied the Commission was mindful of the limited weight that should be attributed to the deposition evidence in coming to its conclusions.
At page 27, Mr. Justice Hollinrake, speaking for the Court, concluded that "the admission of the deposition evidence, accompanied by the inevitable denial of cross-examination, has not led to the appellants being denied a fair hearing, and thus a denial of natural justice".
In our view, the case before us is distinguishable from Four Star. In Four Star, the depositions were not put to the respondents and, as a result, the respondents were not given an opportunity to contradict the evidence or to comment on it. In this hearing, the spreadsheet and Frank's transcripts were put to Eugene. His answers are part of the record. We find that Eugene was given a fair opportunity of commenting on the evidence and of contradicting it. He made no application for an adjournment to deal further with it. In these circumstances, we do not consider that there was anything contrary to natural justice.
The Commission, having accepted the spreadsheet and Frank's transcripts, must weigh the significance of that evidence based on all the evidence and the arguments of counsel and give it such weight as it chooses, and in doing so it may prefer it against the viva voce evidence of Eugene.
3.3 Katz Letter
The panel also admitted as evidence in the hearing a letter from Mr. Andy Katz, a broker with Pacific International Securities Inc., advising that he had received instructions from both Frank and Eugene in respect of trades through one of the Accounts over which only Frank had trading authority. Katz did not give evidence at the hearing. Martin Eady, in his evidence before the hearing, said he understood that Katz had changed his evidence. We have disregarded this evidence.
3.4 Expert Testimony
Dean Holley was tendered by Mr. Skwarok as an expert witness in respect of analysis of trading in securities and of the trading policies and practices on the Exchange. Mr. Skwarok introduced through Holley an expert report prepared by Holley, dated November 28, 1989, and entitled "Analysis of Trading in the shares of Montreux Development Corporation".
At the time of the hearing, Holley was Deputy Superintendent of Brokers, Compliance and Enforcement. When his report was prepared, he was a Compliance Officer with the Compliance and Enforcement Department, a position he had occupied since October 1987. Prior to joining the staff of the Commission, Holley had served two and one-half years as Supervisor, Market Surveillance, for the Exchange and, before that, five years as a trader with various brokerage firms. Holley has received extensive training in securities related matters, has spoken at conferences and has been an instructor at courses relating to trading practices, corporate disclosure and the regulation of securities markets.
Mr. Smart objected to the acceptance of Holley as an expert witness because he considered the area of expertise described by Mr. Skwarok to be too broad. In particular, he submitted that Holley was not an expert in what motivates people to buy and sell securities. He argued that any experience Holley had as a broker was limited and dated.
Our ruling was to accept Holley as an expert witness. We indicated then that we would consider whether Holley's report was within his area of expertise. We find that it is well within his area of expertise.
3.5 Analyser
We were asked to accept reports produced by Analyser regarding trading on the floor of the Exchange as evidence in hearings before the Commission. Evidence was presented, first through John Forbes, a Vice President of the Exchange and the person who developed Analyser, and then through David Hooper whose expert testimony confirmed the accuracy of the information in the blotters, which Analyser used along with the trading surveillance reports to produce reports on trading in the shares of Montreux during the Relevant Period by the Accounts.
We accept the evidence produced in connection with Analyser and make the following findings: first, that reports produced by Analyser regarding trading on the floor of the Exchange are reliable and accurate and can be accepted as evidence in hearings before this Commission; and, second, that the reports produced by Analyser on trading in the shares of Montreux during the Relevant Period by the Accounts are reliable and accurate and can be accepted as evidence of that trading.
4. STANDARD OF PROOF
Mr. Smart argued that the standard of proof that should be required by the Commission in this case is "clear and convincing evidence ... which means more than that the allegations are probably correct". His basis for this argument was that the allegations of the Superintendent are criminal in nature. The case cited by Mr. Smart in support of his argument, C.(J.) v. College of Physicians and Surgeons of B.C. (1988), 31 B.C.L.R. (2d) 383 (B.C.S.C.), dealt with the standard of proof in a medical discipline case.
This issue has been settled by the Commission in In the Matter of Capital Reserve Inc. et al., December 2, 1988, British Columbia Securities Commission Weekly Summary. On appeal that decision was confirmed by the Court of Appeal in its decision, indexed as Rak v. B.C. (Supt. of Brokers), 51 B.C.L.R. (2d) 27. The C.(J.) case was considered by the Court of Appeal at page 33, where Hollinrake J.A. addressed the question of standard of proof as follows:
| The submission of the appellants before us is that the securities commission in this case should have articulated a degree of proof that would meet the test of whether, on the evidence before it, it "could properly have been convinced" that the appellants were guilty of the charges against them. To put it another way, was there clear and convincing evidence before the commission to justify the conclusions it reached? | |
| There are, in my opinion, two significant things in what was said by Taylor J. in the C.(J.) case. | |
| The first of these is that "the courts have not been prepared to define the requisite standard of degree beyond stating that it is neither the 'mere balance of probabilities' nor the criminal standard 'beyond a reasonable doubt'." The appellants say that is not good enough for a lay commission and the court should impose on it the requirement of stating in precise terms the degree of proof it requires in any given case. I do not agree with this submission. In my view it would be difficult if not impossible to articulate a degree of proof in any particular case. The best that can be said is that the securities commission on a hearing such as this should be mindful of the common law principles of standards and degrees of proof as they apply to the case before it. Here, in my opinion, the commission was mindful of this as can be seen from its decision where it said: | |
| Accordingly, we reject the suggestion that we must have proof beyond a reasonable doubt. The basic test in our proceedings is the balance of probabilities. It may be that in serious matters like the present case, we require a relatively high degree of proof within that standard. We consider that the evidence we have relied on in this case has met any reasonable standard of proof that would be applied in proceedings under our jurisdiction. | |
| The court was advised at the hearing that one of the three commissioners who sat on this case is a lawyer and the commission itself has the benefit of full-time house counsel. | |
| I turn to the second factor in the judgment of Taylor J. that in my opinion is of significance here. This is his reference to "a case having grave professional consequences" (emphasis mine). | |
| In my view, trading in securities is not a profession in the sense that doctors, lawyers, architects, engineers, accountants and other professionally trained persons can be said to be engaged in a profession. In my opinion, it cannot be said that a trader in securities is deprived of his ability to pursue a profession because his exemptions under the Securities Act are lifted. I repeat here what I said in Four Star Mgmt. Ltd. v. B.C. (Securities Comm.) ... [now reported 46 B.C.L.R. (2d) 195]; ... at ... [p208]: | |
| I think it significant here that the British Columbia Securities Commission is not in the same position as administrative tribunals which govern professions such as those of lawyers, doctors, engineers, architects and so on. Those tribunals find themselves called on to deny to people who have spent years in the educational and training process to become members of their professions, their right to practise those professions. That is not the case here. None of these appellants was licensed under the Securities Act. I think it of significance, too, that while self-regulating professional bodies are statutorily obliged to consider the public interest in their deliberations, that interest is, perhaps, of even greater importance in the case of securities commissions. | |
| In my opinion, the judgment of Taylor J. in the C.(J.) case is of no help to the appellants here. I think the securities commission properly recognized that there are cases where it requires "that in serious matters, like the present case, we require a relatively high degree of proof" within the civil standard of proof on a balance of probabilities. Further, I do not think the commission is required as a matter of law to articulate the degree of proof it requires in any given case before it. | |
Mr. Smart argued, in a discussion of our jurisdiction, that we ought to interpret section 144 of the Act narrowly by making orders only in respect of conduct that is proscribed by the Act. In making this argument, he asked us to decline to follow the decision in Re C.T.C. Dealer Holdings Limited et al and Ontario Securities Commission et al (1987), 37 D.L.R. 4th 94 (Ont. Div. Ct.), which found that the discretion conferred upon the Ontario Securities Commission by section 123 of the Ontario Securities Act (the equivalent to section 144 of the Act) could be exercised without there being a concurrent breach of another section of the Ontario Securities Act. Mr. Smart suggested that the C.T.C. decision had been made without consideration of the Charter of Rights and Freedoms and that interpreting section 144 of the Act in that manner would be inconsistent with the Charter.
Alternatively, Mr. Smart submitted that section 144 should be struck down as being contrary to section 7 of the Charter.
The validity of section 144 of the Act cannot be argued before notice is given to the Attorney General under the Constitutional Question Act, R.S.B.C. 1979, c. 63, and the Commission cannot hold section 144 invalid until after notice has been served. We have no evidence that the required notice was served on the Attorney General. This issue was recently before the Commission in In the Matter of Chromex Nickel Mines Ltd. et al., July 26, 1991, British Columbia Securities Commission Weekly Summary.
In any event, Section 7 of the Charter does not apply to proceedings under the Act. This issue was settled recently by the Supreme Court of British Columbia in Russell James Bennett, William Richards Bennett, and Harbanse Singh Doman v. British Columbia Securities Commission, unreported No. A906331 Vancouver Registry May 3, 1991. Mr. Justice Melnick stated at page 90:
| In summary, the purpose of s. 7 is not meant to protect the rights of these Petitioners who are involved in a regulatory, inquisitorial process, the consequences of which are economic and do not impact on their physical liberty and security of the person. Therefore, because I find that s. 7 of the Charter is not applicable in these circumstances, it will not be necessary for me to undertake the two stage analysis of determining whether the Petitioners' s. 7 rights have been violated. | |
In our view, the issue of our jurisdiction has long been settled. Chairman Leon Getz (as he then was) speaking for the Corporate and Financial Services Commission in its decision In the Matter of Fisher Securities corporation and Errol Fisher, September 3, 1976, Corporate and Financial Services Division Weekly Summary (B.C. Department of Attorney-General) at page 9 stated:
| During the hearing we did, however, put to [counsel for the respondents] the question whether it was open to the Superintendent to conclude that the practice was objectionable and contrary to the public interest, even if no violation of the Act or the Rules of the Exchange was made out. In reply, he asserted that to do this would be to exercise a legislative function not given to the Superintendent or the Commission. In our view, however, it is of the very nature of legislative references to "the public interest" that they are not reducible to a set of literal statements capable of mechanical application; but that, on the contrary, they invite a responsible exercise of discretion. We are, accordingly, of the opinion that it is proper for us to reach the conclusion that Mr. Fisher's conduct in this matter was prejudicial to the public interest without making any finding on the question whether a violation of the Securities Act has taken place, and that this is an appropriate case for us to exercise the discretion given to us under [the equivalent of section 144] of the Securities Act. | |
6. ANALYSIS AND FINDINGS
Our analysis and findings are focused on the following questions that are raised by this case, as outlined in the Notice:
| - Did Eugene and Frank Sirianni contravene section 70 of the Act in failing to file insider reports in respect of their holdings of Montreux shares during the Relevant Period? | |
| - Did Eugene and Frank Sirianni act in concert in their trading activities during the Relevant Period? | |
| - Could the trading by Eugene or Frank Sirianni during the Relevant Period be fairly described as market making? | |
| - Was any of the trading by Eugene and Frank Sirianni during the Relevant Period done for the purpose of debit kiting? | |
| - Did the trading by Eugene and Frank Sirianni create a misleading appearance of trading activity in the shares of Montreux during the Relevant Period? | |
| - If so, did Eugene or Frank Sirianni know, or ought they to have known, that their trading created a misleading appearance of trading activity? | |
The Superintendent alleged that, during the Relevant Period, the Respondents were insiders of Montreux and failed to file insider reports as required by section 70 of the Act. The relevant statutory provisions are as follows:
| - Under section 1 of the Act an insider of an issuer is defined as, inter alia, "a person whose control, or direct or indirect beneficial ownership, or a combination of that control and ownership, over securities of the issuer extends ... to securities carrying more than 10% of the voting rights attached to all that issuer's outstanding voting securities". | |
| - Section 70(2) of the Act requires that an insider of a reporting issuer file an insider report within 10 days of becoming an insider disclosing any direct or indirect beneficial ownership of, or control or direction over, securities of the issuer (his "holdings"). | |
| - Section 70(4) of the Act requires an insider to file an insider report within 10 days after the end of a month in which there is any change in his holdings, disclosing the changes and disclosing his holdings at the end of the month, so long as he was an insider of the reporting issuer at any time during that month. | |
Eugene admitted that he contravened section 70 but took the position that the contravention was relatively minimal. He claimed that the contravention was the result of a misinterpretation of the disclosure requirement, in that he assumed that the accounts in the names of his children did not have to be counted in determining whether his holdings exceeded 10 per cent. However, he did not suggest that he had made any similar assumption with respect to the accounts in the names of his wife and mother. Eugene had trading authority over all of these accounts, as well as accounts in his own name and in the name of FSL. As a very active participant in the market, he ought to have known that he was required to report his holdings. Indeed he was warned by a letter from the Commission's Compliance and Enforcement division in September 1988, just three months before the Relevant Period, about his failure to comply with with section 70 in respect of another reporting issuer of which he was an insider.
We find that both Respondents contravened section 70 of the Act in failing to file insider reports in respect of their holdings of Montreux shares during the Relevant Period. Frank failed to file reports for December 1988 and January 1989 and Eugene failed to file a report for December 1988.
6.2 Acting in Concert
The Superintendent alleged that Frank and Eugene Sirianni participated in a scheme to make purchases and sales of Montreux shares. Counsel for the Superintendent argued that the Respondents acted in concert in making those purchases and sales.
The concept of acting in concert is dealt with in two sections of the Act.
Control person, as defined in section 1 of the Act, includes each person in a combination of persons acting in concert by virtue of an agreement, arrangement, commitment or understanding.
In the context of a take over bid or an issuer bid, section 78 of the Act states that it is a question of fact whether a person is acting jointly or in concert with an offeror and, without limiting the generality of the foregoing, a person is presumed to be acting jointly or in concert with an offeror where there is an agreement, commitment or understanding, whether formal or informal with the offeror.
We are of the view that it is a question of fact whether Frank and Eugene were acting in concert in making purchases and sales of Montreux shares and that we are not limited by the words in the definition of control person or section 78 in making our finding.
Eugene denied that he and Frank acted in concert and claimed that he was unaware of Frank's trading activity. Frank, in his prior interviews, claimed that he never discussed trading with Eugene.
However, there was evidence that Eugene and Frank had a close working relationship with respect to Montreux and had, in general terms, a common purpose with respect to their involvement in Montreux.
Frank and Eugene were brothers. Frank came to Vancouver at the invitation of Eugene. Frank said he came to help Eugene, to be his "second set of eyes" and his "keeper". Eugene said he was trying to help Frank by hiring him. Either way, there was clearly a close working relationship. Frank was Eugene's personal accountant, was the administrator and a director of Eugene's company, FSL, and dealt with the same investors, issuers and brokers as Eugene. They also held shares in many of the same issuers.
When Frank set up Interglobe to carry on the public relations function, he continued to share premises with Eugene and FSL and they shared employees and expenses.
Eugene and Frank became involved with Montreux together. Eugene attempted to arrange financing for Montreux with Canarim and introduced the Keystone-Holy Terror Gold Mine to Montreux. Frank, through Interglobe's agreement with Montreux, provided investor relations services.
Both Eugene and Frank dealt with Charterhouse Bank, Bank Hoffman and Handelskredit Bank, with respect to investments in Montreux shares. Eugene gave a tortured explanation of how he and Frank followed different processes in dealing with these offshore banks and stated that he was looking for investors while Frank was trying to sell stock. The fact is that both brothers were approaching the same persons in an effort to get those persons to purchase shares of Montreux.
One of the more telling passages of Eugene's prior interview shows how intertwined his activities were with those of Frank. When Eugene was asked to explain the business purpose of a particular transaction in Montreux shares, the following exchange took place:
| EUGENE SIRIANNI: Well, the only interpretation I can give you is that -- I mean, I've got no idea of why I did it at the time and I just can't reflect on that. | |
| When did the agreement come into place whereby we were directly involved in this company? Was it prior to this date, do you know? | |
| MR. EADY: | Which agreement are you referring to? | |
| Interglobe. | |
| Interglobe? | |
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| I'm having a hard time hearing you. | |
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Similarly, both Eugene and Frank dealt with Keith Sheedy at McDermid St. Lawrence. The following exchange in Frank's interview of June 30, 1989, indicates the nature of the relationship between the brothers:
| FRANK SIRIANNI: ... he basically implied that he wanted to work with us because he wanted to make money again. You know, Keith had been involved with Eugene before my time. | |
| MS. RITMILLER: So, he wanted to work with Eugene and yourself? | |
| F.S.: | Yes, in a sense of, you know, cooperative broker. | |
| . . . | |
| F.S.: And toward the end he -- we re not even sure what happened. See, he kept telling us that he still had stock. And then at the end of the day we were told by somebody else that McDermid was neck (sic) short, which means that their house had less, you know, it was in a negative position. | |
| I knew that I had approximately 60,000 shares of (sic) McDermid in my accounts. So, therefore, they were aggressively short, and that was a falling out because we then rang Keith to ask him how much he had on his books and -- I didn't ring him, Eugene did, he's more emotional than I am. | |
A further indication of the Respondents' common purpose with respect to Montreux is given by the very purpose of their involvement. Eugene gave various reasons for being involved with Montreux: he wanted to ingratiate himself to Lorne Camozzi because of the $200,000 he had previously borrowed; he wanted to help build a company; he wanted to earn finder's fees for bringing properties to Montreux; and he wanted to profit from his shareholding. Frank Sirianni had a more direct interest through Interglobe's agreement to expand interest in Montreux' stock, but he also wanted to profit by maintaining a large share position.
Both Eugene and Frank held significant positions and were major buyers and sellers of Montreux shares during the Relevant Period, both using a large number of accounts at a number of different brokerage firms. Frank's spreadsheet contained a listing of the Accounts and their shareholdings, organized by brokerage firm and interspersing the accounts in his own name with those in the names of Eugene, Eugene's family members and FSL.
During the Relevant Period there were 37 trading days. Frank made purchases on 31 of those days, totalling 171,000 shares or 27.4 per cent of the total purchases of Montreux shares during the Relevant Period, and made sales on 22 days, totalling 106,500 shares or 17.0 per cent of the total sales. On 19 days, Frank both purchased and sold Montreux shares. Eugene made purchases on 28 days, totalling 97,900 shares or 15.6 per cent, and made sales on 23 days, totalling 109,700 shares or 17.5 per cent. On 18 days, Eugene both bought and sold Montreux shares.
On a combined basis, Eugene and Frank purchased or sold Montreux shares on 36 of the 37 trading days, and on 32 of those days they purchased and sold Montreux shares. Their combined purchases were 268,900 shares representing 43 per cent of all the purchases and their sales were 216,200 shares representing 34.5 per cent of all the sales. There were 81,700 shares of Montreux traded among the Accounts, representing 13 per cent of all the trading of Montreux shares during the Relevant Period.
Eugene was unable to give a satisfactory explanation for most of his trading in Montreux shares during the Relevant Period. He claimed to have had no planned trading strategy and insisted that his intent was to invest for the long term. However, he admitted that FSL's sole source of income was from trading. Under cross-examination he offered a variety of reasons for the trades he made, suggesting that they were initiated by brokers in the context of individual accounts whether to settle a debit in the account, to buy or sell shares to meet orders from other clients, or to generate commissions to keep the brokers happy. His answers to questions about particular transactions became flippant and absurd as the cross-examination proceeded and the improbability of his explanations became more obvious. As a consequence, we do not find his evidence credible with respect to the reasons for his trading in Montreux shares.
Each Respondent claimed to have conducted his trading without knowledge of the trading of the other. We do not believe their claims. Based on the evidence, we find that they acted in concert in purchasing and selling Montreux shares during the Relevant Period.
6.3 Market Making
Eugene suggested in his testimony and in his prior interview that one of the reasons for his trading activity was that he was performing the role of a market maker in Montreux shares. He appeared to drop this contention in his argument, probably in recognition that it was inconsistent with his argument that his trades were unplanned and were done on an account by account basis in response to calls from individual brokers.
In any case, Holley's analysis demolished any suggestion that the Respondents' trading constituted market making. The purpose of market making is to add liquidity to the market and to stabilize prices by reducing the effects of short term excesses of supply and demand. Holley concluded that "a large number of the trades by the Accounts were inconsistent with the fundamental principles of market making as they did not add any actual liquidity to the market, did not tend to have a stabilizing influence on the market, and may have contained an element of price leadership adding to the short-term volatility of the market price."
We find that the trading in Montreux shares by the Respondents during the Relevant Period could not fairly be described as market making.
6.4 Debit Kiting
Holley defined debit kiting as follows:
| Debit kiting is a term used to describe a practice whereby a person: | |
a) | | purchases a security through a brokerage account resulting in a debt owed to the brokerage firm which is, in the normal course, due and payable within five business days; | |
b) | | cannot or chooses not to settle the transaction with the payment of cash or the sale of the same or different securities as provided for in sections F.6.00 and F.9.00 of the VSE rules; | |
c) | | arranges to sell the securities out of the account, or waits for the brokerage house to sell out the account, to settle the debt; | |
d) | | arranges to have another account which the same person owns or controls at a different brokerage firm purchase the shares when they come into the market, thereby retaining control over the shares without paying for them and renewing the delayed Settlement period for the purchase through the second brokerage firm. | |
| This type of transaction is done for the purpose of using the delayed Settlement procedure as a means of obtaining credit. | |
Frank openly admitted that a number of his trades were made for "credit" purposes and referred to the fact that he was attempting to hold a significant share position despite not having the cash to pay for it. Eugene was more evasive. He specifically denied debit kiting but gave evidence on cross-examination that clearly indicated he made trades in some instances in order to move a debit from one account to another.
Holley's report examined the balances of the Accounts in relation to the 54 trades between the Accounts as identified by Analyser.
| The Sirianni group of Accounts consisted of 51 accounts at 15 different brokerage firms opened in the names of 12 different people or companies. This number of accounts potentially participating in the kiting of debits would make detection very difficult. | |
| Frank Sirianni's spread sheet dated MAR 1 lists the debit and credit position in the Accounts. Again, very many of the Accounts are in a significant debit position which would be consistent with the occurrence of trades driven by the need to settle accounts. | |
| The "comparison of Brokerage Accounts Cash Positions" schedule indicates that for every one of the trades noted between the Accounts the selling Account had a debit position on the day prior to the sale. In 15 instances the sale was made to an account that had a zero balance or a small credit. These trades, in my opinion, contain the classic characteristics of debit kiting. | |
| In other instances sales were made to Accounts that also had a significant debit. The fact that purchases were allowed by the brokerage firms in these Accounts at these times would indicate that additional credit was still available, possibly because of other equity in the Accounts or due to earlier sales in the Accounts which had not yet reached Settlement date. These trades then are not inconsistent with the explanation of debit kiting. | |
| Based on my review I am of the opinion that the most viable explanation for the 54 trades between the Accounts is that they were made to kite debits from one brokerage account to another in order to maintain control of a large block of shares in Montreux which the Accounts would have otherwise been unable to pay for. | |
We find that this trading by the Respondents, aggregating 130,300 shares of Montreux, was done for the purpose of debit kiting.
6.5 Misleading Appearance of Trading Activity
The Superintendent argued that the Respondents engaged in a pattern of trading that had the effect of creating a misleading appearance of trading activity in the shares of Montreux.
This issue was reviewed by the United States Securities and Exchange Commission ("SEC") in its decision In the Matter of Thornton and Company, 28 S.E.C. 4 (1948) 208. That case also involved a debit kiting arrangement. The SEC observed, at page 218:
| Investors reading reports of stock exchange transactions on ticker tapes and in newspapers ordinarily assume that the reports reflect legitimate transactions. If the transactions instead reflect fictitious activity, such investors are deceived as to the market in the security. They are falsely led to believe that bona fide transactions have occurred at a certain price and they may be induced by the volume or price changes to purchase or sell the securities as the case may be. | |
| When an outsider, a member of the public, reads the price quotations of a stock listed on an exchange, he is justified in supposing that the quoted price is an appraisal of the value of that stock due to a series of actual sales between various persons dealing at arm's length in a free and open market on the exchange, and so represents a true chancering of the market value of that stock thereon under the process of attrition due to supply operating against demand. | |
Their trading was a major factor in the market. The one day during the Relevant Period on which they did not trade Montreux shares had, by far, the lowest volume of total trading in Montreux shares of any day during the Relevant Period. Conversely, their most active day of trading had the highest volume of trading during the Relevant Period.
Analyser identified 54 trades for a total of 81,700 shares that were traded between the Accounts. These clearly fall into the category of fictitious trades.
A further 48,600 shares were bought and sold by the Accounts at the same price on the same day, although they were not matched between the Accounts. These are also fictitious trades, as they result in an overstatement of the actual arm's length trading in the market.
A further 15,350 shares were bought and sold by the Accounts on the same day but at different prices. In some of these cases, the Accounts purchased shares at prices higher than they sold them, which makes no economic sense. In other cases, purchases were made at lower prices than the sales but, when commissions are taken into account, most of these transactions do not make economic sense. These should also be regarded as fictitious trades.
The remainder of the Respondents' trading represented net purchases, totalling 123,850 shares on 22 days during the Relevant Period, and net sales, totalling 70,550 shares on 14 days. Apart from the last 7 trading days, when the accounts made net purchases of about 50,000 shares, the net purchases and net sales were interspersed through the Relevant Period and caused little change in the total holdings of the Accounts. The effect of this trading was, therefore, to create the impression of active trading in Montreux, driven by trading of the Accounts, while in fact shares were effectively being moved among the Accounts. As Holley's analysis showed, this trading could not be explained away as market making. It was, in large measure, more fictitious trading.
It is clear from this analysis that the Respondents' trading during, the Relevant Period had, for the most part, no economic purpose other than debit kiting and had an enormous illusory effect on the reported trading activity in Montreux shares. We find that the trading by the Respondents created a misleading appearance of trading activity in the shares of Montreux during the Relevant period.
6.6 The Respondents' Knowledge
Finally, we come to the question of whether the Respondents knew, or ought to have known, that their trading would create a misleading appearance of trading activity.
The Respondents are both well educated, having university degrees in economics. Eugene Sirianni was experienced in the investment industry, in both Australia and Canada. Frank Sirianni had, during the Relevant Period, close to two years experience promoting junior public companies. They were both involved in promoting a number of public companies, including Montreux, and had dealings with a vast number of brokers. They had stock quotation terminals in their premises and, given their large holdings, they had an obvious interest in keeping track of the trading in Montreux shares.
The SEC looked at the effect of debit kiting transactions in Thornton (note 31, page 224):
| It should be noted that, apart from the conclusions reached in the text, even if registrant's claim that it had to execute wash transactions solely to finance its transaction were credited, it would appear evident that such self-created difficulty could not be employed as a valid defense to the charges directed against registrant. Registrants wash sales are not isolated transactions. There are entire days in which all the transactions on the Exchange were the fictitious trading of registrant. For example, on April 3, 1946, registrant executed all the Exchange transactions on that day, which consisted of eight wash sales involving 510 shares of Northwest at an aggregate price of $90,002. Adopting registrant's assertion that it was unable to meet the payment for 510 shares on that day except by wash transactions, it is clear that such transactions were the foreseeable consequences of overtrading. We do not think that registrant can be heard to say that the consequent misleading and false market, which was a natural and probable result of his fictitious trading, is none of his concern because his own private interest happened to be served. An experienced market operator, as was Charles Thornton, who undertakes a program of fictitious trading knowing that it will create a false picture as to the market on the security, cannot absolve himself merely by stating that his fictitious trading was primarily for the purpose of financing his transactions. | |
More than this, however, we consider that the Respondents had a strong motive to create a misleading appearance of trading activity. They held a large position in Montreux shares, financed by very expensive credit. They hoped to profit from their holdings of Montreux shares. Despite Eugene's claim that Montreux was undervalued, there was nothing in Montreux's business activities to indicate that its share price should rise. During the Relevant Period, it was in the process of abandoning the mineral property that was the subject of its initial public offering and failed to make the required payments under its agreement to acquire a new property. At the beginning of the Relevant Period, its market capitalization already far exceeded the book value. The only way for the Respondents to profit from their holdings of Montreux shares was to induce investor interest.
Based on this motive and the pattern of their trading activity, we find that the Respondents participated in a scheme involving purchases and sales of Montreux shares when they knew that the transactions created or resulted in a misleading appearance of trading activity.
7. DECISION
The trading in Montreux shares by the Respondents during the Relevant Period represents a pattern of behaviour that is prejudicial to the public interest because it damages confidence in an open, efficient and credible securities market.
Eugene Sirianni argued that his contravention of section 70 of the Act was relatively minimal in respect of the period of time he was in breach and the amount by which he exceeded the reporting threshold. Frank Sirianni was somewhat further above the threshold, but would no doubt have made the same argument.
We do not consider the contravention of section 70 by the Respondents to be minimal. Although Eugene Sirianni remained only slightly above the 10 per cent threshold, the combined holdings of the Respondents, whom we have found were acting in concert, were very significant and their trading was the dominant factor in the market during the Relevant Period. These comments by the Commission in In the Matter of Robert Theodore Slavik July 20, 1990, British Columbia Securities Commission Weekly Summary are equally appropriate here:
| Failure of an insider to file reports under section 70 of the Act suppresses the disclosure of important information about the trading activities of a person closely associated with the issuer. Disclosure of trading by insiders is a key element of the system of continuous disclosure concerning the affairs of reporting issuers. Contravention is particularly serious when, as in this case, the insider is trading significant volumes of shares. | |
| The trading practices referred to above have, in my opinion, an undesirable effect on the integrity of the public securities markets and on the public confidence in those markets; namely that the trading through and between the Accounts would have reasonably led arm's-length investors and registrants who reviewed the trading to believe: | |
(i) | | that Montreux was the subject of much greater general investor interest than was actually the case, | |
(ii) | | that Montreux offered a much greater degree of liquidity than was actually the case, | |
(iii) | | the market price of Montreux shares was considered by many individual investors to fairly represent the share value when in fact the valuation of Montreux was dependent to a considerable degree on the past accumulation of shares by the Sirianni's, on their continued active trading in the market, and on their ability to maintain control of their large share position without having to make additional payment. | |
We consider it in the public interest to protect the market by removing the Respondents from the market and from involvement with reporting issuers for a significant period.
We order:
1. | | under section 144(1)(c) of the Act, that the exemptions described in sections 30 to 32, 55, 58, 80 and 81 do not apply to Eugene or Frank Sirianni for 15 years from the date of this decision; | |
2. | | under section 144(1)(d) of the Act, that Eugene and Frank Sirianni are prohibited from becoming or acting as directors or officers of any reporting issuer for 15 years from the date of this decision; | |
3. | | under section 144(1)(d) of the Act, that Eugene and Frank Sirianni are prohibited from becoming or acting as directors or officers of any issuer that provides management, administrative, promotional or consulting services to a reporting issuer for 15 years from the date of this decision; and | |
4. | | under section 154.2 of the Act, that Eugene and Frank Sirianni pay prescribed fees or charges for the costs of or related to the hearing incurred by the Commission and the Superintendent, the amounts to be determined following further submissions from the parties. | |
Chairman
E.L. LIEN
Member