Decisions

CONNOR FINANCIAL CORPORATION and JOEL GERRETT CONNOR [Decision]

BCSECCOM #:
Document Type:
Decision
Published Date:
1996-04-11
Effective Date:
1996-03-11
Details:


THE MATTER OF THE SECURITIES ACT
S.B.C. 1985. c. 83

AND

IN THE MATTER OF CONNOR FINANCIAL CORPORATION

AND

IN TKE MATTER OF JOEL GERRETT CONNOR


HEARING

PANEL: DOUGLAS M. HYNDMAN CHAIR
          EDWARD L. LIEN MEMBER

DATES: FEBRUARY 28 AND MARCH 11, 1996

APPEARING: CATHARPE ESSON FOR COMMISSION STAFF
          JOHN FORSTROM FOR CONNOR FINANCIAL
                          CORPORATION AND JOEL
                          GERRETT CONNOR

DECISION OF THE COMMISSION

1.INTRODUCTION

This is a hearing under sections 144(1) and 144.1 of the Securities Act, S.B.C. 1985, c. 83. The matter comes before us under a notice of hearing issued by the Executive Director on February 9, 1996. Commission staff allege that Connor Financial Corporation ("CFC") contravened an order of the Commission and ask us to make further orders against CFC or its principal. Joel Gerrett Connor.

2. BACKGROUND

CFC is registered under the Act as a mutual fund dealer. Connor is registered as
the sole trading director for CFC.

Following a hearing held August 2 and 3, 1995, the Commission issued a decision
dated November 30, 1995. In that decision, the Commission found, among other things,
the following:
    • In 1988, CFC deliberately set up a scheme to retain interest on its clients' funds that contravened both its trust obligations to its clients and its representations to Commission staff that it would use the interest on client funds to purchase additional mutual fund units for the clients.
    • In 1992, CFC contravened a condition of its registration, in publishing an advertisement without submitting it for review by Commission staff The advertisement was generally misleading and did not comply with the guidelines for sales communications set out in National Policy No. 39.

Based on its findings, the Commission made a number of orders. Included were a $40,000 administrative penalty, an order to prohibit CFC from "holding or handling client funds" and an order that CFC send to its clients a copy of "the Commission's news release respecting this decision."

Following representations by CFC as to the appropriate form of the order concerning client funds, the Commission issued a variation order on December 22, 1995. The variation order contained the following paragraph:

CFC hasrequested modification of the news release that we ordered be disseminated to clients to reflect our clarification of the order respecting the holding of client funds. We will vary our order to provide for dissemination of a modified document and to provide additional time for dissemination.

The variation order included orders under section 144(l)(e) of the Act requiring CFC :
    • to disseminate to each of its past and present clients a copy of a "Notice to Clients Of Connor Financial Corporation", which the Commission prepared and attached to the variation order, by posting a copy of it in a prominent place in CFC's office and by sending a copy to each client by first class mail, postage pre-paid, on or before January 15, 1996; and
    • to disseminate a copy of the decision and the variation order to any client that requested them, by sending the copy promptly by first class mail, postage prepaid.

The notice prepared by the Commission describes the Commission's orders and findings. It is a two page document on 8.5 x11 inch paper, containing text in 12 point type, with bold faced headings, spaces between paragraphs and bullet points to set out the specific orders of the Commission. The notice is on Commission letterhead, containing the provincial crest and the Commission's name, address and telephone and fax numbers.

On or about January 15, 1996, CFC sent a document to about 1,800 past and present clients, purportedly in compliance with the Commission order. The CFC document differs from the Commission notice as follows:
    • The CFC document contains an introductory commentary that was prepared by CFC, preceding a modified version of the text of the Commission notice.
    • The CFC document is compressed to fit on one small page of 8.5 x7 inches. It uses smaller 10point type, has no spaces between paragraphs and does not include the bold face headings.
    • The orders made by the Commission are reduced from bullet points to clauses in a single long sentence. Two quotes from the Commission decision that are set off and indented in the Commission notice are rolled into longer paragraphs in the CFC document.
    • The Commission letterhead with identifying information and the address and telephone numbers is not included.
    • There are a number of typographical errors, punctuation changes andminor omissions in the CFC document.
    • The description of one of the Commission orders was changed to exclude the reference to CFC's having "illegally retained for its own benefit" the interest on client funds.
    • Areference to CFC having charged "an undisclosed fee equal to 85% of the interest" was changed to "an undisclosed fee equal to eight-five (sic) per cent of the interest".

Connor testified that he retyped the notice for three reasons. First, he said he wanted to include the introductory commentary. Second, he said he wanted to get it on one page to save time, paper and money. Third, he said he only had a copy of the
Commission notice that had been faxed to him (presumably by his counsel) and he wanted a clearer type face. He did not ask for a non-fax copy to be sent to him.

Connor admitted to having made some typographical and transcription errors. He said he changed the language regarding the retention of interest to use the words of the Commission's order, rather than the notice, which he said were clearer.

Connor had the wording of the introductory commentary reviewed by CFC's counsel and was advised by counsel that it would be acceptable to retype the Commission's notice on a single page. He did not show counsel the CFC document or advise counsel that it would be on 8.5 x7 inch paper.

After the notice was sent, some clients phoned CFC asking for more information. Some of them were referred to Commission staff . Some clients asked for copies of the Commission decision. They were told that their names would be put on a list and copies would be sent in about two weeks. At least one client did not receive a copy for about three weeks. Connor testified that he wanted to see how many copies were requested before CFC arranged to have copies made and sent out.

About 15 clients contacted Commission staff, either directly or after being referred by CFC. They were referred to Lang Evans, a compliance officer in the Compliance and Enforcement Division. After talking to a few clients, Evans became aware that the CFC document was different from the Commission notice. Evans was told by two clients that they had experienced difficulties or delays in getting the Commission decision from CFC.

In late January, Commission staff expressed concerns to CFC or its counsel that CFC had not complied with the Commission decision. Some discussions ensued. CFC asked what would be required to satisfy staff’s concerns and avert a hearing. Staff determined that the matter should be referred to the Commission and issued the notice of hearing on February 9. In correspondence between counsel, CFC continued to seek staffs views as to how the perceived problem could be redressed. Afterthe hearing originally scheduled for February 19 was adjourned to February 28 (for reasons beyond the control of the parties) staff advised CFC to send out to clients a copy of the Commission notice with an explanatory note. That notice was sent on February 28.

3. FINDINGS

Commission staff submit that the CFC document was not the notice to clients that the Commission ordered CFC to send to its past and present clients by January 15, 1996, and that CFC therefore contravened the Commission's order. Staff say that the effect of the contravention was to greatly diminish the clarity and credibility of the information provided to the clients.

Staff also submit that CFC contravened the Commission's order to send a copy of the decision and the variation order promptly to all clients who requested them.

CFC submits that the document that it sent to clients complied with the order. In the alternative, CFC submits that any contravention of the order was rectified when CFC subsequently sent a copy of the Commission notice to clients.

CFC submits that it did comply with the order to send copies of the decision and the variation order promptly to clients who requested them. CFC says that it was reasonable and within the terms of the order to defer sending copies while waiting to see how many requests it would receive.

The CFC document includes much of the same text as the Commission notice. However it contains modifications, both intentional and unintentional. More important, it looks different and omits some information and identifying features that would convey to the reader that the notice is an official document of a public regulatory agency. The Commission notice is clearly set out in a form intended to provide direct communication from the Commission to CFC's clients. The CFC document compresses and buries the Commission's message in a less "reader-friendly" document. It also removes the Commission's reference to CFC's illegal retention of interest, which would be expected to cause clients concern. We find that the CFC document is not a copy of the Commission notice and that, in failing to send a copy by January 15, 1996, CFC contravened the Commission's order.

With respect to the order to send copies of the decision and variation order promptly to clients who requested them, it was reasonable for CFC to wait for some limited time, perhaps as much as a few days, to see how many requests it would receive so it could make economical arrangements to make and send copies. However, the time CFC took to send the copies, generally two weeks and about three weeks in one case, stretched beyond any reasonable interpretation of the word "promptly". If CFC found the obligation to send the copies promptiy to be too onerous, it could have sought a variation order, as it did with respect to other aspects of the decision. We find that CFC contravened the order to send copies of the decision and variation promptly.

CFC argues that this hearing constitutes a proceeding for contempt and that common law principles of civil contempt should apply. In particular CFC argues that, in determining an appropriate remedy, we must consider the gravity of the contempt, the harm caused, if any, and whether the contempt is continuing or has been purged.

The Commission does not have the power to find, or punish for, contempt. Under section 144.2 of the Act, Commission orders can be filed in the Supreme Court and proceedings may be taken on them in the Court. This hearing is different. It is an administrative proceeding in which we are asked to consider whether CFC has contravened an order of the Commission and, if so, whether further orders are in the public interest. It may be that, in a proceeding like this concerning the contravention of a
Commission order, we can usefully consider some of the principles applied by the Court in contempt proceedings. However, we must always base our decision on the fundamental criterion that we are required to consider, the public interest related to the regulation of trading in securities.

Within this context, we consider the principles put forward by CFC.

Gravity of the non-compliance. CFC argues that this was a case of benign noncompliance. CFC notes that it complied with other parts of the decision, including paying the $40,000 administrative penalty, and says it tried to comply with the order by sending the CFC document, which was prepared after CFC obtained legal advice. CFC says that the sending of the CFC document should not be viewed as a calculated scheme to diffuse the effect of the Commission notice, suggesting that it would have been "a remarkably ham-fisted effort." Finally, CFC notes that some clients who called with questions about the CFC document were referred to Commission staff.On this basis, CFC argues that its non-compliance was benign and displayed no contumacious attitude.

In our view, the CFC document did represent a remarkably ham-fisted effort to frustrate the Commission's communication with CFC clients. Connor must have known and intended that the CFC document would soften and diffuse the Commission's message and would be less likely to be read by CFC clients. Further, appearance of the CFC document is such that clients could easily mistake it for "junk mail"and discard it without realizing its significance.

CFC takes exception to Commission staff’s characterization of its conduct as blatant non-compliance. We agree that it was not blatant. CFC's non-compliance was an insidious effort to comply in a way that would frustrate the effect of the order. It was the same type of conduct as (although less serious than) that exhibited by CFC in 1988, when it set up a scheme that purported to comply with regulatory requirements regarding interest on clients funds but actually resulted in non-compliance with the requirements.
Although CFC sought some legal advice with respect to its plan to retype the Commission notice on a single page, it did not show the actual document to counsel or advise counsel of the size of paper to be used.

We find that GFC's contravention of the order was not benign. Connor did display a contumacious attitude in attempting to frustrate the effect of the Commission's order.

Effect of non-compliance. CFC argues that, if CFC intended to frustrate the
Commission's order, it failed. Clients who read the notice and phoned Commission staff were obviously aware of CFC's contravention of regulatory requirements. CFC says there is no evidence that problems arose and that the CFC document had the effect intended by the Commission order - to give early notice of the decision to clients.

There is no direct evidence of the effect of CFC's sending the CFC document instead of the Commission notice. We have no way of knowing how many, if any, clients did not read or understand the implications of the CFC document or, more particularly, what difference the Commission notice would have made.

In our view, the effect of the non-compliance can be deduced from the documents themselves. The purpose of the Commission notice was to communicate to CFC clients some important and complex information about regulatory non-compliance by the mutual fund dealer with whom they were doing business. The CFC document is, on its face, a substantially less informative document than the Commission notice. Communication involves more than just putting words on paper. The letterhead, the size of the paper, the size of the print and the paragraph spacing all affect the amount of information that is communicated by a document. Connor must have known and intended that the CFC document would, by reason of its form, be less informative to clients. Furthermore, the typographical errors make the document appear less official and the text changes – to exclude the reference to CFC's having "illegally retained for its own benefit" the interest on client funds and to change the reference to "an undisclosed fee equal to 85% of the interest" to "an undisclosed fee equal to eight-five per cent of the interest" - obscure two major points that would be of concern to clients.

We find that the effect of CFC's non-compliance was to frustrate the effect of the Commission's order.

Subsistence or purging of non-compliance. CFC argues that it has rectified, or "purged its non-compliance by sending out the Commission notice. On this basis, CFC says that there is no compelling public interest in the Commission taking any further steps.

We do not accept this argument. It might be applicable in a contempt proceeding but, in this case, the result would be unacceptable. It is simply not appropriate for a registrant, who is expected to comply with high ethical standards of business conduct, to comply with regulatory requirements only after being found contravening them.

We consider that further orders are in the public interest to impress upon CFC, and others, the importance of complying with regulatory standards and orders.

4. DECISION

Commission staff submit that we should make orders suspending CFC's registration for 30 days, imposing an administrative penalty of $10,000 and requiring CFC to pay prescribed fees and charges for the costs of or related to the hearing.

CFC submits that a suspension could do irreparable damage to CFC's business, by encouraging its entire client base to move temporarily to another registrant, and that a $10,000 administrative penalty would be excessive.

We expressed concern in our original decision that CFC's conduct called into question its suitability to be registered. Our concern is heightened by CFC's contravention of the Commission's order. We accept that a complete suspension of CFC's registration would be unduly disruptive in the circumstances, but we consider a reprimand and a temporary restriction on new business to be in the public interest.

We also consider it to be in the public interest to order CFC to pay an administrative penalty for its contravention of the Commission order and to provide notice of this decision to its clients.

We order,

1. under section 144(1)(e) of the Act, that
    CFC is required to disseminate to each of its past and present clients a copy of a "Second Notice to Clients of Connor Financial Corporation", as attached to this decision, by posting a copy in a prominent place in CFC's office and by sending a copy to each client by first class mail, postage prepaid, on or before April 30, 1996, and

    CFC is required to disseminate a copy of this decision to any of its clients that requests it, by sending the copy promptly by first class mail, postage prepaid;

2.under section 144(l)(f), that
    • CFC is reprimanded for contravening the Commission's orders to disseminate the Commission notice and the decision and variation order,
    • Connor is reprimanded for causing CFC to contravene the orders, and
    • CFC's registration under the Act is restricted for the period April 15to July 15, 1996, such that CFC may not trade with or on behalf of any new clients;

3.under section 144.1 of the Act, that CFC pay an administrative penalty of $10,000 within 30 days of this decision;

4. under section 154.2 of the Act, that CFC pay prescribed costs of or related to the hearing to be determined following further submissions from the parties.


DATED at Vancouver, British Columbia, on April 9, 1996.
FOR THE COMMISSION



(Signature) (Signature)
Douglas M. Hyndman Edward L. Lien
Chair Member


SECOND NOTICE TO CLIENTS OF CONNOR FINANCIAL CORPORATION

The British Columbia Securities Commission has made hrther regulatory enforcement orders against Connor Financial Corporation ("CFC"), a Victoria mutual fund dealer, and Joel Gerrett Comor for failure to comply with a Commission order made in December.

After a hearing in August 1995, the Commission found that CFC had committed two regulatory violations. CFC had illegally retained interest on client funds and published a misleading advertisement. In December 1995, the Securities Commission ordered CFC
    • to pay a fine of $40,000,
    • not to hold any client funds,
    • to resolve the disposition of interest illegally retained in the past,
    • to send to its clients a copy of a "Notice to Clients Of Connor Financial Corporation", prepared by the Commission, and
    • to provide clients copies of the Commission's original decision and a variation order, promptly on the request of the clients.

In January 1996, CFC sent to clients a document that was modified from, and less informative than, theCommission notice. It is compressed from two full pages to one small page, is not on Commission letterhead, uses smaller type, contains several typographical errors and omits an important reference.

After Securities Commission staff told CFC that the document sent out did not comply with the order, CFC sent a copy of the Commission notice on February 28,1996.

The Commission held a second hearing in February and March 1996, to consider CFC's and Mr. Connor's conduct. On April 9, 1996, theCommission decided that CFC had not complied with the orders to send the Commission notice to clients and to send copies of the original Commission decision promptly to clients who requested it.

Asa result, the Securities Commission has reprimanded CFC and Mr. Connor. It has also ordered CFC
    • to pay a fine of $10,000,
    • not to deal with any new clients for 3months,
    • to pay costs of the Commission hearing,
    • to send this notice to clients, and
    • to send a copy of the April 9 decision to clients promptly on request.

The British Columbia Securities Commission is a provincial government agency responsible for regulating trading in securities and exchange contracts.
April 9, 1996
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