Decisions

BRIAN BILES, et. al. [Decision]

BCSECCOM #:
Document Type:
Decision
Published Date:
1997-07-11
Effective Date:
1997-07-04
Details:


IN THE MATTER OF THE SECURITIES ACT
R.S.B.C. 1996, c. 418
AND

IN THE MATTER OF THE VANCOUVER STOCK EXCHANGE

AND

IN THE MATTER OF BRIAN BILES


HEARING AND REVIEW


PANEL: DOUGLAS M. HYNDMAN CHAIR
BRENT W. AITKEN MEMBER
PETER A. MANSON, Q.C. MEMBER


DATE: MARCH 11, 1997


APPEARING: PATRICK ROBITAILLE FOR COMMISSION STAFF
              GORDON R. JOHNSON FOR THE VANCOUVER STOCK EXCHANGE

              DANA PRINCE FOR BRIAN BILES

DECISION OF THE COMMISSION

1. INTRODUCTION

This decision relates to a hearing and review under section 28 of the Securities Act, R.S.B.C. 1996, c. 418, of a decision of a disciplinary hearing committee of the Vancouver Stock Exchange.

The decision under review, dated April 18, 1996, related to allegations against Brian Biles contained in a citation issued by the Exchange on November 13, 1995. The hearing panel found that Biles had committed numerous infractions of the Exchange’s rules and by-laws. The panel fined Biles $40,000, ordered him to pay the costs of the hearing and withdrew the Exchange’s approval for five years, the withdrawal to be suspended if certain conditions were fulfilled.

On May 17, 1996, the Executive Director applied for a hearing and review of the decision so that the Commission may “consider whether the findings and sanctions of the hearing committee are appropriate and whether irrelevant matters were considered in arriving at the decision”.


2. BACKGROUND

Biles was employed as a registered representative with Brink, Hudson & Lefever Ltd., a member firm of the Exchange, from 1984 to 1996. The hearing committee found that Biles “admitted fraudulent conduct, designed to mislead, and in breach of the Exchange Rules and By-laws from approximately 1986 to 1993”. The impugned activity apparently ceased following the issuance of the citation in November 1993, and in 1995 Biles was placed under strict supervision by Brink Hudson. Following the decision in April 1996, Biles left Brink Hudson and is no longer employed as a registered representative.

The misconduct found by the hearing panel relates to four accounts:
    1. The Kim Belcher Account

In or about 1984 Biles opened an account at Brink Hudson for Kim Belcher, who was at the time a girlfriend. The personal relationship ended in or about late 1985, but they remained friends. From 1986 onward, Biles treated the Belcher account as his own and had a beneficial interest in the account. He did not designate the account as his own and he failed to maintain sufficient identification in writing to establish the beneficial owner of the account or the party financially responsible for it.

For the six month period from November 1991 to April 1992, Biles executed 46 trades in the Belcher account having a value in excess of $100,000. All of these trades were made at Biles direction and at least in part for his benefit. During this period, Biles fraudulently wrote the signature of Kim Belcher on a securities and cheque requisition form.

During the investigation, Biles lied to an Exchange investigator about the Belcher account, telling him that the account was operated on Belcher’s instructions and that a $7,000 debit in the account arose from a loan made by Belcher to another client, Darcy Krell.
    2. The Linda Zubke Account

This account was similar to the Belcher account in that it was opened at a time when Zubke was a girlfriend of Biles. Apparently Biles’ personal relationship with Zubke ended in or about July 1990. During the relationship Zubke was aware that Biles was using her account for trading purposes, but she was unaware that Biles continued to use her account after the relationship ended. Biles treated the Zubke account in part as his own and had a beneficial interest in it.

For the eighteen months in the period beginning in November 1989 and ending in September 1991, as described in the decision, Biles executed over 100 trades in the Zubke account having a value in excess of $180,000. All of the trades and transactions reported on those account statements were made at Biles’ direction and at least in part for Biles’ benefit. Biles’ beneficial interest in the Zubke account was never designated or identified in writing.

During this period, Biles fraudulently wrote the signature of Linda Zubke on a securities and cheque requisition form.

3. The Chase Management Account

Biles was the representative for an account in the name of Chase Management Limited and took instructions on that account from Scott Emerson. On or about September 13, 1991, Biles purchased for the Chase Management account 8,500 shares of Guardian Communications Industry Inc. In October 1991, Emerson advised Biles that the shares had been purchased without his authorization and asked that the transaction be corrected. In December 1991, Biles transferred the shares to the Cunningham account (discussed below) at the original purchase price, despite the fact that the share price had declined significantly and the shares were then worth about $1,000 less. Biles later lied to an Exchange investigator about the circumstances of the transfer. He also claimed to the investigator and in his evidence before the hearing panel that Emerson had authorized the purchase. The panel rejected Biles’ evidence on this point and preferred the evidence of Emerson.

4. The Cunningham Account

In October 1991, Biles took over responsibility for the account of a client, Glen Cunningham, who had previously dealt with Biles’ brother. For the next five months, Biles accepted orders and executed trades with respect to the account on the instructions of another individual, Darcy Krell. Biles had never met or spoken to Cunningham and had not used due diligence to learn the essential facts relative to Cunningham, his account or the orders and trades. Biles did not have on file a trading authority signed by Cunningham authorizing Krell, or anyone else, to enter orders on Cunningham’s behalf.

In the course of handling the account, Biles accepted and acted on several securities and cheque requisitions and a facsimile, all purporting to be signed by Cunningham, when Biles knew that the purported signature was a fraud.

Biles later falsely represented in a letter, on Brink Hudson letterhead, to Krell’s mother that Cunningham had provided oral and written instructions for the disposition of $24,000 Krell had deposited in the Cunningham account.

Biles also lied to an Exchange investigator about his relationship with Cunningham. He claimed that he had spoken with Cunningham as often as twice a week, that Cunningham and only Cunningham had given him instructions on the account, that he had a signed authorization from Cunningham for the account and that Cunningham had specifically authorized the transfer of the Guardian shares from the Chase Management account at a price higher than the market value.
    Penalty

The hearing panel delivered to the parties an oral decision (later incorporated in its written reasons) on its findings with respect to the allegations against Biles. It then heard further evidence, in the form of testimony from both Biles and John Jennings, then President of Brink Hudson, followed by argument with respect to penalty.

After reviewing the evidence and arguments, the hearing committee concluded:
      Mr. Biles’ case presents a difficult conundrum in that we have admitted fraudulent conduct, designed to mislead, and in breach of the Exchange Rules and By-laws from approximately 1986 to 1993. We then have a period from 1993 to early 1996 where Mr. Biles continues in the business, albeit under close supervision since March, 1995, and according to the evidence, he has undergone a significant change in the manner in which he does business, and he has retained the confidence of his employer, and presumably his clients.

      There can be no doubt that Mr. Biles’ offences are serious and demonstrate a lamentable lack of judgment on Mr. Biles’ part, and a willingness to ignore the rules to achieve his own and his clients’ purposes. It is significant that there is no evidence of financial loss to clients, or to his employer.

      Mr. Biles has been found guilty of serious professional misconduct. However, we agree that there are mitigating factors here that will allow the imposition of a significant penalty, provide adequate protection to the public, and yet perhaps not end Mr. Biles’ career.

      …

      Considering all of the circumstances of this case, the penalty is as follows:

      1. Mr. Biles to pay a fine of $40,000, (according to the evidence approximately 50% of his 1995 income) in equal quarterly installments, over 12 months, the first payment to be on September 1, 1996;

      2. Withdrawal of Exchange approval for five years; however, this withdrawal will be suspended on condition that:
        (a) Mr. Biles continue under strict supervision for five years, that is until March 1, 1001;

        (b) that performance reports with reference to Mr. Biles’ activities, by his firm’s compliance officer, satisfactory to the Exchange be filed with the Exchange every month, commencing June 1, 1996 and continuing every month thereafter during his suspension;

        (c) That Mr. Biles be employed with a member firm during the aforesaid period of suspension; and

        (d) That Mr. Biles successfully complete the Canadian Securities Course Examinations and the Conduct and Practices Handbook Examinations within six months of these Reasons.
      3. Mr. Biles pay costs associated with this inquiry, such costs to be agreed by the parties, or failing agreement, the Panel will hear further submissions with respect thereto.

      If Mr. Biles fails to comply with any of the conditions set forth in paragraph 2, the suspension shall be immediately rescinded and the withdrawal of approval will become effective.

We were advised at the hearing and review that, in fact, Biles did not complete the required examinations within the required time, so that the five year withdrawal of approval has become effective.


3. ANALYSIS

The findings of the Exchange hearing panel are not in dispute. The question before us is whether we should vary the penalty imposed by the hearing panel.

Commission staff and the Exchange say the penalty is inadequate and ask us to increase it. The Exchange says we should vary the penalty and impose a lifetime withdrawal of approval on Biles because the hearing panel proceeded on an incorrect principle in failing to give meaningful consideration to the principle of general deterrence. Commission staff agrees and says, in the alternative, that we should vary the penalty on the basis that it does not adequately protect the public interest.

Biles says that, based on long-standing jurisprudence, we should only interfere with a decision of an Exchange hearing panel in certain circumstances. He says those circumstances are not present in this case.

Our jurisdiction in this hearing and review is set out in section 165(4) of the Act: “On a hearing and review, the Commission may confirm or vary the decision under review or make another decision it considers proper.” This gives us a very broad discretion to make whatever decision we consider to be in the public interest. As a matter of adjudicative policy, the Commission has adopted a practice of deferring to the decisions of the Exchange unless certain criteria are met. This practice was developed in a series of cases by the Ontario Securities Commission and has been applied in a number of decisions of this Commission. It is now codified in section 5.14 of Local Policy Statement 3-12, as follows:
    In hearings and reviews of decisions of the Exchange, the Commission will generally confirm the decision of the Exchange unless
      (a) the Exchange has proceeded on some incorrect principle,
      (b) the Exchange has erred in law,
      (c) the Exchange has overlooked some material evidence, or
      (d) new and compelling evidence is presented to the Commission that was not presented to the Exchange.

The purpose of this policy is to prevent the hearing and review process being used simply to obtain a second opinion from the Commission on a matter decided by the Exchange. Each case must be considered on its own merits but, to ensure the integrity of the Exchange’s decision making process, we do not consider it appropriate to interfere with an Exchange decision simply because we might have made a different decision in the circumstances. The criteria described in Local Policy 3-12 indicate the type of circumstances in which we would generally consider it appropriate to interfere with a decision and substitute our own decision for that of the Exchange.

In addition to the four criteria set out in Local Policy 3-12, a fifth criterion has been adopted and applied by the Ontario Securities Commission. The OSC says it may intervene in a decision of The Toronto Stock Exchange where the Commission’s view of the public interest is different from the view of the Exchange. Although this criterion has not been specifically considered by our Commission in a previous hearing and review, and it is not specifically included in Local Policy 3-12, it should be read into the statement that, in the absence of the other four criteria, the Commission will generally confirm the decision of the Exchange. Clearly, even in the absence of any of the four listed criteria, the Commission will be moved to vary a decision that we consider to be prejudicial to the public interest. This discretion should be used sparingly to deal with circumstances where the decision has clearly failed to protect the public interest, and not to simply impose our own view where we might have a difference of opinion.

In the matter before us there are no evidentiary issues and no apparent error in law. The question comes down to whether, in imposing the penalty it chose, the hearing panel proceeded on an incorrect principle or whether the penalty is, in our view, inadequate to protect the public interest.

Before the hearing panel, the Exchange argued for a lifetime suspension of Biles as an approved person. The details of the argument were not put before us and the hearing panel gave no explanation for the decision to reject it.

The hearing panel acknowledged Biles had engaged in serious professional misconduct but, in deciding on a penalty, the panel took into account what it regarded as mitigating factors: the apparent change in Biles’ business practices after the citation was issued in 1993; the support given to Biles by the member firm; and the fact there was no evidence Biles’ activities caused losses to clients or the member firm. The panel decided “there are mitigating factors here that will allow the imposition of a significant penalty, provide adequate protection to the public, and yet perhaps not end Mr. Biles’ career.” The panel imposed a $40,000 fine and a five year withdrawal of approval, the latter to be suspended provided certain conditions were met.

We should be slow to intervene in a decision by a hearing panel. The members of the hearing panel heard the oral evidence of Biles and other witnesses directly, where we did not. Nevertheless, we must also look at the facts of this case in the context of the broader public interest. For seven years Biles ran clandestine trading accounts for himself and a friend, concealed from his employer by means of fraudulent signatures. After he was caught, he lied on several occasions to Exchange investigators. This type of conduct must be dealt with firmly, both to protect investors and to send a message to others similarly inclined that it simply will not be tolerated. In our view, the penalty imposed by the hearing panel falls well short of what is necessary to achieve those goals and is prejudicial to the public interest.

The hearing panel imposed a $40,000 fine and a five year withdrawal of approval rather than the $25,000 fine and lifetime withdrawal requested by the Exchange. Although we might have imposed a different penalty in the circumstances, we would not interfere with that part of the hearing committee’s decision.

The hearing panel then went on to suspend completely the withdrawal of approval provided that Biles remain under strict supervision, that his firm file monthly performance reports on Biles’ activities with the Exchange, and that Biles successfully complete the Canadian Securities Course Examinations and the Conduct and Practices Handbook Examinations within six months. It is this aspect of the decision that we find prejudicial to the public interest. Although it appears that Biles has missed the opportunity to qualify for the suspension, we consider it appropriate to deal with it to provide guidance to future hearing panels.

There may well be cases in which a complete suspension of a withdrawal of approval would be an appropriate recognition of mitigating factors or an individual’s rehabilitation. However, in this case, the hearing panel found significant and repeated lapses of honesty and integrity. These character traits are critical to an individual’s fitness for registration. Biles’ misconduct demands that there be at least some period during which he would be completely excluded from participating in the industry. We might question whether there should be even a partial suspension of the five year withdrawal of approval but, in the interests of minimal interference in the hearing panel’s decision, we will vary that decision only to say that any suspension of the withdrawal of approval should not commence until at least two years have elapsed from the date of the decision.

4. DECISION

Under section 165(4) of the Act, we order that the decision of the hearing panel be varied to provide that any suspension of the five year withdrawal of approval, on the conditions set by the hearing panel, commence no sooner than two years after the date of the hearing panel’s decision.

DATED at Vancouver, British Columbia on July 4, 1997.

FOR THE COMMISSION






Douglas M. Hyndman Brent W. Aitken
Chair Member






Peter A. Manson, Q.C.
Member
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