Securities Law & Instruments


[Update: The terms and conditions imposed by the Director in this decision were removed as at July 28, 2009.]

In the Matter of
the Renewal of Registration of Swift Trade Inc.

Opportunity to be Heard by the Director
Section 26(3) of the Securities Act


Date of decision:
February 5, 2008
 
Director:
Marrianne Bridge, CA
Manager,Compliance
Ontario Securities Commission (OSC)
 
Written submissions by :
Donna Leitch
Assistant Manager, Registrant Regulation
for the staff of the OSC
 
Simon Romano, Stikeman Elliott LLP
for Swift Trade Inc. (Swift Trade)

Overview

1.    On December 7, 2007, OSC Registrant Regulation staff advised Swift Trade that it recommended that Swift Trade’s limited market dealer (LMD) registration be renewed on a month-to-month basis beginning January 2008. During each month, staff will assess the fitness of Swift Trade for registration. Swift Trade’s registration will be renewed monthly unless it is notified otherwise by staff in the first five business days of the month. Staff’s recommendation is based on the allegations set out in the Statement of Allegations dated December 7, 2007 (Statement of Allegations).

2.    Pursuant to section 26(3) of the Securities Act (Ontario) (Act), Swift Trade is entitled to an opportunity to be heard before a decision is made on the proposed terms and conditions. Swift Trade asked for an opportunity to be heard in writing. My decision is based on staff’s written submissions set out in the memorandum dated January 2, 2008 of Donna Leitch, Assistant Manager, Registrant Regulation and the written submissions of Simon Romano, Stikeman Elliott LLP on behalf of Swift Trade dated January 16, 2008.

3.    I have set out some general background to this matter first, then a summary of staff’s and Swift Trade’s submissions, and concluding with my decision and reasons.

Enforcement Notice of Hearing and Statement of Allegations

4.    On December 7, 2007, OSC Enforcement staff issued a Notice of Hearing (Notice of Hearing) in the Matter of Swift Trade and Peter Beck (Respondents). Staff sought a Commission order that, among other things, suspended, restricted or terminated the registration of the Respondents. The Notice of Hearing set a January 18, 2008 hearing date. That date was subsequently adjourned to March 5, 2008. The full text of the Notice of Hearing is available on the OSC’s website.

5.    The full text of the Statement of Allegations issued by Enforcement staff is also available on the OSC’s website. For ease of reference and to the extent relevant to my decision, a brief summary of the Statement of Allegations is included here.

Summary of the Statement of Allegations

Incorporation and operations of Swift Trade

6.    In 2003, Swift Trade Securities Inc. transferred its operations into Swift Trade. Since 2003, Swift Trade has provided software and an electronic trading platform that links its clients’ traders through its affiliated U.S. dealer, Biremis Corp, with access to U.S. markets. All trades in U.S. markets for all Swift Trade clients are executed by Swift Trade head office through its affiliated U.S. dealer, Biremis Corp.

7.    Trieme Corporation (Trieme) was incorporated for the sole purpose of trading securities on its own behalf. Peter Beck (Beck) is the sole shareholder and beneficial owner of Trieme. Barka Co. Ltd. (Barka) was incorporated in Cyprus on January 22, 2004 for the sole purpose of trading securities on its own behalf.

8.    Beck is the co-founder and president of Swift Trade and he owns 70.5% of BRMS Holdings Inc., which owns 100% of Swift Trade. Beck has been registered with the OSC since 1998. Since 2002, he has been registered as a director and trading officer of Swift Trade. From November 2004 to August 2006, Beck was designated as the compliance officer for Swift Trade.

9.    In 2006, Swift Trade had approximately 55 corporate accredited investor clients. All of the clients, except one, were incorporated internationally. Each client hired independent contractor traders (Traders) to trade the client’s capital using the Swift Trade software and electronic trading platform. In total, there are approximately 2,000 Traders executing trades on behalf of Swift Trade clients worldwide. None of these Traders are registered with the OSC. In 2006, Barka employed approximately 1,100 Traders on its behalf, making it Swift Trade’s largest client.

Staff review and examinations

10.    Registration and Compliance staff conducted a compliance field review of Swift Trade in August 2006. The purpose of the review was to gain an understanding of Swift Trade’s operations, business model, clients and employees. Following that review, Beck and others were examined under oath by Registration staff under section 31 of the Act. Beck was also examined under oath by Enforcement staff in December 2006.

Misrepresentations to staff

11.    Staff allege that Beck made statements regarding the beneficial ownership of Barka and by implication, Swift Trade’s operations, that, in material respects, at the time and in light of the circumstances under which they were made, were misleading or untrue, and/or Beck failed to state facts that were required to be stated or that were necessary to make the statements not misleading.

12.    Staff’s allegations are more fully set out in the Statement of Allegations.

Staff submissions

Overview

13.    Staff argue that the allegations in the Statement of Allegations, if true, call into question Beck’s integrity and ongoing fitness for registration. If proven true, the conduct would be sufficient to conclude that Beck is not suitable for registration and that his ongoing registration is objectionable on public interest grounds.

14.    It is staff’s understanding that Swift Trade is strictly a proprietary trading organization and that it is functionally dependent on Beck. To the extent that Beck is unsuitable for registration, staff is of the view that Swift Trade itself is also unsuitable for registration and that its registration is also objectionable on public interest grounds.

15.    In light of the allegations against the Respondents set out in the Statement of Allegations, staff recommended that Swift Trade’s registration as an LMD be renewed on a month-to-month basis.

Suitability for registration generally

16.    Subsection 25(1) of the Act generally requires that any person or company that trades in securities or advises others in securities investments be registered in the relevant category. A Registrant is in a position to provide valuable services to the public, both in the form of direct services to individual investors and as part of the larger system that provides the public with the benefits of fair and efficient capital markets. A registrant also has a corresponding capacity to do material harm to investors and to the public at large. Determining whether an applicant should be registered is thus an important component of the OSC’s mandate. As well, as noted in numerous decisions by the Commission, other securities commissions and the courts, registration is a privilege, not a right.

17.    Subsection 26(1) of the Act states that unless it appears to the Director that a registrant is not suitable for renewal of registration or that a proposed renewal of registration is objectionable, the Director shall renew the applicant’s registration. Therefore, the question for me to determine as Director in this matter is whether Swift Trade, as applicant for renewal of registration, is suitable for renewal of registration and/or whether Swift Trade’s renewal of registration is objectionable.

18.    The meanings of “suitable” and “objectionable” for the purposes of section 26 of the Act are not set out in securities law. However, the Commission has over time and in a number of previous Director’s decisions, articulated three fundamental criteria for determining suitability for registration:
  • Integrity , which includes honesty and good faith, particularly in dealings with clients, and compliance with Ontario securities laws
  • Competence , which includes prescribed proficiency and knowledge of the requirements of Ontario securities laws and
  • Financial solvency, which is considered relevant because it is an indicator of a firm’s capacity to fulfill its obligations and can be an indicator of the risk that an individual will engage in self-interested activities at the expense of clients.

The criterion at issue here is integrity.

Objectionable

19.    Subsection 26(1) draws a distinction between the Director’s determination whether:
  • an applicant is suitable for registration or
  • it is objectionable to permit the applicant to be registered.
20.    Staff argues that the determination that something is “objectionable” must be with reference to the public interest mandate of the Commission set out in section 1.1 of the Act:
  • to provide protection to investors from unfair, improper or fraudulent practices and
  • to foster fair and efficient capital markets and confidence in capital markets.
21.    In most cases, the determination of whether conduct is objectionable will coincide with the determination of whether it is also suitable based on the criteria set out above. However, the Director has the power to determine that it is objectionable to approve a renewal application on broader public interest grounds, regardless of the determination of suitability.

Relevance of past conduct

22.    In the Charko case (Re Charko (1992), 15 OSCB 3989), the Commission said that “[in] assessing fitness for registration, the Director must necessarily place a strong reliance on an applicant’s past behaviour”. As well, it stated that “[s]uitability includes the totality of… [a Registrant’s]… past and present”.

23.    In the Mithras case (Re Mithras Management Ltd., (1990) 13 OSCB 1600), the Commission stated that “… the role of this Commission is to protect the public interest by removing from the capital markets… those whose conduct in the past leads us to conclude that their conduct in the future may well be detrimental to the integrity of those markets… We are here to restrain, as best we can, future conduct that is likely to be prejudicial to the public interest by having capital markets that are both fair and efficient. In so doing we must, of necessity, look to past conduct as a guide to what we believe a person’s future conduct might reasonably be expected to be…”

Suitability of Beck and Swift Trade

24.    Staff is recommending that Swift Trade’s registration as an LMD be renewed on a month-to-month basis. The recommendation is made on the basis that if the allegations in the Statement of Allegations are proven true, Beck’s conduct is sufficient to conclude that he is not suitable for registration due to a lack of integrity.

25.    As indicated in Charko and Mithras, the Director must necessarily place a strong reliance on an applicant’s past behaviour in assessing fitness for registration and must protect the public interest by removing from the capital markets those whose conduct in the past leads to the conclusion that their conduct in the future may well be detrimental to the integrity of the capital markets.

26.    Staff alleges that Beck made representations to it under oath that are alleged to have been misleading or untrue. Staff also submits that the nature of the allegations are, in and of themselves, sufficient to conclude that Beck is not suitable for registration due to a lack of integrity.

27.    It is staff’s understanding that Swift Trade is functionally dependent on Beck. It is also staff’s understanding that Beck is the majority shareholder of Swift Trade. As a result, to the extent that Beck is considered unsuitable for registration, Swift Trade is also unsuitable for registration.

Registration objectionable

28.    The Director also has the ability to determine whether a proposed renewal of registration is objectionable on broader public interest grounds, regardless of the suitability determination. Staff submits that if the allegations in the Statement of Allegations are proven true, the renewal of registration of Swift Trade is objectionable on public interest grounds.

Terms and conditions recommended and not denial of registration

29.    Depending on the degree to which an applicant for renewal of registration fails to satisfy the suitability criteria, Registration staff will often recommend terms and conditions tailored to the suitability concerns specific to the individual applicant. Less often, staff will recommend the denial of registration altogether because of the extent or persistence of an applicant’s failure to satisfy the suitability criteria.

30.    Staff argues that the allegations against Swift Trade and Beck demonstrate a disregard for Ontario securities laws. However, the allegations (although serious) have not been considered by the Commission and the Commission has not made a determination as to their merit. As such, staff recommends that Swift Trade’s registration as an LMD be renewed on a month-to-month basis pending the Commission making its determination.

Swift Trade submissions

Overview

31.    The Respondents argue that staff’s allegations are without merit. They also argue that the allegations will be fully considered at the resulting enforcement hearing where the Commission is being asked to consider making an order suspending, restricting, terminating or imposing terms and conditions on the registration of one or both of them. As a result, they argue that there is no basis for, and no legitimate regulatory purpose served by, the implementation of the proposed terms and conditions.

32.    The proposed terms and conditions will have material adverse effects on Swift Trade and its customers and will be fundamentally unfair to the Respondents as they result in a form of remedy before any determination of wrongful conduct. They argue that allegations of improper conduct should not be used to support a request for a remedy in the registration context.

Selected additional background

33.    Swift Trade provided some additional background on the company’s operations. To the extent the information is directly relevant to the matter at hand, I have summarized it in this Decision.

34.    Swift Trade developed a unique technology based business model that allows its customers to trade electronically on a very cost effective basis on securities markets around the world. Swift Trade’s customers focus on a large number of small volume, computer-monitored trades in liquid stocks, engaging in rapid purchases and sales, without overnight position risk. Trades are routed by Biremis through other registered dealers.

35.    Swift Trade has two clients with links to Canada – Trieme and Barka. Trieme engages part time trading personnel to process trades on its behalf on markets around the world using Swift Trade’s computer system. Barka engages full time trading personnel (including 200 Ontario residents) to process trades on its behalf on markets around the world using Swift Trade’s computer system.

Submissions on proposed terms and conditions

36.    Swift Trade’s submissions on why the proposed terms and conditions are unreasonable are:
  • The Statement of Allegations relates solely to Beck’s alleged conduct. There are no grounds to implicate Swift Trade.
  • The proposed month to month registration renewal term gives Swift Trade and Beck an unreasonably short period of time to restructure or sell the Swift Trade business.
  • The enforcement proceedings, which explicitly address registration concerns, are sufficient to address Registration staff concerns.
  • Registration staff do not have any basis for proposing month to month renewal of registration, nor has any analysis or explanation for the terms and conditions been provided.
  • The existence alone of the Statement of Allegations does not justify the imposition of the proposed terms and conditions. This decision is a quasi-judicial process and the Commission (in the enforcement proceedings) is a statutory decision maker vested with discretion to be exercised in the public interest. Therefore, it is not appropriate for me to simply rely on the Statement of Allegations in imposing the requested terms and conditions.
  • The proposed terms and conditions effectively preempt the ability of Swift Trade to challenge the loss of its registration if it is not renewed in any particular month. This is because the terms and conditions do not allow for a separate opportunity to be heard at that time. This leaves Swift Trade in the untenable position of having to reapply for registration, a process that takes many months. The result is fundamentally unfair and inappropriate. To suspend a registration, staff should use section 127 of the Act. To refuse to renew a registration, staff should use section 26(3) of the Act. Using terms and conditions in this manner violates the “doctrine of fairness” or “duty to act fairly”. This is a well established concept under administrative law. The Supreme Court has clearly indicated that natural justice requires that the procedures before any tribunal be fair in the circumstances, and that procedural protection be equally afforded to judicial, quasi-judicial and administrative proceedings. It has also clearly indicated that a person that is adversely affected should be told of the case against him and be afforded a fair opportunity of answering it. The courts place emphasis on the duty of fairness as it applies to an administrative tribunal with the power to grant a licence. The decisions of such a tribunal can determine the livelihood of a person. As such, the administrative body has the duty to act fairly by bringing to the attention of the party whose livelihood may be jeopardized by the facts at issue and the alleged breaches and afford the party the opportunity to be heard. The proposed terms and conditions are designed to deny Swift Trade this fundamental right to procedural protection.
  • If the Commission decides not to take action to limit Swift Trade’s registration as part of the enforcement proceedings, it is inappropriate for Registration staff to be in a position to create the same result through the proposed terms and conditions.
  • Persons engaged by Barka who rely on Swift Trade to earn a living, and the employees of Swift Trade itself, will be materially adversely impacted by the abrupt forced closure of Swift Trade’s operations.
  • Swift Trade’s business is not functionally dependent on Beck and can function successfully without him because it is primarily based on sophisticated technology.
  • Swift Trade’s business model does not cause material harm to individual investors or to the public at large. Swift Trade does not have any individual clients in Canada. It provides services solely to accredited investors.

Decision

37.    After having reviewed the written submissions provided, it is my decision that Swift Trade should be subject to the terms and conditions proposed by staff with the addition of the following paragraph:
“2. Swift Trade Inc. shall be granted an opportunity to be heard by the Director before the Director makes any decision not to renew Swift Trade Inc.’s registration.”
38.    If the Respondents are found not guilty by the Commission in the enforcement matter, I direct staff to immediately remove the terms and conditions, as amended, on Swift Trade’s registration. I understand that this is staff’s normal practice. However, that practice was not explicitly set out in the terms and conditions as recommended or in the accompanying letter.

Reasons

39.    The question for me to determine is whether Swift Trade, as applicant for renewal of registration, is suitable for renewal of registration and/or whether Swift Trade’s renewal of registration is objectionable. I concur with staff’s position that the nature of the allegations set out in the Statement of Allegations are, in and of themselves, sufficient to conclude that Beck is not suitable for registration at this time due to a lack of integrity. In Re Michalik (2007), 30 OSCB, 6717, the Commission said that “terms and conditions ought to be imposed only where an applicant otherwise meets the standard for registration but circumstances are deemed to require additional safeguards”. I have not come to the conclusion that Swift Trade does not currently meet the standard for registration (nor was I asked to by staff), rather the fact that there are serious allegations against the Respondents requires the safeguard of month-to-month assessment of fitness for registration to protect the public interest.

40.    Swift Trade’s counsel questioned whether Swift Trade should be subject to terms and conditions in circumstances where the alleged conduct issues appear to relate only to Beck. Regardless of whether Swift Trade is functionally dependent on Beck as argued by staff, Beck is the co-founder, President, majority shareholder, director, trading officer and, for a large part of the company’s history, the compliance officer of Swift Trade. As well, Beck attended the staff examinations in his capacity as a representative of Swift Trade. It is clear to me that Beck is the directing mind behind Swift Trade. As a result, questions surrounding Beck’s integrity apply equally to Swift Trade and I find that (absent the terms and conditions, as amended, confirmed by this decision):
  • Swift Trade is not suitable for registration due to a lack of integrity and
  • the renewal of registration of Swift Trade is objectionable on public interest grounds.
41.    If was also argued that it was not appropriate for me to simply rely on the Statement of Allegations in making my determination on the proposed terms and conditions. With respect, I disagree. The allegations in the Statement of Allegations are serious and, if proven, demonstrate that neither Beck or Swift Trade are suitable for renewal of registration at this time and that their registration would be objectionable. My opinion is that it is appropriate for me (with the safeguard provided by the amendment to the terms and conditions) to rely on the Statement of Allegations in making a determination regarding whether Swift Trade’s registration should be renewed. The arguments relating to the Statement of Allegations are more properly heard by the Commission as part of the enforcement process. I do not intend to, and will not as part of these reasons, assess whether the allegations in the Statement of Allegations are correct or true.

42.    In my view, my decision on the last argument is consistent with the principles in the decision in Coughlan v. WMC International Ltd. [2000] O.J. No. 5109. I am not making an assumption on whether the allegations in the Statement of Allegations are true. Rather, I have made my decision simply on the existence of the enforcement proceedings and the possibility that the allegations may be true.

43.    Swift Trade’s counsel also took the position that it was inappropriate for Registration staff to be in a position to create the same result as the Commission was being asked to take as part of the enforcement proceeding. With respect, I disagree with this assertion. The terms and conditions on Swift Trade’s registration do not create the same result as the Commission has been asked to take. The Commission will make a determination on the merits of the Statement of Allegations. The terms and conditions make no such determination whatsoever. In fact, they make no substantive change with respect to Swift Trade’s ongoing business. All they do is change the duration of registration from a one year interval to one month intervals.

44.    Our 1991 Annual Report stated in part that “[the Registrant Regulation] section administers a registration system which is intended to ensure that all Applicants under the [Act]… meet appropriate standards of integrity, competence and financial soundness”. As well, I refer to the Director’s Decision in the matter of Leng Wilson Ng (Re Ng (2003), 25 OSCB 5485) which states that “Staff submitted that the standard of proof for determining suitability under section 26 is different than that for proceedings under section 127. The difference in the standard is consistent with [the] difference in the scope of the sections. I agree with Staff that the Director must only find that the applicant appears to be unsuitable and that is a different standard than section 127”. As Director, I have limited power under section 26 of the Act to grant, renew or impose terms and conditions on registration based on suitability of the applicant or whether the registration is objectionable. The Commission has much broader powers including the ability to review this decision and make such other decision as the Commission considers proper.

February 5, 2008

“Marrianne Bridge”