Proceedings

IN THE MATTER OF THE SECURITIES ACT
R.S.O. 1990, c. S.5, AS AMENDED

AND

IN THE MATTER OF
MARCHMENT & MACKAY LIMITED, AMIT JAMES SOFER,
CHARLES LORNE ORNSTEIN, JERRY MURRAY SALTSMAN,
GREGORY CHARLES OSBORNE AND FRASER JOHN EDWARD PLANT

 


Hearing:
August 3, 1999

Panel:
David A. Brown, Q.C., - Chair
Helen M. Meyer - Commissioner
Derek Brown - Commissioner

Counsel:
For the Staff of the Ontario Securities Commission
James D.G. Douglas
David Hausman
Rima Pilipavicius

Counsel: For Marchment & MacKay Limited
Thomas Dunne, Q.C.
Benjamin Na

Counsel: For Amit James Sofer
Nigel M. Campbell

Counsel:For Charles Lorne Ornstein
Edward Greenspan
Jane Kelly

Counsel: For Jerry Murray Saltsman, Gregory Charles Osborne & Fraser John Edward Plant
Brian H. Greenspan
Sharon Lavine

REASONS FOR ORDERS ISSUED

1. BACKGROUND

The Notice of Hearing in this matter was issued on August 2, 1996. The hearingcommenced on June 22, 1998 and continued during 38 sitting days until June 24, 1999at which time the receipt of evidence and argument relating to the matters set out in theNotice of Hearing and amended Statement of Allegations was completed.

On July 16, 1999, the Panel delivered its decision on the findings with respect to theconduct of Marchment & Mackay Limited, Charles Lorne Ornstein, Amit James Sofer, JerryMurray Saltsman, Gregory Charles Osborne and Fraser John Edward Plant (collectivelyreferred to as the "Respondents") set out in the amended statement of allegations datedAugust 2, 1996 without giving reasons for the decision (published at (1999), 22 OSCB4359). On July 27, 1999, the Panel issued its reasons for the decision (published at(1999), 22 OSCB 4705).

On August 3, 1999, the hearing was reconvened for the purpose of receiving evidence andmaking submissions with respect to any orders to be issued imposing remedies orpenalties. At the outset of the proceedings held on August 3, 1999, the Panel was advisedthat the Respondent Marchment & Mackay Limited had filed an assignment in bankruptcyand would not be making any submissions with respect to penalty.

After considering the evidence and submissions received on August 3, 1999, the Panelissued an Order effective August 3, 1999 as against the Respondents (published at(1999), 22 OSCB 4835). At that time, the Panel stated that reasons for the Order wouldfollow in due course.

2. PURPOSE OF THE HEARING

The purpose of the hearing, as set out in the Notice of Hearing, was to consider whetherit is in the public interest for the Commission to order that the registrations of Marchment& Mackay Limited, Charles Lorne Ornstein, Amit James Sofer, Jerry Murray Saltsman,Gregory Charles Osborne and Fraser John Edward Plant be suspended, terminated,restricted or made subject to terms and conditions pursuant to paragraph 1 of subsection127(1) of the Securities Act (the "Act") and whether, pursuant to paragraph 3 of subsection127(1) of the Act, any and all of the exemptions contained in the Act not apply to theRespondents. Staff also asked the Commission to consider whether, pursuant tosubsection 37(1) of the Act, it is in the public interest to suspend, cancel, restrict or imposeterms and conditions upon the right of the Respondents to call at or telephone to anyresidence in Ontario for the purpose of trading in any security or in any class of securities.

Staff urged us to make these orders based on conduct alleged to have been undertakenby the Respondents which was set out in considerable detail in the amended Statementof Allegations. In our Decision delivered on July 16, 1999 and amplified by our Decisionand Reasons delivered on July 27, 1999, we found that the Respondents had engaged insome but not all of the conduct alleged in the amended Statement of Allegations.

3. LEGAL PRINCIPLES

The decision of the Commission in In the Matter of Mithras Management Ltd. et al (1990),13 OSCB 1600 sets out the relevant principles guiding the Commission in respect of theimposition of sanctions. At page 1610-1611, the Commission stated:

Under sections 26, 123 and 124 [now section 127] of the Act, the role of thisCommission is to protect the public interest by removing from the capitalmarkets- wholly or partially, permanently or temporarily, as thecircumstances may warrant- those whose conduct in the past leads us toconclude that their conduct in the future may well be detrimental to theintegrity of those capital markets. We are not here to punish past conduct;that is the role of the courts, particularly under section 118 of the Act. Weare here to restrain, as best we can, future conduct that is likely to beprejudicial to the public interest in having capital markets that are both fairand efficient. In so doing we must, of necessity, look to past conduct as aguide to what we believe a person's future conduct might reasonably beexpected to be; we are not prescient after all. And in so doing, we may wellconclude that a person's past conduct has been so abusive of the capitalmarkets as to warrant our apprehension and intervention, even if noparticular breach of the Act has been made out. Equally, however, even ifthere has been a technical breach of the Act, we may well conclude that, inthe circumstances, no sanction is necessary to protect the public interest.

In Re E.A. Manning (1995), 9 C.C.L.S. 231, the Commission referred to the decision inMithras and stated at page 288:

Like in the panel in Mithras, we are not prescient. The only way in which wecan realistically look at the question of what may happen in the future in acase of this sort is to consider what the actions of the respondents havebeen in the past. On the evidence, we are satisfied that it is necessary toimpose sanctions under clauses 127(1)1 and 3. To permit the conduct of therespondents to continue would be to seriously detract from the credibility ofthe capital markets in Ontario, as well as to permit investors to continue tobe victimized.

4. DECISION

The focus of the Panel in these proceedings has been the protection of the public and notthe punishment of a Respondent. The Commission has repeatedly held that orders shouldbe made where there is a reasonable likelihood that objectionable conduct may continuein the future unless the Commission moves to prevent a recurrence.

With these principles in mind, we considered the particular findings against eachRespondent. Set out below are the reasons for the Orders issued, each of which, in ouropinion, are necessary and appropriate in the public interest.

In view of the terminations and suspensions of registrations which we have ordered, asdescribed below and as set out in our Order dated August 3, 1999, we have concluded thatthere is no need, pursuant to subsection 37(1) of the Act, to suspend, cancel, restrict orimpose terms and conditions upon the right of any of the Respondents to call at ortelephone to any residence in Ontario for the purpose of trading in any security or in anyclass of securities.

Marchment

We have found that Marchment portrayed itself to its customers as a full-service brokeragefirm engaged in the business of providing advice to small and beginning investors;however, its business was actually much different than that portrayed to potentialcustomers. We concluded that, although Marchment may well have dealt in other facetsof the securities business, in reality, its core business was the sale of low cost, high riskpenny stocks from its own inventory to members of the public who were contacted bytelephone.

As we stated in our Decision and Reasons at p. 4729:

...we have concluded that Marchment's core business is the sale of low cost,high risk penny stocks from its own inventory to members of the public whoare contacted over the telephone. We have also concluded that these salesare made without adequate regard to the suitability of the investments forsuch clients or adequate disclosure of the risks involved in thesetransactions. Although Marchment's clients are led to believe that they cancount on the firm to provide investment advisory services to them, in reality,Marchment's real interest lies in disposing of large positions that it hasacquired in low-cost stocks to its customers at a substantial markup and thenensuring that the customers hold on to these securities until the campaignis over.

Further, at p.4732:

We find that Marchment recommended that its clients acquire Stockguard'sshares at prices that were dictated solely by its own selling campaign andwhich bore no relation at all to the appraised value of the securities or to anyindependent market price.

We are satisfied that if the conduct of Marchment is permitted to continue there would bea serious risk to the integrity of the capital markets as well as to the protection of thepublic.

In our view, it is in the public interest that the registration of Marchment as a securitiesdealer be terminated pursuant to paragraph 1 of subsection 127(1) of the Act. In addition,we are of the view that it is necessary to make an order pursuant to paragraph 3 ofsubsection 127(1) of the Act removing the trading exemptions available to Marchment. Weare of the view that this is necessary in order to ensure that Marchment is not involved inany capacity in the capital markets in Ontario.

Mr. Ornstein

Mr. Ornstein is the president of Marchment and is registered with the Commission as anofficer and a director of the firm. All of the capital of Marchment belongs indirectly tomembers of Mr. Ornstein's family. In all respects, Mr. Ornstein is the directing mind ofMarchment.

We concluded that Mr. Ornstein, along with Mr. Sofer, conceived and implemented theaspect of Marchment's business dealing with the sale of speculative penny stocks from itsinventory by extensive telephone campaigns through numerous salespeople withoutregard to the suitability of the trades to the needs of its clients.

For example, in discussing Marchment's mark-up of the price of securities sold from itsinventory, we stated at p.4732 as follows:

On cross-examination, Mr. Ornstein confirmed that Marchment did not knowhow strong Latimer's bid was in the Stockguard shares and never asked.Contrary to Mr. Sofer's evidence as to the importance of the market maker'sbid, Mr. Ornstein testified on cross-examination that, even if there were nomarket maker, Marchment would still mark up its principal stock by morethan 100 per cent.

We also stated at p. 4734:

Although Mr. Ornstein may have reviewed the new application forms, weseriously doubt whether his review had anything to do with suitability. If hedid, it was clearly a fruitless exercise as it would appear that every client whoagreed to purchase a test amount of speculative securities from Marchment'sinventory was deemed to be interested in speculating in the stock marketand therefore eligible to be sold additional speculative securities.

We are satisfied that if the conduct of Mr. Ornstein is permitted to continue, there wouldbe serious risk to the integrity of the capital markets as well as to the protection of thepublic interest.

In our view, taking into consideration the findings made against Mr. Ornstein, it is in thepublic interest that the registration of Mr. Ornstein be terminated pursuant to paragraph1 of subsection 127(1) of the Act. In addition, in order to prevent Mr. Ornstein fromparticipating in any capacity in the capital markets in Ontario, we are of the view that it isnecessary and appropriate to impose sanctions pursuant to paragraph 3 of subsection127(1) of the Act. These sanctions remove Mr. Ornstein's trading exemptions as set outin the Order. In removing the trading exemptions available to Mr. Ornstein, we specificallyconsidered that exceptions should be made with respect to personal trading in certainlimited circumstances after a two year period. We are of the view that the orders made inrespect of paragraph 3 of subsection 127(1) of the Act are necessary in order to protectthe public interest.

Mr. Sofer

Until his resignation in March of this year, Mr. Sofer was the vice president and complianceofficer of Marchment and was registered with the Commission as an officer of Marchment.At all material times, Mr. Sofer was responsible for the training and supervision ofMarchment's sales staff.

We concluded that Mr. Sofer, along with Mr. Ornstein, conceived and implemented theaspect of Marchment's business dealing with the sale of speculative penny stocks from itsinventory by extensive telephone campaigns through numerous salespeople withoutregard to the suitability of the trades to the needs of its clients. We also commentedadversely on the credibility of portions of Mr. Sofer's testimony.

We are satisfied that if Mr. Sofer were to seek to re-enter the securities industry, therewould be a serious risk that he would engage in similar conduct. We are also satisfied thatif we were to permit such re-entry, there would be a serious risk to the integrity of thecapital markets as well as to the protection of the public interest.

With respect to the conduct of Mr. Sofer as a senior salesperson set out in the amendedStatement of Allegations, we concluded that Staff did not establish to our satisfaction thatMr. Sofer had engaged in such activities.

In our view, taking into consideration the findings made against Mr. Sofer, it is in the publicinterest that the registration of Mr. Sofer be suspended for a period of ten years pursuantto paragraph 1 of subsection 127(1) of the Act. In addition, in order to prevent Mr. Soferfrom participating in any capacity in the capital markets in Ontario, we are of the view thatit is necessary and appropriate to impose sanctions pursuant to paragraph 3 of subsection127(1) of the Act. These sanctions remove Mr. Sofer's trading exemptions as set out inthe Order for a period of ten years. In removing the trading exemptions available to Mr.Sofer, we specifically considered that exceptions should be made with respect to personaltrading in certain limited circumstances after a one year period. We are of the view thatthe orders made in respect of paragraph 3 of subsection 127(1) of the Act are necessaryin order to protect the public interest.

Mr. Saltsman

Mr. Saltsman has been a registered securities salesperson for approximately 33 years andhas been employed as a salesperson at Marchment for the past ten years. He wassuspended by Mr. Ornstein early in May of this year.

Mr. Saltsman dealt with four customer witnesses who gave evidence at the Hearing. Inrespect of all four of them we found that Mr. Saltsman did not deal fairly, honestly and ingood faith with them and that he breached his fiduciary obligation to all of them. In all fourcases he failed to ensure that the purchases he recommended were suitable for hiscustomers. We also found that he did not disclose the risks inherent in the investmentsthat he recommended and found instances where he used high pressure sales techniquesand employed techniques of intimidation and coercion to induce a customer to borrowmoney to pay for securities. In respect of statements made by Mr. Saltsman to one witnesswho had recorded the conversation, we found that Mr. Saltsman's statements ranged frombeing merely false and misleading to blatant lies and deception for which he had no basisin fact.

We are satisfied that if the conduct of Mr. Saltsman is permitted to continue, there wouldbe serious risk to the integrity of the capital markets as well as to the protection of thepublic interest.

In our view, taking into consideration the findings made against Mr. Saltsman, it is in thepublic interest that the registration of Mr. Saltsman be terminated pursuant to paragraph1 of subsection 127(1) of the Act. In addition, in order to prevent Mr. Saltsman fromparticipating in the capital markets in Ontario, we are of the view that it is necessary andappropriate to impose sanctions pursuant to paragraph 3 of subsection 127(1) of the Act.These sanctions remove Mr. Saltsman's trading exemptions as set out in the Order. Inremoving the trading exemptions available to Mr. Saltsman, we specifically considered thatexceptions should be made with respect to personal trading in certain limitedcircumstances. We are of the view that the orders made in respect of paragraph 3 ofsubsection 127(1) of the Act are necessary in order to protect the public interest.

Mr. Osborne

Mr. Osborne has been registered as a salesperson with Marchment for over 12 years andcontinued in that position throughout the period relevant to these proceedings.

Mr. Osborne dealt with two customer witnesses who gave evidence at the Hearing. In bothcases, we found that Mr. Osborne did not deal fairly, honestly and in good faith with themand that he breached his fiduciary obligation to them. We also found that he failed toensure that the purchases that he recommended were suitable and he failed to disclosethe risks inherent in the investments. We also found that Mr. Osborne was aware of thefact that one customer had to borrow money to finance his purchases of Marchmentprincipal securities.

We are satisfied that if the conduct of Mr. Osborne is permitted to continue, there wouldbe serious risk to the integrity of the capital markets as well as to the protection of thepublic interest.

In our view, taking into consideration the findings made against Mr. Osborne, it is in thepublic interest that the registration of Mr. Osborne be suspended for a period of sevenyears pursuant to paragraph 1of subsection 127(1) of the Act. In addition, in order toprevent Mr. Osborne from participating in the capital markets in Ontario, we are of the viewthat it is necessary and appropriate to impose sanctions pursuant to paragraph 3 ofsubsection 127(1) of the Act. These sanctions remove Mr. Osborne's trading exemptionsas set out in the Order for a period of seven years. In removing the trading exemptionsavailable to Mr. Osborne, we specifically considered that exceptions should be made withrespect to personal trading in certain limited circumstances. We are of the view that theorders made in respect of paragraph 3 of subsection 127(1) of the Act are necessary inorder to protect the public interest.

Mr. Plant

Mr. Plant joined Marchment in 1986 and became a registered salesperson approximatelysix months later. He resigned from Marchment in 1998 and, at the time of giving histestimony in April of this year, was employed as a licensed real estate agent with RoyalLePage Commercial.

Mr. Plant dealt with one customer witness at the hearing. We found that Mr. Plant did notdeal fairly, honestly and in good faith with that customer and breached his fiduciary dutyto him. We also found that Mr. Plant failed to ensure that the purchases that herecommended were suitable and he failed to disclose the risks that the customer wasincurring. We also found that Mr. Plant discouraged the customer from selling Marchmentprincipal securities to finance the purchase of other securities from Marchment's inventory.

We are satisfied that if Mr. Plant were to seek to re-enter the securities industry therewould be a serious risk that he would engage in similar conduct. We are also satisfied thatif we were to permit such re-entry, there would be a serious risk to the integrity of thecapital markets as well as to the protection of the public interest.

In our view, taking into consideration the findings made against Mr. Plant, it is in the publicinterest that the registration of Mr. Plant be suspended for a period of five years pursuantto paragraph 1 of subsection 127(1) of the Act. In addition, in order to prevent Mr. Plantfrom participating in the capital markets, we are of the view that it is necessary andappropriate to impose sanctions pursuant to paragraph 3 of subsection 127(1) of the Act.These sanctions remove Mr. Plant's trading exemptions as set out in the Order for a periodof five years. In removing the trading exemptions available to Mr. Plant, we specificallyconsidered that exceptions should be made with respect to personal trading in certainlimited circumstances. We are of the view that the orders made in respect of paragraph3 of subsection 127(1) of the Act are necessary in order to protect the public interest.

5. ORDERS

For the reasons set out above, we determined that it was in the public interest to make thefollowing orders pursuant to section 127 of the Act, which orders were made on August 3,1999:

1. the registration of Marchment and Mackay Limited as a securities dealer isterminated and the exemptions contained in Ontario securities law do not apply toMarchment permanently;

2. the registration of Charles Lorne Ornstein ("Ornstein") is terminated and theexemptions contained in Ontario securities law do not apply to Ornsteinpermanently; provided, however, that following the expiration of a two year periodcommencing from the date of this order, Ornstein may trade in certain securities forhis own account or for the account of his registered retirement savings plan orregistered retirement income fund (as defined in the Income Tax Act (Canada)) if:

(a) the securities are securities referred to in clause 1 of subsection 35(2) of theAct; or

(b) in the case of securities other than those referred to in (a),

(i) the securities are listed and posted for trading on The Toronto StockExchange or the New York Stock Exchange (or their respectivesuccessor exchanges);

(ii) neither he nor any member of his family is an insider, partner orpromoter of the issuer of the securities; and

(iii) he does not own directly, or indirectly through another person orcompany or through any person or company acting on his behalf,more than one percent of the outstanding securities of the class orseries of the class in question;

3. the registration of Amit James Sofer ("Sofer") is suspended for a period of ten yearsand the exemptions contained in Ontario securities law do not apply to Sofer for aperiod of ten years; provided, however, that following the expiration of a one yearperiod commencing from the date of this order, Sofer may trade in certain securitiesfor his own account or for the account of his registered retirement savings plan orregistered retirement income fund (as defined in the Income Tax Act (Canada)) if:

(a) the securities are securities referred to in clause 1 of subsection 35(2) of theAct; or

(b) in the case of securities other than those referred to in (a),

(i) the securities are listed and posted for trading on The Toronto StockExchange or the New York Stock Exchange (or their respectivesuccessor exchanges);

(ii) neither he nor any member of his family is an insider, partner orpromoter of the issuer of the securities; and

(iii) he does not own directly, or indirectly through another person orcompany or through any person or company acting on his behalf,more than one percent of the outstanding securities of the class orseries of the class in question;

4. the registration of Jerry Murray Saltsman ("Saltsman") is terminated and theexemptions contained in Ontario securities law do not apply to Saltsmanpermanently; provided, however, that Saltsman may trade in certain securities forhis own account or for the account of his registered retirement savings plan orregistered retirement income fund (as defined in the Income Tax Act (Canada)) if:

(a) the securities are securities referred to in clause 1 of subsection 35(2) of theAct; or

(b) in the case of securities other than those referred to in (a),

(i) the securities are listed and posted for trading on The Toronto StockExchange or the New York Stock Exchange (or their respectivesuccessor exchanges);

(ii) neither he nor any member of his family is an insider, partner orpromoter of the issuer of the securities; and

(iii) he does not own directly, or indirectly through another person orcompany or through any person or company acting on his behalf,more than one percent of the outstanding securities of the class orseries of the class in question;

5. the registration of Gregory Charles Osborne ("Osborne") is suspended for a periodof seven years and the exemptions contained in Ontario securities law do not applyto Osborne for a period of seven years; provided, however, that Osborne may tradein certain securities for his own account or for the account of his registeredretirement savings plan or registered retirement income fund (as defined in theIncome Tax Act (Canada)) if:

(a) the securities are securities referred to in clause 1 of subsection 35(2) of theAct; or

(b) in the case of securities other than those referred to in (a),

(i) the securities are listed and posted for trading on The Toronto StockExchange or the New York Stock Exchange (or their respectivesuccessor exchanges);

(ii) neither he nor any member of his family is an insider, partner orpromoter of the issuer of the securities; and

(iii) he does not own directly, or indirectly through another person orcompany or through any person or company acting on his behalf,more than one percent of the outstanding securities of the class orseries of the class in question;

6. the registration of Fraser John Edward Plant ("Plant") is suspended for a period offive years and the exemptions contained in Ontario securities law do not apply toPlant for a period of five years; provided, however, that Plant may trade in certainsecurities for his own account or for the account of his registered retirement savingsplan or registered retirement income fund (as defined in the Income Tax Act(Canada)) if:

(a) the securities are securities referred to in clause 1 of subsection 35(2) of theAct; or

(b) in the case of securities other than those referred to in (a),

(i) the securities are listed and posted for trading on The Toronto StockExchange or the New York Stock Exchange (or their respectivesuccessor exchanges);

(ii) neither he nor any member of his family is an insider, partner orpromoter of the issuer of the securities; and

(iii) he does not own directly, or indirectly through another person orcompany or through any person or company acting on his behalf,more than one percent of the outstanding securities of the class orseries of the class in question;

7. in this order, "Ontario securities law" has the meaning ascribed to that term in theAct.

October 8th, 1999.

"David Brown"

"H. M. Meyer"

"Derek Brown"