R.S.O. 1990 C. S. 5 AS AMENDED
IN THE MATTER OF
MARCHMENT & MACKAY LIMITED, AMIT JAMES SOFER, CHARLES LORNEORNSTEIN, JERRY MURRAY SALTSMAN, GREGORY CHARLES OSBORNE ANDFRASER JOHN EDWARD PLANT
STATEMENT OF ALLEGATIONS OF STAFF OF
THE ENFORCEMENT BRANCH OF THE
ONTARIO SECURITIES COMMISSION
Staff of the Enforcement Branch of the Ontario Securities Commission allege that:
A. THE PARTIES
1. Marchment & MacKay Limited ("Marchment") is, and was at all material times,registered with the Commission as a securities dealer pursuant to Part XI of theSecurities Act, R.S.O. 1990 c.S.5 as amended (the "Act").
2. Charles Lorne Ornstein ("Ornstein") is, and was, at all material times, the Presidentand a principal shareholder of Marchment. Ornstein is registered with theCommission to trade in securities as an officer and director of Marchment pursuantto Part XI of the Act.
3. Amit James Sofer ("Sofer") is, and was at all material times, a Vice-President andthe Compliance Officer at Marchment as well as a salesperson. Sofer is registeredwith the Commission to trade in securities as an officer and director of Marchmentpursuant to Part XI of the Act.
4. Jerry Murray Saltsman ("Saltsman") is, and was at all material times, a salespersonof Marchment and is registered as such with the Commission pursuant to Part XIof the Act.
5. Gregory Charles Osborne ("Osborne") is, and was at all material times, asalesperson of Marchment and is registered as such with the Commission pursuantto Part XI of the Act.
6. Fraser John Edward Plant ("Plant") is, and was at all material times, a salespersonof Marchment and is registered as such with the Commission pursuant to Part XIof the Act.
B. ALLEGATIONS RELATING TO TRADES IN SECURITIES TO CLIENTS OFMARCHMENT
7. Between January 1993 and the present Marchment, Sofer, Saltsman, ^ Osborneand Plant have failed to deal fairly, honestly, and in good faith with clients and/orpotential clients of Marchment (collectively "clients"), did not act in the best interestsof clients, and otherwise acted contrary to the public interest and prudent businesspractice. Among other things, these respondents:
(a) failed to disclose adequately to clients the risks associated with investing inthe securities offered by Marchment;
(b) failed to disclose in particular that the securities traded by Marchment werehighly speculative, of limited liquidity or marketability, and that an investmentin these securities could result in a loss on the original capital invested;
(c) failed to take adequate steps to ensure that securities sold to clients weresuitable or appropriate in view of the clients' net worth, income, investmentknowledge and experience and objectives;
(d) otherwise failed to trade in securities in conformity with their"know-your-client" obligations;
(e) adopted and used high-pressure sales techniques;
(f) made incorrect, misleading or unjustifiable statements regarding the futuretrading price of the securities offered by Marchment and/or the prospects ofthe issuers of those securities, for the purpose of completing trades ofsecurities to clients;
(g) made representations to clients based upon purported knowledge of insideinformation;
(h) failed to disclose adequately to clients that:
(i) Marchment was selling the securities as principal;
(ii) Marchment was selling the securities at a price that was substantiallyhigher than their initial acquisition costs; and
(iii) Marchment's salespersons received remuneration on each traderanging between 16 and 18 percent of the clients' acquisition cost;
(i) delivered confirmation slips to clients that misled them about the grossprofits earned by Marchment and the remuneration received by Marchmentsalespeople on trades;
(j) failed to disclose that Marchment's salespersons would lose their entitlementto the remuneration referred to in clause 7(h)(iii) above, if clients sold thesecurities they acquired within a certain period of time;
(k) sold securities to clients without making any bona fide independentverification or investigation regarding the nature of the business or financialcondition of the issuers of those securities;
(l) resisted or refused to sell securities when clients instructed them to do so;and
(m) made unjustifiable, misleading and/or false statements to clients designedto induce them to refrain from selling their securities.
C. ALLEGATIONS RELATING TO SALES TRAINING
8. Sofer and Marchment conducted sales training courses for prospective membersof Marchment's junior sales staff. These courses were designed to instruct thesales trainees to use highly manipulative and promotional techniques to sellsecurities over the telephone. These sales techniques were designed to closesales without adequate regard to the attributes of the securities being promoted orthe client's own investment experience, income, assets or objectives. The trainingprogramme was therefore contrary to the public interest and prudent businesspractice. In particular Sofer and Marchment taught sales trainees:
(a) that the sales trainees should use the uniform sales pitch that Soferdemonstrated during the training course in all sales regardless of the client'scircumstances or the particulars of the securities sold to the client;
(b) that, by using the sales pitch described in subparagraph 8(a) above, thetrainees could foster a sense of urgency and excitement in the minds ofclients so as to facilitate the closing of sales of securities to them;
(c) to advise clients that favourable news regarding the securities then beingpromoted would be forthcoming, and that a positive impact on the tradingprice for the securities would result regardless of the actual prospects of theissuers of the securities traded by Marchment;
(d) to advise their clients that they, as ^ junior salespeople, intended to foster along-term relationship with their clients, although they were not permitted tomaintain any relationship after the first trade of securities to their clients;
(e) to advise clients that the securities they were selling constituted a "specialopportunity" offered only to a select few clients when these securities were,in fact, being offered to each and every prospect that junior salespeoplecontacted over the telephone;
(f) to adopt high-pressure sales techniques designed to dismiss and discountany reservations that a client might have about purchasing the securitiesoffered;
(g) to place no or inadequate emphasis on the speculative nature of thesecurities offered; and
(h) to avoid advising clients about the actual remuneration received byMarchment salespeople and to avoid disclosure of the profits earned byMarchment on trades of securities.
D. HIGH-PRESSURE SELLING ACTIVITY
9. In substance, during the period in issue, Marchment has been engaged in ^ activityconsisting of an extensive selling campaign by telephone to offer securities toclients through numerous salespeople without regard to the suitability of theinvestments to the needs of the client, in such a manner as to induce a hastydecision to buy the security being offered without disclosure of the material factsrelating to the issuer, contrary to the public interest and prudent business practice.
E. ALLEGATIONS REGARDING KNOWLEDGE AND PARTICIPATION OF SENIORMANAGEMENT
10. The respondents Ornstein and Sofer, as the senior officers of Marchment, wereaware of, permitted, acquiesced and participated in the sales activity referred to indivisions B and C above, contrary to the public interest and prudent businesspractice.
11. Furthermore, Sofer, as the Compliance Officer of Marchment, and Ornstein, as thePresident of Marchment, failed to establish and enforce procedures for dealing withclients that conformed with prudent business practice. Such procedures wouldhave prevented the activity described in division D above as well as improperselling scheme referred to in division B above, contrary to the public interest andprudent business practice.
F. ALLEGATIONS REGARDING INTERFERENCE WITH COMPLAINTS TO THEONTARIO SECURITIES COMMISSION
12. Sofer and Marchment have interfered with the administration of the Act by staff ofthe Commission in a manner that is contrary to the public interest. In particularMarchment and Sofer:
(a) offered reimbursement for all or part of the trading losses sustained byclients who had complained about Marchment to the Enforcement Branch ofthe Commission, on the express condition that these clients:
(i) withdraw their complaints; and
(ii) write letters to the Enforcement Branch denying that Marchment hadengaged in any inappropriate conduct in the sale of securities tothem;
(b) offered reimbursement to clients for all or part of the losses that theysustained as a result of their trades in securities through Marchment on thecondition that they not proceed with any proposed complaint to theEnforcement Branch; and
(c) required as a term of settlement with clients who had sustained tradinglosses that the client not disclose any matter relating to their dealings withMarchment with any other person including any representative of staff of theCommission; and
(d) required as a term of settlement with clients who had sustained tradinglosses that the client deliver up to Marchment all documents in the client'spossession relating to the client's dealings with Marchment.
G. OTHER ALLEGATIONS
13. Staff also relies upon such further and other allegations as staff may advise and theCommission may permit.
August 2nd, 1996.