Securities Law & Instruments

IN THE MATTER OF

THE SECURITIES ACT (ONTARIO)

R.S.O. 1990 C.S.5, AS AMENDED

AND

IN THE MATTER OF

NATHANAEL PAUL FLORENCE

WRITTEN SUBMISSIONS TO THE DIRECTOR PURSUANT

TO SUBSECTION 26(3) OF THE ACT

DATE:
August 23, 2004
 
DIRECTOR:
Marrianne Bridge
Manager, Compliance
Capital Markets
 
SUBMISSIONS:
Les Daiter
Registration Research Officer, Registrant Regulation, For Ontario Securities Commission Staff (Staff)
 
Nathanael Paul Florence (the Applicant)
For himself

DECISION

My decision is to deny Nathanael Paul Florence's application for registration as a mutual fund dealer (MFD) and limited market dealer (LMD) sponsored by Family Investment Planning Inc. (Family).

These are the reasons for my decision.

OVERVIEW

I was advised that Mr. Florence's registration history is as follows. From April 1996 to October 2001, he was registered as a MFD and LMD sponsored by Regal Capital Partners Ltd. From October 2001 to September 2003, he was registered as a MFD and LMD sponsored by Cartier Financial Services Inc. (Cartier). He was terminated for cause from Cartier in September 2003. From November 2003 to June 2004, he was employed by Family.

Staff argues that Mr. Florence is unsuitable for registration and that his proposed registration would be objectionable for three reasons. First, Mr. Florence acted in a registerable capacity with Family from November 2003 until June 2004 while not registered in contravention of subsection 25(1) of the Securities Act (Ontario) (the Act){1}. Second, Mr. Florence failed to disclose three pertinent facts in his November 2003 registration application -- namely a Canada Customs and Revenue Agency (CCRA) requirement to pay, two outstanding civil actions in which he is named as a defendant, and his termination for cause from Cartier. Third, Mr. Florence admitted during the discovery process for the two outstanding civil actions that he had forged client signatures on various leveraging documents, had clients sign blank forms, and had not obtained know your client (KYC) information from clients at initial meetings and subsequently completed the documents with false or misleading information concerning the clients' risk tolerance, investment knowledge, net worth, and income.

I will deal with each of Staff's allegations and Mr. Florence's response to each allegation separately.

ANALYSIS OF THE STAFF ALLEGATIONS

     

    Acting in a registerable capacity while not registered

The first Staff allegation relates to Mr. Florence acting in a registerable capacity from November 2003 to June 2004 without being registered.

The Staff materials set out that Staff became concerned about the length of time Mr. Florence's November 2003 registration application had been outstanding and that no contact had been made from either Mr. Florence or his sponsoring firm, Family, since the submission of the application. Staff advised that they contacted the provincial compliance officer for Family, Katherine Dooley, to determine whether Family still wanted to sponsor Mr. Florence, given the considerable period of time that had elapsed since the date of application. Ms Dooley advised Staff that Mr. Florence was already registered and had been acting in a registerable capacity since the November 2003 registration application. Ms Dooley told Staff she thought Mr. Florence was registered based on telephone conversations with Kevin Brown (at the time, the Acting Registration Research Officer at the Commission). According to Mr. Florence's submissions "Mr. Brown indicated that I was able to trade as long as [Family] undertook proper supervision of my activities". Furthermore, no written correspondence was ever received from the [Commission] to discredit this belief."

I do not find the Applicant's submissions to be credible. As a registrant for over seven years and as a registrant that had previously submitted registration applications relating to employment with two other sponsoring firms, I do not find it plausible that Mr. Florence did not know that written confirmation of registration is required. It is not reasonable to assume that the filing of registration application documents entitles the filer to act in a registerable capacity without written confirmation to that effect. As well, since it is part of Family's responsibility as a registrant to supervise the activities of Mr. Florence, I do not find it credible that either Mr. Florence or Ms Dooley would assume that "proper supervision" of Mr. Florence's activities somehow replaced the need for Mr. Florence to be appropriately registered prior to carrying out registerable activities.

     

    Failure to disclose pertinent information in the November 2003 registration application

The second Staff allegation relates to Mr. Florence's failure to disclose three pertinent facts in his November 2003 registration application -- namely a CCRA requirement to pay, two outstanding civil actions in which he is named as a defendant, and his termination for cause from Cartier.

With respect to the CCRA requirement to pay, Mr. Florence argues that the requirement to pay has been lifted. This is confirmed by letter dated June 9, 2004 from the CCRA to Cartier. According to Staff, Mr. Florence subsequently provided Staff with another copy of a registration application form dated two days after the filed registration application that he asserts was completed at the time of the original application, but apparently not filed. The second form does make reference to the CCRA requirement to pay, but not to the two outstanding civil actions or his termination for cause from Cartier. In any event, since the requirement to pay is not disclosed in a filed registration application, Mr. Florence's argument does not succeed and I find that he failed to disclose the CCRA requirement to Staff as alleged by Staff.

With respect to the outstanding civil actions, Mr. Florence argues that he discussed the actions verbally with Mark Winter, President of Family and that Family was subsequently given copies of the two statements of claim and his defence documents. Mr. Florence answered "no" to question 16 in his November 2003 registration application which asks whether there are any successful or pending civil proceedings against the applicant which are based in whole or in part of fraud, theft, deceit, misrepresentation, or similar conduct. Staff was advised of these civil proceedings by Cartier, his former sponsoring dealer. Based on my review of the statements of claim, both civil actions contain plaintiff claims for damages for negligence, breach of fiduciary duty, and breach of contract. As a result, in my view, the appropriate answer to question 16 should have been "yes" and I find that he failed to disclose the outstanding civil actions in his registration application as alleged by Staff.

With respect to his termination for cause from Cartier, Mr. Florence advises that he advised Mr. Winter of it verbally. However, his termination for cause was not disclosed, as required, in his November 2003 registration application. As a result, I find that he failed to disclose his termination for cause in his registration application as alleged by Staff.

     

    Inappropriate dealings with clients

The third allegation relates to Mr. Florence's conduct which is the subject of the two outstanding civil actions. Staff alleges that Mr. Florence admitted during the discovery process that he had (a) forged client signatures on various leveraging documents, (b) had clients sign blank forms, and (c) had not obtained KYC information from clients at initial meetings and subsequently completed the documents with false or misleading information concerning the clients' risk tolerance, investment knowledge, net worth, and income.

The two sets of plaintiffs in both cases are retired, uneducated, unsophisticated, elderly couples that cannot read English. When they began dealing with Mr. Florence, one set of plaintiffs had $12,000 in RRSPs, substantial equity in their home, and a mortgage of approximately $30,000 which was expected to be paid off in two to three years. After the conduct alleged in the civil action, they had no RRSPs and a mortgage in excess of $149,000. The other set of plaintiffs originally had $12,000 in short term investments, substantial equity in their home, and a mortgage of approximately $9,000, which was expected to paid off in approximately one year. After the conduct alleged in the civil action, they had outstanding loans in excess of $93,000.

The statements of claim set out substantially similar allegations as follows:

     

    1. Mr. Florence was aware that the plaintiffs had minimal (if any) investment experience and could not read English and that they relied upon Mr. Florence to fully explain documentation with respect to their investments with them

    2. Mr. Florence and Cartier (the Defendants) caused the plaintiffs to execute investment forms and purchase forms in blank on the basis that this was standard procedure and that the Defendants would complete the forms. The forms were completed to indicate that the plaintiffs' risk tolerance and investment knowledge was moderate when they knew or ought to have known that the plaintiffs were retired, living on a small fixed income and had little (if any) investment experience

    3. Mr. Florence had the plaintiffs execute disclosure statements and other documents without properly explaining the contents of the documents when he knew that they were unable to read and understand the documents

    4. Mr. Florence had the plaintiffs sign blank dealer investment loan application forms on his assurance that he would complete it properly. When the forms were completed by Mr. Florence, they created substantial loans secured by their investments and invested the proceeds of the loans in equities. Subsequently, other "routine" blank forms were signed by the plaintiffs to move investments or liquidate investments to cover loan payments, margin calls, buy different investments and increase leveraged investments loans. At one point, one of the sets of plaintiffs had investment loans of $233,000. As well, neither set of plaintiffs received any loan statements.

Neither case has been resolved to date to my knowledge. I reviewed the statements of defence and the replies to the statements of defence. There are a number of facts at issue between the parties. Mr. Florence claims that he transacted business with both plaintiffs through a family member, as translator. He claims that all transactions that took place were discussed in a full, true and plain manner and that all transactions were initiated with the plaintiffs' will and consent. He also claims that no changes were made to forms without the authority of the plaintiffs through their family members and that "at no point [did he act] without the knowledge and approval of [the plaintiffs]".

Mr. Florence also advised in his written submissions that he has "learned and applied much from this experience. I blame most of my mistakes on simply 'not knowing better'. I was in my early 20's at the time, and was relatively new to the business world and the securities industry. I acted very much in good faith with these clients and their children. It has cost me dearly, but I have learned a great deal from these experiences. I can assure you that I am an honest, intelligent, competent, individual with a high moral value and a belief that my integrity is the greatest asset I possess". He also asks that the Director consider imposing terms and conditions on his registration rather than refusing his registration application.

In a letter to the Ontario Securities Commission (the OSC) from Cartier, Cartier states that Mr. Florence made several admissions during the examination for discovery in these proceedings as follows:

     

    1. Client signatures for one set of plaintiffs were forged on various documents relating to leveraging undertaking in January 2000;

    2. Blank forms were signed by the plaintiffs and subsequently completed with instructions by Mr. Florence; and

    3. Mr. Florence did not obtain KYC information from one set of plaintiffs at the original meeting with them and subsequent KYC documents were knowingly completed with inaccurate information relating to risk, knowledge, net worth, and income.

Mr. Florence was made aware of this disclosure of his purported admissions and has not denied their substance or having made them.

While the ultimate resolution to the two civil proceedings will be determined in another forum at a later date, it is clear to me from his own admissions that Mr. Florence did not act in the best interests of either set of clients. From the facts that appear to be agreed upon between the parties, both clients were retired, uneducated, unsophisticated, elderly couples that cannot read English and that have minimal assets. It is incomprehensible to me how Mr. Florence determined that it was appropriate for either set of clients to engage in substantial leveraging to invest in the equities market to the point where both sets of clients now have substantial loan obligations.

SUITABILITY FOR REGISTRATION

Subsection 25(1) of the Act requires any person or company that trades in securities or advises others in respect of investment in securities to become registered in the relevant category under the Act. Determining whether an applicant should be registered is an important component of the OSC's work.

Subsection 26(1) of the Act provides that unless "it appears to the Director that the Applicant is not suitable for registration [or] renewal of registration.... or that the proposed registration, renewal of registration or amendment of registration is objectionable, the Director shall grant registration, renewal of registration..... to an applicant". The question for the Director in reviewing an application for registration is whether an applicant is suitable for registration or whether registering the applicant would be objectionable.

     

    Fundamental criteria for determining suitability for registration

The meanings of "suitable" and "objectionable" for these purposes are not set out in Ontario securities laws. However, the OSC has articulated three fundamental criteria for determining suitability for registration:

     

    1. integrity, which includes honesty and good faith, particularly in dealing with clients, and compliance with Ontario securities laws;

    2. competence, which includes prescribed proficiency and knowledge of the requirements of Ontario securities laws; and

    3. financial solvency, which is considered relevant because it is an indicator of a firm's capacity to fulfil its obligations and can be an indicator of the risk than an individual will engage in self-interested activities at the expense of clients.

I also note that section 102 of the Regulation under the Act expressly provides than no registration or renewal of registration will be granted unless the applicant has complied with the applicable requirements of the Regulation at the time of the granting of registration or renewal of registration.

     

    Relevance of past conduct

In the past, the Commission has taken the position that in assessing fitness for registration, strong reliance must necessarily be placed on an applicant's past behaviour. This was articulated in the Commission's decision in Re Charko{2} as "Suitability includes the totality of.... [a Registrant's]....past and present". The Commission's decision in Re Mithras Management Ltd.{3} is also relevant here. It stated that:

     

    ... the role of this Commission is to protect the public interest by removing from the capital markets -- wholly or partially, permanently or temporarily, as the circumstances may warrant -- 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 capital markets. We are not here to punish past conduct; that is the role of the courts..... We are here to restrain, as best we can, future conduct that is unlikely to be prejudicial to the public interest in 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...

     

    Denial or terms and conditions

Depending on the degree to which Staff determines a registrant has not meet the three suitability criteria set out above, Staff will recommend either denial of registration or the imposition of terms and conditions. Terms and conditions, if recommended, will be tailored to the suitability concerns specific to the applicant. Less often, Staff will recommend denial of registration because of the extent and/or persistence of the applicant's failure to satisfy the suitability criteria. In this case, Staff has recommended denial of recommendation. I think the decision in Re Jaynes{4} which sets out the following is relevant:

     

    While terms and conditions restricting registration may be appropriate in a wide variety of circumstances, they should not be used to "shore up" a fundamentally objectionable registration. To do so would be to create the very real risk that a client's interests cannot be effectively served due to the severity and extent of the restrictions imposed.

SUITABILITY OF THIS APPLICANT

Staff argues that the numerous failures of this applicant to satisfy the suitability criteria might, taken in isolation, warrant conditional registration (i.e. terms and conditions), but that considering the totality of Mr. Florence's conduct, he is unsuitable for registration and it would be objectionable to permit him to be registered. I concur with Staff's conclusion.

     

    Integrity and competence

I find that Mr. Florence lacks the integrity and competence expected of registrants. He has acted contrary to requirements of Ontario securities laws that he should have known of and understood, including treating clients without honesty and good faith. This is demonstrated by (i) his failure to disclose pertinent facts in his November 2003 registration application, (ii) his acting in a registerable capacity from November 2003 to June 2004 without being registered, and (iii) his admitted actions contrary to the requirements of Ontario securities laws and the best interests of his former clients who are now involved in the civil disputes described above.

     

    Financial solvency

Staff argues that it continues to have some concerns regarding Mr. Florence notwithstanding the lifting of the CCRA requirement to pay because he is the defendant in two civil law suits which involve claims in excess of $500,000. As the outcome of these two suits is still to be determined, I have placed no weight on Staff's financial solvency arguments in making this decision.

August 23, 2004.

"Marrianne Bridge"

     

    {1} 25(1) No person or company shall,

       

      (a) trade in a security or act as an underwriter unless the person or company is registered as a dealer, or is registered as a salesperson or as a partner or as an officer of a registered dealer and is acting on behalf of the dealer; or

      (b) Repealed: 1999, c. 9, s. 199 (2).

      (c) act as an adviser unless the person or company is registered as an adviser, or is registered as a representative or as a partner or as an officer of a registered adviser and is acting on behalf of the adviser,

    and the registration has been made in accordance with Ontario securities law and the person or company has received written notice of the registration from the Director and, where the registration is subject to terms and conditions, the person or company complies with such terms and conditions.

    {2} (1992) 15 OSCB 3989

    {3} (1990) 13 OSCB 1600

    {4} (2000) 23 OSCB 1543