Securities Law & Instruments


[Update: The terms and conditions imposed by the Director in this decision were removed as at April 29, 2011.]


[Update: On November 10, 2009, the Decision revised to amend the term and condition (i) to read "The registration of both Messrs. Kaplan and Poulstrup, as dealing representatives of PFAM, is subject to close supervision.]


IN THE MATTER OF
CHRISTOPHER KAPLAN AND JAKE POULSTRUP

OPPORTUNITY TO BE HEARD BY THE DIRECTOR
UNDER SECTION 31 OF THE SECURITIES ACT,
R.S.O. 1990, c. S.5, AS AMENDED

REASONS AND DECISION



Hearing: September 29, 2009
   
Decision: October 28, 2009
   
Director: Erez Blumberger
   
Counsel: Michael Denyszyn      For Staff of the Ontario Securities Commission
   
  Rene Sorell                For Christopher Kaplan and Jake Poulstrup


I.     OVERVIEW

[1]     This matter arises from a request by Christopher Kaplan and Jake Poulstrup (together, Messrs. Kaplan and Poulstrup or the Applicants) for an opportunity to be heard pursuant to section 31 of the Securities Act (Ontario) R.S.O. c. S.5, as amended (the Act) in connection with their respective applications for reinstatement of registration.

II.     BACKGROUND

[2]     On February 22, 2008 Market Regulation Services Inc., now the Investment Industry Regulatory Organization of Canada (IIROC), issued a Statement of Allegations (the IIROC Allegations) claiming that Messrs. Kaplan and Poulstrup, along with their colleagues Kenneth Nott, Robert Nemy and Aidin Sadeghi, contravened certain requirements of the Universal Market Integrity Rules by entering orders:
with the intention of establishing a high closing bid price in order to improve the daily profit and loss position of the shares held in their inventory accounts, or to assist their colleagues improve their daily profit and loss position, and thereby to misrepresent the performance of the securities. (IIROC Allegations at para. 8)
[3]     The hearing relating to the IIROC Allegations is currently scheduled for December 7, 2009.

[4]     Messrs. Kaplan and Poulstrup were both employed with TD Securities Inc. (TDSI) from 2005 and 2003, respectively until September 30, 2008 when they were both dismissed in good standing as a result of TDSI’s decision to close its Burlington branch.

[5]     Messrs. Kaplan and Poulstrup were both registered with IIROC from 2000 and 1998, respectively until September 30, 2008. The IIROC Allegations did not result in IIROC suspending their registrations at any time.

[6]     On March 3, 2009, Ontario Securities Commission staff (Staff) received an application from Messrs. Kaplan and Poulstrup requesting that their respective registrations be reinstated (the Application) with Pro-Financial Asset Management Limited (PFAM). PFAM was then registered in Ontario as a Limited Market Dealer and Investment Counsel and Portfolio Manager and is now registered as an Exempt Market Dealer and a Portfolio Manager.

[7]     By letter dated August 18, 2009, Staff advised Messrs. Kaplan and Poulstrup that they were not prepared to recommend reinstatement of registration because (i) in light of the IIROC Allegations, Staff did not have sufficient information to determine whether the Applicants were suitable for registration and (ii) pending the resolution of the IIROC Allegations the Applicants’ registration would be objectionable.

[8]     Messrs. Kaplan and Poulstrup responded to Staff’s position by requesting an opportunity to be heard before the Director, which took place on September 29, 2009 at the offices of the Ontario Securities Commission.

III.     THE ISSUE

[9]     The issue for determination before me is whether to reinstate the registration of Messrs. Kaplan and Poulstrup in light of the IIROC Allegations made against them.

IV.     THE SUBMISSIONS

[10]     The following is a summary of the submissions made by Staff and the Applicants.

A. Summary of Staff’s submission

[11]     Staff recommends that the Director refuse the Application to reinstate the registration of Messrs. Kaplan and Poulstrup until the IIROC Allegations are resolved.

[12]     Staff put forth the following reasons to support their recommendation:
1. In situations involving allegations of misconduct, it is Staff practice to recommend that registration be refused pending resolution those allegations.

2. The IIROC Allegations raise questions regarding the integrity of Messrs. Kaplan and Poulstrup. Integrity is a key principle in determining fitness for registration. In light of the IIROC Allegations, Staff does not have sufficient information to assess the Applicants’ integrity.

3. It would be objectionable and not in the public interest to register Messrs. Kaplan and Poulstrup in light of the IIROC Allegations. Moreover, since the proceedings relating to the IIROC Allegations are currently scheduled for December 7, 2009, any potential harm to the Applicants by waiting until the IIROC Allegations are resolved, is incremental.
B.     Summary of the Applicants’ position

[13]     The Applicants submit that the Director should reinstate their respective registrations notwithstanding the IIROC Allegations.

[14]     The Applicants position is as follows:
1. The IIROC Allegations are not proven and the Applicants deny any wrongdoing.

2. Notwithstanding the IIROC Allegations, IIROC permitted the Applicants to continue working in the securities industry. IIROC could have, but did not take any action to suspend the Applicants following the IIROC Allegations. IIROC allowed the Applicants to continue working in the securities industry from February 22, 2008 (when the IIROC Allegations were issued) to September 30, 2008, when the Applicants’ employer (TDSI) closed the Burlington branch where the Applicants were employed. But for TDSI’s decision to close its Burlington branch the Applicants would have continued to work in the securities industry pending resolution of the IIROC Allegations.

3. TDSI did not dismiss the Applicants as a result of the IIROC Allegations. Rather, TDSI dismissed the Applicants due to economic reasons resulting in the closure of its Burlington branch.

4. TDSI conducted a thorough investigation of the misconduct described in the IIROC Allegations. TDSI found that the actions of others, also named in the IIROC Allegations, did amount to misconduct and dismissed these individuals for cause. However, TDSI specifically found that the actions of Messrs. Kaplan and Poulstrup did not amount to misconduct.

5. There is a limited potential for harm to the public resulting from the trading activity of Messrs. Kaplan and Poulstrup at PFAM. The Applicants will be employed, at PFAM, as proprietary traders and will not conduct registerable activity on behalf of retail clients or members of the public. The Applicants assert that the Director should therefore, balance earning a living against the potential for actual harm to the public.
V.     THE LAW

[15]     Subsection 27 (1) of the Act provides that:

On receipt of an application by a person or company and all information, material and fees required by the Director and the regulations, the Director shall register the person or company, reinstate the registration of the person or company or amend the registration of the person or company, unless it appears to the Director,
(a) that, in the case of a person or company applying for registration, reinstatement of registration or an amendment to a registration, the person or company is not suitable for registration under this Act; or

(b) that the proposed registration, reinstatement of registration or amendment to registration is otherwise objectionable.

[Emphasis added]
A.     Determining whether a person or company is not suitable for registration

[16]     Subsection 27 (2) of the Act provides that:

In considering for the purposes of subsection (1) whether a person or company is not suitable for registration, the Director shall consider,
(a) whether the person or company has satisfied,
(i) the requirements prescribed in the regulations relating to proficiency, solvency and integrity, and

(ii) such other requirements for registration, reinstatement of registration or an amendment to a registration, as the case may be, as may be prescribed by the regulations; and
(b) such other factors as the Director considers relevant.
B.     Determining whether reinstatement of registration is otherwise objectionable

[17]     As stated in section 1.1:

The purposes of the Act are,
(a) to provide protection to investors from unfair, improper or fraudulent practices; and

(b) to foster fair and efficient capital markets and confidence in capital markets.
[18]     Prior Commission decisions have held that registration is “otherwise objectionable” if it is determined, with reference to the purposes of the Act, that it is not in the public interest for the individual to be registered. For example, in Re Mithras Management Ltd., (1990) 13 OSCB 1600, the Commission held 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.
[19]     In In The Matter of The Application For Reactivation of Registration By Thierry Gevaert as an Officer of Hav-Loc Private Wealth Partners Inc., (2009) 32 OSCB 06 at para. 42, the Commission held that the Director has the ability to determine whether a proposed reinstatement of registration is objectionable regardless of the suitability determination.

[20]     Other cases that have bearing on this matter will be referred to in the Analysis portion of this decision.

Terms and conditions

[21]     Subsection 27 (3) of the Act provides that:

The Director may, in his or her discretion, impose terms and conditions on the registration, reinstatement of registration or amendment of registration of any person or company and, without limiting the generality of the foregoing,
(a) may restrict the duration of the registration; and

(b) may restrict the person or company to,

(i) trading only specified securities or specified classes of securities or securities of specified classes of issuers,

(ii) underwriting only specified securities or specified classes of securities or securities of specified classes of issuers, or

(iii) providing advice with respect to investing in, buying or selling only specified securities or specified classes of securities or securities of specified classes of issuers.
[22]     The Director should not, however, use terms and conditions to address what is otherwise a fundamentally objectionable registration. In Re Jaynes (2000), 23 O.S.C.B. 1543 at para. 52 (Re Jaynes), the Director held that:
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.
VI.     ANALYSIS

Should the registration of Messrs. Kaplan and Poulstrup be reinstated?

[23]     In considering this issue, the law requires that I reinstate the registration of Messrs. Kaplan and Poulstrup unless it appears to me that:

1. they are not suitable for registration, or

2. the reinstatement of their registration is otherwise objectionable.

1.     Are Messrs. Kaplan and Poulstrup not suitable for registration

[24]     In order to conclude whether Messrs. Kaplan and Poulstrup are not suitable for registration, I am required to consider whether the Applicants have satisfied the requisite requirements relating to proficiency, solvency and integrity contemplated by subsection 27(2) of the Act. The principles of proficiency and solvency are not at issue in this matter. Integrity, however, is a contentious issue.

[25]     Staff have argued that until the IIROC Allegations are resolved Staff does not have sufficient information to assess the integrity of the Applicants. Therefore, Staff takes the position that, the reinstatement of the Applicants’ registration should be refused until the IIROC Allegations are concluded. I respectfully disagree. In my view, it would be fundamentally unfair, and could potentially bring the administration of the registration regime into disrepute, for me to conclude that the Applicants’ integrity has been compromised solely based on the IIROC Allegations. I am mindful that these are serious allegations, but they are simply that – allegations – and as such they do not, in my view, compromise the integrity of the Applicants for the purposes of the determination before me.

[26]     In addition, when considering whether a person is not suitable for registration, subsection 27(2)(b) of the Act states that the Director shall consider “such other factors as the Director considers relevant”.

[27]     I consider the following factors relevant in determining whether the Applicants are not suitable for registration:
i. While Messrs. Kaplan and Poulstrup were registered with IIROC, there were no claims of wrongful conduct against them other than the actions described in the IIROC Allegations.

ii. Notwithstanding the IIROC Allegations, IIROC permitted the Applicants to continue working for TDSI (an IIROC member) from February 22, 2008, when the IIROC Allegations were issued, to September 30, 2008, when the TDSI dismissed the Applicants as a result of the closure of its Burlington branch.

iii. TDSI conducted an investigation into the misconduct described in the IIROC Allegations. TDSI found that the actions of others, also named in the IIROC Allegations, amounted to misconduct and dismissed these individuals for cause. TDSI also specifically found that the actions of Messrs. Kaplan and Poulstrup did not amount to misconduct.
[28]     Accordingly, for the reasons set out above it does not appear to me that the Applicants are “not suitable” for registration.

2.     Is the reinstatement of registration of Messrs. Kaplan and Poulstrup otherwise objectionable

[29]     Staff has also argued that, in light of the IIROC Allegations, it would be “otherwise objectionable” and therefore not in the public interest, to reinstate the registrations of the Applicants. Peripherally, Staff have argued that since the proceedings relating to the IIROC Allegations are currently scheduled for December 7, 2009 (i.e., a relatively short time from now) any potential harm to the Applicants by waiting until the IIROC Allegations are resolved, is incremental.

[30]     I do not fully understand Staff’s “incremental harm” argument. I do, however, think that Staff’s main argument – that in light of the IIROC proceeding the Applicants’ registration is otherwise objectionable – has merit. In support of its position, Staff contends that it is regulatory practice to refuse registration when there are outstanding or unresolved allegations and this regulatory practice is supported by case law.

Cases

[31]     Staff referred to two cases in particular to support its position: the case of Re Jaime Arlindo Vilas-Boas (2002) 25 OSCB 6401 (Vilas-Boas) and the case of Re Peter Vultaggio (2006) 29 OSCB 27 (Vultaggio).

[32]     In Vilas-Boas, the Director found that it was inappropriate to grant registration to an applicant while serious questions regarding the applicant’s past conduct remained outstanding. In that case, there were two outstanding investigations by the Investment Dealers Association (now IIROC). The IDA investigation resulted from (i) a complaint from two clients and (ii) comments made in the termination notice filed by Merrill Lynch Canada Inc. (Merrill), the former employer of the applicant. The applicant was accused by his clients of falsely representing that Merrill would act as financial advisor and process consultant for a financing transaction involving the clients’ business. The clients also produced a document that stated the applicant’s representation on Merrill letterhead. The clients also alleged that, in connection with this transaction, the applicant recommended that the clients engage the services of an individual who represented himself as a Chartered Accountant, but who was expelled from the Institute of Chartered Accountants of Ontario for professional misconduct. The IDA investigation also revealed that the applicant appeared to have facilitated the sale of shares of the clients’ company without a prospectus, in violation of section 53 of the Act.

[33]     In Vilas-Boas, the IDA investigation also found that the applicant may have engaged in similar conduct in the past with respect to a company called Urban Resorts. Merrill conducted an internal investigation of the Applicant’s role in the Urban Resorts transaction. As a result of the investigation, Merrill reprimanded the applicant and indicated that the applicant would have been terminated had he not resigned shortly after the reprimand was delivered.

[34]     In Vultaggio, the Director refused to grant registration where there were investigations outstanding. In that case, a joint audit by the Mutual fund Dealers Association and the Autorité des Marchés Financiers revealed frequent trading in a number of Mr. Vultaggio’s client accounts. The Chambre de la sécurité financière investigated the allegations and although they did not provide all the findings from their investigation, CSF did state that excessive and unauthorized trading occurred in the accounts of 11 elderly clients who had an average age of 80. The applicant’s employer, Iforum Financial Services Inc. also conducted an internal investigation into the applicant’s transactions and noted that Mr. Vultaggio had received a very high amount of commission income. Iforum placed the applicant under close supervision until he resigned.

[35]     In Vultaggio, OSC Staff recommended that the Director refuse to grant registration in light of the outstanding allegations. The Director, in the opportunity to be heard, found that Mr. Vultaggio did not refute the allegations made by OSC staff or give any business reasons or other reasons for the excessive and unauthorized trading in the client accounts.

[36]     In my view, the facts and circumstances in this case are readily distinguishable from both Vilas-Boas and Vultaggio.

[37]     In Vilas-Boas, the applicant resigned prior to being terminated for cause by his employer. In Vultaggio, the applicant resigned for cause after the applicant’s employer determined that questionable conduct occurred. Accordingly, in both Vilas-Boas and Vultaggio the Director found registration inappropriate or refused to grant registration when faced with a decision to register applicants against whom there were outstanding allegations of misconduct and other factors pointing to misconduct (including, in each case, the factors underling the resignations of the applicant).

[38]     In the case before me there are only the IIROC Allegations and no other factors pointing to misconduct. Messrs. Kaplan and Poulstrup have specifically refuted the IIROC Allegations and both were terminated in good standing by TDSI for reasons relating to the economic viability of the TDSI branch they worked for. In fact, prior to their termination they worked for several months after the IIROC Allegations were issued. From this I infer that IIROC did not consider their continued employment to be a public interest concern and view this as a “comforting” factor (from a public interest standpoint) rather than a factor pointing at misconduct. Lastly, as discussed above, another comforting factor, in my view, is that TDSI conducted an internal investigation into the subject matter of the IIROC Allegations. While TDSI found certain of its staff culpable and terminated them, it also found that Messrs. Kaplan and Poulstrup did not engage in the conduct described in the IIROC Allegations.

[39]     To reiterate, in my view, the unique facts in this case clearly distinguish it from both Vilas-Boas and Vultaggio.

Proprietary trading

[40]     Messrs. Kaplan and Poulstrup have requested reinstatement of their respective registrations in order to work as proprietary traders for the account of PFAM (the same roles they had when employed by TDSI). As proprietary traders they will not conduct registerable activity on behalf of retail clients or otherwise deal directly with members of the public.

[41]     In order to provide comfort to the regulator that the risk of registering the Applicants is limited, PFAM submitted an affidavit indicating that it is prepared to impose restrictions (i.e. terms and conditions) upon the trading activity of the Applicants. In particular, PFAM has submitted that it will monitor the trading activity of Messrs. Kaplan and Poulstrup on a daily basis, it will restrict the Applicants’ ability to enter bids for securities during the last five minutes of any daily trading session except to close positions, and it will ensure that there are no over-night inventories are carried by the Applicants. In my view applying these terms and conditions would be consistent with the proper use of terms and condition as discussed in Re Jaynes.

[42]     Accordingly, for the reasons discussed above it does not appear otherwise objectionable to reinstate the registration of Messrs. Kaplan and Poulstrup.

VII.     DECISION

[43]     Upon reviewing the facts and the applicable law and for the reasons set out above I order that the registrations of the Applicants be reinstated with the following terms and conditions applicable to their registrations pending resolution of the IIROC Allegations:
i. The registration of both Messrs. Kaplan and Poulstrup, as dealing representatives of PFAM, is subject to strict supervision.

ii. Messrs. Kaplan and Poulstrup are not permitted to carry overnight inventories of securities.

iii. Messrs. Kaplan and Poulstrup are not permitted to enter orders, both buy and sell, and sales contracts for securities during the last five minutes of any daily trading session on any organized marketplace or exchange except to close positions to ensure that there are no over-night inventories.
[44]     I also order, as a precondition to the reinstatement of the Applicants registrations, the imposition on PFAM of such corresponding terms and conditions that are appropriate to ensure the supervision of the Applicants described in conditions (i) through (iii) of this Decision.

October 28, 2009
“Erez Blumberger”
Manager, Registrant Regulation
Ontario Securities Commission