In the Matter of Staff’s Recommendations
to Suspend the Registrations
of Waterview Capital Corp. and Dimitrios Neilas
Opportunity to be Heard by the Director
under Section 31 of the Securities Act
1. My decision is that the registration of each of Waterview Capital Corp. (Waterview) and Dimitrios Neilas (Neilas) (collectively, the Applicants) should be suspended. My decision is based on the verbal arguments of Michael Denyszyn, Senior Legal Counsel, Compliance and Registrant Regulation Branch, for Staff of the Ontario Securities Commission, and Kevin Richard, Groia & Company Professional Corporation, counsel for the Applicants, and the evidence provided at the opportunity to be heard (OTBH).
Brief chronology of events
Registration history of Waterview and Neilas
2. Waterview was registered as a limited market dealer in November 2008 and suspended in December 2008 because it did not renew its registration. It became active again in June 2009. By operation of law, Waterview became registered as an exempt market dealer (EMD) in September 2009.
3. Neilas, currently the President of Waterview, was first registered in 2003. He was suspended in 2005 when his former firm did not renew its registration. Neilas was next registered with Waterview in 2008, was suspended when Waterview’s registration was suspended, and his registration became active again when Waterview’s registration did. He became Ultimate Designated Person (UDP) of Waterview in December 2009.
Staff compliance review of Waterview
4. Staff performed a compliance field review of Waterview in early 2010. Waterview’s operations consist of sales of exempt product (i.e. units of Neilas (Shepherd Road) Limited Partnership (LP)). Neilas is the directing mind of both the LP and Waterview. The LP’s operations consist of a real estate project in Oakville.
5. Staff identified numerous significant deficiencies during its review. Waterview provided late (and inadequate) responses to Staff’s compliance field review report. Staff subsequently sent a second letter to Waterview in December 2010. In that letter, Staff advised that if adequate responses to its remaining questions were not received on a timely basis, then Staff would take appropriate regulatory action. Waterview did not respond to the December 2010 letter on a timely basis.
Suspension letters to Neilas and Waterview
6. By letter dated December 22, 2010, Staff advised Neilas of its recommendation that he be suspended because he did not meet the proficiency requirements for a chief compliance officer (CCO) set out in section 3.10 of National Instrument 31-103 Registration Requirements and Exemptions (NI 31-103) within the transition period set out in section 16.9 of NI 31-103. Pursuant to section 31 of the Securities Act (Ontario) (Act), Neilas is entitled to an OTBH before a decision is made by the Director.
7. By letter dated January 18, 2011, Staff advised Waterview of its recommendation that Waterview’s registration as an EMD be suspended. Staff’s recommendation was made based on numerous violations of Ontario securities law described elsewhere in this decision. Pursuant to section 31 of the Act, Waterview is entitled to an OTBH before a decision is made by the Director. The letter also advised Waterview that Staff intended to make a request to the Director that the OTBHs for Neilas and Waterview be consolidated. The (consolidated) OTBH was held on April 1, 2011.
8. The major issue at the OTBH was whether the Applicants should be suspended (as recommended by Staff) or whether terms and conditions should be imposed on the Applicants (as recommended by counsel to the Applicants).
Stipulations of Staff, Waterview and Neilas
9. Staff and the Applicants stipulated to a number of statements which greatly sped up the OTBH. Some of the stipulations are described briefly below:
- The Applicants did not respond to Staff’s compliance field review report in a comprehensive or complete manner
- The LP’s 2009 financial statements were not produced to Staff or made available to investors
- Waterview traded without registration and while suspended
- On behalf of Waterview, “SF” traded without registration by engaging in registerable activity prior to obtaining registration
- Waterview did not maintain know your client (KYC) forms for some investors
- Waterview sold units of the LP to “L”, who did not qualify as an accredited investor
- Waterview did not state the nature of the relationship between itself and the LP in newspaper advertisements placed by Waterview
- Waterview did not file Form 45-106FI Report of Exempt Distributions on a timely basis for distributions of LP units since January 26, 2010, and
- Neilas did not obtain the requisite proficiency for a CCO.
10. A number of other questions and issues were also discussed at the OTBH.
Arguments from Staff on suspension of Waterview’s and Neilas’ registrations
Outline of the arguments
11. Staff argued that suspension of the Applicants was appropriate because:
- Waterview’s marketing practices violate section 44(2) of the Act
- Waterview traded securities while suspended in violation of section 25 of the Act
- Waterview’s KYC forms and referral arrangements violate NI 31-103
- Waterview sold units of the LP to a non-accredited investor in violation of section 25 of the Act
- Waterview’s advertising violates section 13.6 of NI 31-103
- Waterview failed to make timely filings in violation of National Instrument 45-106 Prospectus and Registration Exemptions
- Waterview’s significant deficiencies in its operations, and
- Neilas did not meet the proficiency requirements set out in section 3.10 of NI 31-103 within the transition period set out in section 16.9 of NI 31-103
12. As a result of these numerous violations of Ontario securities law, Staff argues that section 28 of the Act permits me, as Director, to suspend the registration of each of the Applicants on the basis that the each of the Applicants is not suitable for registration or has failed to comply with Ontario securities law or that their registrations are otherwise objectionable.
Suspension vs. terms and conditions
13. Staff also argued that the test in Jaynes, Re (2000), 23 OSCB 1543 is appropriate here. That decision stated that “[w]hile 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”. In Staff’s view, the use of terms and conditions in this case would be shoring up fundamentally objectionable registrations.
Arguments from Applicants’ counsel on suspension of their registrations
Outline of the arguments
14. Applicant’s counsel argued that the compliance issues identified by Staff were “mistakes” and that they do not go to the integrity of the Applicants. Counsel further argued that a more appropriate remedy for the conduct of the Applicants identified by Staff is the imposition of terms and conditions. Counsel’s recommended terms and conditions included:
- Engaging a consulting firm to address Staff’s concerns. The consulting firm would report directly to Staff and all compliance deficiencies identified by Staff would be resolved within 90 days. Follow up reports to Staff would be provided for an additional 12 months
- A new CCO would be approved. The candidate is currently an Executive Assistant at Waterview. Although she does not currently meet the proficiency requirements for a CCO, she is currently registered in the appropriate courses
- Neilas’ brother would be the CFO of Waterview and he would replace Neilas as UDP of Waterview
- Trading activities of Waterview would be handled and documented by Waterview staff other than Neilas
- Waterview would invest in appropriate staff and resources to ensure compliance and timely reporting, and
- Waterview would implement proper controls and procedures (in consultation with the consultant)
15. Counsel for the Applicants argued that this is a case where a second chance is warranted and that a suspension of the Applicants is neither fair or appropriate.
16. Counsel argued that the John Doe, Re (2010), 33 OSCB 1371 case referred to by Staff was not an applicable precedent because that case dealt with a failure to disclosure a criminal charge, which is not the case here. Counsel also argued that the Carter, Re (2010), 33 OSCB 8691 case was also not an applicable precedent because that case dealt, in part, with harm to investors, which is not the case here. He argued that both of these cases were integrity cases and that this case is about compliance “mistakes” only and not the integrity of the Applicants.
Suspension of registration and meanings of suitable and objectionable
17. The purposes of the Act, which are set out at section 1.1, are to provide protection to investors from unfair, improper or fraudulent practices, and to foster fair and efficient capital markets and confidence in capital markets.
18. Section 28 of the Act provides that the Director may suspend the registration of a person or company at any time during the period of registration of the person or company if it appears to the Director that (i) the person or company is not suitable for registration or has failed to comply with Ontario securities law, or (ii) the registration is otherwise objectionable.
19. A registrant is in a position to provide valuable services to the public. 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 public interest mandate. As well, as noted in numerous prior decisions, registration is a privilege, not a right.
20. The OSC has, over time, 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 law), proficiency, and solvency. These three fundamental criteria have been codified in subsection 27(2) of the Act, which provides that in determining whether a person or company is suitable for registration, the Director shall consider whether the person or company has satisfied the requirements prescribed in the regulations relating to proficiency, solvency and integrity, and such other factors as the Director considers relevant. The criterion at issue here is integrity.
21. The determination of whether an applicant’s proposed registration may be otherwise objectionable goes beyond the three suitability criteria above. Prior OSC 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 person or company to be registered. See Mithras Management Ltd., Re (1990), 13 OSCB 1600.
Decision on the suspensions of the Applicants
22. In my view, some of the violations set out above in and of themselves demonstrate that the Applicants are not suitable for registration. However, the sum of all of the violations demonstrates a pattern of non-compliance that is not appropriate for registrants. To quote my decision to suspend registration in Carter, Re (2010), 33 OSCB 8691:
“In conclusion, in my view the evidence in this case supports my decision that Carter’s registration should be suspended. I concur with staff’s assessment that Carter has engaged in a pattern of conduct – through its individual registrants – that demonstrates that it lacks the integrity required of registered firms under the Act. Many of the issues identified by staff are violations of securities legislation. If Carter possessed the requisite integrity for a registrant, it would not have engaged in the pattern of misconduct identified above. My decision is that Carter is not suitable for registration, that Carter has failed to comply with Ontario securities law, and that Carter’s ongoing registration is objectionable.”
23. As in Carter, I find that each of the Applicants is not suitable for registration, has failed to comply with Ontario securities law, and that each of their ongoing registrations is otherwise objectionable. As a result, my decision is that the registrations of each of the Applicants should be suspended.
24. I had several difficulties with the Applicant’s proposed terms and conditions. The first was that I think that Staff is right in that the use of terms and conditions in this case would be shoring up fundamentally objectionable registrations. I do not agree with the Applicants’ arguments that the compliance issues identified by Staff were merely “mistakes”. Staff identified a number of very serious violations of the Act including conducting registerable activity while registration was suspended and prior to registration being granted. The violations described above in my view demonstrate a pattern of conduct that is not acceptable for registrants under the Act and therefore, as above, suspension of each of the Applicants is appropriate in these circumstances.25. The second difficulty I had with the proposed terms and conditions was the suggestion that someone other than Neilas could be UDP of Waterview. Neilas is the directing mind behind Waterview. The UDP of a registered firm, is by law, the individual that is responsible for supervising the activities of the firm and promoting compliance by the firm. In most cases, the UDP will be the most senior person (i.e. chief executive officer) of the firm. Given the structure and operations of Waterview, in my opinion, no one other than Neilas himself could be the UDP of Waterview.
26. The third difficulty I had with the proposed terms and conditions is the suggestion that someone currently in the position of Executive Assistant could effectively perform the duties required as the CCO of Waterview. In my view, as long as Neilas himself is a majority owner of Waterview and is operating out of Waterview’s premises, I am not convinced that the proposed person could effectively carry out the duties as CCO of Waterview.
“Marrianne Bridge”, FCA
Compliance and Registrant Regulation Branch
Ontario Securities Commission
April 25, 2011