Securities Law & Instruments

In the Matter of Staff’s Recommendation
for the Refusal of Registration
of Stephen Lorne Elias

Opportunity to be Heard by the Director
Section 31 of the Securities Act



Decision

1. For the reasons outlined below, my decision is to refuse the registration of Stephen Lorne Elias (Elias).

Overview

2. On April 7, 2011, Staff recommended that Elias’ registration as a representative in the category of dealing representative for the exempt market dealer Frank Capital Partners Inc. (Frank) be refused. Under section 31 of the Securities Act (Ontario) (Act), Elias is entitled to an opportunity to be heard before a decision is made by me, as Director.

3. My decision is based on the written submissions of Michael Denyszyn, Senior Legal Counsel, Compliance and Registrant Regulation Branch of the Ontario Securities Commission (OSC) for Staff, and Elias (on his own behalf).

Suitability for registration generally

4. Subsection 25(1) of the Act requires any person that trades in securities to be registered in the relevant category. As set out in numerous prior decisions, a registrant is in a position to perform valuable services to the public, both in the form of direct services to individual investors and as part of the larger system that provides the public benefits of fair and efficient capital markets. A registrant also has a corresponding capacity to do material harm to individual investors and to the public at large. Determining whether an applicant should be registered is thus an important component of the work undertaken by the OSC.

5. Subsection 27(1) of the Act provides that the Director shall register the person unless it appears to the Director that the person is not suitable for registration or that the registration is otherwise objectionable. In the recent case of Ittihad Securities Inc., Re (2010) 33 OSCB 10458, I, as Director, stated that:

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 is suitable for registration, the Director shall consider whether the person has satisfied the requirements prescribed in the regulations relating to proficiency, solvency and integrity, and such other factors as the Director considers relevant.

The determination of whether an applicant’s 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. For example, see Mithras Management Ltd., Re (1990), 13 OSCB 1600.”

The issues at hand are Elias’ integrity and proficiency.

 

Submissions from Staff relating to its recommendation to refuse Elias’ registration

Summary of Staff’s submissions

6. Staff submits that Elias’ proposed registration should be refused on the grounds that he is unsuitable for registration due to a lack of the requisite integrity and proficiency of a securities professional. Staff further submits that Elias’ proposed registration would be objectionable.

Elias as independent wealth coach and sales agent for FFI

7. Elias has never been registered. According to his initial registration submission, he began working as an “independent wealth coach” and “sales agent” for FFI First Fruits Investments Inc. (FFI), an affiliated entity of HEIR Home Equity Investment Rewards Inc. (HEIR) in October 2008. Elias proposed in his initial registration submission that he would continue to devote seven hours per week to FFI during his proposed registration with Frank. In his registration application, Elias explained that his “independent wealth coach” and “sales agent” roles involved teaching people “to think like the wealthy” and to use their existing assets “to increase their potential future [assets]”. (As an aside, Elias advised me that after learning about the OSC allegations referred to in the next paragraph, he resigned from HEIR and FFI. Staff submits that it is not clear when Elias left HEIR and FFI because he has not, to date, updated his Form 33-109F4 Registration of Individuals and Review of Permitted Individuals (Form 4) to indicate that he has left FFI, or that he no longer proposes to work for FFI during his proposed registration. As well, Elias’ current application for registration filed on the National Registration Database continues to list FFI as “Current Employment”.)

8. HEIR, FFI, related entities, and principals Archibald Robinson and Eric Deschamps (Respondents) are the subject of a Statement of Allegations dated March 29, 2011 (Statement of Allegations) issued by the OSC. In the Statement of Allegations, the OSC alleges that the Respondents engaged in acts in furtherance of trades (HEIR trading) including:

  1. Advertising and promoting HEIR and various securities,
  2. Holding one-on-one sessions with investors that promoted HEIR and various securities,
  3. Holding HEIR seminars and meetings with potential investors and arranging for third party entities to attend and give presentations promoting their securities and providing promotional and other materials, including offering memoranda, to potential investors, and
  4. Employing and contracting commissioned sales agents to bring in new investors and solicit investment in securities.

The OSC also alleges that the Respondents engaged in advising by offering their opinions on the investment merits of various specific securities by expressly or impliedly recommending and endorsing them to potential investors (HEIR advising).

Elias is not suitable for registration

9. Staff submits that in his capacity as “independent wealth coach” and “sales agent” with FFI, Elias engaged in many of the examples of HEIR trading and HEIR advising referenced in the Statement of Allegations. Each of these examples of HEIR trading and HEIR advising by Elias are explained in further detail below.

Advertising and promoting HEIR and various securities

10. Staff submits that Elias solicited memberships in HEIR. In the Statement of Allegations, the OSC alleges that HEIR offered its fee paying members access to certain investments of third parties. “HM” (a personal acquaintance of Elias) advised Staff that Elias told HM and her husband that if they were “looking at opportunities to try and invest money” they “might wish to consider some of the opportunities” offered by HEIR. HM signed up to be a member of HEIR with Elias as her designated consultant. Both HM and “AZ” (a former colleague of Elias’) confirmed to Staff that they paid $5,000 plus GST to become HEIR members.

11. Staff alleges that Elias also promoted specific securities, including securities of Capital Mountain Holding Corporation (CMHC), a company currently in receivership and the subject of Securities and Exchange Commission proceedings in the Untied States alleging that the principals of CMHC operated a Ponzi scheme and committed fraud. As part of the CMHC receivership proceedings, investors in CMHC and related companies were asked to complete an investor proof of claim declaration form. The declaration asked investors to identify anyone that spoke to them about their investment, provided information about their investment, convinced them to invest, handled their investment or otherwise caused them to make an investment. At least three investors identified Elias in response to this question – “SM”, “RC” and “IF”. Notwithstanding this, Elias advised me that “[M]y only relationship with CMHC has always been solely as an investor”.

12. Staff also alleges that Elias advertised and promoted additional specific securities. Examples include AZ, who told Staff that “all the information” he received in respect of his investment in “S Co” came from Elias. As well, Staff alleges that Elias also referred AZ to “W Co” for the purchase of securities. Similarly, “RL” confirmed that he only spoke with Elias with respect of his investment in “C Co”. Lastly, SM stated that she was told about W Co by Elias, a close relative of hers. Elias received a cheque in the amount of $2,985 in respect of SM’s investment in W Co.

Holding one-on-one sessions with investors that promoted HEIR and various securities

13. In his registration application, Elias summarized his duties as an independent wealth coach at FFI as follows - met with people at their homes, learn what their dreams and goals are, show them how to consolidate any debts they may have, explain how to perform due diligence on investments and show and explain all advantages of membership with FFI (including access to members’ websites, monthly newsletters, etc.). Staff has evidence from investors that confirms that Elias conducted these one-on-one sessions.

Attending HEIR seminars and meetings with potential investors and third party entities, and providing offering documents and promotional materials

14. Examples provided by Staff include:

  1. RL told Staff that Elias accompanied him to a “question and answer” presentation made by an individual on behalf of C Co at a specific location in Ottawa in May 2009,
  2. HM told Staff that Elias worked with a representative of C Co to explain certain of the investment features of a particular C Co offering to her, and indicated that Elias told her about the terms of the investment,
  3. SM told Staff that it was Elias who “walked [her] through” the particulars of her investment and provided her with documents and other marketing information relating to CMHC, and
  4. RL told Staff that he asked Elias questions about filling out the paperwork involved in investing in a C Co product.
Acting as a commissioned sales agent to bring in new investors and solicit investment in securities

15. Elias described himself as “sales agent” for FFI and SM confirmed that she considered Elias to have been acting as “agent” in respect of her purchase of CMHC securities. According to a sales ledger produced by C Co, Elias acted as consultant in respect of 17 sales of four different types of securities to multiple purchasers in amounts ranging from $7,992 to $39,296. In addition, AZ invested over $150,000 in “S Co” and, together with his wife, approximately $210,000 in W Co, all pursuant to his relationship with HEIR and Elias. As well, Staff obtained nine cheques, each worth greater than $1,000, for what appears to be commissions payable to Elias from the Respondents.

Advising by offering opinions on the merits of various specific securities by expressly or impliedly recommending or endorsing them to potential investors

16. Examples provided by Staff include AZ stated that Elias told him that S Co was “a fantastic company”, and DL said that Elias told “personal stories” about the background of C Co and the successes and failures experienced by C Co prior to DL investing in C Co.

Elias’ conduct required registration

17. Subsection 1(1) of the Act defines “trade” or “trading” as including not only “any sale or disposition of a security for valuable consideration” but also “any act, advertisement, solicitation, conduct or negotiation directly or indirectly in furtherance of any of the foregoing” (emphasis added by Staff). Staff submits that by advertising and promoting HEIR and various securities, by holding one-on-one sessions with investors that promoted HEIR and various securities, by attending HEIR seminars and meetings with potential investors and third parties, by providing offering documents and promotional materials, and by acting as a commissioned sales agent to bring in new investors and solicit investment in securities, Elias engaged in “trading” within the meaning of the Act.

18. Paragraph 25(1)(b) of the Act prohibited Elias from engaging in or holding himself out as engaging in the business of trading in securities unless he was a registered representative in accordance with Ontario securities law as a dealing representative of a registered dealer (and was acting on behalf of the registered dealer).

19. Guidance in respect of the “business trigger” for dealer registration can be found in section 1.3 of Company Policy 31-103 CP Registration Requirements and Exemptions (31-103 CP). Staff submits that Elias’ traded for a business purpose based on no fewer than four of the factors set out in the CP which include:

  1. Engaging in activities similar to a registrant,
  2. Directly or indirectly carrying on the activity with repetition, regularity or continuity,
  3. Being, or expected to be, remunerated or compensated, and
  4. Directly or indirectly soliciting

20. Staff is therefore of the view that Elias engaged in the business of trading in securities and required registration, but was not registered in any capacity. In the recent case of Re Waterview Capital Corp, and Dimitrios Neilas (2011) 34 OSCB 5059, I, as Director, stated that “conducting registerable activity… prior to registration being granted” was a “very serious” violation of the Act.

21. As well, to the extent that Elias offered opinions on the merits of various specific securities by expressly or impliedly recommending and endorsing them to potential investors, as he did with AZ, RL and DL, Elias also engaged in the business of advising others with respect to investing in, buying or selling securities in contravention of the adviser registration requirement set out in subsection 25(3) of the Act.

Elias appears to lack the integrity and proficiency required of a securities professional

22. Staff submits that integrity encompasses not only honesty and good faith but also compliance with Ontario securities law. Staff submits that Elias engaged in a course of conduct that does not reflect the requisite integrity of a securities professional.

23. According to transcripts of an examination by Staff, AZ did not qualify as an accredited investor. SM, RL and IF confirmed to Staff that they also did not qualify as accredited investors. Staff submits that Elias acted in furtherance of the sale of prospectus-exempt securities to all four investors. In fact, RL told Staff that Elias told him that the requirement to be an accredited investor did not apply to products issued by C Co because it was an offshore entity. This is not correct. There is no offshore exemption to the prospectus requirement set out in Ontario securities law.

24. Staff also submits that Elias failed to act fairly, honestly and in good faith with his clients as required by section 2.1 of OSC Rule 31-505 Conditions of Registration (OSC Rule 31-505) by not disclosing to several of his investors that he received commissions or referral fees in respect of their investments.

25. Staff submits that Elias’ failure to comply with the dealer and adviser registration requirements exposed clients to significant risks in dealing solely through unregistered entities, such as HEIR, S Co, C Co and CMHC. His activities on behalf of the Respondents were not regulated by the OSC and did not comply with any of the investor protection components of the Act. As well, Staff submits that Elias has not demonstrated any concern or remorse in respect of his unregistered actions of behalf of the Respondents.

26. Staff also submits that Elias appears to lack the proficiency required of a securities professional, which necessarily includes knowledge of the requirements of Ontario securities law. During the entire period of Elias’ employment with FFI, dealer registration was required in Ontario for individuals in the business of trading in prospectus-exempt securities. As well, Staff submits that Elias’ failure to update his Form 4 for his claimed resignation from FFI also demonstrates that he still lacks the requisite proficiency of a securities professional.

27. As a result, Staff’s position is that the foregoing establishes that Elias lacks the integrity and proficiency required of a securities professional and he is therefore unsuitable for registration.

Elias’ registration is objectionable

28. The Director has the clear power under the Act to determine that it would be objectionable to approve a registration application on broader public interest grounds, regardless of the determination as to suitability. Staff submits that the proposed registration of Elias would be objectionable on public interest grounds.

29. Elias initially proposed to continue to act on behalf of FFI, one of the Respondents, while registered with Frank. The OSC has made serious allegations that FFI, as well as the other Respondents, has violated Ontario securities law and acted contrary to the public interest. As a result of these allegations, Staff is of the view that Elias’ unregistered conduct with an entity against which the OSC has filed a Statement of Allegations would make Elias’ proposed registration objectionable. As well, as set out in Staff’s submissions in this decision, Elias carried our many of the same activities as it is alleged that the Respondents did in the Statement of Allegations.

Refusal of registration or terms and conditions

30. Depending on the degree to which an applicant for registration has failed to satisfy one or more of the criteria for registration, Staff will often recommend that registration be subject to terms and conditions tailored to the suitability concerns that are specific to the individual applicant. Less often, Staff will recommend that registration be denied altogether because of the extent or persistence of an applicant’s failure to satisfy the suitability criteria. In Jaynes, Re (2000), 23 OSCB 1543, the Commission 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”.

31. Staff submits that Elias’ registration would be fundamentally objectionable and that it cannot be shored up by terms and conditions.

Elias’ submissions

Summary of Elias’ submissions

32. Elias submits that he has always acted in the best interests of his clients (comprised primarily of his family and friends). He submits that he has “always acted with integrity, following the rules as I knew them to be. Any regulations that weren’t followed were due to a lack of knowledge, not lack of integrity”.

Being a HEIR consultant does not show a lack of integrity

33. Elias submits that being an HEIR consultant and FFI agent does not, in and of itself, demonstrate that he lacks the integrity required of a registrant. He points out that another person on the HEIR consultant list, “CO”, is now registered in his home province of Alberta, and also in Saskatchewan and British Columbia. Similarly, “SK”, is now registered in his home province of Saskatchewan and also in Alberta and British Columbia. Elias also advises that approximately 10 other HEIR consultants are also now registered in other Canadian provinces. Elias submits that these jurisdictions also have registration requirements for integrity, similar to the requirements in the Act. From this, he concludes that a reasonable conclusion is that being an HEIR consultant and FFI agent does not show a lack of integrity.

HEIR is not a private investment club

34. Elias also submits that HEIR is an education club, not a private investment club and thus any allegations concerning promoting and selling HEIR memberships is irrelevant concerning securities. He states that to his knowledge, no one has ever given HEIR monies to invest for them. He submits that he paid his HEIR membership fees for education which included being introduced to companies that he didn’t know existed and learning from them how they make their money. He also submits that the third party investments that Staff alleges are available to HEIR’s fee paying members are also available to the public and thus it is not necessary to become an HEIR member to invest in these companies.

35. Elias submits that he has also taken courses and coaching from other entities, and that “HEIR is by far the least expensive and the most encompassing educational company”. He provided a list of topics discussed at HEIR “Wealth Building Club” meetings including – how to become a successful investor, re-engineering retirement, understanding the exempt market, etc.

Elias’ conduct does not constitute trading

36. Elias also made submissions about Staff’s position that his conduct described above constituted trading within the meaning of the Act. Elias argues that discussions of investments with friends and family – both prior to and after he became a HEIR member - does not constitute trading.

37. Elias also takes issue with Staff’s submission that he promoted CMHC. However, in his submission, it is clear that he (or his wife) told SM and IF about this opportunity. In fact, he states that IF “asked if they could visit and ask us questions about our investment in CMHC. I was happy to explain…”. He also states that he was surprised that SM, IF, and RC invested in CMHC because he was under the impression the opportunity was closed. He also states that “[a]ny information I imparted to them about CMHC was from personal experience in the setting of talking to friends and family about our investments. This cannot possibly be interpreted as “selling” or “promoting”.” He also states that RC wanted to sell something and SM wanted to buy it. “I introduced them to each other. In no way can this be interpreted as selling or promoting. He concludes by stating that “the evidence is clear that I did not sell or promote CMHC securities”.

38. Elias acknowledges that he referred “people” to W Co by inviting them to hear W Co speakers. He received referral fees for these referrals. He also acknowledges that he referred “people” to S Co by inviting them to watch a webinar, but that he did not receive a referral fee for these referrals. He submits that referring people to companies and receiving a fee for it is “perfectly acceptable” and that he did not sell or promote W Co or S Co. Lastly, he draws a distinction between referring friends and family to companies (which themselves had several products) versus referrals to specific products.

39. With respect to C Co, Elias submits that since C Co was “presented as a real estate opportunity… the investor was purchasing land [,and] the Securities rules did not apply”. Elias disputes Staff’s accounting of the interviews with RL, DL and HM. He does, however, acknowledge that “it is possible I made statements and told stories regarding [C Co] that I would not have, had the opportunities been classified as a security. At the time of all these incidents, they were classified as real estate”. He further submits that his actions with respect to C Co do not demonstrate a lack of integrity. However, he submits that one could make a weak argument that his actions show a lack of proficiency “in that I didn’t recognize the [C Co] investments were a security”.

Elias’ proficiency

40. With respect to proficiency, Elias acknowledges that some of his actions showed a lack of proficiency. He admits to not being “proficient at that time”. However, he submits that his lack of previous proficiency is not relevant because he was not applying for registration at that time. He also advised that he has successfully completed the course for exempt market dealer representatives in February 2010.

Elias’ integrity

41. Elias submits that there is nothing he has done to indicate a lack of integrity. He submits that he “followed the rules as I knew them to be. When I discovered the OSC allegations against HEIR and FFI, I resigned”. He also submits that the “testimony of some of my clients indicates that I did not always make a clear enough distinction between HEIR as an education company and the fact the opportunities were offered by third parties”.

42. He submits that the Mithras test does not apply here and I, as Director, should not be punishing past conduct. He submits that the evidence shows that he always followed the rules as he knew them to be and that he has always acted in what he thought was the best interests of his clients.

Reasons

43. My decision is that Elias’s registration should be refused because he does not have the requisite integrity or proficiency of a securities professional. I also agree with Staff that Elias’ proposed registration would be objectionable.

Elias lacks the requisite integrity and proficiency

44. I agree with Staff’s submissions that Elias engaged in numerous acts of trading as defined in the Act and as described elsewhere in decision, including meeting with IF to discuss CMHC, discussing the CMHC investment with SM, facilitating the transfer of CMHC securities from RC to SM, inviting AZ to go on a W Co bus tour, offering to come to HM’s house to discuss investment opportunities, and discussing investment opportunities with HM. Since Elias was engaged in acts of trading, he should have been appropriately registered under the Act but he was not. In my view, these previous acts of illegal trading can clearly be relied on in assessing Elias’ current registration application.

45. Elias submits that, during his employment with FFI, he “certainly was not aware” that acts in furtherance of trades constituted trading within the meaning of the Act. Ignorance of the law is not an acceptable excuse for non-compliance (i.e. not registering) under the Act. As well, I do not agree with Elias’ submissions that his discussions of investments with friends and family does not constitute trading. In my view, this activity clearly meets the definition of trading in the Act.

46. Elias also distinguishes between trading activity and “referring people to companies and receiving a fee for it”. I do not agree. As above, it is my opinion that Elias’ activities clearly met the definition of trading in the Act. I concur with Staff’s submission that Elias failed to act fairly, honestly and in good faith with his clients as required by section 2.1 of OSC Rule 31-505 by not disclosing to several of his investors that he received commissions or referral fees in respect of their investments.

47. I also concur with Staff’s submission that Elias lacks the proficiency required of a securities professional, which includes knowledge of the requirements of Ontario securities law. The requirement for Elias to be registered in Ontario for carrying out the types of trading activities he carried out has existed in Ontario for approximately 25 years.

48. I also find that Elias engaged in the business of advising others in contravention of the adviser registration requirement set out in subsection 25(3) of the Act by offering opinions on the merits of various specific securities by expressly or impliedly recommending them and endorsing them to others, as he did with AZ, RL and DL.

49. As a result of this illegal trading and advising activity, I find that Elias lacks the requisite integrity and proficiency of a securities professional.

Elias’ proposed registration would be objectionable

50. I agree with Staff’s submission that Elias was involved in trades with at least four clients – SM, RL, DL and AZ – that did not qualify as “accredited investors”. Securities issued by W Co, S Co, C Co and CMHC were not accompanied by a prospectus and a prospectus exemption was required to effect these trades. Elias submits “[t]hat is probably true” and that “[i]t is clear I acted as a referral agent”. I concur with Staff’s submission that it does not matter if Elias’ clients were “happy with [the] investment in [S Co]” or that they “wanted to be involved in the [CMHC] opportunity”. Elias’ involvement in these illegal distributions renders his proposed registration objectionable.

51. 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. As per the test set out in Mithras, in my view Elias unregistered trading in the past leads me to conclude that his conduct in the future (i.e. his possible registration) may be detrimental to the integrity of the capital markets. As a result, I concluded that it is not in the public interest to register Elias.

52. Lastly, as a result of my finding that Elias’ proposed registration is objectionable, I concur with Staff’s submissions that the use of proposed terms and conditions in this case would be shoring up a fundamentally objectionable registration.



“Marrianne Bridge”, FCA
Deputy Director
Compliance and Registrant Regulation Branch
Ontario Securities Commission
June 22, 2011