Securities Law & Instruments

In the Matter of Staff’s Recommendation
for the Refusal of Registration
of M.H.

Opportunity to be Heard by the Director
Section 31 of the Securities Act, R.S.O. 1990,
c. S.5, As Amended (the Act)



Decision

1. This matter relates to an opportunity to be heard proceeding (OTBH) held on December 6, 2011 pursuant to section 31 of the Act to consider whether M.H. (M.H.) should be denied registration as dealing representative of a mutual fund dealer.

2. For the reasons set out below, my decision is to refuse the registration of M.H.

3. My decision is based on the verbal submissions of Mark Skuce, Legal Counsel, Compliance and Registrant Regulation Branch of the Ontario Securities Commission (OSC) for Staff, and M.H., on his own behalf.

4. I have also made a decision, pursuant to subsections 8(c) and 10(a) of the Procedures for Opportunities to be Heard Before Director’s Decisions on Registration Matters (the OTBH procedures), that the transcript from this proceeding and any exhibits introduced therein be sealed and not disclosed to or made available to the public; and that the identity of M.H. be protected in the title of proceedings through the use of initials. Subsection 8(c) the OTBH procedures provides that: “[t]he proceedings will be open to the public unless intimate financial, personal and other matters may be disclosed that, in the opinion of the Director, would outweigh the public benefit of openness in Ontario Securities Commission proceedings”. Subsection 10(a) of the OTBH procedures provides that: “[a]ll written submissions and transcripts of appearances will be available to the public upon request, unless intimate financial, personal or other matters may be disclosed that, in the opinion of the Director, would outweigh the public benefit of openness in Ontario Securities Commission Proceedings”. As discussed below, M.H. entered into a direct accountability program (also known as a diversion program) relating to a criminal charge of theft under $5000. I consider this to be an intimate personal matter, and in light of the fact that the theft charge was dropped (by virtue of M.H. completing the program), I believe that the harm that would inure to M.H. resulting from public disclosure of this information would outweigh the public benefit of openness of Ontario Securities Commission proceedings.

Background

5. On September 13, 2011 M.H. was involved in a shoplifting incident at a local Zellers store. He was detained by security personnel when he left the store with an item that he later admitted he did not pay for. Police were called and M.H. was issued a notice of appearance, pursuant to which he was ordered to make a first appearance in court on October 4, 2011.

6. On September 29, 2011 M.H. submitted an application for registration to the Compliance and Registrant Regulation branch of the OSC as a mutual fund dealing representative.

7. On September 29, 2011, in the course of reviewing his application, Staff conducted a series of normal course security checks, including a search of the Canadian Police Information Centre (CPIC) database. The CPIC search revealed that M.H. had an outstanding charge of Theft Under $5000 relating to the Zellers incident that took place on September 13, 2011.

8. On the same day, Staff wrote to M.H. seeking clarification about why in his registration application he answered ‘No’ to the following question: “Are there any outstanding or stayed charges alleging a criminal offence that was committed in any province, territory, state or country?”

9. On October 5, 2011, M.H. faxed to Staff the letter of September 29, 2011 marked with the following handwritten notation: “… the charge has been dropped, I do not have any outstanding charge. Please go ahead with my application”.

10. On October 6, 2011, OSC staff received from M.H. a two page document entitled “Consent to Participate Direct Accountability Program” (the DAP Consent). It was signed by M.H. and dated October 4, 2011. The following heading appears on page 1 of the document: “Charge(s): Theft Under”. Paragraph 1 of the document states the following: “I take responsibility for the actions which gave rise to the above noted charges”. Paragraph 5 of the document states: “I understand that once I have completed the terms and conditions of my Direct Accountability Program Agreement to the satisfaction of the Community Justice worker, the above-noted charges shall be withdrawn as soon as practicable…”. Paragraph 7 of the document states: “I understand that my participation in Direct Accountability Programming may involve sharing of information about me… which is relevant for the purpose of the Community Justice Worker determining the most appropriate consequence for my offending behaviour…” Under M.H.’s signature is a notation indicating M.H. spoke to duty counsel.

11. Further OSC enquiries ensued, including an email from Staff dated October 7, 2011 stating in part as follows: “It appears that you were charged with shoplifting on September 13, 2011. You applied for registration on September 29, 2011, and in response to the question ‘Are there any outstanding or stayed charges against you alleging a criminal offence that was committed in any province, territory, state or country?’ you wrote ‘No’. Please explain why you answered this question ‘No’ on September 29, 2011”.

12. On the same day M.H. sent an email response to Staff stating that “The charge was wrong. I did not shoplifting (sic). I was accused shoplifting. This is why I have to go to court to explain to the judge … and fight for my right. And the charge had been dropped”.

13. Further correspondence took place between Staff and M.H. in an apparent attempt to reconcile the information in M.H.’s original registration application of September 29 (‘No’ to the question about outstanding criminal charges); the information in the fax M.H. sent to Staff on October 5 (stating “the charge had been dropped”); and the information in the DAP Consent document alluding to existence of theft under charges against M.H.

14. By letter dated November 11, 2011, Staff recommended that the registration of M.H. in the category of dealing representative for a mutual fund dealer be refused.

Staff’s submissions

15. Staff submits that M.H. should be denied registration as a dealing representative because he lacks the requisite level of integrity required of an individual that would be licensed to deal with the investing public. The salient elements of Staff’s submissions are that M.H.:

  1. Engaged in theft; and
  2. Made the following misrepresentations to Staff and his sponsoring firm during the course of the registration process:
    1. Despite signing the DAP Consent stating that he took responsibility for his actions giving rise to the theft charge, he later denied the conduct to Staff;
    2. He informed his employer that the OSC was not responding to him in relation to his application for registration, when in fact Staff had been in regular contact with him; and
    3. In response to staff enquiries about his sponsoring firm’s views about the DAP Consent M.H. misinformed Staff with respect to nature of his meetings with his sponsoring firm.

M.H. Submissions

16. M.H. submits that staff’s refusal to recommend that he be registered is based on “really a lot of misunderstanding”. In particular, he submits his application for registration was accurate when he submitted it on September 29, 2011, because at that point in time he had not technically been charged with a criminal offence. He claims that the shoplifting incident that took place on September 13, 2011 was too a misunderstanding: “… I went to buy a telephone set, and a salesman told me it was buy one get one free. So I took two telephone sets and paid for one. And at the door, the security stopped me and accused me stealing the telephone set. And it was supposed to be free, from my understanding. I said to him that the salesman told me that if I buy one then I get one free”. According to M.H., the salesman that told him about the two for one sale could not be found.

17. M.H. went on to explain that the Police were called, that he explained his story to them and was issued a notice of appearance for a court date on October 4, 2011. He also explained that it was his understanding from speaking with the police that “at that time I am not charged until I go to court”.

18. M.H. did not make any submissions regarding entering into the direct accountability program. Accordingly, I asked him about the DAP Consent that he signed as a condition for the theft charge being withdrawn. In particular, I asked him about Paragraph 1 of the document which states: “I take responsibility for the actions which gave rise to the above noted charges”; paragraph 5 of the document, which states: “I understand that once I have completed the terms and conditions of my Direct Accountability Program Agreement to the satisfaction of the Community Justice worker, the above-noted charges shall be withdrawn as soon as practicable…”; and paragraph 7 of the document, which states: “I understand that my participation in Direct Accountability Programming may involve sharing of information about me… which is relevant for the purpose of the Community Justice Worker determining the most appropriate consequence for my offending behaviour…”. He responded by saying “I didn’t really have time to read it. Honest.” When I asked him why he agreed to pay $200 as part of the direct accountability program if he had truly done nothing wrong, he said “ the lady [at court] was saying that if you agree to a donation, $200, then you are free to go… that’s what I understand. So I think, okay, it’s a donation, so I make a donation. I don’t really understand the whole thing”.

Suitability for registration generally

19. 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. Therefore, determining whether an applicant should be registered is an important component of the work undertaken by the OSC.

20. Subsection 27(1) of the Act provides that the Director shall register a 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, the Director discussed the well established criteria that have been identified by the OSC when considering whether an applicant is suitable for registration:

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 issue in this proceeding relates to the integrity of M.H.

 

Reasons

21. Staff submits that M.H.’s proposed registration should be refused on the grounds that he is unsuitable for registration because he lacks the requisite integrity of a securities professional. In this regard, Staff’s main submissions were that M.H. engaged in theft; and made numerous misrepresentations in the course of the registration application process.

M.H. engaged in theft

22. As discussed above, M.H. was engaged in a shoplifting incident on September 13, 2011. According to M.H., he purchased a telephone from Zellers and was detained by store security personnel when he left the store with two telephones, one of which he admitted not paying for. Police were called and M.H. was issued a notice of appearance, pursuant to which he was ordered to make a first appearance in court on October 4, 2011.

23. His explanation was that he was told by a salesperson in the store that the phones were on a two-for-one sale and that the whole incident was simply a misunderstanding. In my mind, his explanation does not have the ring of truth to it. I was particularly troubled by two points in his story. Firstly, the salesperson who supposedly told M.H. about the two-for-one sale was nowhere to be found to corroborate his story (either on the date of the incident or in the future and M.H. apparently made no independent effort to track this person down in support of his claim). Secondly, M.H. claimed he intended to buy two phones for the price of one yet he presented only one phone to the Zellers cashier. If he believed the phones were indeed part of a two for one sale why would he not present both phones to the cashier? He had no credible explanation for this.

24. I do agree with M.H. that his application for registration was accurate when he submitted it on September 29, 2011; as Staff acknowledged during the proceeding, at that point in time it does not appear that he had technically been charged with a criminal offence. Nonetheless, I find that Staff did take appropriate steps to follow up with M.H. as a result of its CPIC search indicating that M.H. was involved in a theft incident on September 13, 2011.

M.H. made misrepresentations

25. Staff also submits that M.H.’s proposed registration should be refused on the grounds that in the course of the registration application process he made numerous misrepresentations to his sponsoring firm and to OSC staff, particularly that:

  1. Despite signing the DAP Consent stating that he took responsibility for his actions giving rise to the theft charge, he later denied the conduct to Staff;
  2. He informed his employer that the OSC was not responding to him in relation to his application for registration, when in fact Staff had been in regular contact with him; and
  3. In response to Staff enquiries about his sponsoring firm’s views about the DAP Consent, he misinformed Staff with respect to nature of his meetings with his sponsoring firm.

26. In my view, Staff was justifiably concerned with M.H.’s conduct relating to the above. In response to a request by Staff for an explanation about the theft incident, on October 7, 2011 M.H. faxed a note to Staff, stating: “The charge was wrong. I did not shoplifting (sic). I was accused shoplifting. This is why I have to go to court to explain to the judge … and fight for my right and the charge had been dropped.” As it turns out, this response was patently false. M.H. did go to court on October 4, 2011, but court transcripts from this session submitted by Staff make it plain that M.H. did not ‘fight for his right’ as he claimed to Staff or say even one word in court to indicate that he believed the theft under charge was ‘wrong’. He did not convince the court to drop the charge, per his note to Staff. His only action in court on October 7, 2011 was to consent to enter the DAP program.

27. M.H. would have me believe that each of the above examples was simply a product of misunderstanding between him and Staff. I find this explanation difficult to accept. In my view, seen in the best possible light, M.H. cut corners with the truth in his representations to both Staff and his sponsoring firm. Why he did this is open to speculation, but from my perspective it was done to keep his sponsoring firm in the dark about Staff’s integrity concerns, while he tried to cajole Staff into recommending that his registration be issued in the face of Staff’s questions surrounding the theft incident.

Conclusion

28. Even if I give M.H. the benefit of the doubt with respect to whether he intentionally made the misrepresentations discussed above, I can not overlook the biggest blow to his integrity in this proceeding -- the theft incident. By virtue of completing the DAP program, which included taking responsibility for his action and making a $200 donation, M.H. does not have a criminal record. The test for registration is, however, whether M.H. possesses the requisite integrity and high standards demanded of a securities professional licensed to deal with the investing public. M.H. signed the DAP Consent and in so doing he acknowledged his responsibility for the theft and his bad judgement in the matter. The evidence presented also confirms that he spoke to duty counsel. It is clear to me that he understood what he was doing (and if he did not, I would question whether he possesses the requisite level of proficiency and competency to be licensed as a dealing representative).

29. In order to effectively protect members of the investing public from future harm, it is necessary for securities regulators to be aggressive and vigilant gatekeepers. Part of this work necessarily entails ensuring, to the extent possible, that as a precondition to receiving the privilege of working with the investing public, an applicant has met the high standard of integrity necessary to work in the Ontario capital market. Based on the information that was presented to me in this proceeding, I find that M.H. has not met this standard. Accordingly, it is my decision that his registration be refused.

 

“Erez Blumberger”, LL.B.
Deputy Director
Compliance and Registrant Regulation Branch
Ontario Securities Commission
January 5, 2012