Securities Law & Instruments

IN THE MATTER OF THE SECURITIES ACT,
R.S.O. 1990, c. S.5 AS AMENDED

- AND -

IN THE MATTER OF ERIC KAPLAN,
WILLIAM RUSSELL, QUARTZ CAPITAL GROUP LTD., and
BLYTHCO INC.

SETTLEMENT AGREEMENT



Introduction

1. This settlement agreement (the Settlement Agreement) relates to the registration status under the Securities Act (Ontario) (the Act) of Eric Kaplan (Kaplan), William Russell (Russell), and the acquisition by Blythco Inc. (Blythco) of all of the issued and outstanding shares of Quartz Capital Group Ltd. (Quartz), a firm registered under the Act as a dealer in the category of exempt market dealer, from Kaplanco Inc. (Kaplanco).

2. On January 31, 2012, Quartz gave notice under section 11.10 of National Instrument 31- 103 – Registration Requirements, Exemptions, and Ongoing Registrant Obligations (NI 31-103) that Blythco intended to acquire all of the issued and outstanding shares of Quartz from Kaplanco (the Proposed Acquisition). On March 6, 2012, Russell applied for registration as a dealing representative in the category of exempt market dealer, sponsored by Quartz (the Application).

3. As more particularly described below, staff of the Ontario Securities Commission (Staff) identified conduct on the part of Kaplan, Quartz, and Russell which it considered to be breaches of Ontario securities law. As a result, Staff informed Kaplan, through his counsel, that it would recommend to the Director that the registration of Kaplan and Quartz be suspended. Staff also informed Russell, through his counsel, that it would recommend that the Application be refused. Finally, Staff informed Quartz and Blythco, through their counsel, that it would recommend to the Director that the Director object to the Proposed Acquisition. Section 31 of the Act provides Kaplan, Quartz, and Russell with the right to request an opportunity to be heard before any decision could made by the Director with regards to Staff’s recommendation regarding their registration status, and subsection 11.10(7) of NI 31-103 provides Blythco with the right to request an opportunity to be heard in respect of any objection by the Director to the Proposed Acquisition.

4. In order to resolve this matter without recourse to the opportunity to be heard process, Kaplan, Quartz, Russell, Blythco (collectively, the Settling Parties) and Staff have agreed to the statement of facts and joint recommendation to the Director set out in this Settlement Agreement.

Agreed Statement of Facts

Quartz and Kaplan

5. Quartz has been registered under the Act as an exempt market dealer since September 28, 2011. Since its inception, Kaplan has been the ultimate designated person, chief compliance officer, and sole dealing representative of Quartz.

6. At the time of the events described in this Settlement Agreement, Kaplan was twenty-seven years old and had never previously been registered under the Act.

7. Kaplanco owns all of the issued and outstanding shares of Quartz. Kaplanco is a corporation incorporated pursuant to the laws of Ontario.

8. Kaplan is the sole officer, director, and shareholder of Kaplanco.

Blythco

9. Blythco is a corporation incorporated pursuant to the laws of Ontario. Blythco is not registered under the Act.

10. Peter Wallace (Wallace) is the sole officer, director, and shareholder of Blythco.

Russell

11. Russell is an individual who is not currently registered under the Act, but who has previously been registered as follows:

  1. November 1996 to August 2002 – salesperson in the category of mutual fund dealer and limited market dealer with Investors Group;
  2. October 2002 to January 2005 – salesperson in the category of investment dealer sponsored by RBC Dominion Securities Inc.;
  3. February 2005 to January 2008 – salesperson in the category of investment dealer sponsored by Cumberland Private Wealth Management Inc.;
  4. February 2008 to September 2009 – associate advising representative in the category of investment counsel and portfolio manager sponsored by Newport Private Wealth Inc. (Newport);
  5. September 2009 to April 2010 – associate advising representative in the category of portfolio manager sponsored by Newport; and
  6. March 2011 to January 2012 – associate advising representative in the category of portfolio manager sponsored by BloombergSen Inc. (BloombergSen).
The Proposed Acquisition

12. On January 31, 2012, Staff received a notice under section of 11.10 of NI 31-103 that Blythco proposed to acquire all of the issued and outstanding shares of Quartz from Kaplanco (i.e., the Proposed Acquisition).

13. In a letter dated February 13, 2012 delivered to Staff in connection with the Proposed Acquisition, Kaplan advised that upon closing of the Proposed Acquisition, he would resign as a director of Quartz, and would be replaced by a new board of directors including, among other individuals, Russell, Wallace, Craig Loverock (Loverock), and Michael Svetkoff (Svetkoff). Kaplan’s letter also advised that Russell, Loverock, and Svetkoff would seek registration as dealing representatives with Quartz, and that Kaplan would remain the chief compliance officer of Quartz following the closing of the Proposed Acquisition.

14. In the documents submitted to Staff as part of the Proposed Acquisition, Kaplan represented that neither Loverock nor Svetkoff would engage in any registerable activities until they became registered under the Act.

15. On the basis of the documents submitted to Staff as part of the Proposed Acquisition, including the representations made by Kaplan that Loverock and Svetkoff would not engage in any registerable activity without registration, on March 20, 2012, the Director issued a letter to Kaplan notifying him that she did not object to the Proposed Acquisition (the Non-Objection Letter). The Non-Objection Letter was expressly conditional on the accuracy of the factual representations made by the filer in respect of the Proposed Acquisition.

16. Subsequent to the issuance of the Non-Objection Letter, Staff discovered that Kaplan was also an officer of Trend Auto Lease GP Inc., the general partner of Trend Auto Lease LP (Trend). This outside business activity had not previously been disclosed by Kaplan, as required by National Instrument 33-109 – Registration Information (NI 33-109).

17. Also subsequent to the issuance of the Non-Objection Letter, Staff was informed by Kaplan, for the first time, that he planned to be replaced by Loverock as the chief compliance officer of Quartz, and upon being replaced as the chief compliance officer, he would assume full-time duties with Trend.

18. In light of the apparent irregularities that had emerged with respect to Kaplan’s registration filings and the submissions made in respect of the Proposed Acquisition, Staff determined that it would be appropriate to review the matter further, and informed Kaplan, through his counsel, that the Proposed Acquisition should not be closed pending the completion of that review.

The Application

19. On January 16, 2012, Staff received a notice pursuant to NI 33-109 that BloombergSen had terminated Russell’s employment, and had alleged cause for the termination. The notice delivered by BloombergSen included an allegation that Russell had been acting on behalf of Quartz while he was employed by BloombergSen.

20. Russell does not agree with all aspects of BloombergSen’s description of the circumstances surrounding his termination, but he admits to the facts set out in this Settlement Agreement.

21. On March 6, 2012, Russell submitted the Application. As the Application was sponsored by Quartz, and as the information relating to Russell’s termination alleged that Russell had been actively engaged with Quartz, Staff included its review of the Application as part of its review of the Proposed Acquisition.

Review by Staff

22. On May 1, 2012, Staff met with a representative of BloombergSen, and from information provided by BloombergSen, Staff has determined the following:

  1. Russell’s employment duties at BloombergSen consisted of selling securities of investment funds managed and distributed by BloombergSen. (It appears that Russell was registered in the incorrect category while employed by BloombergSen. Russell understood that he was to be registered as a dealing representative in the category of exempt market dealer when he joined BloombergSen.)
  2. While he was employed by BloombergSen, Russell referred a number of individuals to three issuers which were not offered or approved for sale by Bloombergsen: Equity Premium Finance LP, Skyline REIT, and Morrison Laurier Mortgage Corporation (the Unauthorized Issuers). BloombergSen has informed Staff that it was not aware that Russell was referring individuals to the Unauthorized Issuers;
  3. In some of his communication with investors and potential investors regarding the Equity Premium Finance LP, Russell provided them with the offering memorandum for the issuer, offered his views on the merits of the issuer, and directed the investor as to where to send their subscription funds;
  4. During the time that he was employed with BloombergSen, Russell was in communication with a number of individuals regarding Quartz, and emails sent and received by Russell during this time relate to the Proposed Acquisition; and
  5. It was anticipated that Russell would be employed by Quartz once the Proposed Acquisition was complete.

23. On May 3, 2012, Staff conducted a voluntary interview of Kaplan, during which he gave evidence, under oath, regarding Quartz, Trend, the Proposed Acquisition, and the Application. During the course of this interview, in response to questions by Staff, Kaplan represented that nobody other than himself had performed any registerable activity on behalf of Quartz.

24. On May 7, 2012, Staff conducted voluntary interviews of Wallace, Loverock, Svetkoff, and Russell regarding Quartz and its related business activities, as well as the Proposed Acquisition, and the Application.

25. During the course of these interviews, Svetkoff and Russell informed Staff that they had met with a number of potential investors in Trend and Canadian First Financial Centres Ltd. (CFFC), another issuer distributed by Quartz. Some of these meetings were held in the absence of Kaplan, and were for the purpose of soliciting investments in Trend and CFFC on behalf of Quartz. A number of the individuals with whom Svetkoff and Russell met invested in Trend and CFFC, and Svetkoff and Russell anticipated receiving compensation for these sales from Quartz. It appears to Staff that Svetkoff and Russell may have engaged in the business of trading in securities without registration, contrary to representations to Staff made by Kaplan.

26. On June 13, 2012, in response to a May 4, 2012 request by Staff, Kaplan provided Staff with the subscription agreements and new client application forms for Trend investors. Based on these documents, Staff determined that approximately seven investors had not met with Kaplan at all, or had not met with him prior to their decision to invest in Trend. In addition, for a number of investors, the new client application form, in which know-your-client (KYC) information was to be recorded, had been completed several weeks or months after the investment was made.

27. During its review of this matter, Staff did not identify any breaches of the Act on the part of Wallace or Loverock.

28. During the time that the conduct described in this Settlement Agreement occurred, Quartz was being advised by a third-party compliance consultant (the Initial Consultant).

Acknowledgement of Wrongdoing

29. Kaplan admits that in permitting Svetkoff and Russell to trade in securities on behalf of Quartz without registration, and by allowing Trend securities to be distributed by Quartz to investors without properly collecting their KYC information in order to determine trade suitability, Kaplan failed to discharge his duties as the chief compliance officer and ultimate designated person of Quartz, as set out in Part 5 of NI 31-103.

30. Kaplan admits that in representing to Staff that he was the only person doing registerable activity on behalf of Quartz, he made an untrue statement about a material fact.

31. Kaplan acknowledges the seriousness of his wrongdoing in this matter and accepts full responsibility for, and is remorseful for, his actions.

32. Russell admits that in trading in securities of the Unauthorized Issuers, he was not acting on behalf of BloombergSen, and accordingly he was engaged in the business of trading in securities without registration, contrary to paragraph 25(1)(b) of the Act.

33. Russell admits that in trading in securities of Trend and CFFC when he was not registered under the Act in any capacity, he was engaged in the business of trading in securities without registration, contrary to paragraph 25(1)(b) of the Act.

34. Russell acknowledges the seriousness of his wrongdoing in this matter and accepts full responsibility for, and is remorseful for, his actions.

35. Quartz has represented to Staff that neither Svetkoff nor Russell shall receive any form of compensation for their sales of securities of Trend or CFFC.

Agreed Terms and Joint Recommendation to Director

36. In order to resolve this matter without recourse to the opportunity to be heard process, and on the basis of the agreed statement of facts set out in this Settlement Agreement, the Settling Parties and Staff have agreed to the following terms, and make the following joint recommendation to the Director:

  1. Kaplan’s registration in all categories will be suspended;
  2. Kaplan will not apply for reinstatement of registration as a dealing representative in the category of exempt market dealer for a period of eighteen months from the date his registration is suspended, after which Staff will not recommend to the Director that his application be refused, unless Staff becomes aware after the date of this Settlement Agreement of conduct impugning Kaplan’s suitability for registration, and provided he meets all other applicable criteria for registration at the time he applies for registration;
  3. Kaplan will not apply for reinstatement of registration as the ultimate designated person or chief compliance officer of any registered firm for a period of five years from the date his registration is suspended, after which Staff will not recommend to the Director that his application be refused, unless Staff becomes aware after the date of this Settlement Agreement of conduct impugning Kaplan’s suitability for registration, and provided he meets all other applicable criteria for registration at the time he applies for registration;
  4. Kaplan will successfully complete the Conduct and Practices Handbook Course before applying for registration in any capacity;
  5. The registration of Quartz shall be made subject to terms and conditions:
    1. requiring that it not trade in securities or open new client accounts until such time as it has a registered ultimate designated person, chief compliance officer, and dealing representative; and
    2. requiring that it will retain, at its expense, a third-party compliance consultant other than the Initial Consultant, satisfactory to Staff, to design and implement a compliance program for Quartz, and to monitor the implementation of this program for a period of three months and submit monthly reports to Staff regarding the firm’s adherence to the program.
  6. The Application will be withdrawn;
  7. Russell will not apply for registration as a dealing representative in the category of exempt market dealer for a period of twelve months from March 6, 2012, the date he submitted the Application, after which Staff will not recommend to the Director that his application be refused, unless Staff becomes aware after the date of this Settlement Agreement of conduct impugning Russell’s suitability for registration, and provided he meets all other applicable criteria for registration at the time he applies for registration;
  8. Russell will successfully complete the Conduct and Practices Handbook Course before applying for registration in any capacity;
  9. Staff will not recommend to the Director that the Director object to the Proposed Acquisition in light of the following:
    1. Quartz has agreed to amend the terms of the Proposed Acquisition as follows:
      1. Wallace will apply to be the ultimate designated person of Quartz. As of the date of this Settlement Agreement, Staff has not identified any basis upon which it would recommend to the Director that Wallace’s application for registration as ultimate designated person be refused;
      2. Loverock will apply to be the chief compliance officer of Quartz. As of the date of this Settlement Agreement, Staff has not identified any basis upon which it would recommend to the Director that Loverock lacks the requisite integrity or solvency for registration, and his proficiency will be assessed by Staff in the normal course following receipt of his application for registration;
      3. None of Svetkoff, Russell, or Kaplan will, directly or indirectly, be employed by, or act on behalf of, Quartz following the closing of the Amended Proposed Acquisition until such time as they may be registered under the Act with Quartz; and
      4. Quartz will retain, at its expense, a third-party compliance consultant other than the Initial Consultant, satisfactory to Staff, to design and implement a compliance program for Quartz, and to monitor the implementation of this program for a period of three months and submit monthly reports to Staff regarding the firm’s adherence to the program.
    2. On the basis of the amended terms of the Proposed Acquisition agreed to by Quartz, Staff is of the view that the Proposed Acquisition is not:
      1. Likely to give rise to a conflict of interest;
      2. Likely to hinder the registered firm in complying with securities legislation;
      3. Inconsistent with an adequate level of investor protection; or
      4. Otherwise prejudicial to the public interest.

37. The Settling Parties and Staff submit that their joint recommendation is reasonable, having regard to the following factors:

  1. Previous decisions of the Commission and the Director;
  2. Kaplan’s relative youth and inexperience at the time of the events described herein;
  3. Kaplan and Russell have no prior disciplinary issues as part of their registration history;
  4. It appears that no investors have suffered any losses as a result of the activity described herein;
  5. Kaplan and Russell have accepted full responsibility for their misconduct and have expressed remorse for that misconduct; and
  6. By agreeing to this Settlement Agreement, Kaplan, Quartz, Russell, and Blythco have saved Staff the time and resources that would have been required for an opportunity to be heard.

38. The Settling Parties and Staff acknowledge that if the Director does not accept this joint recommendation:

  1. This joint recommendation and all discussions and negotiations between the Settling Parties and Staff in relation to this matter shall be without prejudice to the parties; and
  2. The Settling Parties will be entitled to an opportunity to be heard in accordance with section 31 of the Act or subsection 11.10(7) (as the case may be) in respect of any recommendation that may be made by Staff regarding their registration status or the Proposed Acquisition.


Mark Skuce   Melissa MacKewn
Mark Skuce, Legal Counsel, Compliance and Registrant Regulation   Melissa MacKewn Counsel for Eric Kaplan and Quartz Capital Group, Ltd.
     
October 11, 2012   October 10, 2012
Date   Date
     
    Peter Greene
    Peter Greene
    Counsel for William Russell and Blythco Inc.
     
    October 10, 2012
    Date
     


Decision of the Director



Having reviewed and considered the agreed statement of facts, agreed terms, representations, and submissions contained in the settlement agreement entered into between Eric Kaplan, William Russell, Quartz Capital Group, Ltd., Blythco Inc., and staff of the Ontario Securities Commission (Staff), and on the basis of those agreed facts, agreed terms, representations, and submissions, I, Erez Blumberger, in my capacity as Director under the Securities Act (Ontario) (the Act), accept the joint recommendation of the parties, and make the following decision:

  1. Effective immediately, Eric Kaplan’s registration as ultimate designated person, chief compliance officer, and dealing representative of Quartz Capital Group, Ltd. is suspended pursuant to section 28 of the Act;
  2. Eric Kaplan will not apply for reinstatement of registration as a dealing representative in the category of exempt market dealer for a period of eighteen months from the date of this decision;
  3. Eric Kaplan will not apply for reinstatement of registration as the ultimate designated person or chief compliance officer of any registered firm for a period of five years from the date of this decision;
  4. Eric Kaplan shall successfully complete the Conduct and Practices Handbook Course before applying for reinstatement of registration in any category;
  5. Effective immediately, the registration of Quartz Capital Group, Ltd. is subject to the following terms and conditions pursuant to section 28 of the Act:
    1. Until such time as an ultimate designated person, chief compliance officer, and dealing representative is registered with Quartz Capital Group, Ltd., neither Quartz Capital Group, Ltd. nor anyone acting on its behalf shall, directly or indirectly:
      1. Trade in any security that is offered for sale by Quartz Capital Group, Ltd.; or
      2. Open any new client accounts.
    2. Quartz Capital Group, Ltd. will retain, at its own expense, a third-party compliance consultant other than the “Initial Consultant” as that term is defined in the settlement agreement between staff of the Ontario Securities Commission (“Staff”), Eric Kaplan, William Russell, Quartz Capital Group, Ltd., and Blythco Inc., satisfactory to Staff, to design and implement a compliance program for Quartz Capital Group, Ltd., and to monitor the implementation of this program for a period of three months and submit monthly reports to Staff regarding the firm’s adherence to the program.
  6. I do not object to the acquisition by Blythco Inc. of all of the issued and outstanding shares of Quartz Capital Group, Ltd. from Kaplanco Inc. as described in the notice delivered by Quartz Capital Group, Ltd. dated January 31, 2012, amended by further correspondence dated January 31, 2012, February 13, 2012, February 14, 2012, February 29, 2012, March 7, 2012, and September 19, 2012 (collectively, the Notice) pursuant to National Instrument 31-103 – Registration Requirements, Exemptions and Ongoing Registrant Obligations. If there is a material change to the acquisition or if it is completed in a manner that is materially inconsistent with the description in the Notice, Quartz shall provide Staff with prompt written notice of the change or inconsistency, so that the Director may consider whether it affects Quartz’s ongoing suitability for registration or causes its registration to become otherwise objectionable.


October 12, 2012   Erez Blumberger
Date   Erez Blumberger
    Deputy Director
    Compliance and Registrant Regulation